EUR 850.00 For Business Accounts Only

Morningstar | HK Electric Investments' High-Quality Assets Operate in a Stable Regulatory Regime

Hong Kong Electric Investments is one of two vertically integrated electricity suppliers in Hong Kong and the sole provider of electricity to the island. Its peer CLP provides electricity to Kowloon, New Territories, and Outer Islands. We like the consistent, favorable regulatory regime in Hong Kong, allowing Hong Kong Electric Investments to earn reasonable returns and underpin its steady distribution payout. The new Scheme of Control governing the framework for the government's review of utilities, offers a permitted return of 8% on the firm's average net fixed assets from 2019. Despite a decline in the permitted return from the current 9.99%, we forecast Hong Kong Electric Investments to generate returns above its return of capital. The new SoC will apply for 15 years compared with the current term of 10, providing greater regulatory certainty, in our view.While the SoC does not restrict Hong Kong Electric Investments and CLP to specific areas in Hong Kong or new entrants, we do not expect changes to the market structure, as the Hong Kong market is small with limited land and low population growth. Both electricity operators have historically achieved high reliability ratings relative to global peers'. This is supported by its mostly underground transmission and distribution network, which is less vulnerable to weather disruption. Electricity generated from its power plant on Lamma Island is currently majority coal and gas-fired with oil used for peak demand. The Hong Kong government's initiative to reduce carbon emissions will see the firm retire three coal-fired units and one 2017 gas-fired unit. Construction of two gas-fired replacements, L10 and L11, is under way, and they will be commissioned in 2020 and 2022, respectively. Hong Kong Electric Investments has historically received accommodative development plans for capital expenditure covering maintenance and new government policies. The transition to cleaner energy and lower carbon emission underpins profit and distribution growth for Hong Kong Electric Investments. The company and CLP are assessing feasibility in developing an offshore LNG facility and will add to their fixed asset base.