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Announcement:

Moody's: Outlook stable for Asian power sector in 2019, more regulatory challenges for Korean and Japanese companies

 The document has been translated in other languages

05 Dec 2018

Hong Kong, December 05, 2018 -- Moody's Investors Service says that its outlook for the broad power sector in Asia through 2019 is stable, supported by steady cash flows, the gradual pace of regulatory changes, a gradual transition to a low carbon economy and sufficient mitigants against capital-market volatility.

"We expect most rated power companies will report stable operating cash flow over the next 12-18 months, helped by stable or increasing dispatch volumes or timely cost pass-throughs amid a gradual pace of regulatory changes, thus supporting their credit quality," says Mic Kang, a Moody's Vice President and Senior Credit Officer.

"However, regulatory challenges are starting to adversely affect the credit metrics of Korean and Japanese companies, because of prolonged delays in cost pass-throughs in Korea and growing competition amid market deregulation in Japan," adds Kang.

Moody's conclusions are contained in its just-released report on Moody's outlook for the Asian power sector, titled "Power — Asia: 2019 outlook stable, with steady cash flow offset by regulatory challenges," which is authored by Kang.

Moody's report points out that growing power demand or timely cost pass-throughs will also mitigate the strain on cash flows from higher generation costs and higher capital spending for most rated power companies in Asia.

In addition, regulations will remain broadly stable as most Asian geographies implement regulatory changes gradually, supporting cash flow stability.

Business conditions will be tougher in 2019 in certain countries, because of regulatory challenges and, to a lesser extent, trade protectionism potentially slowing demand growth. The main regulatory risk is timely cost pass-throughs in certain countries, particularly China (A1 stable), Indonesia (Baa2 stable) and Korea (Aa2 stable). In addition, there is uncertainty associated with the effects of deregulation in Japan (A1 stable).

However, Moody's expects power demand growth in China and Indonesia will continue to support cash flow stability or growth for most rated power companies in those countries.

By contrast, Korea's major power companies increasingly rely on debt to fund their capital spending, because of the continued low likelihood of timely cost pass-throughs amid strengthening safety requirements for nuclear operations and the Korean government's energy policy to gradually move away from nuclear and coal. As such, their credit metrics are weakening.

And in Japan, Moody's expects some power companies will find it difficult to strengthen their weak credit metrics amid increasing competition and weakening monopolistic market positions.

Carbon transition risk will increase in Asia's power sector. The cash flows of coal-driven power generation companies will weaken gradually as both generation from renewables and environmental compliance costs are rising.

However, carbon transition risk will not emerge as a material credit risk during the next 12-18 months, because renewable power growth is unlikely to outpace power demand growth in Asia, while the importance of the coal power as a major energy source will not decline materially over this time frame.

Most rated companies have mitigants in place against capital market volatility. They generate steady operating cash flow, have adequate access to the debt markets, do not have material near-term debt maturities denominated in foreign currency, or are hedged naturally or through cross-currency swaps.

Moody's could change its outlook for the broad power sector in Asia to negative if (1) it expects cash flows will be lower than its projections because of materially weaker power-consumption growth or an inability to pass through increased costs in a timely manner; (2) regulations change adversely; (3) carbon transition risk emerges rapidly; and (4) global capital market volatility weakens many rated power companies' funding capacity.

Moody's does not expect a significant improvement in business conditions over the next 12-18 months that would prompt a change in the sector outlook to positive, given trade tensions -- particularly between the US and China --, the weakening of local currencies against the US dollar, and tightening global liquidity.

Moody's has maintained its broad stable outlook on the Asian power sector since 2009.

Moody's report covers the power sectors of ten Asian geographies: China (A1 stable), Hong Kong (Aa2 stable), India (Baa2 stable), Indonesia (Baa2 stable), Japan (A1 stable), Korea (Aa2 stable), Malaysia (A3 stable), the Philippines (Baa2 stable), Singapore (Aaa stable) and Thailand (Baa1 stable).

Moody's outlook is stable for the eight power sectors of China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore and Thailand, in turn driving Moody's stable outlook for the broader Asian power sector.

However, Moody's outlook for the Korean and Japanese power sectors is negative, given the greater regulatory challenges faced by companies in these countries.

Subscribers can access the report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1147698

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, S? Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Mic Kang
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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