China Coal Energy

Datang Power sees tougher operating conditions in second half as coal price continues to rise

Prospects may improve next year after it sells coal-to-chemical operations

PUBLISHED : Wednesday, 31 August, 2016, 7:22pm
UPDATED : Wednesday, 31 August, 2016, 10:49pm

Datang International Power Generation, whose profits have been dragged down for years by steep losses on projects that turn coal into chemicals and natural gas, expects tougher operating conditions in the second half as coal prices continue to rise as power sales competition intensifies.

But it may be able to have a clean separation from the troubled projects by the end of the year and start afresh next year, as it expects to soon complete their sale to its parent.

“After our shareholders approved the sale [on Monday], we will strive to complete the deal before year-end,” president Wang Xin told reporters on Wednesday. “We will no longer be burdened by the projects’ losses and financial risks, so that we can return to the road to sustainable development.”

The Beijing-based listed flagship of China Datang Group – one of the nation’s big five state-owned power generation firms – on Monday posted a 19.1 per cent decline in first-half net profit to 1.71 billion yuan.

Operating profit from power generation edged up 1.7 per cent to 6.13 billion yuan, while coal mining saw its operating loss widen to 336 million yuan from a year-earlier loss of 135.2 million yuan. Operating loss of coal-to-chemical and natural gas operations worsened to 2.24 billion yuan from 1.8 billion yuan.

The company agreed two months ago to sell the hugely loss-making portfolio of coal conversion projects among other assets to its parent for a token one yuan, and agreed to waive 10 billion yuan of loans owed by the troubled businesses to it.

In the early 2000s, the power generator diversified into coal mining and later further ventured into riskier projects that turn coal into chemicals and natural gas – businesses whose commercial viability had not been proven at the time. Technical challenges resulted in low plant utilisation and losses.

First-half power generation revenue fell 10 per cent to 26.2 billion yuan, on the back of a 5.8 per cent decline in power output and a 10 per cent reduction in average power selling prices.

Due to intensifying competition and worsening industry overcapacity, first-half average utilisation of its coal-fired power plants dropped 10 per cent year on year.

Lower plant utilisation is bad for profit margins as more fixed costs like maintenance and asset depreciation have to be borne by each unit of power sold.

Chief economist Ying Xuejun said the second-half operating environment will be challenging , as coal price could rise further due to Beijing-ordered supply cuts, although the pace is expected to be much slower after a more than 20 per cent rise year-to-date.

The rally was particularly steep in July and August, due to peak summer power demand.

Director of finance Sun Yanwen said Datang coped by mixing cheaper and lower quality coal into its usage volume, which cut its first-half fuel cost per unit of power sold by 30 per cent year on year and offset the impact from lower power sales volume and prices.

Meanwhile, Ying expects the competition over power sales to intensify both on the volume and price, after more regional governments rolled out Beijing’s policies to allow generators to directly negotiate sales volume and prices with large industrial users, and subject certain portions of a region’s power sales to open bidding.

Previously, power sales volumes are allocated by state-owned distribution monopolies, while prices were set by the government.

Ying expected more than 20 per cent of its total power sales would be subject to market competition next year, up from about 15 per cent this year. Selling prices of volumes sold via direct sales to large users – amounting to two-thirds of this year’s total projected sales – were 10 per cent lower than state-set benchmark prices.