Hong Kong company reporting season

CLP profits hit by volatile Australian energy contracts

The larger of Hong Kong’s two electricity suppliers reports profit of HK$5.91 billion, 3.5pc down from 2016 and short of expectations

PUBLISHED : Monday, 07 August, 2017, 1:36pm
UPDATED : Monday, 07 August, 2017, 10:10pm

CLP Holdings, the larger of Hong Kong’s only two electricity suppliers, reported weaker than expected profit after volatile energy prices in Australia saw it book a loss on forward energy sales contracts there.

The company, 35.1 per cent-owned by its largest shareholder, the Kadoorie family, generated a net profit of HK$5.91 billion in the year’s first six months, down 3.5 per cent from HK$6.13 billion in the same period last year, it said in a filing to Hong Kong’s bourse after the morning trading session closed.

“[Our Australia profit was hit by] significant volatility in the value of energy contracts,” said Sir Michael Kadoorie, chairman of the sole electricity generator and distributor in Kowloon, the New Territories and Lantau Island.

“Against a backdrop of uncertain energy policies, the energy market in Australia  remains very  challenging, leading to a period of high and volatile wholesale prices.”

The profit is lower than the HK$6.3 billion estimated by Citi’s head of Asia-Pacific utilities research Pierre Lau who had expected higher Australia earnings, and the HK$6.09 billion forecast by another analyst polled by Bloomberg.

It amounted to 45.8 per cent of the HK$12.9 billion average full-year profit estimate of 12 analysts, according to Bloomberg.

A second interim dividend of 59 HK cents per share was proposed, making the total first-half payout HK$1.18, compared to HK$1.14 in the first half of last year.

CLP’s Hong Kong business, protected by a guaranteed return regime on asset value, posted a 1.9 per cent rise in profit to HK$4.36 billion as fixed-asset values rose. This is despite a 2.6 per cent power sales volume fall due to a warmer and drier winter.

First-half profit from India grew 21 per cent year on year to HK$242 million, while profit from mainland China slumped 24.3 per cent to HK$637 million as higher coal costs could not be offset by rising power prices amid oversupply.

The company’s Australian operation booked a 15.5 per cent year-on-year fall in first-half profit to HK$758 million, after it booked HK$214 million of accounting “fair value adjustments” on its energy contracts for risk management, against a gain of HK$65 million in the year-earlier period.

When asked whether the firm’s expectation that wholesale prices to remain volatile and high “in the near term” meant that there is little chance of a reversal of the unfavourable “adjustments” in the year’s second half, chief executive Richard Lancaster said its “portfolio of many energy contracts will be adjusted over time” and some would be gradually unwound.

While having power generation and retail operations meant it was both a buyer and seller of energy contracts in different states, Lancaster said on balance, CLP was a net buyer in Australia.

The contracts have maturity of up to two years, and a demand spurt caused by extreme weather, the shut-down of coal-fired plants and rising contribution of intermittent solar and wind power, as well as a shortage of natural gas all played a part in the sudden price surge.

Meanwhile, its Energy Australia subsidiary is facing a lawsuit initiated by state government-owned Queensland Investment, whose Lochard Energy unit bought the Iona natural gas processing and storage facilities in southwest Victoria state from CLP in late 2015 for A$1.78 billion (HK$10 billion).

In May, Lochard filed a court writ seeking A$967 million of damages, alleging CLP had made “certain representations” in the asset disposal agreements related to the “technical performance” of the facilities.

CLP reiterated in the filing that it intends to “vigorously defend the claims” and holds the view that “a material outflow of economic benefits from the CLP Group is unlikely”.

Lancaster said they submitted last Friday a defence to the court but did not elaborate on their side of arguments.

CLP Monday closed 0.7 per cent lower at HK$83.90 after the results, against a 0.5 per cent rise of the Hang Seng Index.