Hong Kong, March 27, 2017 -- Moody's Investors Service says that the strategies of unregulated power
companies to strengthen their financial profiles and mitigate market volatility
and carbon transition risk will be increasingly important for their credit
quality.
"SK E&S Co. Ltd's and Origin Energy Limited's
successful execution of their strategies to adapt operating models and/or
cut debt will reduce their exposure to market volatility, and strengthen
their financial buffers," says Mic Kang, a Moody's Vice
President and Senior Analyst.
Kang was speaking on Moody's just-released report on Unregulated
Power Utilities -- Asia Pacific, titled "Strategies to Manage
Cash Flow Volatility Will Be Key". The report was authored
by Kang.
Carbon transition risk will likely increase cash flow volatility for unregulated
utilities, such as SK E&S Co. Ltd (Baa2 negative) in
Korea (Aa2 stable) and Origin Energy Limited (Baa3 negative) in Australia
(Aaa stable). Volatility in energy prices and volumes will grow
as power markets undergo decarbonization, given this will affect
the demand for carbon-intensive energy.
SK E&S centers on vertical integration spanning liquefied natural
gas (LNG) sourcing, re-gasification at its new LNG receiving
terminal, the generation of power and district heating, and
strengthening of its financial buffer through deleveraging.
Origin is cutting debt, selling assets and undertaking cost reduction
initiatives to strengthen its resilience to volatile commodity prices.
In addition, both companies may mitigate credit pressures over the
next 1-2 years, owing to the ramp-up of new power
plants or LNG production, earnings growth in their gas businesses,
and/or deleveraging.
"But SK E&S and Origin have less flexibility to manage their
credit quality, owing to execution risk for their strategies,
few long-term power purchase agreements (PPA), and/or greater
debt leverage at their rating levels," adds Kang.
In contrast, Ratchaburi Electricity Generating Holding PCL (Ratch,
Baa1 stable) in Thailand (Baa1 stable) -- which benefits from well-structured,
long-term PPAs with the state-owned Generating Authority
of Thailand (unrated) -- will be better positioned to manage
market volatility and evolving carbon transition risk.
As such, SK E&S' and Origin's lower credit quality
-- when compared with Ratch -- mainly reflects the
potential for higher volatility in their cash flows due to their exposures
to competition and commodity prices.
SK E&S' and Origin's credit quality is lower despite Moody's
expectation that these three companies will have a similar level of financial
leverage, as measured by the ratio of funds from operation (FFO)
to gross adjusted debt, of 14%-20% over the
next 1-2 years.
AGL Energy Limited (Baa2 stable) in Australia is also exposed to a competitive
market. However, its lower debt leverage and ability to largely
supply its retail customer base from its own low cost generation fleet
provide more flexibility to manage such challenging operating environments
in the near term.
Cikarang Listrindo (P.T.) (Ba2 stable) in Indonesia (Baa3
positive) operates under exclusive supply contracts with large and diversified
industrial customers and PPAs with PT Perusahaan Listrik Negara (Baa3
positive).
However, the execution risk associated with its greenfield project
for a coal-fired power plant and further expansion, if any,
will likely weaken cash flow predictability and/or increase debt leverage,
over the next couple of years.
Country risk will remain manageable for rated unregulated utilities in
Asia Pacific. While the rated issuers operate in diverse countries,
the market frameworks in those locations are unlikely to weaken materially
over at least the next 1-2 years and their offtakers will maintain
a reasonable to strong ability to meet their obligations.
Ratch's credit quality is the highest among the rated utilities
in the region, despite Thailand having a higher country risk than
Australia and Korea, where Origin and SK E&S operate.
However, higher country risk, particularly in emerging markets
with low sovereign ratings, can translate into a weaker market framework
and greater offtaker risk, which can in turn constrain the credit
quality of power generators operating in those countries.
Subscribers can find the report at:
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1061669
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This publication does not announce a credit rating action. For
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for the most updated credit rating action information and rating history.
Mic Kang
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
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China (Hong Kong S.A.R.)
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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