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Tuesday, May 16, 2000

HEI may exit
China power project

Its shares dropped almost
4% on the news

By Edmond Lococo
Bloomberg News


Hawaiian Electric Industries Inc. shares fell nearly 4 percent today after announcing that it may withdraw from a $110 million investment in a new coal-fired power plant in Inner Mongolia unless a local power company signs an electricity connection agreement.

Hawaiian Electric Industries Its subsidiary HEI Power Corp. owns 75 percent of the venture, with partner Baotou Iron & Steel Co., China's fifth-largest steelmaker, holding the remainder. HEI said yesterday it would be imprudent to continue without the agreement and would try to recover the $25 million it has already invested if it quits.

"At this we point we recognize it's an uncertainty and we don't know what the outcome will be," spokeswoman Edwina Kawamoto said. "We are working with our partner and we hope to get this resolved."

HEI shares fell $1.37 1/2 to close at $36 on the New York Stock Exchange today. The stock, however, is still up nearly 25 percent so far this year, compared to a 10 percent rise in the S&P 400 Midcap index.

China's power market has been losing its luster with foreign investors, frustrated by the need to secure annual government approval to adjust power rates and facing. Now China's growing power generation capacity is resulting in excess supply, making some local power companies demand higher connection fees.

China's installed power generating capacity reached a record 300 million kilowatts in April, up from 100 million kilowatts in 1987.

While it was Baotou's responsibility to secure the connection agreement with the Inner Mongolia Power Co., which owns and operates the electricity grid in the province, it has so far failed to do so, Kawamoto said.

Despite Baotou's failure to reach an agreement, HEI has yet to serve the company a default notice, she said. Once the notice is served Baotou will have a set amount of time to reach an agreement with the power company, she said, declining to indicate how long a period, or when the default notice was likely to be served.

"They are trying to get the agreement and we will give them some more time," she said.

The board of directors of the joint venture held a meeting today and resolved to continue to work to attain the connection agreement, said Wei Xuanshi, company secretary for Baotou. He declined to comment on why the company had been unable to obtain a connection agreement from the Inner Mongolia Power Co.

The first of two generating units of the 200-megawatt plant in northern China was expected to come on line early next year, with the second to follow in six months. All the electricity was to be purchased by Baotou.

Baotou produced 3.88 million metric tons of steel in 1999 and is one of 14 steel companies which the central government has approved to sell shares either at home or abroad this year.

The Inner Mongolia Power Co. has been reluctant to sign the connection agreement with Baotou because it is uncomfortable with an arrangement which provides for a Sino-foreign joint venture to supply power direct to a customer, said Li Yu an official in the planning division of Inner Mongolia Power Co.

"There have been no other companies doing this same thing before in Inner Mongolia and it is rare in the whole country," Li said. "We may need to talk more with Baotou Iron & Steel."

A connection to the provincial power grid is needed both as a source of auxiliary supply for the steel plant, as well as source of power to the plant itself when commencing operations after a shut down.

Inner Mongolia's reluctance to connect the joint venture to its grid may reflect the growing surplus of power generating capacity in China, industry analysts said.

"The supply and demand situation in China has shifted around and supply is greater than demand in most places, so there is very little push for new plants," said Bill Ruccius president and chief executive at AES Orient Group, a wholly owned subsidiary of AES Corp, the largest U.S. power plant developer.

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