Fitch: Chinese power producers' leverage on the rise

Fitch Ratings said that while the operating margins for China's independent power producers rebounded in the first half of 2006 following the implementation of the "fuel-tariff pass-through mechanism" and higher energy sales, substantial capital expenditure in the absence of equity capital injections continued to lift the companies' leverage ratios.

The five major Chinese independent power producers mentioned by Fitch were Huaneng Power International, Inc., Datang International Power Generation Co. Ltd., Huadian Power International Corp. Ltd., China Resources Power Holdings Co. Ltd. and China Power International Development Ltd.

The Chinese independent power producers will likely see negative free cash flow as capital expenditure on new capacity remains significant enough to put a strain on operating cash flows, the agency predicted. The Chinese power sector has seen aggressive construction of new power generation capacity over the past few years in a bid to alleviate the current power shortages.

Fitch said the companies' credit profiles are supported, however, by sustainable domestic power demand, the availability of significant domestic coal resources for power generation, ongoing progressive industry reform, government promotion of renewable energy sources and good funding sources from the domestic banking sector.

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