Chinese Power Gencos’ leverage to rise on coal price, capex

10 May, 2021 06:12
source: Fitch Ratings

Singularity Financial Hong Kong May 10, 2021– Rated Chinese power generation companies’ (gencos) dark spread, the difference between the tariff and unit coal cost, will narrow in 2021 on higher coal prices and lower power tariffs, squeezing their profit and operating cash flows, which, coupled with high capex on renewable energy, will keep leverage elevated, says Fitch Ratings.

All Fitch-rated power generation companies reported better EBITDA margins in 2020 compared with 2019 due to weaker coal prices, and higher contribution from renewable power. Fitch expects coal prices to rise in 2021 after the cost of the fuel increased at the start of the year, which will squeeze Chinese power gencos’ dark spread. This will be heightened by a potentially lower coal-fired power tariff as all of the Fitch-rated power gencos are selling more electricity under the market-trading mechanism to drive sales volume, and the discount for market-traded power may also widen.

Capex rose in 2020 for most of the Fitch-rated power gencos. China Huaneng Group Co., Ltd. (Huaneng, A/Stable), China Huadian Corporation Ltd. (Huadian, A/Stable) and State Power Investment Corporation Limited (SPIC, A/Stable) reported capex increased by 13.6%, 48% and 39%, respectively, mainly to support their investments in renewable power.

Rated provincial energy companies also demonstrated a similar pattern. The capex of Zhejiang Provincial Energy Group Company Ltd. (ZEG, A+/Stable), Guangdong Energy Group Co., Ltd. (GEG, A/ Stable), and Shenergy (Group) Company Limited (A+/Stable) rose by 118.2%, 48.2% and 24.9% in 2020, respectively, largely on renewable energy projects. ZEG also invested in fuel refilling stations while Shenergy invested in gas facilities, including pipelines and liquefied natural gas terminals.

Most of the Fitch-rated power gencos had negative free cash flow and elevated leverage in 2020 as high capex almost offset the impact of better EBITDA, especially for SPIC, GEG and ZEG, whose leverage profile deteriorated as a result of high debt-funded capex.

Fitch expects capex for power gencos to remain high in the medium term as they continue to expand their renewable business. SPIC plans to increase the share of its clean energy capacity to 60% in the next five years and the target of the proportion of clean energy set by Huaneng is 50%. Similarly, Huadian expects its non-fossil fuels to account for over 50% of its generation capacity by 2025. Provincial energy companies such as ZEG, GEG and Shenergy will also spend on their gas infrastructure in addition to renewable power.

Higher capex will raise leverage although the pressure will be alleviated by their strong funding capability and potential equity contribution from minorities at the project level. The transition to renewable energy is also positive for their business profiles and will improve their cash flow predictability, as renewable power enjoys higher grid-parity, guaranteed utilisation hours and fixed power tariffs, while exposure to fuel price fluctuation will be lowered.