China Resources Power plant's on-grid tariff to drop 2-4%

Following a recent national announcement.

China Resources Power Holdings Co. Ltd. has recently said that the on-grid tariff of its coal-fired power plants will drop by RMB0.004-RMB0.019 per kilowatt hour (kWh), or about 2%-4%.

According to a release from Moody’s Investors Service, the reduction is credit negative for the independent power producer, 88% of whose power plants are coal fired, because it will reduce the company’s sales and profits.

The tariff cut follows China’s National Development and Reform Commission’s announcement in August that it would lower on-grid tariffs for coal-fired power plants in China effective 1 September.

As a result of the reduction, we estimate that CR Power’s revenue will decline by around RMB1.6 billion in 2015, based on Moody’s expectation for the company’s annual net generation volume for that year of 134 million megawatt-hours.

This amount equals only 2.3% of CR Power’s total revenue of RMB70 billion in 2013, so the effect on the company’s credit metrics will be minimal.

Here’s more from Moody’s Investors Service:

CR Power’s profitability is more sensitive to coal prices than it is to tariff adjustments. CR Power’s costs for purchasing coal declined 9.2% year on year in the first half of 2014, and we expect the prolonged weakness in coal prices to help offset some of the revenue decline arising from the tariff reduction.

Accordingly, we expect CR Power’s adjusted debt/book capitalization and adjusted funds from operations/debt over the next 12 months to remain similar to 2013 levels of 55% and 23%, respectively.

The tariff reductions reflect China’s efforts to implement a pricing mechanism introduced in 2012 that links the sales price of electricity generated by coal-fired power plants to the price of coal.

China aims to improve the transparency of its tariff mechanism, although achieving that goal is likely to be gradual.

CR Power invests in, develops, owns and operates power plants in China. China Resources Holdings Co. Ltd (unrated), is a major Chinese conglomerate owned by China’s State Council, controls 63.1% of CR Power.

As of 30 June, CR Power had 94 power plants in commercial operation, with a total attributable installed capacity of 29,897 megawatts, of which, 22% are powered by wind, hydro and natural gas, with the remainder coal-fired.