UPDATE: CLP, China Southern Power Grid Eye Exxon Mobil Hong Kong Power Stake

Power supplier CLP Holdings Ltd. (CLPHY) and China's state-owned China Southern Power Grid Co. are in talks to acquire the 60% stake in a Hong Kong electricity company held by a unit of Exxon Mobil Corp. (XOM), in the mainland company's second attempt to break into Hong Kong's power generation market.

The assets involved are ExxonMobil Energy Ltd.'s stake in Castle Peak Power Co., a power generating joint venture in which CLP Power Hong Kong, a wholly owned unit of CLP Holdings, owns a 40% stake. Castle Peak has three power stations in Hong Kong with a total generating capacity of 6,908 megawatts.

The size of the potential deal could be HK$22 billion (US$2.8 billion), Royal Bank of Scotland analyst Jenny Cosgrove said.

CLP confirmed talks were being held in a statement issued late Thursday. Exxon did not immediately respond to requests for comment.

Some analysts say CLP and its partner are well positioned to win the stake, and that China Southern Power Grid's participation would strengthen ties between the two, which in turn could open the way for CLP to make new investments on the mainland.

China Southern Power Grid is one of two monopoly power grid companies in China. It controls the network in the provinces of Guangdong, Guangxi, Yunnan, Guizhou and Hainan.

"The power stations are under Scheme of Control which permits a 9.99% return on net fixed assets until 2018. We see the Scheme of Control in Hong Kong as the best place for a marginal dollar of investment by CLP and so view this possible deal positively," Cosgrove said.

The Hong Kong government regulates the profits of the two power companies active there now--CLP, which supplies power to Kowloon and the New Territories, and Power Assets Holdings Ltd., the sole power supplier on Hong Kong island--through a licensing system called the "Scheme of Control" which has been in place since the 1960s.

Citigroup analyst Pierre Lau said funding of a deal could come from borrowings, proceeds from CLP Australia unit TRUenergy's initial public offering in Australia and issuing new shares, as CLP's net debt-to-equity ratio was high, at 81%, at the end of 2011.

"We believe that having China Southern Power Grid as a partner, instead of ExxonMobil, in Castle Peak Power, might give CLP a better position bargaining with the Hong Kong government for the next five-year capex plan for its Hong Kong business in 2014-18," Lau said.

In 2006, the government reviewed the possibility of opening the city's power-supply market to new players. This prompted Southern Power Grid to form a joint venture with Chinese state-owned electricity producer China Power International Holdings Ltd., which is controlled by former premier Li Peng's daughter Li Xiaolin, and Hong Kong media firm Vertex Communications & Technology Group Ltd. (8228.HK).

So far the company hasn't produced an investment plan and isn't active in supplying power to Hong Kong.

CLP is China's largest foreign-based power provider. It has over 40 power projects, with a combined capacity of around 19,000MW, its website says.

-By Yvonne Lee and Chester Yung, Dow Jones Newswires; 852-2832 2331; [e-mail]