COULD wedding bells be ringing for Hong Kong's two electricity providers after 1997? The framework for a possible marriage between the Kadoorie family's China Light & Power (CLP) and Hongkong Electric (Holdings), linked to developer Li Ka-shing, could be quietly falling into place, claims W. I. Carr Asian utilities analyst Alice Hui. A merger before 1997 would appear both practically and politically impossible. But one after the transition of sovereignty is looking more and more like a distinct possibility. Such a move would be both highly political and highly sensitive, and provoked immediate denials from the two companies. 'As far as the management of the two companies is concerned, we know nothing about it,' said Sandra Mak, CLP's public affairs manager. Even among analysts, Ms Hui would appear to be a maverick. Rohan Dalziell, utilities analyst at Baring Securities, said: 'It's probably a big conspiracy theory.' Another Hong Kong analyst said that the territory's current scheme of control and property development restrictions offered few incentives for a marriage of the two utilities. 'I'm not saying that it couldn't take place, but I'd have to conclude that it's not time to get excited about it,' he said. But sceptics have not stopped Ms Hui from preparing a detailed, 39-page report on the possibility of the union, which makes for interesting reading. Electricity supply in the Special Administrative Region would be monopolised, and Mr Li would indirectly get his hands on CLP's vast reserves of land potentially to help redevelop as lucrative real estate. CLP has an abundance of substation sites which could be redeveloped, while Mr Li has the property expertise required to maximise their potential and profits. As of September 30 last year, CLP had 8,580 primary and secondary substations scattered around the territory. The sites are typically 3,000 square feet each, and include many house substations that are old and outdated. Assuming just one per cent of these substations is developed, the total developable area would amount to 154 million sq ft. Also, it is rumoured that if CLP agrees to participate in phase two of the Daya Bay nuclear power station in Guangdong, both as an equity partner and a buyer of electricity, it will be rewarded in return with an equity interest in the property redevelopment of its Tsing Yi Power Station site. CLP's 25-year-old power station is currently being decommissioned, with some of its components shipped for re-use in India. The site is due to be handed back to the Government by June 30, 1997. Ms Hui estimated the 3.23 million sq ft site to have a market value of $77.5 billion once fully developed. Mr Li's Cheung Kong (Holdings) would be a great help to CLP in embarking on a real estate project of such a huge size. A merger would also result in significant cost savings for both sides in electricity production and supply, thanks to economies of scale and cutbacks where the two companies overlap. This could potentially be passed on to customers in the form of cheaper electricity charges. The pair would also be in a stronger position, if they worked together, to chase independent power producer (IPP) deals elsewhere in the region, including China. Revenue from property sales would provide them with plenty of funds to reinvest. Hongkong Electric's profits in recent years have been cushioned by real estate earnings from the redevelopment of its Ap Lei Chau former power station site, in a joint venture with its 34.6 per cent-owned parent, Mr Li's Hutchison Whampoa. But the last round of profits from the South Horizons housing estate will be booked during the current financial year, leaving it dependent on its core electricity earnings thereafter. With this in mind, Hongkong Electric may well be interested in expanding into new IPP ventures elsewhere in Asia, in partnership with CLP. Ms Hui insists her conclusions are based on facts and fundamental analysis, not speculation. The ties between CLP and Mr Li's family of companies seem to have been getting ever closer. In January this year, Cheung Kong announced it would go ahead and help redevelop CLP's 6.42-hectare former Hok Un power station site in Hunghom. About 4,750 flats housed in 25 residential towers, plus a five-storey commercial building, will be built over the next six years on the site, which has been designated by planning officials for comprehensive development. Then in May, CLP's senior vice-chairman and major shareholder, Michael Kadoorie, was appointed non-executive director to the main board of Hutchison Whampoa. The appointment was made with little fanfare and went largely unnoticed. Ms Hui says: 'The closer relationship between the two families, in our opinion, raises the chance of a major restructuring of CLP and Hongkong Electric, including a potential merger via a share swap.' She argues that even with the completion of phase one of CLP's new 2,500-megawatt power station at Black Point, the company will require additional power reserve capacity by the financial year 2002-2003. The Black Point Power Station could be expanded to a potential capacity of 6,000 MW quite easily and this would mean CLP would have no need to purchase electricity from China. This is assuming that there will be a sufficient supply of natural gas from China to feed the plant. Hongkong Electric will also require new capacity in the 2000-2001 financial year, almost at the same time as that of CLP. Units one and two of Daya Bay's phase two at Ling'ao should be completed for 2002 and 2003 respectively, providing 1,000 MW of nuclear power apiece. It is perfect timing to meet the demand required by both CLP and Hongkong Electric after 2000. In view of the scarcity of land supply and high property prices in Hong Kong, Ms Hui argues that purchase of power from China should be more economical, particularly in the long term. If CLP does buy power from Daya Bay phase two, Ms Hui says the new supply will also be used by end-users on Hong Kong island, in other words consumers of Hongkong Electric. 'The need to maintain reserve capacity at 35 per cent for CLP and 20 per cent to 25 per cent for Hongkong Electric will lead to continued expansion of installed capacity in future,' she said. 'This will be an ongoing process. Given a limited supply of sizeable sites for the construction of power stations in Hong Kong and expensive property prices, it makes sense to use the electricity supply from phase two of Daya Bay. 'China, on the other hand, needs foreign currency from Hong Kong.' As the Chinese Government will approve the new financing plans for the two electric companies in 1998-99, Ms Hui says it is perfect timing to change the power supply situation in Hong Kong. Some local consumer groups may cause a fuss about the creation of a monopoly, but sceptics would argue Hong Kong hardly had much competition in the first place. CLP's current scheme of control runs until September 30, 2008, while Hongkong Electric's expires on December 31, 1998. Some would argue that while these schemes of control are still alive, nothing can be done to affect the current status quo. However, Beijing has openly said it is prepared to rewrite power supply contracts anywhere in China should it be deemed necessary. Any move by CLP to realise fully the group's real estate earnings potential by teaming up with the master builder, Mr Li, should excite shareholders. In 1989, CLP set up a special arm to handle its growing property interests, Long Keen Development, which is fast growing in corporate importance. It currently has four substation sites under redevelopment, following the completion of its Ivy Street property into a 17-storey commercial and residential block this year, known as Kar Wun Court. In Mui Wo on Lantau Island, it has 16 resort houses under construction which are about to be put out for lease in a project called Silverwaves. Composite commercial and residential buildings are also under development in Bulkeley Street, Ma Tau Wai and Ma Hang Chung. The Hok Un Power Station redevelopment is by far the group's biggest real estate venture yet, to be built adjacent to Mr Li's Whampoa Gardens. Nevertheless, many analysts in the industry remain sceptical. Mr Dalziell of Barings said that, theoretically, a merger made sense because Hongkong Electric could buy electricity from CLP, which would have large amounts of surplus capacity after the completion of the Black Point power plant. But Hongkong Electric's announcement of plans to build a new plant on Po Toi Island, which will be in operation by 2003, makes a merger appear doubtful, because Hongkong Electric would not need additional capacity for some time. 'There is tangible evidence that both companies are planning for separate futures,' he said. 'Anyway, even assuming the merger happens, who are you going to buy? I don't have any idea what the investment implications would be.'