CLP/China Grid may pay $2.8b for Exxon power stake

Fri, Mar 16 04:09 AM EDT

* ExxonMobil to sell stake to divest non-core assets

* Deal to be reasonable if priced at $2.8 bln - analyst

* Joint purchase to help CLP secure gas supply

By Charlie Zhu

HONG KONG, March 16 (Reuters) - Regional power utility CLP Holdings and China Southern Power Grid Co are likely to pay around $2.8 billion for a 60 percent stake held by ExxonMobil in a Hong Kong power venture as the oil major seeks to divest its non-core assets.

By increasing its existing holding in Castle Peak Power Co Ltd in partnership with one of China's two main power grid companies, CLP would be able to secure supply of Chinese natural gas needed to fuel its Hong Kong plants, analysts say.

Hong Kong-based CLP, which owns and operates power plants from China to Australia and Thailand to India, said late on Thursday that it and state-owned China Southern were in talks to buy ExxonMobil's stake in Castle Peak.

An industry source familiar with the situation told Reuters the stake would "be worth at least several billion (U.S.) dollars", adding ExxonMobil had long sought to sell the asset as part of efforts to focus on its core business of oil and gas.

The source asked not to be identified because he was not allowed to make public comments on the talks.

CLP, which is controlled by the wealthy Kadoorie family and supplies electricity to users in Kowloon and New Territories in Hong Kong, said there is no certainty an agreement will be reached. No further details were given.

CLP already holds 40 percent of Castle Peak, which owns three coal-fired power stations with generation capacity of 6,908 megawatts -- part of which can burn gas as a back-up fuel.

REASONABLE PRICE

RBS analyst Jenny Cosgrove said ExxonMobil could fetch up to HK$22 billion ($2.83 billion) from its stake in Castle Peak, which enjoys an annual return of 9.99 percent on its net fixed assets until 2018 under a programme known as Scheme of Control.

Citigroup analyst Pierre Lau said CLP was expected to pay HK$11 billion to HK$13.7 billion if it and China Southern were to evenly split the 60 percent stake.

The deal, if it goes through, would also become the first major acquisition by China Southern since its establishment in 2002.

China's cashed up state power groups have been scooping up bargains, with dominant power distributor State Grid Corp. establishing a presence in the Philippines, Brazil and Portugal.

A joint purchase by CLP and China Southern would pave way for further integration of power grids in Hong Kong and neighbouring Guangdong, analysts say. China Southern services Guangdong, Guangxi, Guizhou, Yunnan and Hainan.

The value of ExxonMobil's stake carries a price/book ratio of 1.7 times, Cosgrove said in a note. Assuming an enterprise value of around HK$40 billion for Castle Peak, the estimated price tag of the ExxonMobil stake implies "a very reasonable" valuation of $0.74 million per megawatt, she added.

It is unclear how CLP plans to fund the likely purchase. CLP had HK$3.2 billion in cash and HK$65 billion of total debt at end-2011, with a debt to total capital at 45 percent.

GAS SUPPLY

Echoing views of several other power industry analysts, Cosgrove told Reuters that by partnering up with China Southern Power, CLP might be able to smoothen its ongoing negotiations to secure natural gas for its power plants.

"CLP has been having trouble finalizing the negotiation on new gas supply from mainland China," Cosgrove said. "I wonder if the exit of ExxonMobil and the entry of a Chinese partner would help in finalizing and securing those negotiations."

Hong Kong is calling for a significant increase in the use of natural gas for power generation to cut reliance on coal.

CLP is in discussions with CNOOC long-term natural gas supply. It also plans to import liquefied natural gas from China.

CLP has just finalised negotiations with China's largest energy company PetroChina for the supply of natural gas through the second west-to-east pipeline that pumps gas from Central Asia to Guangdong.

Declining profitability of Castle Peak is also pushing ExxonMobil to sell the stake, the source said.

The local operations of CLP and Power Assets Holdings Ltd , Hong Kong's other power supplier that is controlled by tycoon Li Ka-Shing, are regulated by the government.

In 2008, Hong Kong revised down the permitted rate of return of the two companies to 9.99 percent from 13.5-15 percent amid criticism that the scheme encouraged over investment in power infrastructure, which in turn raised electricity prices.

CLP and Power Assets, facing maturing demand and dwindling returns at home, have been stepping up overseas power investment since 1990s. Overseas assets are already accounting for a substantial chunk of their revenue and earnings.