Hongkong Electric Holdings Ltd. - Company Profile, Information, Business Description, History, Background Information on Hongkong Electric Holdings Ltd.

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History of Hongkong Electric Holdings Ltd.

Hongkong Electric Holdings Ltd. is the holding company for one of the world's oldest electric utility companies, Hongkong Electric Co. The company generates power for nearly half a million people on Hong Kong Island, Lamma Island, and Ap Lei Chau. Other activities include the sale of electric appliances, international project management, and engineering. The company's vast real estate holdings also served it well in the early-to-mid 1990s. Asian billionaire Li Ka-shing and his family controls just over 35 percent of the company through his Cheung Kong (Holdings) Ltd.. In the late 1990s, analysts speculated that a merger (or at least cooperative agreement) between Hongkong Electric and the archipelago's other electric utility, China Light & Power, was imminent.

19th-Century Founding

Hongkong Electric traces its beginnings to Sir Paul Chater, a native of Calcutta who arrived in the British colony of Hong Kong in 1864 to become a clerk with the Bank of Hindustan. By 1870 Sir Paul had left the bank to form his own brokerage house and was setting about becoming one of Hong Kong's most prominent taipans, or merchants. Sir Paul made his early fortune through property, developing a number of commercial sites in and around Hong Kong Island's Core Central business district, and throughout the 1870s, he developed the Hong Kong harbor, providing portside facilities for the colony's expanding trading base.

In 1888 Sir Paul and two fellow members of the ruling Legislative Council were granted a government contract to form an electric company. The men agreed to provide street lights and to pump water to the Peak, a residential district rising high atop Hong Kong Island. The company chose a site at Wanchai--purchased from the government&mdashø build its first power station. A year later, upon the incorporation of the Hongkong Electric Company Ltd., shares were offered to the public on the Hong Kong Stock Exchange.

In the meantime, Sir Paul was busy incorporating another company that would eventually prove to be an asset for Hongkong Electric. The new venture, the Hongkong Land Investment and Agency Company, was organized to reclaim land for new developments on the island. One of the company's particular projects was the 57-acre Praya Reclamation Project in the Central District.

Eventually the government canceled its contract for water to be pumped up to the Peak, but Hongkong Electric was still to supply the electricity for street lights. The company had already ordered two steam-driven generating units from Britain, each with a generating capacity of 50 kilowatts. The Wanchai Power Station was brought on line at 6:00 p.m. on December 1, 1890.

By 1896 the company was flourishing, and Hongkong Electric was able to declare its first dividend. An amount totaling HK$12,000 was paid out to the company's shareholders that year.

Turn of the Century Developments

Supplying electricity to new property developments built by Sir Paul became a successful venture. One such development, the Queen's Hotel which opened on the Praya reclamation site in 1898, was supplied with energy to drive the first electric elevators installed in Hong Kong. The elevators--four in all--sped up and down the structure at 200 feet per minute and operated on a DC electricity supply from Hongkong Electric's first substation.

Rather than taking up precious land--of which Hong Kong Island has so little to spare--in 1905 Hongkong Electric adopted a policy of installing supply cables underground. The company continued to maintain this policy, although the plan did encounter difficulties in its early stages when white ants began eating into the cable coverings.

In 1909, the first light bulbs using metal filaments were installed in residential and commercial buildings on the island. The new bulbs emitted far more light than those previously used, which had filaments made of bamboo. A year later electricity was made available to the western areas of Hong Kong Island and the fashionable Peak residential district.

In 1914 Hongkong Electric decided to expand from its original Wanchai Power Station after the plant's generating capacity became overloaded. A second power station--this one a coal-fired facility--was to be built at North Point, a rural area that was suited for such a plant. A site of approximately 125,000 square feet was purchased for a cost of HK$37,500.

By 1916 sales revenue for Hongkong Electric had topped HK$1 million. Three years later, the new North Point Power Station was brought on line with an initial capacity of 3,000 kilowatts, while the Wanchai Power Station was put on standby. In 1925 an out-of-town substation was opened at Shaukiwan. That same year the supply voltage was changed from 100 to 200 volts. The change meant more than the throw of a switch; 240,000 light bulbs were issued free to the company's customers, and all manner of appliances had to be converted or exchanged. A year later the company, as well as Hong Kong Island, lost a guiding light when Sir Paul Chater died.

The Japanese occupation of Hong Kong, beginning in 1941, had huge consequences for Hongkong Electric. Following the invasion, the North Point Power Station was shut down and abandoned in December. Although the Times of London reported in 1942 that the North Point Power Station had been attacked and destroyed by American bombers, the plant was again generating power two months after the liberation of the island in August 1945.

Rapid Growth in Postwar Era

Demand for electricity began to grow markedly with the influx of Chinese immigrants following the rise of the Communist regime in that country in 1949. In an effort to keep up with the demand the North Point Power Station was refitted and a 20-megawatt generating unit--thus far the company's largest--was installed in 1955. Then, three years later, to meet the still-growing demand, the transmission network voltage was upgraded from 6,600 to 33,000 volts with the installation of an even larger 30-megawatt generator at the newly commissioned North Point "B" station.

By 1964, Hongkong Electric had decided that the North Point Power Station, in addition to having become an environmental hazard in its now-residential site, would not have sufficient capacity to meet projected future demand. In order to build a new oil-fired power station, the company purchased a plot of land on Ap Lei Chau Island. In 1966, as construction continued on the Ap Lei Chau station, North Point "C" station--computerized and oil-fired--was brought on line with a 60-megawatt unit, bringing the network's voltage up to 66,000 volts. In 1968 the first unit at Ap Lei Chau Power Station began generating power.

By this time demand for electricity in Hong Kong was growing exponentially. A 125-megawatt generator, manufactured by the Japanese company Mitsubishi, was brought on line at Ap Lei Chau. Over the course of the next ten years, another six identical units were installed, bringing the entire transmission network voltage to 132,000.

In response to community concern that the company's three smokestacks were offensive due to their resemblance to the joss sticks used in the rituals of ancestor worship and funerals, Hongkong Electric built a fourth stack. Because the additional smokestack was not necessary at that point in time, it went unused, leading to the popular notion that the chimney was a "dummy."

In 1978 the company began planning another new power station, purchasing a site on Lamma Island at Po Lo Tsui. Hongkong Electric made a strategic move when, in response to the OPEC (Organization of Petroleum Exporting Countries) hold on the oil market and the subsequent steep increase in prices, the company decided to equip the new plant with dual-firing capabilities. Therefore, the facility could be run on either coal or oil, as circumstances warranted.

Beginning in 1979, Hongkong Electric was regulated through a Government Scheme of Control in an effort to guarantee equity between the company's customers and stockholders and the Hong Kong Island community. In a cooperative effort, in 1981 the company signed an agreement with China Light & Power (CLP), connecting the two systems. With the ability to transfer up to 480 megawatts, the companies could operate more efficiently in addition to having reserves available for times of peak demand. Moreover, this agreement preserved the monopoly enjoyed by each of the firms; CLP was the exclusive generator of electricity to Kowloon and Hongkong Electric supplied the Hong Kong, Lamma, and Ap Lei Chau islands. These schemes of control also established profit based on capacity; in 1995, the maximum allowable profit was 15 percent of fixed assets.

Records Set in 1980s

A world record was established in 1982 with the completion of the Lamma Power Station, constructed in just under three and a half years. The first unit to go on line, a 250-megawatt coal-fired generator, brought the transmission network voltage up to 275,000 volts.

The 1980s brought Hongkong Electric several more milestones. First, in 1983, the company topped the 1,000 megawatt mark in maximum demand. In 1985 work was completed on the Wanchai Zone Substation, the first substation built in the Far East on a modular basis, saving both time and expense during construction. Then, in 1986, the second phase of the 275-kilovolt submarine cable network, transmitting energy from the Lamma Power Station to Hong Kong Island, was brought on line. This completed the highest-capacity submarine cable network anywhere in the world.

In 1987 a second coal-fired generator, this one with a 350-megawatt capacity, went on line at the Lamma Power Station. The was the company's largest unit, representing a generating capacity 7,000 times greater than Hongkong Electric's first unit, originally installed at Wanchai Power Station.

In 1989 the company recorded that demand for electricity in Hong Kong had exceeded 1,000 megawatts during every month of the year. After six 125-megawatt generators were transferred from Ap Lei Chau to Lamma, where they were to be operated by gas turbines, the Ap Lei Chau Power Station was shut down.

The Lamma Power Station was by now using both coal and oil firing to remain flexible in its fuel use, however, the use of coal far outweighed that of oil. Coal consumption in 1988 was 2.3 million tons and was expected to increase at an average yearly rate of five percent. The station contained a jetty alongside the facility from which coal could be unloaded out of ocean-going vessels. To operate and monitor all the generating units, the Lamma station also contained a Central Control Room that acted as the nerve center of the complex. Complex data processing systems helped personnel keep a running tab on energy output and control the generating units for accuracy, efficiency, and economy.

In 1988 the company constructed and opened a 3.1-kilometer tunnel between Wah Fu and Kennedy Road in order to house its 275-kilovolt transmission network. The tunnel replaced the laying of 275-kilovolt cables in busy urban areas, thereby avoiding disrupting traffic or ruining the environment. Over the course of the decade, the company increased productivity from 1.4 million kilowatt hours per employee annually in 1980 to 2.57 million by 1992. That factor helped multiply Hongkong Electric's net income from HK$611.1 million in 1981 to HK$2.34 billion in 1991.

During the 1980s Hongkong Land Holdings Ltd. reasserted its historic link to Hongkong Electric. Originally founded by Sir Paul Chater during the 1870s, this property development company had grown to rank among the world's largest property management companies. In an effort to weather the recessionary conditions on the island, Hongkong Land began to diversify its holdings, taking a one-third interest in Hongkong Telephone and a similar stake in Hongkong Electric.

However, Hongkong Land did not maintain its investment in Hongkong Electric for long; in 1985 it divested the stake to Hutchison Wampoa Ltd., thereby placing the utility in Asian business magnate Li Ka-shing's sphere of influence. A child of Chinese immigrants, Li started out in the 1950s making artificial flowers. By the time he took his stake in Hongkong Electric, this tycoon known as chiu yan, or Superman, reigned over a HK$390 billion (US$50 billion) empire. His flagship company, Cheung Kong (Holdings) Ltd., built and managed toll roads, toll bridges, power stations, and other infrastructure throughout Asia. It owned a controlling interest in Hutchison Wampoa, which in turn held a substantial stake in Hongkong Electric.

Uncertainties Characterize 1990s

Hongkong Electric's executive management was soon replete with Hutchison expatriots. Simon Murray acted as chairman from 1985 to 1993, when he was succeeded by Hutchison director George Magnus. At that time, Canning Fok Kin-ning advanced to managing director. In 1994, Magnus laid out a rather simple formula for HEH's continued growth, telling Gareth Hewett of the South China Morning Post that "the redevelopment of buildings on established land and the creation of new buildings on existing and future reclaimed land, together with continual increases in domestic per capita electricity consumption, all add to Hong Kong Island's increasing demand for electricity." Increasing demand would require greater capacity, which in turn would drive Hongkong Electric's ever-growing profits. Indeed, Hongkong Electric completed a HK$15 billion program of capital expenditure from 1990 through the end of 1994. And not surprisingly, the utility's profits grew from just under HK$2 billion in 1990 to over HK$4 billion in 1995.

However, Magnus' neat formula did not add up in the mid-1990s, when capacity began to outstrip demand. As manufacturers moved to mainland China, overall sales of electricity flattened and peak power usage began to decline during this period. By 1996, CLP had 50 percent over capacity and was forced by the government to postpone HK$1.8 billion in capital expenditures. Though Hongkong Electric also experienced overcapacity during this period, it forecast that growing demand would require that a new power station be on line by 2003. Its proposal for a new power station on Po Toi Island was met with opposition, first from consumer groups and environmentalists, who questioned the need for additional capacity when CLP had generating power to spare.

As the July 1997 deadline approached for the United Kingdom to hand Hong Kong over to Chinese rule, Li reorganized his empire. He transferred Hutchison Wampoa's 35.01 percent share of Hongkong Electric to the recently-formed Cheung Kong Infrastructure (CKI). Run by Li's eldest son, Victor, this firm managed Asian infrastructure investments. Li told Financial Times (London) that "the reorganisations reflects our intention to increase our total investment in infrastructure." A second restructuring in May made CKI part of Hutchison Wampoa. One benefit to Hongkong Electric from new arrangement was the creation of an international subsidiary in charge of power projects throughout Asia-Pacific. This key growth vehicle made its first acquisition in June, when it took a 25 percent stake in a Thai power plant project.

With its scheme of control agreement up for review in 1998, Hongkong Electric faced the possibility of dramatic change. Possibilities included: a merger with or purchase of capacity from China Light & Power; complete takeover by Li Ka-sheng's Cheung Kong group; or a simple maintenance of the status quo. No matter what the outcome, the utility was likely to enjoy continued long-term prosperity under the auspices of the Li family.

Principal Subsidiaries: The Hongkong Electric Company, Limited; Associated Technical Services Limited; Cavendish Construction Limited; Fortress Advertising Company Limited; Hongkong Electric Fund Management Limited; Gusbury Enterprises Incorporation; Best Liaison Limited; Hongkong Electric International Limited.

Additional Details

Further Reference

100 Years of Energy, Hong Kong: The Hongkong Electric Co. Ltd., 1990.Chetham, Andrew, "Utilities Merger 'A Profitable Proposal'," South China Morning Post, April 16, 1997, p. 14.Clayton, Dusty, "HK Electric Net Rises 8.7 pc," South China Morning Post, March 8, 1996, p. 1.Cottrell, Robert, "HK Land Buys 20 Percent of HK Electric," Financial Times (London), April 27, 1982, p. 21.Criswell, Colin, The Taipans of Hong Kong, Oxford, Eng.: Oxford University Press, 1981.Hewett, Gareth, "Hongkong Electric's Star Shines Brightly," South China Morning Post, March 4, 1994, p. 1.Highlights of the Electric Years, Hong Kong: The Hongkong Electric Co. Ltd., 1992."Hong Kong's Supermen Prepare for China," Financial Times (London), January 14, 1997, p. 25."Li Ka-shing Stays Ahead of the Game," Financial Times (London), January 7, 1997, p. 20.Lucas, Louise, "HK Power Groups Study Co-Operation Deal," Financial Times (London), December 10, 1996, p. 32.------, "Power Policy Kept on Low Heat," Financial Times (London), September 16, 1996, p. 6.Porter, Barry, and Dusty Clayton, "Lucrative Signs of a Powerful Union," South China Morning Post, November 5, 1995, p. 3.Ridding, John and Louise Lucas, "Beijing Buys £1.3 Billion Stake in Top HK Power Supplier," Financial Times (London), January 29, 1997, p. 1.

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