China Resources Power has falling coal prices to thank for 1H14 performance: Moody's

Prices were greater than tariffs decrease.

Moody's Investors Service says China Resources Power Holdings Company Limited's (CR Power) results in 1H 2014 are broadly in line with Moody's expectations.

According to a release from Moody’s Investors Service, it also says that the results will not have an immediate impact on CR Power’s Baa2 corporate family rating, Baa3 senior unsecured rating, and stable rating outlook.

"The company's overall credit metrics are well positioned for its current rating, underpinned by a relatively stable leverage," says Ivy Poon, a Moody's analyst.

Here’s more from Moody’s Investors Service:

"CR Power's profitability and operating cash flows improved, mainly because the fall in coal prices, which are a main component of its production costs, was greater than the decrease in tariffs," adds Poon.

Moody's notes that its average tariff decreased by 2.8% from 1H 2013.

But the company's average unit fuel cost fell by a larger 11.7% due to the combined effects of falls in coal prices and continuous improvements in operational efficiency.

In addition, CR Power maintained stable average utilization hours for its 33 coal-fired power plants, achieving 2,752 hours in 1H 2014, a modest year-on-year growth of 2%.

As a result, the company's adjusted EBITDA margin improved to 38.2% in 1H 2014 from 35.4% in 1H 2013.

Moody's expects tariffs to remain under downward pressure due to prolonged weakness in the coal market and the Chinese government's efforts to improve the link between coal and electricity prices.

However, the downward adjustment on tariffs is likely to be moderate and progressive, such that impact on CR Power's profitability is manageable.

The company's level of debt has increased by around HKD9.4 billion from end-2013, before considering the repayment of shareholder loans amounted to HKD4.8 billion.

Its adjusted debt/book capitalization stayed relatively stable at around 54% at end-June 2014. And adjusted funds from operation/ debt stayed comfortably at 23% compared to 21% at end-June 2013.

Moody's expects CR Power's capital expenditures in 2014 will be at similar levels as 2013 with some modest increases.

Nevertheless, the company's stable operating cash flows -- benefiting from weak coal prices -- will cover a significant portion of its capital expenditures.

Therefore, Moody's expects CR Power's leverage to remain stable over the next 12-18 months.

These projected credit metrics will remain appropriate for the current rating level, though de-leveraging will take time.