Moody’s urges lower exposure
Financial strengthening, market volatility mitigation and carbon transition risk will be increasingly important for the credit quality of regional private power-generating firms, say Moody’s Investors Service.
SK E&S Co and Origin Energy, both South Korean private power-generating firms, have successfully adapted operating models and cut debt, which will reduce their exposure to market volatility and also strengthen their financial buffers, said Mic Kang, Moody’s vice-president and senior analyst.
Thailand’s Ratchaburi Electricity Generating Holding Plc (Ratch), rated Baa1 stable, benefits from well-structured, long-term power-purchasing agreements (PPAs) with the state-owned Electricity Generating Authority of Thailand (Egat) and is better positioned to manage market volatility and evolving carbon transition risk.
Mr Kang said the lower credit quality of SK E&S and Origin relative to Ratch reflects the potential for higher volatility in their cash flows due to their exposures to competition and commodity prices.
“Ratch’s credit quality is the highest among rated utilities in the region, despite Thailand having a higher country risk rating than Australia and Korea, where Origin and SK E&S operate,” he said.
Despite Moody’s expectation that the three power-generating firms’ financial leverage will be at a similar level, Origin and SK E&S have lower credit quality at 14-20% over the next few years, as measured by the ratio of funds from operation (FFO).
Mr Kang said carbon transition risk will likely increase cash flow volatility for unregulated utilities, such as SK E&S, rated Baa2 negative, and Origin, rated Baa3 negative.
“Volatility in energy prices and volumes will increase as power markets undergo decarbonisation,” he said.
SK E&S focuses 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 against volatile commodity prices.
Both companies may mitigate credit pressures over the next few years, due to the increase in new power plants and LNG production, earnings growth in their gas businesses, and deleveraging, he added.
“But SK E&S and Origin do not have flexible credit quality management, owing to the execution risk of strategies, few longterm PPAs, and greater debt leverage for their rating levels,” Mr Kang said.
He said AGL Energy Limited of Australia, rated Baa2 stable, is also exposed to a competitive market. However, lower debt leverage and ability to largely supply its retail customer base from its own low cost generation fleet provides more flexibility to manage challenging operating environments in the near term.
Indonesia’s Cikarang Listrindo, rated Ba2 stable, operates under exclusive supply contracts with large and diversified industrial customers and PPAs with PT Perusahaan Listrik Negara, rated Baa3 positive. But the execution risks associated with its greenfield project for a coalfired power plant and further expansions will likely weaken cash flow predictability and increase debt leverage over the next few years.