Hutchison Whampoa

HK Electric prices to rise as 24-year earnings run ends

PUBLISHED : Saturday, 06 March, 2004, 12:00am
UPDATED : Saturday, 06 March, 2004, 12:00am

Worse than anticipated 8.6pc drop in net profit sets off bid to recoup costs

Hongkong Electric Holdings will lift electricity tariffs by as much as 11.6 per cent next year in a bid to restore returns and eliminate soaring fuel costs, according to analysts.

The prediction came after the utility's managing director, Tso Kai-sum, warned of passing on soaring coal costs and freight charges to customers, which might lead to at least a 1 per cent rise in overall tariffs. An increase in the basic tariff will be necessary after the company failed to earn a permitted return on its regulated electricity supply for the first time in 24 years, due mainly to the Sars outbreak and frozen tariffs last year.

Hongkong Electric, which serves Hong Kong and Lamma islands, delivered a worse than expected 8.61 per cent drop in net profit to $6.05 billion for last year.

Morgan Stanley analyst Christopher Huang said the company could scrap fuel cost rebates embedded in overall tariffs, for an increase of 7.1 per cent in overall tariffs to $1.085 per kilowatt-hour next year.

In addition, customers owed the utility $1.2 billion in outstanding fuel costs, which needed to be settled by the expiry of the scheme of control in 2008, he said.

Mr Huang said to restore returns to the permitted levels, which vary between 13.5 per cent and 15 per cent on the average net value of fixed assets based on the scheme of control, Hongkong Electric also needed to lift basic tariffs 4.5 per cent next year.

Sources close to the utility said the chance of meeting the permitted return this year was 'extremely remote' given the frozen tariff and a depleted development fund - a consumer-owned cash reserve that collects excess tariffs and balances shortfalls in regulated profits.

The development fund's entire outstanding balance of $139 million was transferred to the company's profit and loss account last year, but this was still not enough to plug the earnings shortfall.

Some analysts said the size of the tariff increases would depend on electricity sales this year and spending on power assets.

Lehman Brothers analyst Angello Chan estimated Hongkong Electric needed to achieve at least 3 per cent demand growth this year to warrant the government's approval on construction of the ninth generation unit at its Lamma power plant. Last year, the maximum demand growth was flat.

However, unit sales growth has returned to a healthier level in the first two months of this year, rising to 4 per cent.

The poor results prompted ING Financial Markets, Citigroup Smith Barney and Lehman Brothers to downgrade Hongkong Electric's earnings forecasts for this year and next, according to a Thomson First Call poll.

Hongkong Electric shares closed yesterday at $32.50, down 1.21 per cent.