Li Ka-shing

HK Electric restates opposition to lower cap on regulated return

Hong Kong power utility sees electricity sales fall 0.7 per cent

PUBLISHED : Tuesday, 15 March, 2016, 6:13pm
UPDATED : Tuesday, 15 March, 2016, 6:13pm

HK Electric Investments, the Hong Kong power utility spun off from Li Ka-shing’s Power Assets two years ago, renewed its call on the government not to cut the industry’s permitted return as it posted a HK$3.59 billion net profit for last year.

Net profit between January 29 and December 31 in 2014 was HK$3.2 billion. Year-on-year comparable figures were not provided. The spin-off took effect on January 29, 2014.

Electricity sales dropped 0.7 per cent last year as consumers sought to conserve energy, Power tariffs were frozen last year and in 2014, and will fall by 1.1 per cent this year.

Final distribution to trust holders rose to 20.12 HK cents per unit from 19.89 cents in 2014, with the full-year payout rising to 40.04 cents from 36.42 cents in 2014.

One of the most important priorities in the year ahead is to engage with the government to establish a stable and long-term post-2018 regime
Canning Fok, HK Electric

Credit Suisse regional head of utilities research Dave Dai said in a note that HK Electric’s future dividend payout could be challenged by rising interest rates and finance costs, and a lower cap on regulated return when the current regulatory regime expired in 2018.

“We are concerned with possible regulated return cuts under the scheme of control [regulatory regime],” he wrote. “Our base case assumes a cut to 8 per cent in 2024 but we do not rule out the risk of an earlier cut in 2019 if the negotiation is settled before that.”

HK Electric chairman Canning Fok Kin-ning argued against a cut, saying a stable return rate was important to ensure reliable supply.

“One of the most important priorities in the year ahead is to engage with the government to establish a stable and long-term post-2018 regime to guide the development of Hong Kong’s electricity market,” he said in a filing to Hong Kong’s stock exchange on Tuesday.

“The agreed scheme must retain the key elements of the current [regime] including the rate of return to enable operators to make long-term investments conducive to the continued provision of safe, reliable and clean electricity to customers at affordable prices.”

The city’s environment chief, Wong Kam-sing, said last May that while the current regulatory regime had worked well, it could be enhanced in many ways, including cutting the maximum return on power utilities’ net fixed assets to between 6 per cent and 8 per cent, from 9.9 per cent currently, and improving performance with improved incentives and penalties.

The top permitted return was set at 13.5 per cent between 1964 to 2008 before it was slashed to reflect the lower cost of capital and interest rates.

The benchmark 10-year United States treasury yield has fallen from over 14 per cent in 1981 to around 2.7 per cent currently.