Bangkok--1 Feb--Fitch's rating
Fitch Ratings today said the credit outlook for the Asia-Pacific utility sector is stable to negative for 2007.
"Fitch's utility ratings in the Asia-Pacific region reflect the generally robust electricity demand that has led to strong growth in operating cash flows, relatively stable regulatory environments and in many cases, supportive government owners," said Carolyn Martin, Regional Head of Fitch's Energy & Utilities team in a 2007 outlook report for the Asia-Pacific utility sector. "However, specific credit challenges exist in some regions and these include an expectation of increased leverage to fund heavy capital expenditure programmes and the potential for margin squeeze through an uncertain tariff-setting mechanism that does not allow for the timely pass-through of high and volatile fuel costs," Ms. Martin added.
The special report discusses the agency's outlook for power markets in Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand.
A key factor affecting many regional utilities is an expected deterioration in credit metrics to fund substantial capex for new generation capacity and to upgrade transmission and distribution networks. Among others, India, South Korea, China, Taiwan and Indonesia have heavy capex commitments. Fitch notes that this also imposes execution risks and the possibility of delays and cost overruns. While the developing nations require huge amounts of cash to increase capacity, the more mature markets, such as Australia, New Zealand, Singapore and Hong Kong, are facing increased pressure from shareholders to increase distributions and undertake other shareholder-friendly measures such as capital returns and share buybacks, usually to the detriment of debtholders.
Fitch views the transparency and effectiveness of the tariff mechanism as a major foundation of a robust power sector. Utilities operating in competitive markets, or in regulatory regimes with transparent tariff mechanisms that allow the effective pass-through of fuel costs, such as Australia, New Zealand, Japan, Hong Kong and Singapore, are generally less affected by fuel price changes and typically face a substantially lower risk of margin compression arising from fuel price increases. However, in other countries, such as South Korea, China, India, Indonesia, Taiwan and Thailand, the tariff mechanism may prioritise social and macroeconomic considerations in setting tariff rates. This implies that any increase in input costs may not be fully passed on to consumers, leading to potentially weaker credit metrics.
Increasing environmental obligations are also becoming more prominent in the Asian region. With rising pollution levels and growing environmental concerns, there is increased pressure to make emission controls more stringent, adding to the operating costs and capital expenditure of power generators. Credit implications arise when some market participants are more negatively affected than others, and where there is limited opportunity, such as through tariffs, to fully pass on these higher costs to consumers.
The report also notes that a number of Fitch's Asia-Pacific utility ratings benefit from strong explicit or implicit government support, reflecting, amongst other issues: majority government ownership; the provision of subsidies by the government; a favourable regulatory environment; or access to advantageous funding arrangements.
"While each of the power markets in Asia is going through a reform and restructuring process, the nature of the process and the timeframes differ immensely," said Ms Martin. "Some of specific regulatory and reform processes Fitch is observing closely include: expiration of the current 15-year scheme of control in Hong Kong; the very slow reforms in the loss-making electricity distribution sector in India; heightened regulatory risk in New Zealand as illustrated by increased regulatory intervention by the Commerce Commission; and in Australia, a progressive move towards a single national regulator, the Australian Energy Regulator".
A copy of the report 'Asia-Pacific Utilities: Credit Outlook 2007' will be available shortly on the agency's websites, www.fitchratings.com and the subscription-based www.fitchresearch.com .
Contacts: Carolyn Martin, Kevin Lewis or Gavin Madson, Brisbane, Tel: +61 7 3222 8611; Shang Ma, Beijing, Tel: +8610 6533 0606 ext 109; Mic Kang, Hong Kong, Tel: +852 2263 9924; Manish Makhan, Mumbai, Tel: +91 11 4165 7230; A Vasanth, Jakarta, Tel: +62 21 5290 2462; Takeshi Shigemoto, Tokyo, Tel: +81 3 3288 2813; MiKyung Kwon, Seoul, Tel: +822 2076 8360; Kevin Chang, Taipei, Tel: +886 2 2514 7027; Lertchai Kochareonrattanakul, Bangkok, Tel: +66 2 655 4760
Media Relations: Ching-Yuen Lock, Singapore, Tel: +65 6238 7301; Sylvia McKaige, Singapore, Tel: +65 6336 0095.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com . Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.