Yesterday's $13 billion acquisition of a power station and distribution network in Australia brings CLP Holdings managing director Andrew Brandler a big step closer to his target of generating a third of the group's earnings outside Hong Kong's protected 'scheme of control' electricity market. But diversification has come at a price.
With the Australian dollar at eight-year highs and with the company's credit rating under review, this is likely to prove an expensive purchase.
But CLP has little choice. For the past 40-odd years, the company has enjoyed the protection of a generous government guarantee. Under the scheme of control, CLP and its co-monopolist Hong Kong Electric are promised an annual return on their assets of nearly 15 per cent. That compares handsomely with the 7 or 8 per cent return electricity generators make in other developed markets.
Sensitive to criticism that it is supporting big business at the expense of consumers, the government is to scrap the current scheme in 2008. What will replace it is not clear, but it is a safe bet that the generators' guaranteed returns will be slashed.
In response CLP has been trying to diversify for the past 10 years. But making their way in the big wide world has proved tougher than company executives anticipated. A string of attempted purchases has fallen through. And where CLP has made acquisitions, they have often failed to generate worthwhile returns.
In Malaysia, the company backed out of its holding in local utility YTL after failing to make any headway with further acquisitions.
In India, CLP, like other foreign power generators, has struggled to collect payments from state electricity boards.
Meanwhile, margins at the company's Shandong generating project in China have come under pressure as the company is forbidden by its long-term power purchasing agreement from passing higher coal prices on to customers.
Rising fuel costs have also squeezed margins at CLP's existing Yallourn power station in Australia. That compression at least partly drove CLP's latest purchase. The million gas and electricity customers it acquired along with a power station, a gas storage facility and a part share in a gas pipeline will give CLP a hedge for shrinking margins at its generation business.
With this addition, its Australian businesses should eventually provide CLP with a relatively safe and steady revenue stream. But the purchase will not be cheap. CLP is proposing to pay about 40 per cent of the cost, about A$850 million ($5.2 billion), out of its own funds. At present exchange rates that will be painful.
So will borrowing some A$1.2 billion to finance the remaining 60 per cent. As CLP has diversified abroad, its debt-to-equity ratio has shot up from a modest 8.5 per cent five years ago to 44 per cent last year. And as it has drawn more of its earnings from uncertain markets and less from Hong Kong's scheme of control, CLP's reputation in the credit market as the next best thing to a sovereign borrower has been eroded.
Funding the latest purchase will push debt levels to more than 60 per cent, and the rating agencies have taken note. Both Moody's Investors Service and Standard & Poor's are threatening to downgrade CLP's credit rating, which will push up borrowing costs.
With its guaranteed earnings secure for another three years, CLP will have no difficulty paying the higher interest rates, but given the firm's poor record outside Hong Kong, the market will be watching closely to see whether its latest purchase can deliver decent returns.
Mr Brandler and his management team still have a long way to go to prove CLP is a credible international electricity utility, and not a hothouse flower.