S&P: Scheme of Control Agreements may affect Hong Kong electricity companies

Standard & Poor's said that proposed changes to the Scheme of Control Agreements (SCAs) under which Hong Kong electricity companies operate could have an impact on their credit quality in an article titles "Credit FAQ: Hong Kong's Electricity Reform Proposals Won't Shock, But Could Rock Profitability."

The report said that while the Hong Kong government proposed in a recent report to continue the SCAs after they expire in 2008, it suggests significant changes to their framework, including lowering the rate of return range.

This could affect the financial performances of the two electricity operators, Hongkong Electric Co. Ltd. (A+/stable) and CLP Power Hong Kong Ltd. (A+/stable/A-1), as well as that of their respective parents, CLP Holdings Ltd. (A+/stable/A-1) and Hongkong Electric Holdings Ltd. (A+/stable), the agency said.

"The financial profiles of the power companies are exceptionally strong, leaving some capacity for their profiles to weaken while the current A+ ratings are maintained. Nevertheless, it is possible that a severe reduction in the rate of return - say to about 7% for the bulk of assets - could result in materially weakened credit quality and trigger a negative outlook or downgrade," said S&P credit analyst Mary Ellen Olson.

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