UPDATE 2-China Huaneng's H2 disappoints, warns on 2008

(Adds Huadian Power executives' comment, details)

By Judy Hua

HONG KONG, March 26 (Reuters) - Huaneng Power International Inc (0902.HK), China's largest electricity producer, posted a disappointing 16 percent slide in second-half earnings as coal prices soared, and warned of a sustained cost squeeze and intensified competition in 2008.

Robust demand in China, the world's largest electricity consumer after the United States, has propped up the bottom line for Huaneng (600011.SS) (HNP.N) and rivals Datang International Power (0991.HK) (601991.SS), Huadian Power International (1071.HK) (600027.SS) and China Resources Power (0836.HK).

But the outlook for the power producers is overshadowed by record high coal prices and little chance of an inflation-fearing government raising power tariffs in the near future.

Huaneng's unit fuel cost jumped 10 percent in 2007, outstripping management's 8 percent target. It aims to contain the increase in unit fuel costs to below 18 percent for 2008.

"That will be an arduous task," admitted Chairman Li Xiaopeng, adding that contract coal prices had already jumped 12 percent this year from 2007.

Huaneng conceded its challenges this year included a shortage of coal, a continuous increase in coal prices, a decline in coal quality and intensified competition domestically.

It earned 3.3 billion yuan ($470 million) in the second half of 2007 versus 3.9 billion yuan a year earlier, based on calculations off previously reported first-half earnings. That lagged a forecast of 3.6 billion yuan, the average estimate of 17 analysts surveyed by Reuters Estimates.

For the year, it recorded a net profit 6.16 billion yuan in 2007, versus 6.07 billion yuan a year ago.

For a full earnings statement, please click here 032 Smaller rival Huadian Power International saw 2007 net pr ofit slip 0.36 percent. [ID:nHKG333631].

Huadian expects its coal prices to rise at least 17 percent this year, adding immense pressure to its operations, Vice General Manager Zhong Tonglin told reporters.

LOOKING ABROAD

Macquarie estimates coal prices, which hit a record in February, are likely to rise more than 50 percent in 2008/2009 from the 2007/2008 contract year.

So cash-rich Huaneng is setting its sights abroad. Parent Huaneng Group agreed this month to pay S$4.2 billion ($3 billion) to buy Tuas Power from Singaporean state investor Temasek Holdings [TEM.UL], sealing the largest overseas purchase by a Chinese power firm.

Listed Huaneng said it had signed a letter of intent to subsequently buy Tuas Power from its parent, but analysts doubted the deal would make sense in the short term [ID:nSP102842].

Morgan Stanley's Simon Lee did not see immediate synergies between Tuas Power and Huaneng on an operational level, as Tuas Power operated primarily oil and gas units, while Huaneng's expertise was in coal-fired generators.

"We would likely view this transaction as negative," UBS analyst Stephen Oldfield said. "We estimated a value for Tuas of S$2.9 billion, so China's Huaneng's premium paid was 46 percent."

Huaneng Chairman Li told reporters the purchase price for Tuas Power was "reasonable" and added that the listed company will buy it from parent at a "reasonable price".

"This will be the first step Huaneng Power International makes for overseas investment," Li said. "It will enhance our earnings per share."

Huaneng plans to generate 200.8 billion kilowatt hours (kwh) of electricity in 2008, up from 173.7 billion kwh in 2007. Its measure of average utilisation hours is expected to come to 5,757 hours for its coal-fired generation units in 2008, up from 5,656 hours in 2007.

The firm will set aside 62.7 billion yuan for capital expenditure over the next three years to boost capacity: 34.1 billion yuan for 2008, 19.8 billion yuan for 2009 and 8.9 billion yuan for 2010.

It aims to have installed power generation capacity of more than 60 gigawatts in 2010, up 62 percent. The company expects its coal supply capacity to total 50 million tonnes per year by then, and its coal storage and transportation capacity should exceed 40 million tonnes per year.

Huadian also said it would set aside a total 33.5 billion yuan in capital expenditure to nearly double its installed capacity to 40,000 megawatts by 2010 from 21,746 megawatts now. ($1=7.025 Yuan) (Editing by Ken Wills and Lincoln Feast)