TNAG-0638-FCO40-786-Supplies-of-electricity-for-Hong-Kong-1977 — Page 10

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Loans

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Loans represent by far the largest source of finance for future expansion and will be provided through the ECGD package which will make funds available for all the generating plant and equipment as well as for the high voltage equipment associated with the transmission and distribution network. Repayments will be in seventeen half-yearly instalments at 7 3/4% (although for rounding off purposes 8% has been used in the model), commencing 6 months after commissioning of the plant. Loan finance of this magnitude and on these terms will help considerably to level out the pattern of tariff increase and this makes acceptance of the ECGD offer most desirable.

Retained earnings and proposed dividends

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Supplementing loans will be the retained earnings of CLP which, on average for the period up to 1983, will be about 55% of CLP's net return (or 40% of the return of the group as a whole). The dividends behind this figure up to 1983 show an annual increase of 15.5% compared with an actual increase of approximately 12% per annum since 1967. CLP feel that the higher growth in dividends is needed to compensate for the greater risk they associate with the new expansion. The Government considers that there are no valid grounds for disputing this commercial judgement, particu- larly since the CLP pay-out of dividends in the past has not been out of line with the dividend yield of other major companies in Hong Kong. Should it transpire that the risks are less than expected, then the permitted return and dividend policy could be amended accordingly in the 1983 review (a point stressed in paragraph 17 of XCC(77)86).

New funds

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This is an area where some criticism could be levelled at the company's proposals because CLP have not planned any rights issues during the period. But even if there were to be a new issue say in 1979/80 the beneficial effect on tariffs would be short term only. The tariff increases for 1980 and 1981 could perhaps be reduced slightly but thereafter higher increases would be necessary in 1982 and 1983.

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Nevertheless, on balance the Government feels that the company should consider a rights issue whenever the timing and market climate appear to be favourable.

CONFIDENTIAL