Siemens and Vattenfall pull out of China power generation venture

Yet more foreign investors flee China''s beleaguered power sector.

Siemens and Vattenfall are said to have made a loss on their investment in Hanfeng power plant in Hebei province following its sale for $168 million. Siemens is thought to have paid $190 million for its original investment in the MW1,320 power plant eight years ago.

It purchased a 40% stake and went on to sell 16% to Vattenfall in 2000. The remaining stake is split between the Hebei Electric Power Corporation on 40% and the Hebei Construction and Investment Corporation on 20%.

As part of the deal, tied up at the end of 2004, the two also transferred $282 million in debt to Mainland buyers CITIC and Huaneng.

Their departure follows a strategic re-alignment back to Europe by Vattenfall. Siemens has a number of power plants in China, but some specialists say they are not surprised by the sale. As one commenator puts it, "Siemens only bought into the power plant because it would help it sell power generating equipment."

The price paid by CITIC and Huaneng equates to $350,000 thousand per megawatt. This is somewhat lower than a comparable sell down by US power generator Mirant when it sold off its stake in the Guandong power plant Shajiao C at $500,000 per MW in 2002.

Specialists say the difference can be attributed to Hanfeng's far higher debt level.

Sources would not discuss the company's recent earnings, although they point out that the company has paid dividends since 2001, and that it is profitable.

However, sceptics say it is very difficult to turn a profit in the Chinese energy sector, given the government's reluctance to pass on soaring coal costs to the consumer. When the National Development and Reform Commission permitted indexing generation costs to coal costs last month, it stipulated that the generation companies should absorb 30% of any increase, thereby decreasing the power companies' top line by the same amount.

"I'm not in the least bit surprises at the sell-off. The plant has been on the market for almost one year now," says one China-based CEO, who believes the plant almost certainly did not make a profit in 2004.

"2004 figures have not yet been announced, so they would not be included," he continues. " Until 2004, we were all making money. But the last year has been catastrophic thanks to a doubling of coal prices and consumer tariffs that have not changed."

Dutch investment bank ING advised Siemens and Vattenfall on the deal.