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.