Electricity generators enhance capital muscle to expand capacity, grab shares

By Chinese power conglomerates having been rolling out a series of financing schemes in an effort to seize market share before the demand for power peaks again.

In recent months, China's five power behemoths have launched several financing plans that involve 15 billion yuan (US$1.8 billion). Those schemes have sparked a new round of frenetic capital expenditures.

China in 2002 broke up the State Power Corp, a monopoly, into five similar-sized power producers - China Huaneng Group, China Datang Group, China Huadian Group, China Guodian Group and China Power Investment Group.

To date, four of the groups have listed their international units in Hong Kong.

China Power International, a unit of China Power Investment Corp, made its sharp trading debut last month in Hong Kong, at which time it raised US$321.1 million.

In September, China Huaneng International Corp announced its shareholders had approved plans to issue, overseas, US$300 million in 12-month bonds.

Previously, China Southern Power Grid Co Ltd, China Guodian Corp and China Huadian Corp completed their debt-offering plans. They raised 3 billion yuan (US$361 million), 4 billion yuan (US$481 million), and 2 billion yuan (US$240 million), respectively.

China Datang Corp also plans to raise money through debt offerings.

The firms' investment directions, however, have been different.

China Power Investment Corp and China Guodian Corp mainly invest in hydropower, while Huaneng and Huadian are more interested in hydropower and thermopower.

"It seems these power tycoons have been well armed with sufficient ammunition to realize ambitious plans," said Qiao Yi, a power analyst with Guotai Junan Securities Co Ltd.

Different from other sectors, electricity generation is a "capital-intensive industry, so various financing vehicles must be introduced," Qiao said.

Liability-to-asset ratios of some power projects have reached 70-80 per cent, the analyst said.

Apart from syndicate loan and bond placements, some flexible ways are widely used to enhance power generators' financial competence.

China Huaneng Group has sought a stronger foothold in the finance sector. The China Banking Regulatory Commission gave Huaneng Finance Co Ltd permission, last summer, to enlarge its capital by 490 million yuan (US$59.2 million).

China Power Investment Corp plans to use its Hong Kong-listed unit, China Power, to expand its overall capacity. Its parent, China Power Investment Corp, gave China Power first right to buy assets from it in China, with the exception of Shanghai.

China Power's only business in the country's richest city will be through the exercise of a call option to buy a 25-per-cent stake in Shanghai Electric Power Co, within three years.

In fact, asset-purchasing movement is aimed at effectively manoeuvring money within the group.

The State Grid Corp of China is expected, within the next few months, to appoint foreign investment banks to manage the sales of 11 power plants to foreign companies.

The move is expected to provide the generator with funds needed to upgrade infrastructure and alleviate its capital constraints.

Other project financing approaches are being widely used within the sector.

The BOT (build-operate-transfer) model often refers to the way that a private entity receives a franchise from the public sector. The public sector is any part of a country's economy, which is controlled or operated by the State or local government.

BOT has achieved great success for some small local generating plants, or China's independent power producers, or IPPs.

International power generators have little presence in China, but have long hoped to gain a bigger foothold.

Last summer, a consortium of US-based private-equity investors paid US$84.6 million to buy a 20-per-cent stake in Meiya Power Co, one of the biggest foreign-owned independent power producers in China.

In short time, the electricity giant has tried its best to flex its capital muscles. The obvious purpose is to enlarge capacity and seize market share before the industry is deregulated, Qiao said.

Last year, two-thirds of China's provinces were plagued by regular power outages. To date this year, 24 of China's 27 provinces have experienced power shortages.

China has entered a fast-growth period - at a blistering pace. That has caused several sectors to use greater amounts of electricity.

Hence, power generating firms have benefited greatly from increased demand.

Given the fact China's regions have suffered serious power shortages, the generators are eager to raise money to construct new plants.

China hopes to fill the gap in power supply before the end of next year, suggest analysts.

China Huaneng Group, which has a current gross capacity of 39 gigawatts (GW), aims to grow to 60 GW by 2010 and 120 GW by 2020, or about 12 per cent of the nation's total installation capacity.

China Guodian Group, which has a current gross capacity of 31 GW, plans to have more than 40 GW by 2005, and 60 GW by 2010.

China Huadian Group, with a current gross capacity of 31 GW, plans to control 60 GW by 2010.

China Power Investment Corp, which has 30 GW gross capacity, aiming to reach 70 GW by 2010.

China's gross domestic product reached 9.7 per cent in the year's first half, while the growth rate of electricity demand hit 15.8 per cent.

The growth rate in electricity demand this year will reach 13 per cent, and the momentum will continue until 2006, indicates a report released by Guotai Junan Securities

The Chinese Government plans to more than double total power generation capacity, to about 900,000 megawatts, by 2020.

Given the longstanding gap, the generators will be further stimulated to accelerate capital expenditure on building new plants, and to maintain the grid.

Meanwhile, China's power generators are eyeing overseas and capacity expansions. Encouraged by China's "venture out" policy, Chinese power generation firms are stepping up efforts to expand overseas.

However, they face many hurdles, especially in terms of raising capital.

It is difficult to attract outside investments, because authorities tightly regulate the power industry. When demand for power soars, generators cannot raise prices unless authorized by the government.

Some media have reported, recently, that electricity producers may be allowed to raise prices in the near future.

Alternative stable financing methods should still be explored over the long term, Qiao suggested.

The authors are industry observers and contributors to China Business Weekly

(Business Weekly 12/15/2004 page5)