Huaneng Power International Inc.
(a sino foreign joint stock limited company incorporated in the People’s Republic of China)
(Stock Code: HNP)
MAJOR AND CONNECTED TRANSACTION
Independent Financial Adviser
to the Independent Directors Committee and the Independent Shareholders
A letter from the Board of Huaneng Power International, Inc. is set out on pages 4 to 21 of this circular. A letter from the Independent Directors Committee of Huaneng Power International, Inc. is set out on page 22 of this circular. A letter from DBS containing its advice to the Independent Directors Committee and the Independent Shareholders of Huaneng Power International, Inc. is set out on pages 23 to 24 of this circular.
A notice convening the EGM to be held at 9 a.m. on 24 June 2008 at the headquarters of the Company at West Wing, Building C, Tianyin Mansion, 2C Fuxingmennan Street, Xicheng District, Beijing, the People’s Republic of China is set out on pages 213 to 215 of this circular.
If you intend to attend the EGM, you should complete and return the reply slip in accordance with the instructions printed thereon as soon as possible.
Whether or not you are able to attend, you should complete and return the form of proxy in accordance with the instructions printed thereon and return it to Hong Kong Registrars Limited at Room 1806-1807, 18/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event by not later than 24 hours before the time appointed for holding such meeting or any adjournment thereof.
Completion and return of the form of proxy will not preclude you from attending and voting at the EGM should you so wish.
THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
10 May 2008
1. INTRODUCTION
On 29 April 2008, the Board made an announcement (“Announcement”) regarding the acquisition of 100% interest in SinoSing Power from Huaneng Group. As stated in the Announcement, the Company shall issue a circular to the Shareholders containing further information of the transaction as contemplated by the Transfer Agreement and will convene a general meeting for obtaining the Independent Shareholders’ approvals for the conduct of the Acquisition.
The letter from the Independent Directors Committee to the Independent Shareholders is included in this circular. DBS has been appointed as the independent financial adviser to advise the Independent Directors Committee and the Independent Shareholders on the fairness and reasonableness of the terms of the Transfer Agreement and whether the Transfer Agreement (together with the Acquisition) is in the interests of the Company and its shareholders as a whole. The letter of advice from DBS to the Independent Directors Committee and the Independent Shareholders is included in this circular.
2. BACKGROUND
The Company and its subsidiaries develop, construct, operate and manage power plants in China nationwide, with a total generation capacity of 33,723MW on an equity basis. The Company wholly owns sixteen operating power plants, and has controlling interests in thirteen operating power companies and minority interests in four operating power companies. Currently, it is the largest listed power producer in China.
Huaneng Group is principally engaged in the operation and management of industrial investments; the development, investment, construction, operation and management of power plants; organising the generation and sale of power (and heat); and the development, investment, construction, production and sale of products in relation to information, transportation, new energy and environmental protection industries.
Huaneng Group is the controlling shareholder of HIPDC, holding a 51.98% direct interest in HIPDC. In addition, Huaneng Group also holds a 5% indirect interest in HIPDC and directly holds 8.75% of the total issued share capital of the Company. As at the Latest Practicable Date, HIPDC holds approximately 42.03% of the total issued share capital of the Company.
The relationships among the Company, Huaneng Group and HIPDC are as follows:
51.98%
42.03%
8.75%
5%
Huaneng Group
The Company
HIPDC
* Huaneng Group, through China Huaneng Group Hong Kong Company Limited, its wholly-owned subsidiary, indirectly holds a 50% interest in Pro-Power Investment Limited while Pro-Power Investment Limited holds a 10% interest in HIPDC. Therefore, Huaneng Group holds a 5% indirect interest in HIPDC.
The transaction as contemplated by the Transfer Agreement constitutes a connected transaction to the Company. The transaction scale of the Acquisition in aggregate exceeds 2.5% of the applicable percentage ratios as calculated pursuant to Rule 14.07 of the Hong Kong Listing Rules, therefore the Acquisition is a connected transaction to the Company, which shall be subject to the Independent Shareholders’ approval according to Rule 14A.18 of the Hong Kong Listing Rules. Huaneng Group, HIPDC and their respective Associates will abstain from voting in the EGM in respect of the ordinary resolution to approve the Acquisition (including the Transfer Agreement).
The Acquisition also constitutes a major transaction to the Company, the conduct of which requires the approval by the Shareholders.
The Transfer Agreement was approved by the Directors on 29 April 2008 and signed by Huaneng Group and the Company on the same day.
Date: 29 April 2008
Parties: Seller: Huaneng Group
Purchaser: the Company
Interests to be acquired:
Interests representing 100% of the issued share capital of SinoSing Power, together with all the rights attached thereto as at 24 March 2008 (the day on which Huaneng Group acquired 100% interests in Tuas Power through SinoSing Power from Temasek) Consideration: The consideration to be paid by the Company comprises (1) approximately US$985 million (approximately HK$7.674 billion) being the capital injected into SinoSing Power by Huaneng Group (including US$197 million (approximately HK$1.535 billion) from internal sources of Huaneng Group and US$788 million (approximately HK$6.139 billion) from a loan obtained by Huaneng Group); and (2) an aggregate amount of approximately RMB176 million (approximately HK$196 million), being all the related expenses (including loan interest) directly incurred by Huaneng Group in relation to the acquisition of 100% interests in Tuas Power through SinoSing Power from Temasek. On Closing Day, the Company shall pay the consideration in full, of which US$788 million (approximately HK$6.139 billion) shall be settled by way of assignment of debts while the remaining balance of approximately RMB1.572 billion (approximately HK$1.752 billion)* shall be paid by way of cash in RMB.
The purchase price was determined on the basis of normal commercial terms and arm’s length negotiations between the parties thereto.
* Comprises the cash of US$197 million (approximately HK$1.535 billion) and the expenses of approximately RMB176 million (approximately HK$196 million). The exchange rate used to convert the US$197 million in RMB is the historical rate used when the US$197 million was purchased using RMB.
Assignment of loans and repayment obligations:
(1) The capital contribution by Huaneng Group in SinoSing Power amounted to approximately US$985 million (approximately HK$7.674 billion), of which US$788 million (approximately HK$6.139 billion) was borrowed from The Export-Import Bank of China. According to the Transfer Agreement, the Company shall assume the repayment obligation of such principal amount of US$788 million (approximately HK$6.139 billion) and the interest thereof on the Closing Day. The Company will use the proceeds generated from the operation of the Company (including Tuas Power) to repay the loans.
(2) In addition, SinoSing Power has obtained a loan of approximately US$600 million (approximately HK$4.675 billion) from Bank of China for the purpose of acquiring 100% interest in Tuas Power from Temasek. Huaneng Group has provided a repayment guarantee in favour of Bank of China. Pursuant to the Transfer Agreement, the Company, upon Closing, will assume the guarantee obligation from Huaneng Group. Conditions: Closing is subject to the satisfaction or waiver of the following conditions:
(1) Conditions which need to be satisfied:
●
(2) Conditions which the Company may waive:
(3) Conditions which Huaneng Group may waive:
In case that any conditions for Closing are waived, further announcement will be made by the Company accordingly.
Closing Day: Closing shall take place on, whichever is later, (i) the third business day after the conditions as stipulated in the Transfer Agreement have been satisfied or waived; or (ii) the day agreed upon by both parties. The Company expects the Closing will take place by the end of June 2008.
Closing: On Closing day, (1) the Company shall pay the consideration in full, of which US$788 million (approximately HK$6.139 billion) shall be settled by way of assignment of debts while the remaining balance of approximately RMB1.572 billion (approximately HK$1.752 billion)* will be paid by way of cash in RMB from the Company’s internal sources; and (2) Huaneng Group shall deliver all title documents (including the relevant share certificates) representing the exclusive ownership of the SinoSing Power Interests to the Company where the SinoSing Power Interests shall be free from encumbrances.
* Comprises the cash of US$197 million (approximately HK$1.535 billion) and the expenses of approximately RMB176 million (approximately HK$196 million). The exchange rate used to convert the US$197 million in RMB is the historical rate used when US$197 million was purchased using RMB.
4. REASONS FOR THE ACQUISITION, PRICING FACTORS AND IMPACT
The Acquisition reflects the Company’s continued implementation of its development strategy which focuses on both green-field development and acquisition. Tuas Power, which is 100% owned by SinoSing Power, is one of the three largest power companies in Singapore. It has advanced technologies and solid management and operations. Tuas Power has been regarded by the international power market as a quality asset. Upon completion of the Acquisition, the Company will own 100% interests in SinoSing Power, which in turn holds the entire equity interests in Tuas Power. This would help the Company to diversify its geographical risk and to improve its fuel structure. Through the operation of Tuas Power, the Company will participate in Singapore’s competitive power generation market and power retail market, thus gaining experience in operating in a competitive power market.
In addition, the Acquisition provides the Company with a platform to expand overseas and to develop its experience in overseas investment operation, which is in line with the Company’s “Expand Outwards” strategy, and is to the long-term benefit of the Company and its Shareholders.
In respect of the trading prospect of the Company, its scale of operation will be further enhanced upon completion of the Acquisition. Its generation capacity will increase by 2,670 MW on an equity basis, while the total generation capacity on an equity basis will increase from 33,723 MW to 36,393 MW, representing an increase of 7.9%. The Company’s asset and liabilities will also be increased correspondingly with only a slight increment in the debt level, thereby further utilising the financial leverage effect. Upon completion of the Acquisition, Tuas Power, as a new source of profit for the Company, will help to increase the overall profit of the Company.
The consideration for the Acquisition was determined on the basis of normal commercial terms and arm’s length negotiation between the Company and Huaneng Group. The parties agreed that the consideration shall comprise (1) approximately US$985 million being the capital injected into SinoSing Power by Huaneng Group; and (2) all the related expenses (including loan interest) directly incurred by Huaneng Group in relation to the acquisition of 100% interests in Tuas Power through SinoSing Power from Temasek.
The consideration was based on the purchase price paid by Huaneng Group to Temasek in the acquisition of 100% issued shares in Tuas Power through SinoSing Power on 24 March 2008.
Determination of the aforementioned purchase price was first based on the results of valuing Tuas Power. Such evaluation comprises objectively appraising the present situation and future development potentials of Tuas Power from various perspectives including the market, technological, financial and legal aspects. Key factors that have been considered include the growth of demand for power in Singapore, the market structure and the future competitive landscape of the power industry in Singapore, fuel supplies and costs, risk management capabilities, the technology and reliability of the existing generating units, repowering of the existing units, impact of unresolved legal issues, Tuas Power’s existing financial and operational conditions, structure and costs of the acquisition financing and etc.. The evaluation of such factors was based on in-depth and objective due diligence on Tuas Power conducted by various professional parties.
Finalisation of the purchase price for acquiring the 100% interests in Tuas Power was the result of a market-driven competitive bidding process. In the sale of the 100% interests in Tuas Power, Temasek followed the international common practice by adopting a two-stage auction process. The auction process was transparent, open and competitive and forms the basis of a fair price discovery mechanism. The final winning price was S$4.235 billion (approximately HK$24.238 billion), which reflected the value of Tuas Power as determined by the market. There has been no material change in the value of Tuas Power since it was acquired by Huaneng Group on 24 March 2008. The total cost for Huaneng Group to acquire Tuas Power amounted to RMB21.92 billion (approximately HK$24.43 billion), comprising S$4.235 billion (approximately HK$24.238 billion) being the purchase price paid to Temasek, and RMB176 million (approximately HK$196 million), being the expenses (including interest of loan) directly incurred by Huaneng Group for purpose of acquiring Tuas Power. Huaneng Group’s sources of fund for paying such costs were as follows:
(1) an amount of US$985 million (approximately HK$7.674 billion) being capital injected by Huaneng Group into SinoSing Power, comprising (i) US$197 million (approximately HK$1.535 billion) from Huaneng Group’s internal sources; and (ii) US$788 million (approximately HK$6.139 billion) being a loan provided by The Export-Import Bank of China on normal commercial terms; and
(2) loans to SinoSing Power from various banks (upon completion of the Acquisition, repayment obligations of such loans are still with SinoSing Power) comprising (i) a loan of approximately US$600 million (approximately HK$4.675 billion) from The Bank of China; and (ii) a non-recourse loan of S$2.25 billion (approximately HK$12.877 billion) from an overseas bank group.
Financial leverage is properly utilised in the above financing and debt structures. This combines with a competitive financing cost structure to ensure a reasonable level of investment returns. As to the financial impact of the Acquisition, according to the International Financial Reporting Standards, the Company and its subsidiaries have a consolidated audited net assets value of approximately RMB52.080 billion (approximately HK$58.050 billion) as at 31 December 2007. Based on the unaudited pro forma statement of assets and liabilities of the Company and its subsidiaries (including SinoSing Power and its subsidiaries), as a result of the acquisition of SinoSing Power, the consolidated net assets value of the Company and its subsidiaries (including SinoSing Power and its subsidiaries) as at 31 December 2007 would change to approximately RMB52.047 billion (approximately HK$58.013 billion). The gearing ratio of the Company and its subsidiaries for the year ended 31 December 2007 as computed based on debt over debt and equity was approximately 53.65%. Assuming the Acquisition had been completed on 31 December 2007, based on the pro forma financial information as included in Appendix IV to this circular, the gearing ratio of the Group will be increased to approximately 61.47%, being an increase of approximately 7.82%. The Directors are in the opinion that the increase in the gearing ratio will not affect the operation of the Company and its subsidiaries (including SinoSing Power and Tuas Group).
As set out in the audited consolidated financial information of Tuas Group in Appendix II to this circular, Tuas Group had turnovers of approximately S$2.267 billion (approximately HK$12.974 billion) and approximately S$1.668 billion (approximately HK$9.546 billion) for the year ended 31 March 2007 and the nine months ended 31 December 2007 respectively. Upon the completion of the Acquisition, the results of SinoSing Power and its subsidiaries will be consolidated into the Company, thus increasing the Company’s turnover and earnings. Please refer to Appendix IV to this circular for further details of the financial information of the Company and its subsidiaries (including SinoSing Power and its subsidiaries).
Having considered the fact that the accountants’ report of Tuas Group for the three years ended 31 March 2007 and the nine months ended 31 December 2007 has already been included in this circular, the Board believes that such financial information regarding Tuas Group is sufficient to enable the Shareholders to make an informed assessment and to decide whether or not to approve the Transfer Agreement and the transaction as contemplated thereby in the EGM.
In addition, the Board confirms that sufficiant due diligence on Tuas Group has been performed to ensure that (a) up to the date of this circular, there had been no material adverse change in the financial position or prospects of Tuas Group; and (b) there is no event since 31 December 2007 which would materially adversely affect the financial information in the accountants’ report of Tuas Group. The board of Directors believes that the price and the terms of the Acquisition are fair and reasonable to the Company and its Shareholders. In addition, the Acquisition is based on normal commercial terms. The Board is therefore of the view that the Acquisition is in the interests of the Company and its Shareholders as a whole.
5. INFORMATION REGARDING SINOSING POWER
The corporate structure of SinoSing Power is set out below:
100%
100% 75% 60% 100%
72.19%
SinoSing Power
TPS TPGS New Earth TPU
New Earth Sing
Tuas Power
The subject matter of the Acquisition is the 100% issued shares of SinoSing Power currently held by Huaneng Group. For the purpose of acquiring 100% issued shares of Tuas Power by Huaneng Group from Temasek, SinoSing Power was incorporated in Singapore by Huaneng Group as its wholly owned subsidiary. Huaneng Group’s capital investment in SinoSing Power amounted to approximately US$985 million (approximately HK$7.674 billion). The acquisition of 100% issued shares in Tuas Power by SinoSing Power was completed on 24 March 2008. The consideration paid by SinoSing Power amounted to S$4,235 million (approximately US$3 billion, approximately HK$24.238 billion).
Details of SinoSing Power are set out below:
Date of incorporation: 10 March 2008
Place of incorporation: Singapore
Total issued shares: US$985,000,100, divided into 985,000,100 shares
Shareholding structure: Huaneng Group (100%)
Scope of business: investment holding
As at the date hereof, SinoSing Power has one directly held subsidiary only, namely, Tuas Power. Tuas Power is 100% owned by SinoSing Power.
As at 24 March 2008, the total bank loans of SinoSing Power amounted to approximately S$2,961 million (approximately HK$16.947 billion).
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Page rendered at 7/5/2008 4:32:08 PM (Eastern Daylight Time, UTC-04:00)
Disclaimer The opinions expressed herein are my own personal opinions and do not represent my employer's view in anyway.