INFRASTRUCTURE AND PROJECT FINANCE

OUTLOOK1 December 2016

TABLE OF CONTENTSSummary 1The 2017 outlook for the Asia PacificPower Sector is stable

2

Consistent regulatory returns andmanageable fuel costs support stablebusiness conditions

3

Government commitments to reducecarbon emissions will likely lowerthermal capacity utilization andincrease environmental costs

5

Industry conditions will generallysupport credit metrics of ratedcompanies

6

Sector reforms will cloud operatingconditions for some companies

8

What could change our outlook 9Appendix 1. Asia Pacific PowerCompanies Rated by Moody’s

11

Appendix 2. Regulatory Environments 12Appendix 3. Tariff Systems for AsiaPacific Power Sectors

13

Analyst Contacts

Mic Kang 852-3758-1373VP-Senior Analystmic.kang@moodys.com

Vivian Tsang 852-3758-1538Associate MDvivian.tsang@moodys.com

Arnon Musiker 612-9270-8161SVP/Managerarnon.musiker@moodys.com

Ian Lewis 81-3-5408-4033Associate ManagingDirectorian.lewis@moodys.com

Terry Fanous 65-6398-8307Managing Directorterry.fanous@moodys.com

Power Sector – Asia Pacific

2017 Outlook - Rising Industry ChallengesAre Manageable, Outlook Stable

Our stable outlook indicates our expectations for the fundamental business conditions drivingthe Asia Pacific power industry over the next 12-18 months.

The stable outlook for the Asia Pacific power sector reflects stable outlooks in 11 countrieswithin the region – Australia (regulated networks), China, Hong Kong, India, Indonesia, Japan,Korea, Malaysia, the Philippines, Singapore and Thailand. Our sector outlook has remainedunchanged since 2009.

» Consistent regulatory returns and manageable fuel costs support stable businessconditions. For regulated power companies in Australia (Aaa stable), Hong Kong (Aa1negative) and Singapore (Aaa stable), transparent tariff-setting mechanisms underpinstable sector outlooks. For other power companies with weaker tariff systems, fuel costincreases or competitive pressures will likely remain manageable.

» Government commitments to reduce carbon emissions will likely lower thermalcapacity utilization and increase environmental costs. Many thermal powergenerators will face medium- to long-term pressure, because of lower dispatch volumeand/or increased investment to meet environmental regulations.

» Industry conditions will generally support credit metrics of rated companies.Most rated companies’ funds from operation/debt ratios will remain largely stablecompared with 2014-15 levels during the outlook period. But the credit quality of somerated companies will face downward pressure, owing to rising industry challenges.

» Sector reforms will cloud operating conditions for some companies. Sectorreforms in China (Aa3 negative), Japan (A1 stable) and Korea (Aa2 stable) will have amanageable effect on the operations of power companies during the outlook period. Butthese reforms will create increasingly challenging business conditions over time.

» What could change our outlook. We could revise the outlook to positive if transparenttariff systems are implemented in many power sectors and/or companies strengthentheir financial buffers. We could move the outlook to negative if regulators make adverseadjustments to tariffs or subsidies, and/or intensified competition or sector reformsweaken business conditions for power companies.

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 1 December 2016 Power Sector – Asia Pacific: 2017 Outlook - Rising Industry Challenges Are Manageable, Outlook Stable

The 2017 outlook for the Asia Pacific Power Sector is stableThe stable outlook for the Asia Pacific power sector reflects our expectation of generally stable industry conditions across the 11countries that we cover within the region – Australia (Aaa stable, regulated network sector), China (Aa3 negative), Hong Kong (Aa1negative), India (Baa3 positive), Indonesia (Baa3 stable), Japan (A1 stable), Korea (Aa2 stable), Malaysia (A3 stable), the Philippines(Baa2 stable), Singapore (Aaa stable) and Thailand (Baa1 stable). Our sector outlook has remained unchanged since 2009.

The stable outlook is mainly underpinned by (1) consistent regulatory returns or subsidies; (2) our expectation that fuel costs areunlikely to rise steeply, although they will increase from the low 2015 levels, mitigating the risk posed by the absence of and/oruntested cost pass-through mechanisms in certain countries; and/or (3) our expectation that there will be no significant changes to theregulatory environments during the outlook period (see Exhibit 1).

Exhibit 1

Stable outlook for many countries on supportive regulation and manageable fuel cost increases

Because our outlooks represent our forward-looking view on business conditions that factor into our ratings, a negative (positive) outlooksuggests that negative (positive) rating actions are more likely on average. However, the industry outlook does not represent a sum ofupgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the industry, but rather our assessment of themain direction of business fundamentals within the overall industry.

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Source: Moody's Investors Service

We have changed the outlook for the Indian power sector to stable from negative, because the increased domestic production of coalwill ease constraints on fuel supply. In addition, the Indian government’s debt restructuring of the financially weak distribution utilities,which are also known as state electricity boards (SEB), will likely improve their financial capacity to make timely payments to powergenerators.

We have also assigned an inaugural stable outlook to Japan’s power sector, mainly reflecting a generally predictable regulatory regime.

We believe that the principal challenges for the sector over the next 12-18 months – namely (1) increasing environmental compliancecosts associated with carbon reduction targets; and/or (2) capacity growth of renewables and/or baseload power plants leading todownward pressure on dispatch volume or wholesale prices, particularly in China and Korea -- are manageable over the outlook period.

37 (or 70%) of the rated power companies in Asia Pacific demonstrate ratings with stable outlooks, reflecting broadly unchangedfundamental business conditions, as well as financial profiles consistent with our rating expectations. India’s NTPC has a positiveoutlook on its rating, in line with the positive outlook on the Indian sovereign’s rating. The positive outlook on Alinta's ratings reflectsour expectation that the company's financial profile could further improve following a resolution of its long-term ownership structure.

The remaining 14 companies (or 26%) have negative outlooks or review for downgrade on their ratings. The majority are China’s powercompanies and, to a lesser extent, Japan’s power utilities.

Eight Chinese power companies have a negative outlook or review for downgrade on their ratings. The outlooks on five of them,which are either directly or indirectly owned by the Chinese government, are driven by our assessment that the government’s abilityto provide support may weaken, as indicated in the negative outlook on China’s Aa3 rating. The remaining companies’ negativeoutlooks are driven by weakening credit fundamentals. In addition, we believe China’s coal-oriented power companies will face greaterchallenges than those in other regions. This is particularly because of fast renewable developments leading to larger overcapacity and arecovery in the coal price in the second half of 2016, resulting in an increase in fuel costs amid potential delays in their ability to pass-through such additional costs.

The negative outlooks on some individual Japanese power utilities’ ratings mainly reflect uncertainty over restarts of nuclear reactors,which could make customer retention harder in the face of deregulation or delay recovery of their credit metrics.

Consistent regulatory returns and manageable fuel costs support stable business conditionsFor regulated power companies in Australia, Hong Kong and Singapore, transparent regulatory tariff-setting mechanisms allow fortimely cost recovery and predictable regulated returns, which underpin stable sector outlooks.

Whereas predictable regulated tariffs underpin the stable outlook for Australian regulated networks, we expect generation earningsof unregulated utilities in Australia would be affected by continued volatility in wholesale power prices in 2017, as flexible gas-firedgenerators are more frequently called upon to backup renewable generation. Spot prices will spike in periods when comparativelyexpensive gas-fired generators are dispatched due to renewable capacity being insufficient to meet demand. Such volatility is

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manageable for rated issuers AGL and Origin due to the flexible nature of their generation fleet and large retail market shares, factorswhich leave them better positioned to recover higher wholesale energy costs from their customers.

For other countries with weaker tariff systems, fuel cost increases will likely remain manageable, thereby allowing many powercompanies to record adequate operating results. Despite an upward trend in the oil price since early 2016 and a rally in coal sincemid-2016, we assume that the prices of major fuels – coal and crude oil, to which LNG prices are indexed – will not rise steeply fromthe recent levels of $40-$50/barrel for crude oil and $80-$110/metric ton for Newcastle Coal1 during the outlook period (see Exhibit2).

Exhibit 2

Fuel cost increases likely to remain manageable over the next 12-18 months

Sources: Bloomberg, Moody’s Investors Service

In addition, steady to modest growth in demand for power in many countries will help companies to increase their revenues. Weexpect electricity consumption growth of 3% or less in most countries over the next 12-18 months, owing to soft economic conditionsor economic rebalancing. India, Indonesia and the Philippines will likely see relatively strong rises in demand, of 5% or above, largelyreflecting their higher GDP growth. We expect Japan to continue to see negative growth in demand for power, owing to the country'smuted economic growth and demographics, combined with on-going interest in conserving electricity (see Exhibit 3).

Exhibit 3

Economic growth will likely lead to steady to modest growth in demand for electricity in many countries

Sources: BP Statistics, KEPCO, Moody’s estimates

Less robust tariff systems will remain a fundamental credit weakness in some countries, particularly if they were to see a steep rise infuel costs from recent levels.

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China’s and Malaysia’s tariff systems lack an established track record of timely cost recovery. In Indonesia, Korea and Thailand,retail tariff adjustments for state-owned integrated power utilities are at the governments’ discretion. Nevertheless, the Indonesiangovernment’s regular subsidy aimed at timely cost recovery partly mitigates such a weak tariff mechanism for Indonesia’s PLN.

For Japan, the regulated tariffs allow for full cost recovery. However, in practice, the utilities spread their fuel costs over an assumednuclear generation output that has exceeded actual costs owing to minimal nuclear generation, thereby leading to under-recovery.

Government commitments to reduce carbon emissions will likely lower thermal capacity utilizationand increase environmental costsWe expect thermal power companies in most countries in the Asia Pacific region will become key contributors to carbon emissionreduction targets under the Paris Agreement.

According to BP Statistics, the Asia Pacific region accounted for 48% of global carbon dioxide emissions in 2015. The largest CO2emitters were China and India, followed by Japan, Korea, Indonesia and Australia.

Coal and natural gas are the major sources of power generation in all countries in the region (see Exhibit 4). Coal accounted for 30% orabove of power generation volume in all countries in 2015, except Singapore and Thailand.

Exhibit 4

Fossil fuels account for a significant proportion of fuel mix in many countries

*Based on 2014 generation volumes for Hong Kong and Malaysia; For Hong Kong, the breakdown excludes nuclear power imported from mainland ChinaSources: EIA, Bloomberg, Korea Power Exchange, PLN, Environment Bureau of Hong Kong, Moody’s estimates

Thermal power generators without contracted revenues will likely face medium- to long-term pressure. This is because tariff systemsin many countries may not fully compensate generators for lower dispatch volume stemming from growth of low marginal costrenewable or nuclear generation, or investments to meet environmental regulations. Moreover, in deregulated markets such asAustralia, thermal generators will also be exposed to increased volatility and a likely longer term decline in spot prices to the extentrenewable generation capacity ramps up.

In general, thermal power companies will be adversely impacted by growing renewables and/or nuclear power, which have priority overthermal power sources, including coal, oil and natural gas. Similarly, declining battery costs2 will encourage adoption of distributedgeneration technology in many countries, further pressuring demand for on-grid thermal power over time. That said, we believe thatgrids will remain an essential component of the energy supply chain.

However, we believe environmental risk is manageable for most rated thermal power companies during the outlook period, becausecarbon reduction initiatives will be gradually implemented, and/or regulated or government-controlled market structures will allowcompanies to maintain adequate dispatch capability. In addition, the rated unregulated power utilities in Australia have qualitygeneration assets and strong presence in the retail market, and plans to develop renewable and new technology businesses.

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On a relative basis, we believe China’s thermal power companies will be most affected, because their fuel mix is generally concentratedon coal and planned strong growth in renewables and nuclear generation will further exacerbate the overcapacity in the generationmarket, especially in wind and solar power abundant provinces. The promotion of non-fossil fuel generation, especially in priority ofpower dispatch, will continue to pressure the utilization hours of coal fired power plants.

Australian unregulated utilities are facing increasing carbon transition risk – with likely further closures of baseload thermal powerplants that have higher costs and lower flexibility – over the medium and long term.

Meanwhile, in India, renewable generation could act as a complementary source of power rather than a competitor to thermal, owingto power shortages.

For Indonesia, we do not expect capacity utilization of thermal power plants will materially decline, given that coal continues to be thecheapest and most abundant fuel.

Industry conditions will generally support credit metrics of rated companiesMost rated companies’ credit metrics, as measured by their funds from operations (FFO)/debt ratios, will remain largely steadycompared with 2014-15 levels during the outlook period, reflecting the broadly stable business conditions, although some may seeweaker metrics.

The regulated power utilities in Australia, Hong Kong and New Zealand will likely maintain steady FFO to debt ratios over the next12-18 months, owing to (1) the transparent tariff setting mechanisms insulating them from volume risk and cost movements (seeExhibit 5), and (2) our expectation that Australian issuers will implement countermeasures to mitigate the effect of declining regulatorytariffs, a consequence of falling risk-free rates. Singapore Power and SPPA will likely see lower FFO/debt ratios during the outlookperiod, due to high capex. But the ratios will improve over time when capital projects are completed and enter the regulated assetbase, earning a return on the investment.

Exhibit 5

Consistent tariff systems will lead to steady credit metrics for many power companies operating under transparent regulatory regimes

Sources: Moody’s Financial Metrics, Moody’s forecast

For Japan, the credit profiles of some power companies, particularly Kansai Electric, Kyushu Electric and Hokkaido Electric, will remainunder pressure due to the uncertainty associated with the timing of restarting nuclear plants, the ongoing need to invest to meetnuclear safety requirements and/or increased competition in the face of deregulation.

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We expect many power companies in the other countries to maintain stable FFO/debt ratios over the outlook period when comparedwith 2014-15 levels, with credit metrics likely to remain consistent with our rating expectations. This is because fuel cost increases arelikely to be manageable and/or incremental cash flows from new power facilities will mitigate the absence of and/or untested costpass-through mechanisms. In addition, India’s Adani will likely see a stable FFO/debt ratio, owing to consistently applied cost pass-through for its power transmission operations, while Indonesia’s Cikarang and Star Energy and Thailand’s Ratch will benefit from powerpurchase agreements (PPA) with reliable state-owned counterparties (see Exhibit 6).

Exhibit 6

Credit metrics of many power companies with less predictable tariff systems will likely remain consistent with rating expectations

* Malaysia, the Philippines and ThailandSources: Moody’s Financial Metrics, Moody’s forecasts

However, the credit quality of some rated power generation companies, particularly China’s SEP, BEH and CGN, India’s TPC andKorea’s SK E&S, will face downward pressure over the next 12-18 months, because of increasing competition from renewables,distributed power, or baseload generators, and/or large debt-funded capital expenditure and acquisitions. As such, the powercompanies have negative rating outlooks.

Meanwhile, we believe the capacity of most power companies to fund cash shortfalls through the debt markets will remain strong toadequate (see Exhibit 7). This is because their stable or dominant market positions will allow them to recover investments over timeand most state-owned companies will likely receive government support, if needed.

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Exhibit 7

Rated companies are likely to partly fund capital expenditure and investments through the debt markets

* Moody’s estimates China’s rated power companies will account for around 70% of total capex growth in 2016-17(E)Sources: Each rated issuer, Moody’s estimates

Sector reforms will cloud operating conditions for some companiesWe believe proposed or already implemented sector reforms in China, Japan and Korea will not have a material adverse effect onfundamental business conditions in the countries during the outlook period, because they call for moderate changes in the operationsof most companies (see Exhibit 8).

Exhibit 8

Sector reforms encompass deregulation of retail markets and/or direct sales between generators and retail customers

Sources: China’s National Development Reforms and Commission, Japan’s Ministry of Economy, Trade and Industry, Korea’s Ministry of Strategy and Finance

However, in the medium to long term, we are likely to see power markets in these countries become more liberalized, which will createchallenging operating conditions because of downward pressure on margins from higher competition. A consistent regulatory andpolicy environment associated with market structures has been a key factor underpinning stable business conditions.

In addition, we view sector reforms which result in a material reduction in the strategic importance of companies to the governmentas credit negative for those issuers whose ratings incorporate uplift to reflect the likelihood of extraordinary government or parentalsupport (see Exhibit 9). A decrease in the strategic importance of power companies will mean a lower likelihood of such extraordinarysupport. In other countries, no major sector reforms have been announced and therefore we see little impact on power companies overat least the next one to two years.

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Exhibit 9

Multi-notch uplift suggests credit pressure if strategic importance materially weakens

*For SGID, Longyuan, SEP and SP, the final issuer and/or senior unsecured ratings incorporate a one-notch downward adjustment for structural subordination; **India, Indonesia, Malaysia,New Zealand, and the Philippines, respectively; **The Philippines’ NPC is not included, because it has only a guaranteed instrument rating.Source: Moody’s Investors Service

What could change our outlookWe could revise the outlook to positive if transparent and consistent tariff systems are implemented in a majority of power sectorsacross the region and/or the power companies materially strengthen their financial buffers.

We could move the outlook to negative if regulators make adverse adjustments to tariffs or subsidies which are insufficient to coversustained spikes in fuel prices and environmental compliance costs, and/or a majority of power companies’ dispatch capabilitymaterially weakens as a result of intensified competition, or sector reforms.

Exhibit 10

Tariff systems and market structure drive sector outlooks

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Source: Moody's Investors Service

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Appendix 1. Asia Pacific Power Companies Rated by Moody’s

*Adjusted total assets in US$ millions, as of the latest fiscal year end available; **Rating under review for downgrade; ***NTPC does not benefit from an uplift because its standalonecredit quality is already at the same level as that of the Indian government; ****The Philippines’ National Power Corporation is excluded from the list, because only its senior secured notes(Baa2 stable) are rated. These notes are guaranteed by the Philippine government (Baa2 stable);*****Our corporate ratings in Japan take into account the unique system of support thatoperates there for large and systemically important organizations.Source: Moody's Investors Service

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Appendix 2. Regulatory Environments

Source: Moody's Investors Service

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Appendix 3. Tariff Systems for Asia Pacific Power Sectors

Source: Moody's Investors Service

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Moody's Related ResearchCredit Opinion

» SGSP (Australia) Assets Pty Ltd, November 2016

» AusNet Services, March 2016

» ETSA Utilities Finance Pty Limited, November 2016

» ElectraNet Pty Ltd, January 2016

» NSW Electricity Networks Finance Pty Limited, September 2016

» United Energy Distribution Pty Limited, August 2016

» AGL Energy Ltd, August 2016

» Origin Energy Ltd, August 2016

» Alinta Energy Finance Pty Ltd, October 2016

» State Grid Corporation of China, April 2016

» State Grid International Development Limited, June 2016

» China Southern Power Grid Co., Ltd., March 2016

» China Three Gorges Corporation, March 2016

» Zhejiang Provincial Energy Group Co. Ltd, March 2016

» State Power Investment Corporation, November 2016

» Shanghai Electric Power Company Limited, November 2016

» China General Nuclear Power Corporation, March 2016

» Beijing Energy Holding Co., Ltd., November 2016

» China Longyuan Power Group Corporation Ltd., October 2016

» China Resources Power Holdings Co., Ltd, October 2016

» United Photovoltaics Group Limited, November 2016

» CLP Power Hong Kong Limited, March 2016

» CLP Holdings Limited, May 2016

» NTPC Limited, June 2016

» Adani Transmission Limited, October 2016

» Tata Power Company Limited (The), June 2016

» Perusahaan Listrik Negara (P.T.), February 2016

» Cikarang Listrindo (P.T.) (Cikarang), August 2016

» Star Energy Geothermal (Wayang Windu) Limited, June 2016

» Electric Power Development Co., Ltd., April 2016

MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

15 1 December 2016 Power Sector – Asia Pacific: 2017 Outlook - Rising Industry Challenges Are Manageable, Outlook Stable

» Okinawa Electric Power Company, Incorporated, 2016

» Kansai Electric Power Company, Incorporated, March 2016

» Chubu Electric Power Company, Incorporated, March 2016

» Kyushu Electric Power Company, Incorporated, April 2016

» Chugoku Electric Power Company, Incorporated, November 2016

» Hokkaido Electric Power Company, Incorporated, March 2016

» Hokuriku Electric Power Company, Incorporated, November 2016

» Tokyo Electric Power Company Holdings, Inc., October 2016

» Korea Electric Power Corporation, September 2016

» Korea Hydro & Nuclear Power Co., Ltd, October 2016

» Korea South-East Power Co., Ltd., June 2016

» Korea East-West Power Co., Ltd., June 2016

» Korea Midland Power Co., Ltd., June 2016

» Korea Western Power Co., Ltd., June 2016

» Korea Southern Power Co., Ltd, June 2016

» Tenaga Nasional Berhad, September 2016

» Transpower New Zealand Limited, November 2016

» VECTOR Limited, September 2016

» Power Sector Assets & Liabilities Mgmnt Corp., April 2016

» Singapore Power Limited, 2016

» SP PowerAssets Ltd, August 2016

» Ratchaburi Electricity Generating Holding PCL, July 2016

Issuer In-Depth & Sector In-Depth

» Utilities - Global: Nuclear Power Is a Carbon Reduction Strategy for Some Countries, But Not All, November 2016 (1039916)

» Power Sector – China and Korea: Supportive Policy Stance Underpins Nuclear Generators’ Credit Quality, November 2016

» Electric Utilities - Japan: Nuclear Reliant Electric Utilities Face Customer Losses, November 2016 (1048819)

» Tokyo Electric Power Company Holdings, Inc.: TEPCO's credit strength would benefit from clarity on Fukushima, nuclear restarts,and liberalization, September 2016 (1038594)

» KEPCO's Six Power Generating Companies: Companies' Credit Profiles Can Cope With Weak Wholesale Power Prices, September2016 (1040474)

» Government-Related Issuers – Korea: Public-Sector Reforms Raise Medium- to Long-Term Credit Challenges, July 2016 (1033034)

» Australian Regulated Electricity & Gas Networks: 2017 Outlook - Short-Term Regulatory Uncertainty Is Manageable, June 2016(1027937)

MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

16 1 December 2016 Power Sector – Asia Pacific: 2017 Outlook - Rising Industry Challenges Are Manageable, Outlook Stable

» Power Sector - India: Growth in Renewable Energy Capacity Will Challenge Fossil Fuel Operators, April 2016 (1021013)

» China's Power Market: Sluggish Electricity Demand, But Headroom Within Credit Profiles Provides Support, February 2016(1011388)

» Indian Power Sector: Debt restructuring scheme for India’s state owned power distribution companies is credit positive for powerutilities, November 2015 (1009902)

» Japanese Electric Utilities: Japanese Electric Industry Reforms Could Weaken Utilities’ Credit Quality, September 2015 (1008113)

Rating Methodology

» Regulated Electric and Gas Utilities, December 2013 (157160)

» Regulated Electric & Gas Networks, November 2014 (159570)

» Unregulated Utilities and Unregulated Power Companies, October 2014 (172784)

» Power Generation Projects, December 2012 (147991)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

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Endnotes1 Please refer to Moody’s Sector Comment, titled “US Met Coal Price Rally Unsustainable Long-term” dated 27 October 2016, which mentioned that we

do not view current price levels as sustainable as the recent upturn is attributable primarily to temporary supply disruptions in China, weather events inAustralia and a stimulus-driven increase in demand from the Chinese steel sector.

2 Please refer to Moody’s Sector In-Depth, titled “Batteries Charge Up For the Electric Grid” dated 24 September 2015.

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19 1 December 2016 Power Sector – Asia Pacific: 2017 Outlook - Rising Industry Challenges Are Manageable, Outlook Stable

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Ivy Poon 852-3758-1336AVP-Analystivy.poon@moodys.com

Ada Li 852-3758-1606VP-Senior Analystada.li@moodys.com

Osbert Tang 86-21-2057-4019VP-Senior Analystosbert.tang@moodys.com

Ray Tay 65-6398-8306VP-Senior Analystray.tay@moodys.com

Abhishek Tyagi 65-6398-8309VP-Senior Analystabhishek.tyagi@moodys.com

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Mary Anne Low 612-9270-8137Analystmaryanne.low@moodys.com

Mariko Semetko 81-3-5408-4209VP-Senior Analystmariko.semetko@moodys.com

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