Regulatory risks cast shadow on HK Electric deal

Li Ka-shing's utilities flagship, Power Assets Holdings, has lit up the planned spin-off of its Hong Kong electricity supply operation with an attractive return, but its prospects are being darkened by growing regulatory risks.

Power Assets, which has gas and electricity interests around the world, plans to divest 50.1 per cent to 70 per cent of wholly owned Hongkong Electric - the sole supplier of power to customers on Hong Kong and Lamma islands since 1890 - to a newly created trust. The trust, known as HK Electric Investments and valued at HK$48 billion to HK$63.4 billion, aims to debut on the Hong Kong stock exchange next month.

Some analysts and academics said the annual yield offered by HK Electric Investments, ranging from 5.5 per cent to 7.3 per cent in the first year of listing, was attractive compared with overseas utilities.

However, the scheme of control regulatory regime that governs HK Electric and the other electricity firm in the city, CLP Power, is set for review in 2018, with negotiations between the government and the utilities due next year.

"The future return is likely to be cut and the way to calculate the return is likely to be modified," said William Chung Siu-wai, a director of City University's Energy and Environmental Policy Research Unit.

Some analysts said acquisitions of gas and power projects in Britain, Australia, New Zealand and Canada in the past few years showed Power Assets was trying to mitigate rising regulatory risks on its home turf.

In Hong Kong, HK Electric and CLP are allowed to earn an annual return of up to 9.99 per cent of their average net fixed assets in use, which means their profits are tied to investments in power assets such as generation, distribution and transmission facilities. This return was cut from 13.5 per cent to 15 per cent in 2008.

Chung said he expected the post-2018 return could be lowered to about 7 per cent, which is about the industry average overseas.