HI Energy couples utility expertise with local business experience to build international business
Lee W. Hogan
HI Energy, President and COO
A significant market for private power development has emerged overseas in recent years as both industrialized and developing nations have recognized the need to upgrade and expand their power infrastructures to support economic growth. In a diverse group of competitors vying for opportunities to upgrade or develop the needed power facilities, utility affiliates are benefiting from their size, financial stability, knowledge of electric utility operations and long-term perspective.
Houston Industries Energy Inc. (HI Energy) has forged a successful business strategy by coupling its electric utility background with the country-specific business experience provided by strong local partners. A subsidiary of Houston Industries Inc. (HI), HI Energy entered the nonregulated power business in mid-1993 with more than 100 years of electric utility operation experience.
Although 1994 was HI Energy`s first full year of operations, we have five projects in operation, and we anticipate several additional closings during the remainder of 1995. We attribute that rapid success to a business strategy that makes use of what we know about electric utility operations while working with strong local partners who understand the business environment, economic conditions, cultural and political issues in a particular country.
In a field of competitors that includes equipment vendors, fuel suppliers, engineering/construction firms and independent power developers, some look overseas and see a fertile new market for their products or services or an opportunity for capital gains from reselling the power projects they develop.
In contrast, what HI Energy and other utility affiliates have to sell, first and foremost, is their vast operating expertise. We view overseas ventures as an opportunity to generate profits over the long-term in markets that offer more attractive growth rates than our domestic markets. Being a long-term operator is the way in which we can add value to foreign ventures, and it is central to our business strategy.
We are seeing increasing evidence that decision-makers for government privatizations as well as greenfield projects prefer this broad-based electric utility experience and our interest in being a long-term part of their country`s growth and prosperity. They recognize the integral role that utilities play in the economic and industrial growth of a region, and they are vitally interested in seeing responsible, stable corporations own and operate these assets.
Argentina, for example, began the privatization of its electric utility sector in 1991, primarily through asset sales to investors. Bidders were required to meet a number of prequalification criteria including operating experience and financial standards. Of the approximately (US)$4.3 billion in proceeds the Argentine federal government received from the sale of generation, transmission and distribution assets, about (US)$4.2 billion came from investments by electric utility affiliates or consortiums led by utility affiliates.
The state government of Victoria, Australia, is taking a similar approach in the sale of its electric distribution sector, which began recently with the proposed sale of United Energy to a strategic investor or consortium. To determine a short list of parties eligible to bid, the state government will consider, among other criteria, specific credentials in operating distribution systems and proposed ownership strategy for United Energy.
We treat our strong foundation in the electric utility industry as our most valuable resource and have made it a central part of our business strategy at every stage from project analysis and business development to construction and operations. It is, in fact, an important criterion in determining which opportunities we pursue. We are not interested in being a passive investor or in short-term investments. Instead we pursue projects that allow us to take an active operating role and use our century of industry experience to add value to our investments.
In Argentina, we currently have two electric distribution systems and one 120-MW generating facility in operation. All were acquired through government privatizations, and each offers examples of how we`ve used utility operating experience to improve service and enhance profitability.
Our first Argentine venture was the electric distribution system serving approximately 250,000 customers in LaPlata, Argentina (EDELAP), which our parent company acquired as part of a consortium in late 1992, before HI Energy was formed. We knew going in that substantial efficiency improvements would be needed to achieve profitability. But we also have actively pursued new revenue sources.
One new revenue source came from offering a service routinely provided by US electric utilities. By taking over maintenance of the LaPlata street lighting system, we improved maintenance and reliability and reduced the city`s costs in addition to producing additional revenue and preserving jobs.
However, some efficiency improvements were still needed. We looked to our local partner, Techint Compa?ia T?cnica International S.A.C.I., an Argentine engineering, construction and steel fabrication firm, to be sure those changes were made in compliance with local laws and customs.
HI Energy`s most recent acquisition has afforded even more opportunities to add value through utility operating experience. The Santiago del Estero electric distribution system serves about 100,000 customers in a remote, rural province of northern Argentina where some areas are isolated from the transmission system and served by local diesel generators. The government had planned a (US)$16-million project to construct transmission to tie in the two largest isolated areas. By applying our expertise in transmission design, we were able to add 60 miles of line to the project and tie in four other systems without increasing construction costs.
These examples provide a clear picture of how HI Energy uses its utility experience in the operation of power facilities. But the same advantages apply during the business development stage, even in the case of government privatizations where the winner is determined strictly on the basis of sealed bids by firms and groups that have prequalified.
For one thing, utility operating experience often is required to prequalify, as it was in Argentina. But our experience continues to be an asset after we`ve prequalified because it enables us to analyze assets, not in terms of what they are, but by looking at what they can be. We understand what needs to be done and how much it will cost to correct problems and capitalize on opportunities. That insight allows us to submit bids that are both fair to the governments involved and profitable for HI shareholders.
Industrial power and cogeneration projects, like the one we`ve just been hired to build and operate at a steel mill in San Nicholas, Argentina, are very different from government privatizations and offer an even better opportunity to use our utility expertise for business development. These projects generally have a limited number of bidders or are negotiated contracts. We are able to sell our capabilities more effectively and also to develop an in-depth understanding of the customer`s immediate and long-term needs. We then use our knowledge of industrial power consumption to customize the project.
In this type of situation, we benefit from HI`s domestic utility experience in the heavily industrialized petrochemical and refining complex along the Texas Gulf Coast. We have extensive experience in serving the same types of industrial facilities we are seeking to serve internationally.
In addition to the projects already in operation, we have several under development. The 160-MW cogeneration facility we are planning in San Nicholas, Argentina, will supply 300 metric tons of steam per hour to a steel mill owned by Siderar, SAIC and will sell electricity to the Argentine national grid. We also have been selected by the government of India to build a 500-MWcoal-fueled generating plant in Central India at a cost of approximately (US)$700 million, and we have an agreement with a Pakistani investment group to jointly develop power projects in that country.
In each case, our business strategy has a common thread. We select those opportunities where we can add value to our investment by taking an active operating role, and we fully utilize our electric utility expertise at every stage from project evaluation to operation. We also recognize what we don`t know, and we develop our international projects in conjunction with strong local partners. This strategy already has produced considerable success, and I am confident it will serve us well in the future.