HK Electric chairman renews call to maintain fixed-asset earnings level

Interims show 8.6pc fall in profits, blamed on a sharp rise in financing costs

PUBLISHED : Tuesday, 26 July, 2016, 4:52pm
UPDATED : Tuesday, 26 July, 2016, 10:50pm

The chairman of HK Electric Investments, the listed energy firm spun off from Li Ka-shing’s Power Assets two years ago, has renewed its call on government not to cut the industry’s permitted levels of return on fixed assets, after it posted a 8.6 per cent year-on-year fall in net profit for the first half.

The company blamed the drop to HK$1.1 billion from HK$1.2 billion last time, on a HK$116 million rise in finance costs, due to higher bank borrowings. Revenue during the period grew 1.8 per cent year-on-year to HK$5.33 billion, but power sales edged down 0.8 per cent year-on-year due, it said, due to milder weather.

The company’s share price reacted to the results on Tuesday with a 5.24 per cent drop to HK$7.77, the lowest closing price since July 15.

The Hong Kong government last year held a public consultation on the electricity sector’s future development, including its current 10-year, so-called “scheme of control” policy regime, which expires in 2018.

Under that, the city’s two regional electricity generation and distribution monopolies — Hong Kong Electric, which serves 570,000 customers on Hong Kong Island and Lamma Island and is wholly-owned by HK Electric Investments, and CLP Power Hong Kong — are currently allowed to earn returns of up to 9.99 per cent of their net fixed assets.

The city’s environment chief Wong Kam-sing said in May last year that while the regime had worked well, it could be enhanced.

There is no need to introduce competition ... for the sake of bringing in choice
Canning Fok Kin-ning

This could be achieved by cutting the maximum return on fixed assets to between 6 and 8 per cent and by devising an incentives-and-penalties scheme to help improve performance, and raise competition.

The top permitted return has been 13.5 per cent between 1964 to 2008 before being slashed to current the level, to reflect the lower cost of capital and interest rates.

But in the statement accompanying the half-year results on Tuesday, HK Electric Investments chairman Canning Fok Kin-ning said he “firmly believes the [current] framework should be based on the feedback received during the government’s public consultation” which he claimed showed the regime “has worked well”.

“There is no need to introduce competition ... for the sake of bringing in choice,” he added.

It’s the first time the firm has reported comparable results since becoming a separate unit.

HK Electric Investments is 33.4 per cent-owned by Power Assets — CK Hutchison’s HK-listed utility and infrastructure investment vehicle — 21 per cent by state-owned monopoly power distributor State Grid Corporation of China, and 19.9 per cent by sovereign wealth fund Qatar Investment Authority.

Fok said it has held discussions with the government on the industry’s future regulatory regime, and has underlined the company favours maintaining the regime’s current duration at 10 years, and then keeping the current rate of return to allow further long-term invest in infrastructure.

Some politicians and analysts, however, still consider the 6-8 per cent level to be generous, given the low cost of borrowing for companies.

But the power utility executives, including Fok, have argued a higher return is needed to ensure incentives for companies to invest in infrastructure in the long term.

The company distributes nearly all of its profit to shareholders in the form of dividends, which for the six-month period was unchanged from last year, at 19.92 HK cents per share, which is higher than its earnings per share of 12.46 HK cents.

Credit Suisse analysts said in a March report they expected the top permitted return on assets to be cut to 8 per cent in 2024, adding they did not rule out the risk of an earlier cut in 2019.

Meanwhile, separately within the half-year statement, the company said HK Electric has now joined with CLP Power in conducting an environmental assessment, as part of a feasibility study on building an offshore liquefied natural gas receiving and processing terminal, to import fuel for their power plants.

“If the project receives government approval, the terminal will provide direct access to and enhanced bargaining power in the international market for gas supplies,” it said.

HK Electric plans to raise the proportion of natural gas in its fuel mix from 30 per cent currently to 50 per cent by 2020, to help fulfil the government’s environmental goals.