UPDATE 2-Exxon to sell Hong Kong power operations for $3.4 bln

Tue Nov 19, 2013 5:43am EST

* Exxon sells to CLP and China Southern Power Grid (CSG)

* Deal marks state-ownded CSG's first overseas investment

* CLP to use internal cash and bank loan to fund the deal

* CLP bought stake from Exxon through two years of negotiation-CEO

By Denny Thomas and Charlie Zhu

HONG KONG, Nov 19 (Reuters) - Exxon Mobil Corp has agreed to sell its 60 percent stake in a Hong Kong utility and a power storage firm for a combined $3.4 billion, helping the U.S. oil major raise funds to plough back into its core operations.

Many integrated global oil companies have struggled to boost production, spending heavily on new projects in recent years. In the first nine months of this year, Exxon, the world's biggest oil firm by market value, spent $33 billion.

They are also keen to put cash in the pockets of investors through asset sales, share buybacks or dividends as analysts grumble about lagging stock prices.

Under the deal, CLP Holdings will assume control of Castle Peak Co Ltd, one of Hong Kong's two electricity providers, lifting its stake to 70 percent by buying half of Exxon's holding for HK$12 billion ($1.6 billion). CLP also plans to buy Exxon's 51 percent stake in Hong Kong Pumped Storage Development Co for HK$2 billion.

State-owned China Southern Power Grid (CSG) will buy the other 30 percent held by Exxon, making it its first offshore investment. CSG did not disclose financial terms. But, Betty Yuen, a senior executive at CLP, told reporters that CSG also paid HK$12 billion for the 30 percent stake.

CLP, which is backed by the wealthy Kadoorie family and has been providing electricity to Hong Kong for over 100 years, said the deal will help it better manage and coordinate its Hong Kong power generation and distribution business.

By partnering up with CSG in the acquisition, CLP would have more options in terms of importing electricity generated by clean fuels in mainland China to Hong Kong via CSG's grids, CLP CEO Richard Lancaster said.

CLP, like many power producers around the world, is under pressure to cut emission. Lancaster said CLP will use more natural gas for generation in the next couple of years. Currently, coal accounts for about 45 percent of CLP's power generation, while nuclear makes up 35 percent and the rest comes from natural gas from central Asia and a field in the South China Sea.

Castle Peak Power Co Ltd owns three power stations in Hong Kong with a total power generation capacity of 6,908 megawatts, including a 4,108-MW coal-fired plant called Castle Peak and the 2,500-MW gas-fired Black Point power station.

The sale of the stake from Exxon came from two years of "bilateral discussion" with the U.S. oil major instead of an auction, Lancaster told reporters.

People familiar with the matter had told Reuters that Exxon ran an auction to find a buyer for half its stake earlier this year. While the sale process elicited some interest from Japanese and Southeast Asian bidders, CLP was seen as the natural buyer given its 40 percent existing shareholding, they added.

CLP and Power Assets Holdings Ltd, Hong Kong's other power supplier, garner an annual return of 9.99 percent on net fixed assets until 2018 under a government programme.

Power Assets, controlled by tycoon Li Ka-Shing, has announced plans to spin off its Hong Kong electricity business through a Hong Kong IPO, which could raise up to $5 billion.

CLP is increasing investment in Hong Kong because of growing population and power demand, Lancaster said.

CLP will use internal resources and a HK$10 billion bridge loan facility from HSBC Plc to fund the acquisition, which CLP executives say should be completed around mid-2014.

"We have plenty of firepower to complete the acquisition," said chief financial officer Mark Takahashi, adding that CLP already has HK$16 billion undrawn loan facilities and HK$3 billion cash.

CLP will look at "a range of funding sources from loans to bonds to possible hybrid securities and even possibly equities" to replace the bridge loans when they expire, he added.

Castle Peak's profit rose 2.7 percent to HK$3.1 billion for year ended Dec. 31, 2012, when it had net assets of HK$540 million.

CLP said it was advised by Evercore Partners and HSBC while CSG said it was advised by Morgan Stanley and China International Capital Corp. Barclays Plc advised Exxon, a person familiar with the matter said.