Exclusive: U.S. power firm AES eyes China asset sales: sources

HONG KONG Tue Feb 21, 2012 3:09am EST

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HONG KONG (Reuters) - AES Corp (AES.N), the first U.S. power producer to enter China about two decades ago, is looking to sell all or some of its assets there, said three sources familiar with the process, hobbled by not being able to pass on higher coal costs in a state-regulated industry.

The sources said Arlington, Virginia-based AES, which has a market value of around $10.5 billion, has recently hired an investment bank to kick off the process. A sale or sales could potentially be worth $300-$400 million.

China's sovereign wealth fund China Investment Corp CIC.UL acquired a 15 percent stake in AES for $1.6 billion in 2009.

The likely exit, or scaling down, underscores the challenging operating environment in China's power industry, where coal-fired power producers have little control over electricity prices, which are set by the state.

Chinese independent power producers such as Huaneng Power International Inc (0902.HK) (600011.SS) (HNP.N) and Datang International Power Generation Co Ltd (0991.HK) (601991.SS), which generate power but don't own grid assets, have seen a sharp dip in their business in recent years as coal prices have surged.

They are likely to turn a profit this year, helped by long-delayed power tariff increases, but the profit outlook remains murky in the absence of a tariff regime that allows power producers to pass on fuel costs to consumers.

"Such a tariff system is unlikely to be rolled out any time soon," said Daisy Zhang, analyst at BNP Paribas.

Some foreign power companies, such as InterGen - which is owned by Huaneng and a U.S. pension fund - had seen power purchase contracts at plants in China rewritten by local authorities, resulting in operating losses and forcing them to sell their China assets.

Similarly, subsidized power prices for consumers in Indonesia, Southeast Asia's largest economy, have proved a barrier to entry for energy firms hoping to tap growing electricity demand.

The Indonesian government plans to hike electricity prices this year and is seeking foreign investment via public-private partnerships. A consortium of Japan's Electric Power Development Co (J-Power) (9513.T), Itochu Corp (8001.T) and Indonesian coal miner Adaro Energy (ADRO.JK) is developing a $3.2 billion coal-fired power plant in Java that is expected to start in 2017.

Oil majors also hope Indonesia will raise gasoline prices, which are subsidized and the cheapest in Asia, to enable profitable investment in refining and retail fuel distribution to the world's fourth-largest population. For now, state firm Pertamina has a virtual monopoly on refining and retailing fuel, though it, too, makes losses selling at subsidized prices.

AES AUCTION

AES has operations in more than two dozen other countries, and some Southeast Asia power producers have previously looked at the China assets, a separate source said.

"It's already in the market," said one source of the AES China assets. No other details about the auction were immediately known.

The sources requested anonymity as they were not authorized to speak to the media. Officials at AES in China and the United States could not offer immediate comment.

AES has been trimming back its global operations to focus on some key markets, selling some businesses in Argentina, Italy and Spain. UBS said in a recent report that AES was looking to raise about $2 billion in asset sales.

It was not immediately clear who might want to bid for the AES assets in China.

Overseas producers with relatively large power investments in China include Hong Kong's CLP Holdings Ltd (0002.HK) and Power Assets Holdings Ltd (0006.HK), controlled by Hong Kong tycoon Li Ka-Shing.

Domestic power firms such as state-controlled Huaneng and Datang have been expanding capacity amid China's rapid economic growth. Huaneng, the biggest electricity producer, bought a 50 percent stake in Massachusetts-based utility InterGen for about $1.2 billion from India's GMR Infrastructure (GMRI.NS).

AES has stakes in 15 plants in China, with a combined gross capacity of 2,964 megawatts (MW). It employs more than 200 people in China, from a global workforce of 28,000, according to its website.

Its China operations include gas and coal-fired plants, hydropower stations and wind power capacity in provinces such as Hebei, Jiangsu, Sichuan and Zhejiang, according to a company factsheet dated November last year.

That data showed AES' share of generation capacity from its ventures was 748 MW, including 120 MW of wind power and 525 MW of coal-fired capacity.

Asia accounted for around one tenth of the company's power generation, according to the factsheet. AES, which last year had total group revenue of $16.6 billion, is due to report its latest quarterly earnings on Monday.

LITTLE INCENTIVE?

Power shortages are chronic in China. But it's not that China lacks the generation capacity to meet demand.

Instead, analysts point to a lopsided electricity sector in which government controls starve producers of price rises so that manufacturers can guzzle cheap power.

Analysts say the only real solution is for the government to raise prices, giving producers an incentive to increase power output, and then to tighten the monetary reins to prevent inflation from seeping into the economy.

China's power output eased last year as growth slowed in the world's second-biggest economy, and some in the industry suggest decline in demand could be offset by a slowdown in new power capacity, leading to a new round of shortages in some regions.

That could in turn force factories in key eastern provinces to fire up stand-alone diesel generators and drive up demand for the fuel as it did in 2004. Last year, China faced a major power crisis, which triggered electricity cuts for bigger consumers.

(Reporting by Denny Thomas and Charlie Zhu, additional reporting by Neil Chatterjee and Janeman Latul in JAKARTA; Editing by Chris Lewis and Ian Geoghegan)

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