(The following statement was released by the rating agency)
Nov 12 - Asia-Pacific electric, gas, and water utility companies face margin pressure from a few factors but not all the sparkle is gone. Favorable industry trends will continue to offer growth potential, said Standard & Poor’s Ratings Services today in an industry report card titled, “Favorable Industry Trends And Weakening Demand Place Asia-Pacific Utilities In Fine Balance For The Next Six Months.”
The margin pressure comes from a potential rise in prices of fuel needed for electricity generation, particularly gas and liquefied natural gas (LNG). The pressure becomes more acute when regulators are unwilling to let power producers pass the higher cost on by increasing tariffs or when the increases are insufficient to absorb the higher cost.
“Weaker economic prospects could constrain the regulators’ willingness to raise tariffs in the next three to six months,” said Standard & Poor’s credit analyst Rajiv Vishwanathan.
However, although regulators in China, Korea, and Taiwan have raised tariffs, the profitability of utilities remains weak because the increases were low.
“The regulators focus more on restraining energy costs for industries and consumers rather than ensuring some basic level of profitability,” Mr. Vishwanathan said.
Standard & Poor’s expects a slowdown in industrial activity to have the biggest impact on power demand in China, Korea, and Taiwan because the industrial sector dominates the customer mix for power utilities in the three economies.
Nevertheless, that alone isn’t likely to lead us to downgrade those utilities because the economies still have large or increasing power shortages, which will provide some cushion against slowing industrial demand.
“We expect power utilities in Asia to undertake large capital expenditures to increase generation capacity over the next 12-24 months to meet growing demand. However, in our view, the timing of such investments tends to be somewhat discretionary,” Mr. Vishwanathan said.