Credit quality of Japan's nuke-reliant power utilities to diverge

Due to differences in earnings profiles.

In a report, Moody's Japan K.K. says that the credit quality of its six rated Japanese electric utilities will begin diverging in 2014 because their earnings profiles will demonstrate differences as the timings for the restart of their nuclear reactors and rate increase will drive profitability.

Moody's notes that Kyushu Electric Power (A3 negative) will likely soon receive regulatory approval to restart its reactors and will therefore begin generating profits in the second half of the year, after two years of losses.

But, without other cost or revenue actions, profit recovery at Kansai Electric Power (A3 negative), Hokkaido Electric Power (A3 negative), Chubu Electric Power (A3 negative), Hokuriku Electric Power (A3 negative) and Chugoku Electric Power (A3 negative) will take longer, because their reactors will only restart after Kyushu.
Moody's views were contained in its just-released Special Comment, titled "Japanese Electric Utilities: Credit Quality of Japanese Utilities Will Diverge as Only Some Return to Profitability".

The report says that Kansai, Kyushu and Hokkaido have posted the largest operating losses and resulting equity deterioration because nuclear power accounts for a larger portion of their total generating capacity. The closure of reactors following the accident at Fukushima in 2011 has required the utilities to run thermal power plants that cost more to operate than nuclear reactors.

Accordingly, the utilities will start generating profits when their reactors restart because their costs will then decline, and tariff hikes that took effect in 2013 will be sufficient to cover all operating costs and generate a stable profit.

By contrast, operating loss and capital deterioration have been smaller for Chubu, Hokuriku and Chugoku because nuclear accounts for a smaller portion of their generating portfolios. But as long as their reactors remain shut, their profitability will lag the utilities that restart their reactors, without any revenue actions.

Moody's notes that the six utilities have reduced their losses over the past two years, but their return to profitability is not assured, and profitability will not necessarily lead to an immediate improvement in their overall financial strength.

Their financial recovery will take time, given the significant damage to their balance sheets. Once a utility begins generating profits, Moody's will evaluate its financial results and credit metrics to determine whether we should revise its rating outlook to stable from negative.

Rating upgrades in the near future are unlikely, because the utilities' financial metrics are weak for their A3 ratings, and it is unclear whether industry regulators will remain supportive.