Huaneng Power International to Acquire Shandong Huaneng Power

BEIJINGà‚–Huaneng Power International Inc. and Shandong Huaneng Power Development Co. Ltd. have signed an agreement under which SHP will merge with HPI upon completion of the transaction, with HPI being the surviving entity after the transaction. The shareholders of SHP will exchange all of their shares in SHP in return for a one-time cash payment of RMB1.34 per common share (or US$8.0922 per ADS, each representing 50 common shares), with total consideration of approximately RMB5,768 million. This price represents a premium of 72.6 percent over SHP’s ADS closing price of US$4.6875 on July 17, 2000, and a premium of 92.9 percent over the average closing price of the last four weeks. Upon completion of the transaction, SHP will be de-listed from the NYSE, and will cease to exist.

“Through this transaction, HPI will further consolidate its position as the largest IPP in Asia, with 10,813.5 MW of installed capacity and approximately 5,520 MW under construction and development,” said Li Xiaopeng, HPI chairman. “The addition of SHP’s power plants further strengthens HPI’s portfolio of strategically located assets, allowing us to provide more extensive coverage to China’s coastal regions, including Liaoning, Hebei, Shandong, Jiangsu, Fujian and Guangdong provinces, and Shanghai municipality. These regions remain to be the most important and dynamic in the country in terms of economic development.

“More importantly, this transaction creates an enlarged asset base and increased scale of operation, which will allow HPI to achieve higher operating efficiency, more financial flexibility, and stronger market competitiveness.

“With this merger, we expect to utilize more efficiently the internal resources of our two companies. Combining the expertise in technology, management and human resources from both sides, we will be able to further improve the efficiency of SHP’s plants. HPI has long held, and will continue to have, a high respect for SHP’s management and employees. We look forward to their joining HPI, for building a newer, bigger and stronger company together.”

“This merger is beneficial to SHP’s shareholders,” said Yu Xinyang, SHP chairman. “It allows SHP’s domestic shareholders to cash in their investments. The merger consideration, which is at a premium over SHP’s ADS trading price, will also benefit SHP’s foreign shareholders. The increased size and scope of the post-merger company will enable it to better capitalize on growth opportunities in the Shandong power market and be better prepared for the competition ahead. We believe that the combined entity will have more attractive development prospects than either company alone.”

“With the assistance of their respective financial advisors, HPI and SHP arrived at the agreed upon transaction price and payment terms after arm’s length negotiations. The purchase price takes into consideration the quality of SHP’s assets, the earnings power and prospects of SHP, as well as the strategic benefits that the merger can bring to HPI. The all cash consideration takes into account the cash reserves of both companies and the future cash flow, capex plan and capital structure of the combined entity. The unaudited pro forma 1999 EPS for the combined entity is RMB0.45 per share, 36.4 percent higher than HPI’s reported 1999 EPS of RMB0.33. In arriving at the transaction price, we have considered fully the interests of all shareholder groups involved, resulting in a win-win transaction,” Li pointed out.

With regard to HPI’s growth strategy and dividend policy going forward, Mr. Li further commented, “Following this transaction, HPI will continue to follow the strategy of growth by acquisition and project development. We will seek growth through acquisition of quality operating assets, applying HPI’s management and operation model to improve efficiency and create value, as well as selectively develop expansion or green-field projects. After its peak construction phase over the last few years, HPI started to pay dividends in 1999. With the substantial cash flows expected from its enlarged operating asset base and the relatively small capital expenditure requirements that are in line with a more steady growth rate, we expect that HPI will be able to adopt a more balanced dividend policy.”

Following the transaction, HPI will be the sole overseas-listed power company under the China Huaneng Group. The board of China Huaneng Group has decided to grant to HPI the first right of refusal with regard to any power projects or interest that the Group may wish to sell, as well as any new project development opportunities.

The merger is subject to, among other things, the approvals of the respective shareholders of HPI and SHP and the relevant regulatory bodies in China, as well as compliance with the procedures and filing requirements of the U.S. Securities and Exchange Commission and The Stock Exchange of Hong Kong Limited. It is anticipated that the transaction will be completed within this year. Pursuant to the merger agreement, SHP is not to declare or pay any dividends or make any distribution prior to the effectiveness of the transaction.

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