Low Coal Prices Drive Huaneng Earnings in Quarter

Huaneng Power International reported 2013 third-quarter earnings of $1.52 per ADR compared with $0.92 per ADR in 2012’s third quarter. The reported results included an asset impairment charge and loss on disposal of noncurrent assets that reduced reported earnings by roughly $0.24 per ADR. Low market coal prices continue to drive strong earnings. We are reaffirming our narrow moat and stable moat trend ratings and our fair value estimate of $32 per ADR.

Huaneng also indicated that it received notice from the National Development and Reform Commission regarding the adjustment of on-grid electricity tariffs for coal-fired generating units. The tariff adjustments vary by province and generating unit based on meeting certain environmental requirements. Huaneng indicated that the tariff adjustment would decrease weighted-average on-grid tariffs for the company’s generating capacity by RMB 12.59 per MWh, approximately 2%. We estimate this will decrease 2014 by about $0.30, to approximately $5.30 per ADR.

Our fair value estimate would decline about $3 per ADR based on the tariff reset with no other regulatory adjustments. However, due to the lack of regulatory framework in the Chinese power industry, we have a low level of confidence in how regulators might set coal prices. Coal prices have a major impact on the profitability of Huaneng. Due to this lack of visibility we are leaving our fair value estimate unchanged at this time, but the tariff reset is a material concern.

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