Strong demand to support power businesses across Asia: S&P

Power utilities across Asia-Pacific are well placed to benefit from the region's increasing appetite for energy. But evolving regulations, fuel shortages, rising costs, and lagging recoveries could affect the performance of power firms, says a new report, Managing Fuel Access, Costs, And Recoveries Is Key To Keeping Asia-Pacific Utilities' Lights On, published today by Standard & Poor's Ratings Services.

The rating agency believes that overall favourable economic conditions and an expanding middle class in most of the region is likely to underpin Asia's growing demand for energy. However, much will depend on the prices and the mix of fuel, and companies' ability to recover the associated costs. Also, utilities in several Asian countries have to contend with evolving regulations and tariff policies, and expansion-related capital expenditure.

"Generally, the strong position of the rated utilities in their respective markets should enable them to benefit from rising demand and at least sustain their cash flows over the next 12 months," said Standard & Poor's credit analyst Rajiv Vishwanathan. "But Japan, Australia, and New Zealand remain exceptions to the growth trend."

Standard & Poor's expects the Asia-Pacific utilities sector to remain largely stable over the next 12 months. About 80 per cent of the rated utilities in the region have a stable rating outlook.

Amomg the exceptions are Indian power utilities that are plagued by fuel and policy issues, Japanese firms that that hare confronted by uncertain policy and fuel costs, and Korean utilituies rquiring new investments.

Asia's demand for energy is likely to remain strong in 2013, given supportive economic growth prospects. The region's large power deficit makes demand somewhat inelastic, and this could provide a cushion in unexpected downside scenarios. The residential sector accounts for a large part of the demand in countries such as Malaysia and Thailand.

Due to their low electrification rates, the pent-up demand for power in India and Indonesia  is estimated at baout 65 per cent and 70 per cent, respectively. Demand in China is likely to grow moderately in 2013, similar to the trend in 2012.

"The leverage of power utilities in Asia is likely to increase as they undertake large capital expenditure to increase generation capacity over the next 12-24 months to meet growing demand," says Vishwanathan.

"But most rated utilities in the region have a strong standing in credit markets and adequate to strong liquidity, and should not face any difficulty in refinancing upcoming debt maturities and funding capital expenditure."