Huaneng Power International (HUNGF) Risk Analysis
Risk Overview Q4, 2021
Source: the company's latest filing for the period ended Dec 31, 2021, filed Apr 21, 2022
Risk Change Over Time
No filing history is available.
- Regulation - Risk 1Government regulation of power tariffs and other aspects of the power industry may adversely affect our business
Similar to electric power companies in other countries, we are subject to governmental and electric grid regulations in virtually all aspects of our operations, including the amount and timing of electricity generations, the setting of tariffs, the performance of scheduled maintenance, and the compliance with power grid control and dispatch directives as well as environment protection regulations. There can be no assurance that these regulations will not change in the future in a manner which could adversely affect our business. The tariffs for our planned output are subject to a review and approval process involving the National Development and Reform Commission ("NDRC") and the relevant provincial government. Since April 2001, the PRC Government has been implementing a tariff-setting mechanism based on the operating terms of power plants as well as the average costs of comparable power plants. Pursuant to the NDRC circular issued in June 2004, the tariffs for our newly built power generating units commencing operation from June 2004 have been set on the basis of the average cost of comparable units adding tax and reasonable return in the regional grid. Any future reductions in our tariffs, or our inability to raise tariffs (for example, to cover any increased costs we may have to incur) as a result of the new tariff-setting mechanism, may adversely affect our revenue and profits. In addition, the PRC Government started a program in 1999 to effect power sales through competitive bidding in some of the provinces where we operate our power plants. The tariffs for power sold through competitive bidding are generally lower than the pre-approved tariffs for planned output. In the more recent few years, power sales through competitive bidding only accounted for a portion of our overall power sales. Nevertheless, the PRC Government is seeking to expand the program. Any increased power sales through competitive bidding may reduce our tariffs and may adversely affect our revenue and profits. Furthermore, the PRC Government started in 2009 to promote the practice of direct power purchase by large power end-users. Pursuant to the circular jointly issued by NDRC, the State Electricity Regulatory Commission ("SERC") and China National Energy Administration in June 2009, the direct transaction price shall include the direct transaction price, the grid transmitting price and the governmental fund and additional charges, of which the direct transaction price shall be freely determined through negotiation between the power generation company and the large power end-user. The price of direct power purchase shall be subject to the demand in the power market. Furthermore, the scale and mode of the transaction are also subject to the structure and level of development of local economy. In terms of power generation companies engaged in direct power purchase, direct power sales constitute a portion of the total power sales, thus affecting the power sales of the Company. For the past few years, the PRC Government continued the reform in the area of direct power purchase by large power end-users. In 2013, China National Energy Administration officially launched the direct power purchase program in seven provinces where we have power plants and the program has been steadily rolled out in other provinces. The tariff-setting mechanism is evolving with the reforming of the PRC electric power industry. The PRC government announced a number of development and reform plans for the power market in 2016, covering areas including laws and regulations, comprehensive pilot plans, power transmission and distribution prices and supply side dynamics, the establishment of the power exchanges, rules and market administration committees, and opening up incremental distribution business. In 2017, the development and reform plans have been further expanded to the nationwide scale, with multiple issuances made by the PRC government governing power development plan, electricity transmission and distribution price, opening up of the electricity generation and consumption plans, supply side dynamics, electricity power spot and ancillary market development, electricity exchange rules, market supervision and clean energy consumption, etc. In 2018, the development and reform entered into an implementation stage, reflected in the areas of distribution price reform, establishment of the power exchanges and ancillary market and the incremental distribution network reform, etc. In 2019, the development and reform entered into a "deep-water zone" with long- and mid-term power exchange markets, power commodity exchange markets and ancillary service exchange markets established and relevant rules and policies adopted. In 2020, MOF, NDRC and China National Energy Administration ("NEA") issued Several Opinions on Promoting the Healthy Development of Non-Hydro Renewable Energy Power Generation to clarify the responsibilities of consuming renewable energy power for each provisional administrative region. In 2021, NDRC and NEA issued Notice on Further Deepening the Market-Based Reform of the Electricity Tariff for Coal-fired Power and Notice on Further Developing Time-of-Use Pricing Regime to provide further guidance on tariff pricing. Currently, the percentage of the direct power purchase accounts for more than 80% of our total power sales, which may have an adverse effect over our operating results basing on the relatively lower tariffs generally for this portion. There is no assurance that government regulations on the industry will not change in a manner which could adversely affect our business and impact our results of operations, that we will be afforded sufficient time to adjust the operation of our business in answering to the promulgation of such changes and amendments before they come into effect and apply to our business operations, or that such adjustment measures we take can effectively help us to navigate the new regulatory environment and ease the negative impacts brought by such new changes and amendments on our business operation. See "Item 4 Information of the Company – B. Business Overview – Pricing Policy" for example. As a result, any such regulations and the adjustments we make in answering thereto may lead to changes to the way we operate our business, including without limitation how we formulate our production plan under a new industry regime with respect to dispatch and pricing, and how we manage our operating costs in relation thereto, which may in return have a negative impact on our business and cause the price of our ADSs to incline.
- Regulation - Risk 2Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or as early as 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year ending December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor's, control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects. On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States as early as 2023.
- Taxation & Government Incentives - Risk 3There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in the ADSs or our H Shares to significant adverse United States income tax consequences
We will be a "passive foreign investment company," or "PFIC," if, in the case of any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of "passive" income or (b) 50% or more of the value of our assets (generally determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (the "asset test"). For United States federal income tax purposes, and based upon our income and assets, we do not believe that we were classified as a PFIC for the taxable year ended December 31, 2021, and do not anticipate becoming one in the foreseeable future. While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of the ADSs, fluctuations in the market price of the ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets. Under circumstances where we determine not to deploy significant amounts of cash for active purposes, our risk of being a PFIC may substantially increase. Because PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year. If we are a PFIC in any taxable year, a U.S. Holder (as defined in "Item 10. Additional Information-E. Taxation-United States federal income tax considerations") may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or H Shares and on the receipt of distributions on the ADSs or H Shares to the extent such gain or distribution is treated as an "excess distribution" under the United States federal income tax rules and such holders may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds the ADSs or our H Shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds the ADSs or our H Shares. For more information see "Item 10. Additional Information-E. Taxation-United States federal income tax considerations-Passive Foreign Investment Company Rules."
Risk Highlights Q4, 2021
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 26
- Regulation - Risk 1Any change to the current governmental policy on tariff pricing and power dispatching may have adverse impact on Sahiwal Power Plant's business and results of operations
By a Decision of the Authority released in January 2019, the NEPRA provided to Sahiwal Power Plant with the approved tariff structure and the pricing details as well as dispatch criteria, which were based on the current upfront tariff structure, pricing methods and power purchase regime as provided by the relevant governmental rules and policies. If any of such rules and policies is changed, the NEPRA or the CPPA may be forced to change, or even terminate, the current tariff pricing and dispatching regime applicable to our Sahiwal Power Plant, which may have material and adverse impact on its operation and financial performance.
- Regulation - Risk 2Regulatory changes of the vesting regime in Singapore could expose Tuas Power to electricity price volatility and adversely affect its business and results of operations
Tuas Power derives its revenue mainly from sale of electricity to the National Electricity Market of Singapore (the "NEMS") through a bidding process and vesting contracts under which a significant portion of power sales is predetermined by the Energy Market Authority ("EMA"). The vesting contract regime in Singapore is targeted at mitigation of market power in the wholesale electricity spot market. The regime achieves this objective by assigning a quantity of vesting contracts to generation companies, thereby limiting their incentives to exercise whatever level of market power they may possess. Vesting contracts are a form of bilateral contract imposed/vested on the major power generation companies in Singapore. Vesting contract price is set by the EMA, which is Singapore's power market regulator. Vesting contract price is set at the long run marginal cost of the most efficient base-loaded technology plant employed in Singapore and is reviewed every two years. On a quarterly basis, the EMA allows for vesting contract quantity to be adjusted to account for changes in demand (due to seasonality) and the vesting contract price to be adjusted to account for inflation and changes in fuel prices. Such a mechanism helps protect the profit margins of the power generation companies in the Singapore market, such as Tuas Power, to a large degree. The quantity of vesting contract allocated to the power generation company depends on the proportion of such power generation company's capacity to the total licensed or planned generation capacity at the commencement of the vesting contracts regime. A portion of the volume under the Vesting Contract Scheme has also been allocated to the LNG Vesting Scheme - an incentive scheme where players who have committed to an initial tranche of LNG for Singapore are allocated electricity sale contracts. The volume allocated to the generation companies under the LNG vesting scheme is fixed for a period of 10 years until 2023. Following EMA's review of the Vesting Contract Regime in 2016, it is determined that the vesting contract level shall be maintained at 25% until the end of the first half of 2018 and it shall be reduced to LNG vesting level by the second half of 2019. The vesting contract regime will be phased out by 2023 when the LNG vesting contract expires, which could lead to volatility in electricity prices and adversely affect our business, financial condition and results of operation. In July 2018, EMA issued a determination paper to allow vesting contract holders with steam turbine generation plants, i.e., Tuas Power, Senoko Energy and YTL PowerSeraya, to retain their allocated vesting quantities irrespective of whether the steam turbine generation plants are retired. This will facilitate the three generation companies in making commercial decisions on whether and when to retire their steam turbine generation plants so as to reduce overhead costs and free up resources. In June 2019, EMA embarked on an industry consultation process on the implementation of a Forward Capacity Market ("FCM"). EMA indicated that it planned to develop and implement a FCM, which would function together with the current real-time wholesale spot energy market with ancillary services, to meet the objectives of (i) maintaining resource adequacy by providing adequate incentives to the existing and new generation capacity and ensuring that the power sector is sustainable and (ii) maximizing economic efficiency to minimise long-run costs to consumers. EMA announced on November 2,2021 that "will therefore defer the implementation of the FCM. EMA will continue to monitor market conditions and technological developments, and review the introduction of the FCM in the future."
- Regulation - Risk 3ChangedGovernment regulation of power tariffs and other aspects of the power industry may adversely affect our business
Similar to electric power companies in other countries, we are subject to governmental and electric grid regulations in virtually all aspects of our operations, including the amount and timing of electricity generations, the setting of tariffs, the performance of scheduled maintenance, and the compliance with power grid control and dispatch directives as well as environment protection regulations. There can be no assurance that these regulations will not change in the future in a manner which could adversely affect our business. The tariffs for our planned output are subject to a review and approval process involving the National Development and Reform Commission ("NDRC") and the relevant provincial government. Since April 2001, the PRC Government has been implementing a tariff-setting mechanism based on the operating terms of power plants as well as the average costs of comparable power plants. Pursuant to the NDRC circular issued in June 2004, the tariffs for our newly built power generating units commencing operation from June 2004 have been set on the basis of the average cost of comparable units adding tax and reasonable return in the regional grid. Any future reductions in our tariffs, or our inability to raise tariffs (for example, to cover any increased costs we may have to incur) as a result of the new tariff-setting mechanism, may adversely affect our revenue and profits. In addition, the PRC Government started a program in 1999 to effect power sales through competitive bidding in some of the provinces where we operate our power plants. The tariffs for power sold through competitive bidding are generally lower than the pre-approved tariffs for planned output. In the more recent few years, power sales through competitive bidding only accounted for a portion of our overall power sales. Nevertheless, the PRC Government is seeking to expand the program. Any increased power sales through competitive bidding may reduce our tariffs and may adversely affect our revenue and profits. Furthermore, the PRC Government started in 2009 to promote the practice of direct power purchase by large power end-users. Pursuant to the circular jointly issued by NDRC, the State Electricity Regulatory Commission ("SERC") and China National Energy Administration in June 2009, the direct transaction price shall include the direct transaction price, the grid transmitting price and the governmental fund and additional charges, of which the direct transaction price shall be freely determined through negotiation between the power generation company and the large power end-user. The price of direct power purchase shall be subject to the demand in the power market. Furthermore, the scale and mode of the transaction are also subject to the structure and level of development of local economy. In terms of power generation companies engaged in direct power purchase, direct power sales constitute a portion of the total power sales, thus affecting the power sales of the Company. For the past few years, the PRC Government continued the reform in the area of direct power purchase by large power end-users. In 2013, China National Energy Administration officially launched the direct power purchase program in seven provinces where we have power plants and the program has been steadily rolled out in other provinces. The tariff-setting mechanism is evolving with the reforming of the PRC electric power industry. The PRC government announced a number of development and reform plans for the power market in 2016, covering areas including laws and regulations, comprehensive pilot plans, power transmission and distribution prices and supply side dynamics, the establishment of the power exchanges, rules and market administration committees, and opening up incremental distribution business. In 2017, the development and reform plans have been further expanded to the nationwide scale, with multiple issuances made by the PRC government governing power development plan, electricity transmission and distribution price, opening up of the electricity generation and consumption plans, supply side dynamics, electricity power spot and ancillary market development, electricity exchange rules, market supervision and clean energy consumption, etc. In 2018, the development and reform entered into an implementation stage, reflected in the areas of distribution price reform, establishment of the power exchanges and ancillary market and the incremental distribution network reform, etc. In 2019, the development and reform entered into a "deep-water zone" with long- and mid-term power exchange markets, power commodity exchange markets and ancillary service exchange markets established and relevant rules and policies adopted. In 2020, MOF, NDRC and China National Energy Administration ("NEA") issued Several Opinions on Promoting the Healthy Development of Non-Hydro Renewable Energy Power Generation to clarify the responsibilities of consuming renewable energy power for each provisional administrative region. In 2021, NDRC and NEA issued Notice on Further Deepening the Market-Based Reform of the Electricity Tariff for Coal-fired Power and Notice on Further Developing Time-of-Use Pricing Regime to provide further guidance on tariff pricing. Currently, the percentage of the direct power purchase accounts for more than 80% of our total power sales, which may have an adverse effect over our operating results basing on the relatively lower tariffs generally for this portion. There is no assurance that government regulations on the industry will not change in a manner which could adversely affect our business and impact our results of operations, that we will be afforded sufficient time to adjust the operation of our business in answering to the promulgation of such changes and amendments before they come into effect and apply to our business operations, or that such adjustment measures we take can effectively help us to navigate the new regulatory environment and ease the negative impacts brought by such new changes and amendments on our business operation. See "Item 4 Information of the Company – B. Business Overview – Pricing Policy" for example. As a result, any such regulations and the adjustments we make in answering thereto may lead to changes to the way we operate our business, including without limitation how we formulate our production plan under a new industry regime with respect to dispatch and pricing, and how we manage our operating costs in relation thereto, which may in return have a negative impact on our business and cause the price of our ADSs to incline.
- Regulation - Risk 4ChangedOur ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or as early as 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year ending December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor's, control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects. On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States as early as 2023.
- Regulation - Risk 5AddedChanges in government regulations and legislation may limit our activities and affect our business operations and the price of our ADSs, and result in risks that affect our future financing plans and securities offerings, the liquidity of our investors, and the enforcement of court judgment and shareholders' rights.
As a company established and operating in China, we are required to comply with PRC laws and regulations. The PRC legal system is based on written statutes and their interpretation by the Supreme People's Court. Prior court decisions may be cited for reference but are not considered as binding precedents. In addition, in light of the dynamic nature of the Chinese economy and the continuing evolvement of the PRC legal system, the PRC authorities may promulgate new laws and regulations regulating the power industry, or overall investment and market activities in general, and may influence the implementation of our established business plans and operation strategies. While certain legislative changes are required by law to go through review and comment procedures open to certain market participants or the general public, and to the extent that such changes are made to regulate our business operation, we may have the opportunity to participate in such review and comment procedures during the policy and rule-making process, we cannot assure you that the rules or policies finally adopted will be in our favor. The new regulations and policies or the amendment to the current ones may subject us to enhanced compliance scrutiny, result in more compliance costs and expenses, or otherwise adversely affect our business by requiring adjustments to our business plans and operations. For example, there may be more stringent environmental protection laws and regulations, the compliance with which may require us to shift the operation focus of our business to renewable energy power generation, incur more costs and expenses to upgrade our facilities and to implement more sophisticated pre-emission treatment procedures, and trim down our plan of business expansion. As a result of those new or amended rules and policies, we may not have control over the timing or outcome of approvals of certain of our planned projects, and may encounter significant constraints on our ability to implement our business strategies, to develop or expand our business operations or to maximize our profitability, which could in turn adversely affect our operations by raising our operating costs and lowering our profits or otherwise impeding our efforts to improve our operation efficiency and profitability, and further adversely affect the market expectations of our business operations. Depending on the extent to which our operations are so affected, the value of our ADSs may significantly decline. In addition, as a PRC company with equity securities listed in PRC, Hong Kong and U.S., we are required to obtain the approval of the China Securities Regulatory Commission (the "CSRC") for any public offering of equity securities. We have received from the CSRC the approval for our public offerings of ADSs in U.S. in the past, however, we cannot assure you that we will timely receive such approval if we wish to make any new equity offerings in the future. If we fail to obtain the requisite approvals with respect to future offerings of our equity securities to foreign investors, or if we inadvertently conclude that such approvals are not required any more, our ability to execute our financing and equity offering plans may be significantly limited or completely hindered. In the absence of alternative sources of financing, this could impede our efforts to improve our liquidity or expand our business operation, and we cannot assure you there will not be material negative impacts on our financial conditions and result of operations, or a significant decline in the value of our ADSs. Furthermore, foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange. While we have not been denied of our applications for foreign exchange for the payment of our dividends, we cannot rule out the possibility that such control and limitation could affect our ability to obtain foreign exchange to pay cash dividends declared on our H shares (including ADSs representing our H shares). Consequently, we cannot assure you that your investment will not be subject to foreign exchange payment risks as a result of these foreign exchange control measures. In addition to PRC Companies Laws, we are subject to certain PRC regulations governing PRC companies that are listed overseas. These regulations contain certain provisions that are required to be included in the articles of association of these PRC companies and are intended to regulate the internal affairs of these companies. As the PRC regulations are constantly evolving with the goal of better protecting shareholder's interests, we may face greater uncertainties in the interpretation of PRC laws and regulations. Furthermore, the PRC regulations for protection of shareholder's rights are different from those applicable in the United States and/or exchanges where we are listed. Therefore we made it our policy to adopt the strictest standards of any listing rules potentially applicable to us. Some of these standards are incorporated in our articles of association and bylaws with the view to providing most protection for the interests of our shareholders. As a result, the primary sources of our shareholder rights are our articles of association, the PRC Companies Law, the Listing Rules of the New York Stock Exchange and the Listing Rules of the Hong Kong Stock Exchange, which, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our controlling shareholder. In general, the protection of our shareholder's rights and access to information adopted pursuant to such provisions are not all the same as those applicable to companies incorporated in the United States and other Western countries, and are constantly evolving. Furthermore, while China has become a signatory to various treaties providing for the recognition and enforcement of certain foreign judgments in general, whether a specific judgment issued by a foreign court is capable of being recognized or enforced in China is still subject to uncertainties. Therefore, our investors may be faced with risks associated with the enforcement of court judgements and shareholders rights.
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