Tax gains eroded as first-quarter income increases only 1.2pc Huadian Power International, the fourth-largest mainland generator listed in Hong Kong by market value, reported first-quarter profit growth of 1.2 per cent as a decrease in plant utilisation and rising coal price eroded most of the tax gains. Net income rose to 279.46 million yuan in the three months to March from a restated 276.13 million yuan under Chinese accounting standards, Huadian said yesterday. Turnover rose to 4.19 billion yuan from 3.45 billion yuan. Pierre Lau, the head of Asia-Pacific utilities research at Citigroup, said Huadian's profit was boosted by a one-off cut in deferred tax liabilities, estimated at 123 million yuan. The gain arose from the tax rate unification for local and foreign companies, which will become effective next year and lead to a cut to 25 per cent from 33 per cent for domestic firms. Deferred tax liability is the estimated present value of future tax effects arising from differences in accounting tax expense against actual tax payable. Huadian's pre-tax profit fell 19 per cent to 369 million yuan, dragged down by the drop in utilisation hours at its power generating units and the rising coal price, the company said, without giving details. Mr Lau said Huadian's unit fuel cost rose 8 per cent in the first quarter while interest expense jumped 175 per cent to 282 million yuan. Huadian, which last week said it had received approval to sell four billion yuan short-term debt for refinancing, produced 19.8 per cent more electricity in the first three month to 14 billion kilowatt-hours. A US brokerage utilities analyst said the main reason for the flat net profit growth was an estimated 16 per cent fall in average plant utilisation hours. He said Huadian's net profit would have fallen more than 20 per cent had it not included the one-off reduction in deferred tax liabilities. 'It is quite strange that Huadian booked the gain in the first quarter as a more normal or conservative practice would be to include it only after the details of the tax unification rules come out,' he said. 'It is apparent that the company is using the gain to mask its profit decline.' Lower utilisation will squeeze margin as some costs such as depreciation are fixed. Most mainland power firms saw average utilisation rates at local plants fall last year and the trend is expected to continue this year with an increase in new capacity. Average accumulated utilisation hours of mainland power producers decreased by 203 hours or 3.74 per cent to 5,221 hours last year as total installed capacity increased 20.3 per cent to 622,000 megawatts. Analysts said tariff rises, set by local governments after Beijing indicates a guidance, would be lowered and come later than expected this year to compensate for coal costs. 'Beijing may have to rein in this year's tariff rise to prevent further overinvestment,' the brokerage analyst said.