Issuer Summary: Hong Kong Electric Investments / HKE

Date prepared: 2026-05-18
Ticker: HKE / HKEX 2638
Issuer focus: Hong Kong Electric Investments and HK Electric Investments Limited, The Hongkong Electric Company, Limited, Hongkong Electric Finance Limited
Scope note: This is the initial coverage note on Hong Kong Electric Investments, hereafter HKEI. However, the direct credit exposure for bondholders is generally not to the listed stapled securities themselves, but primarily to unsecured bonds issued by Hongkong Electric Finance Limited, hereafter HEFL, incorporated in the British Virgin Islands, and guaranteed by The Hongkong Electric Company, Limited, hereafter HK Electric. This note therefore uses HKEI’s listed-group disclosures, but focuses on the regulated utility credit of HK Electric as guarantor, the Scheme of Control Agreement, hereafter SoC, the borrowing and guarantee structure, and liquidity. The Hong Kong Government, HKEI, HK Electric, HEFL, Power Assets Holdings, CK Infrastructure, State Grid, and Qatar Investment Authority are not treated as the same legal credit.

1. Business Snapshot and Recent Developments

HKEI is a listed electric utility group whose core operating company is HK Electric, which supplies electricity mainly to Hong Kong Island and Lamma Island. HK Electric is a vertically integrated power utility responsible for generation, transmission, distribution, and supply, and supplied electricity to 599,000 customers at end-2025. Electricity sales in 2025 were 9,916GWh, down 2.3% from 10,150GWh in 2024. The company has a mature demand base on Hong Kong Island, where commercial demand is significant, although sales volumes are affected by the economy, temperature, and commercial activity.

For credit analysis, HKEI should not be read merely as a dividend stock or utility equity, but as a utility infrastructure credit whose repayment source is HK Electric’s regulated assets and tariff framework. In the 2025 Annual Report, HK Electric is shown as the principal company engaged in generation, transmission, distribution, and supply, and both HK Electric and HKEIL are shown as rated A- / Stable by S&P. External ratings are an important supporting input, but for bondholders it is still necessary to separately confirm HEFL’s issuer status, the HK Electric guarantee, the unsecured and unsubordinated ranking, short-term refinancing, and the terms of each individual tranche.

HKEI’s consolidated revenue in 2025 was HK$12.125bn, a modest increase from HK$12.057bn in 2024. Operating profit declined to HK$5.048bn from HK$5.488bn in 2024, while profit attributable to SSU holders increased slightly to HK$3.149bn from HK$3.111bn in 2024. Distributable income was HK$2.830bn, and the annual distribution per stapled security unit was HK32.03 cents, both unchanged from 2024. Shareholder distributions should be viewed as a credit-relevant cash outflow, but in 2025 cash generation from operations was HK$9.194bn and operating cash flow was HK$7.292bn, so the distribution alone did not undermine liquidity.

The key recent business development is the implementation of the 2024-2028 Development Plan. The plan, approved by the Hong Kong Government in November 2023, covers the period from January 2024 to December 2028 and envisages total capital expenditure of HK$22.0bn. The breakdown is HK$10.6bn for the generation system, HK$9.2bn for the power grid, and HK$2.2bn for customer and corporate services. Generation investments include the new L13 gas-fired combined-cycle generating unit, replacement of ageing oil-fired open-cycle gas turbines, and life extension of coal-fired units. Grid investments focus on zone substations to meet new demand in the eastern and southern districts of Hong Kong Island, replacement of ageing underground cables and substation equipment, and smart-grid upgrades.

The January 2026 tariff adjustment is also important. HK Electric’s Basic Tariff rose by HK5.0 cents from January 2025 to HK127.9 cents/kWh, but the Fuel Clause Charge fell from HK44.1 cents/kWh to HK35.4 cents/kWh. As a result, the Average Net Tariff declined by 2.2%, from HK167.0 cents/kWh to HK163.3 cents/kWh. This shows a structure in which capital investment and operating costs put pressure on the Basic Tariff, while lower fuel costs reduced customer tariffs. The SoC supports cost recovery, but tariff acceptability remains an area of negotiation with the government and customers.

The first impression of HKE’s credit is that it has significant predictability as a regulated utility, but it is also necessary to assess the scale of borrowings and short-term refinancing, the investment burden over 2024-2028, and the regulatory framework after 2033. The tariff framework, debt maturities, standalone guarantor liquidity, and execution of the generation-mix transition are more important than short-term earnings fluctuations.

2. Industry Position and Franchise Strength

HK Electric’s franchise rests less on market share won in a competitive market than on its essential role as regional utility infrastructure embedded in Hong Kong’s electricity supply system. The Offering Circular explains that the SoC does not define HK Electric as a legal monopoly operator and does not establish an explicit licensed area. In practice, however, HK Electric is the sole electricity supplier to customers on Hong Kong Island and Lamma Island. This de facto supply position and the SoC tariff framework are the core supports for the company’s credit quality.

Supply reliability is extremely high. According to the 2025 Annual Report, HK Electric again achieved supply reliability of over 99.9999% in 2025, with average unplanned customer minutes lost per customer at less than half a minute. The vertically integrated model, under which the company owns generation, transmission, and distribution, concentrates responsibility for capital investment and operations in the company, while also requiring continuous renewal investment to maintain reliability.

Hong Kong’s electricity demand is mature. Electricity sales in 2025 were 9,916GWh, below the 10,361GWh recorded in 2021. The customer base increased from 584,000 in 2021 to 599,000 in 2025, so the demand base itself is not shrinking, but sales volumes fluctuate depending on commercial-customer activity, weather conditions, energy efficiency, and the economic environment. For HKE’s credit, the key point is not the strength of sales-volume growth, but whether regulated asset investment and costs can be recovered through tariffs even in a low-growth environment.

The SoC is the framework under which operating costs, fuel costs, taxes, and the permitted return for HK Electric’s electricity-related business are addressed through the tariff system. The current SoC runs from 1 January 2019 to 31 December 2033, and HK Electric has a mechanism under which it earns a Permitted Return based on 8% of average net fixed assets, hereafter ANFA, for the electricity-related business. Through the Development Plan, Auditing Review, and Annual Tariff Review, the government monitors the company’s finances, operations, capital investments, and tariffs.

However, the SoC is not a cure-all. First, it is not a government guarantee of debt. Second, the Permitted Return is a framework based on ANFA, and is subject to deductions and adjustments including the Excess Capacity Adjustment, borrowing cost adjustment, Rate Reduction Reserve, and Smart Power Care Fund. Third, tariffs are affected by customer burden and policy judgement. The reduction in Net Tariff in 2026 was supported by lower fuel costs, but the Basic Tariff increased, and the tension between investment and tariff acceptability will continue.

In addition, the FCRA, TSF, and Permitted Return are tariff and accounting recovery mechanisms, not cash on hand or short-term liquidity in themselves. Actual cash recovery depends on the Annual Tariff Review, FCRA / TSF balances, the timing of fuel payments and tariff collections, and customer tariff acceptability. The SoC is therefore a strong support for medium-term credit quality, but should be distinguished from a liquidity buffer capable of immediately repaying short-term maturities.

The key point in translating the tariff framework into credit analysis is that HKE’s earnings are not determined simply by “volume x market price”, but also that it is not a complete cost pass-through. Fuel costs are dealt with through the FCRA, while the Basic Tariff is adjusted through the Development Plan and Annual Tariff Review. As a result, even if fuel costs or capital investment increase temporarily, there is a framework for reflecting them in tariffs. However, because tariffs directly affect households, commercial customers, and government policy decisions, the timing and level of recovery are not determined mechanically by a financial model alone. From a credit perspective, it is necessary to monitor not only the existence of the framework, but also the degree to which the government smoothly reflects approved investments in tariffs, and how customer burden is smoothed through the combination of the Basic Tariff and Fuel Clause Charge.

This point explains both HKE’s strengths and constraints. The strength is that the investments required for HK Electric to maintain supply reliability on Hong Kong Island and Lamma Island can be treated not simply as commercial investments, but as public infrastructure investments. The constraint is that, because investment recovery is achieved through customer tariffs, periods of rising costs inevitably involve social and political friction. In the 2026 tariff, the decline in the Fuel Clause Charge reduced the Net Tariff, but the Basic Tariff increased. In this way, even when lower fuel costs reduce the headline customer tariff, regulated asset investment and operating costs push up the basic tariff component. Investors should look not only at the Net Tariff, but separately at the Basic Tariff, Fuel Clause Charge, FCRA balance, and TSF balance.

Compared with other Hong Kong power credits, HKE is a regulated utility credit protected by the SoC, similar to the Castle Peak Power Company / CLP Power side, but its supply area, asset composition, issuance structure, and rating level differ. HKE is concentrated in HK Electric’s single supply area and is smaller than the CLP side in terms of electricity sales. On the other hand, HKE’s disclosures are relatively extensive through the listed stapled securities and MTN Programme, and standalone financial information for HK Electric as guarantor can also be reviewed in the Offering Circular.

3. Segment Assessment

Rather than assessing HKE’s business segments as multiple earnings pillars like an ordinary diversified corporate, it is more useful to analyse the business by function: generation, transmission and distribution, supply and customer services, and fuel and decarbonisation investments. All are connected as electricity-related businesses subject to the SoC, and the credit focus is less on isolating individual segment profits than on how each capital investment is reflected in regulated assets and tariffs.

On the generation side, Lamma Power Station is the core asset. Total installed capacity at end-2025 was 3,083MW, comprising 1,050MW of coal-fired units, 555MW of oil-fired gas turbines and standby units, 1,475MW of gas-fired combined-cycle units, and around 3MW of wind and solar. Gas-fired generation accounted for about 69% of total output in 2025. L13 is scheduled to commence operation in early 2029, and after completion the share of gas-fired generation is expected to rise to about 80%. This is supportive for decarbonisation and air-quality improvement, but entails risks related to natural gas procurement, LNG prices, construction delays, project costs, and plant availability.

On the transmission and distribution side, grid renewal and smart-grid upgrades are significant. Under the 2024-2028 Development Plan, HK$9.2bn will be invested in the Power Grid, including zone substations to meet new demand in the eastern and southern districts of Hong Kong Island, replacement of ageing underground cables, renewal of substation equipment, remote control, automation, and grid intelligence. Even in a mature market where electricity sales are not growing strongly, renewal investment is difficult to avoid in order to maintain supply reliability and respond to climate, cyber, and urban-development requirements.

On the customer-service side, the rollout of Advanced Metering Infrastructure has progressed, and the Annual Report indicates that the replacement of smart meters has effectively been completed across the entire customer base. Smart meters are relevant to meter-reading efficiency, visibility of consumption data, demand management, and potential future time-of-use tariffs. From a credit perspective, the effect is less direct revenue growth than operating efficiency, demand management, customer satisfaction, and regulatory assessment.

Fuel procurement combines natural gas, coal, low-sulphur diesel, and other backup fuels. The offshore LNG terminal commenced commercial operation in July 2023 and contributes to diversification of gas procurement for HK Electric and CAPCO. The Offering Circular describes HK Electric’s natural gas procurement sources as including long-term take-or-pay contracts from Western Australia, Qatar, and other regions, while coal is sourced mainly from Indonesia. Fuel costs are reflected in tariffs through the FCRA, but the impact of price fluctuations and procurement terms appears through temporary working-capital needs and tariff adjustments.

This functional breakdown shows that HKE is not a growth-investment company, but a renewal-investment company. Even without assuming high growth in electricity sales, capital expenditure will continue for ageing assets, decarbonisation, supply reliability, grid resilience, and IT and cyber response. The fact that recovery of these investments is recognised under the SoC is a credit strength, while the speed and level of reflection in customer tariffs is the constraint.

4. Financial Profile and Analysis

HKEI’s consolidated financials show relatively stable revenue and earnings, as is typical for a regulated utility. Revenue over 2021-2025 ranged from HK$10.793bn to HK$12.125bn, while operating profit ranged from HK$4.509bn to HK$5.488bn. Revenue in 2025 increased slightly year on year, but operating profit declined due to higher direct costs and operating expenses. Finance costs were HK$1.284bn, down from HK$1.408bn in 2024 but still high relative to HK$0.800bn in 2021. Interest rates and the scale of borrowings continue to affect credit metrics.

Unit: HK$ million. Source: 2025 Annual Report. Total borrowings, net debt, net debt / net total capital, and distributions and dividends paid are shown only for 2024 and 2025 because the five-year key financial table in the Annual Report does not present the 2021-2023 figures in the same form; the figures shown are taken from the notes, cash flow statement, and distribution disclosures.

There is no major deterioration if one looks only at profit and loss, but the balance-sheet liquidity presentation requires attention. On a consolidated HKEI basis, net current liabilities at end-2025 were HK$23.652bn, a large increase from HK$1.628bn in 2024. The main drivers were bank borrowings and the current portion of US dollar MTNs. Bank loans and other interest-bearing borrowings at end-2025 were HK$50.556bn, comprising a current portion of HK$22.477bn and a non-current portion of HK$28.079bn. This does not immediately imply credit impairment, but refinancing execution from 2026 onward is an important monitoring point.

HKEI’s consolidated operating cash flow is solid. In 2025, cash generated from operations was HK$9.194bn, and net cash generated from operating activities was HK$7.292bn. Purchases of PPE and capital stock were HK$3.743bn, capitalised interest paid was HK$159mn, and distributions and dividends paid were HK$2.830bn. Operating cash flow leaves some room to fund normal investment and distributions, but given L13, grid investments, and maturity refinancing, access to the bond and bank markets remains important.

SoC accounting explains the earnings stability of HKE that is not visible from the ordinary income statement alone. HK Electric’s Sales of electricity in 2025 were HK$12.089bn, transfer from the FCRA was HK$3.281bn, and Gross tariff revenue was HK$15.449bn. Fuel costs were HK$4.713bn, a large decline from HK$8.420bn in 2022. Permitted Return increased from HK$4.755bn in 2021 to HK$5.391bn in 2025, reflecting expansion of the regulated asset base.

Unit: HK$ million. Source: 2025 Annual Report.

Two points can be read from this table. First, in years of high fuel prices, transfers from the FCRA increase and Gross tariff revenue becomes larger. In 2022, fuel costs rose to HK$8.420bn, and the transfer from the FCRA was also HK$6.922bn. Second, the Permitted Return has increased relatively smoothly and reached HK$5.391bn in 2025, the highest level in the past five years. The SoC increases earnings visibility, but fuel-cost volatility and the timing of tariff adjustments affect profit and loss, working capital, and customer burden. The FCRA and TSF are mechanisms for cost recovery and tariff smoothing, not cash accounts that can repay short-term debt on the spot.

For bondholders, it is necessary to look not only at consolidated HKEI but also at the standalone financials of HK Electric as guarantor. According to the standalone HK Electric information included in the Offering Circular, 2025 revenue was HK$12.125bn and profit attributable to shareholders was HK$4.185bn. Current assets at end-2025 were HK$2.269bn, current liabilities were HK$21.481bn, and net current liabilities widened to HK$19.212bn. Cash was thin at HK$26.9mn, but HK Electric had HK$7.100bn of undrawn committed banking facilities and explains that there were no breaches of financial covenants under its banking facilities at end-2025.

Unit: HK$ million. Source: HEFL Offering Circular 2026. Gearing ratio is based on HK Electric standalone disclosure.

The short-term liquidity bridge at end-2025 should be read as follows.

Unit: HK$ million. HK Electric standalone current borrowings and MTN-related amounts are the sum of current bank loans and current loans from subsidiary.

The guarantor standalone table should be read with care. HK Electric has strong operating cash flow and bank and MTN market access as a regulated utility, but it is not a company whose cash and undrawn committed banking facilities alone cover short-term debt. Even on a consolidated HKEI basis, the sum of cash of HK$28mn and undrawn banking facilities of HK$7.100bn is about HK$7.128bn, below current borrowings of HK$22.477bn. Even after taking operating cash flow into account, contracted capital expenditure and distributions mean that the credit assessment rests on continued operating cash flow, bank refinancing, MTN market access, and maintenance of the rating. The increase in current liabilities reflects the maturity structure of bank borrowings and borrowings from subsidiary, that is, the on-lending of HEFL bonds, and the capital structure assumes refinancing.

Cash-flow quality is the first factor that offsets the weakness in short-term liquidity. HKEI’s consolidated operating cash flow in 2025 was HK$7.292bn, and even after adding purchases of PPE and capital stock, capitalised interest, and distributions, the ordinary-year internal cash generation capacity remains meaningful. However, operating cash flow is generated through the year and does not already exist as cash on any specific maturity date. Therefore, when assessing current borrowings of HK$22.477bn, it is necessary to additionally confirm the maturity-by-maturity profile, confirmed status of bank refinancing, timing of MTN issuance, availability of existing bank lines, and the presence or absence of short-term CP or bridge loans.

The second factor is the priority between investment and distributions. HKEI has an investor base that values distributions as stapled securities, but in a credit-stress situation the flexibility of distributions would be tested. The annual distribution in 2025 was HK$2.830bn and cannot be described as excessive relative to operating cash flow. However, when L13, grid renewal, smart-grid upgrades, and ageing-asset replacement overlap, if refinancing costs rise and fuel-cost recovery lags, assuming a fixed distribution narrows financial flexibility. In assessing credit conservatism, the distribution level, payout policy, capex peak, and required additional borrowings should be reviewed together.

The third factor is the difference between HK Electric as standalone guarantor and HKEI consolidated. The consolidated disclosures of listed HKEI are useful, but the centre of bondholders’ claim is the HK Electric guarantee attached to HEFL-issued bonds. HK Electric standalone holds the operating assets and regulated business, while the proceeds of HEFL’s MTNs appear as borrowings from subsidiaries. Therefore, rather than judging that “HKEI overall is fine” based only on consolidated net leverage, it is necessary to compare the standalone guarantor’s current liabilities, borrowing breakdown, undrawn banking facilities, guaranteed obligations, covenants, and MTN balance.

5. Structural Considerations for Bondholders

The first point to confirm in the structure of HKE-related bonds is the separation between issuer and guarantor. HEFL is a British Virgin Islands-incorporated funding vehicle and a wholly owned subsidiary of HK Electric, with the main purposes of maintaining the MTN Programme and lending issuance proceeds to HK Electric. HEFL itself has no operating substance or employees, and bondholders access the regulated utility credit of HK Electric through the HK Electric guarantee.

The Offering Circular dated 7 May 2026 updated HEFL’s US$5.0bn MTN Programme, which was published on HKEX on 8 May 2026. The Programme was established in 2002 at US$1.0bn, increased to US$2.0bn in 2006, US$3.0bn in 2011, and US$5.0bn in 2014. As of the Offering Circular, the outstanding Programme notes were equivalent to US$3.331bn.

The Notes are direct, unconditional, unsubordinated, and, subject to Condition 4, unsecured obligations of the issuer, HEFL. The HK Electric guarantee is also a direct, unconditional, unsubordinated, and, subject to Condition 4, unsecured obligation, and ranks at least pari passu with HK Electric’s other unsecured and unsubordinated obligations. This is an important protection for bondholders, but it does not provide priority over secured debt and does not constitute a Hong Kong Government guarantee.

The following is a summary of common Programme terms based on the May 2026 Offering Circular. Individual tranches may be amended or supplemented by the Pricing Supplement, so the specific terms of the actual investment target must always be checked.

Events of Default include non-payment of principal or interest, breach of other obligations, cross default, enforcement, enforcement of security, insolvency, winding-up, illegality, ownership, and guarantee not in force. Cross default is relevant where the aggregate amount of the applicable event involving Indebtedness for Borrowed Money, guarantees, or indemnities of the Issuer or Guarantor is US$30mn equivalent or more. This is useful investor protection, but for investment in an individual bond it is still necessary to separately confirm the Pricing Supplement, tax provisions, redemption provisions, governing law, clearing, rating of the specific tranche, and liquidity.

The point to note is that, even though HK Electric’s business is strong, HKEI’s shareholders, Power Assets, CKI, State Grid, QIA, and the Hong Kong Government do not thereby pay the bonds. Power Assets holds 33.37% of HKEI, State Grid 21.00%, and Qatar Investment Authority 19.90%, and these are important investors. However, they are shareholder and governance background, not direct guarantors of the MTN obligations. Bondholders should focus on the scope of the HK Electric guarantee and HK Electric’s standalone repayment capacity.

6. Capital Structure, Liquidity and Funding

HKE’s capital structure includes a large amount of debt relative to its stable regulated utility cash flow. At end-2025, on a consolidated HKEI basis, bank loans and other interest-bearing liabilities were HK$50.556bn, cash and bank deposits were HK$28mn, and net debt was HK$50.528bn. The net debt / net total capital ratio was 51%, unchanged from 2024. Given that the rating level is maintained at A-, this does not look excessively deteriorated, but leverage relative to shareholder equity is high, and the dependence on refinancing conditions is clear.

At the standalone HK Electric guarantor level, total interest-bearing borrowings at end-2025 were HK$41.858bn, total assets were HK$70.178bn, and the gearing ratio was 59.6%. This declined from 61.0% in 2024, but the absolute amount is large. HK Electric is the guarantor of MTNs issued by its subsidiary HEFL, and guaranteed HK$27.084bn of MTNs at end-2025. The Offering Circular also refers to joint and several guarantees by HK Electric and the ultimate holding company for certain MTNs, but which tranches and guarantors correspond to which obligations should be confirmed in the individual documents. The base assessment in this note is centred on the HK Electric guarantee. The proceeds of MTNs are lent to HK Electric and appear as borrowings from subsidiary in its statement of financial position.

The short-term debt presentation at end-2025 is a key monitoring point for HKE. Consolidated HKEI current portion of borrowings was HK$22.477bn, and even standalone HK Electric had current bank loans of HK$7.932bn and current loans from subsidiary of HK$5.847bn. HK Electric had HK$7.100bn of undrawn committed banking facilities, but this amount does not by itself fully cover total short-term debt. Therefore, bank refinancing, MTN issuance, maturity redemption, and reduction of current classification from 2026 onward are important.

A degree of maturity dispersion in the MTN balance can be confirmed. The Programme balance of US$3.331bn equivalent as of the Offering Circular included HK dollar, US dollar, and zero-coupon bonds maturing in 2027, 2028, 2029, 2030, 2031, 2035, 2036, 2040, 2046, 2047, 2049, and 2050. There are multiple maturities in 2027-2031, and sizeable HKD and USD bonds also mature in 2030-2031. HK Electric explains that it manages foreign-exchange and interest-rate risks through derivatives for hedging purposes, and that at end-2025 its external borrowings were denominated in Hong Kong dollars or effectively hedged into Hong Kong dollars.

Capital-expenditure commitments are also heavy. HKEI’s consolidated contracted capex commitment at end-2025 was HK$8.935bn, while authorised but not contracted capex commitment was HK$16.583bn. This indicates that generation and grid investments under the 2024-2028 Development Plan are still in progress. As long as investments are in line with the SoC Development Plan, there is a route to tariff recovery, but construction delays, cost overruns, delays in tariff reflection, and social resistance to Basic Tariff increases are credit constraints.

HKE’s liquidity assessment needs to consider operating cash flow, undrawn bank facilities, the MTN market, ratings, and the SoC framework together. Cash balances alone are thin, but as a regulated utility the company normally designs its funding around rolling refinancing. At the same time, if higher interest rates, deterioration in ratings, disruption in the Hong Kong dollar and US dollar markets, and tariff political risk coincide in a year with large short-term debt, refinancing costs and the quality of liquidity buffers become relevant concerns.

Monitoring funding from 2026 onward requires more than a simple “cash versus short-term debt” comparison. HKE is not the type of issuer that holds large cash balances; it is a utility issuer that manages funding through a combination of operating cash flow, bank lines, MTNs, and bank borrowings. Under this model, the appearance of large short-term debt in years close to maturity is not unusual, but at the same time the cushion in the event of failed refinancing is thinner than for a cash-rich issuer. Investors should therefore monitor the following items in parallel.

As this monitoring table indicates, HKE’s liquidity risk is not “inability to repay because the business is weak”, but rather “a strong business with a refinancing-based capital structure that assumes continued regulatory and market access”. This distinction matters for a regulated utility credit. In the former case, demand and profitability would be the main focus; for HKE, the interaction among refinancing routes, regulatory recovery, investment peaks, and tariff acceptability is what drives the credit.

7. Rating Agency View

HKEI’s 2025 Annual Report shows S&P credit ratings of A- / Stable for HK Electric and HK Electric Investments Limited. This is an important external confirmation that HKE has a relatively high investment-grade credit profile. For the purposes of this note, HK Electric’s regulated utility characteristics, the SoC-based tariff framework, stable operating cash flow, and long operating record are considered to be rating-supportive factors, but S&P’s rating rationale text has not been reviewed.

However, this note has not confirmed S&P’s detailed rating rationale or triggers. The rating shown in the Annual Report is not a substitute for a credit judgement. In particular, the short-term debt presentation at end-2025, investments under the 2024-2028 Development Plan, the post-2033 regulatory framework, fuel-cost recovery, social acceptability of the Basic Tariff, and individual bond terms should be checked separately from the fact that the rating is A- / Stable.

For the MTN Programme as well, the Offering Circular explains that Notes issued under the Programme may be rated or unrated, and that the rating of an individual issue may not be the same as the Programme rating. If an individual tranche is considered for investment, the Pricing Supplement and rating publications should be used to confirm the issue amount, maturity, coupon, rating, early redemption, tax provisions, listing, and liquidity.

The following items are important in assessing rating direction. First, refinancing at the standalone HK Electric level should proceed as scheduled, and short-term debt should not remain excessively large. Second, investments under the 2024-2028 Development Plan should be reflected in tariffs and the asset base in line with the SoC. Third, it is necessary to monitor how S&P assesses the stability of the SoC framework. Fourth, post-2033 regulatory discussions should not undermine the current assumptions for investment recovery. Fifth, political pressure on customer tariffs should not pressure financial metrics.

8. Credit Positioning

HKE is best positioned among Asian electric utility credits as an issuer with low business risk, relatively high financial leverage, and regulatory risk that is clearly managed but not zero. On the business side, the company functions as the de facto sole supplier on Hong Kong Island and Lamma Island, and supply reliability is extremely high. On the tariff side, the SoC runs until end-2033, and there are mechanisms including the Permitted Return based on 8% of ANFA, the FCRA, TSF, Annual Tariff Review, and Development Plan Review. These increase cash-flow visibility compared with ordinary generation companies or commercial electricity retailers.

On the financial side, however, debt dependence is significant. HKEI consolidated net debt-to-net total capital is 51%, and HK Electric standalone gearing ratio is 59.6%. This is a level tolerated because of the backing of the regulated asset base and tariff recovery, and would be high if viewed as a general corporate. The core of the credit is not the absolute level of leverage itself, but recovery of investments and costs recognised by the SoC, continued access to refinancing markets, rating maintenance, and management of short-term debt.

Within Hong Kong, HKE is a SoC-type electric utility credit like the CAPCO / CLP Power side, but differs in that its supply area is concentrated on Hong Kong Island and Lamma Island, and it is analysed through the disclosures of the standalone listed HKEI and HK Electric as guarantor. CAPCO-related bonds are closer to the credit of a generation-asset holding company, while HKE is easier to analyse as the vertically integrated credit of HK Electric, which covers generation through retail supply. Neither is guaranteed by the Hong Kong Government; both are credits supported by the SoC and regulated assets.

For investment purposes, HKE should be treated as a “regulated utility bond with low business risk, high capital intensity, and refinancing dependence”. This note has not confirmed market spreads, relative value, or same-tenor comparisons, and therefore does not make a pricing judgement. From a credit perspective alone, HKE has high supply essentiality and a regulated framework, but because short-term debt and capital expenditure are present, it is not simply a conservative debtor; it is a refinancing-based infrastructure credit supported by regulation and market access.

This positioning also affects its role in a portfolio. HKE bonds differ from cyclical corporates and commodity-linked generation companies in that operating volatility is relatively low. On the other hand, unlike sovereign bonds or explicit government-guaranteed bonds, investors are unsecured creditors of HK Electric, not direct creditors of the Hong Kong Government. HKE can therefore be useful as a defensive utility credit with a stable business, but if spreads are excessively tight, investors need to check whether they are adequately compensated for short-term refinancing, regulatory renewal, and individual-tranche liquidity.

The focus of assessment also differs by tenor. For short- to medium-term bonds, the key points are how the current borrowings shown at end-2025 are refinanced from 2026 onward, and whether bank lines and MTN market access are maintained. For longer-dated bonds maturing in and beyond the 2030s, the recovery of L13 and grid investments, renewal of the SoC after 2033, long-term decarbonisation investment, gas dependence, and social acceptability of customer tariffs become more important. For bonds maturing in the 2040s and 2050, the maturity goes well beyond the current SoC, so investors should not rely simply on the current A- / Stable rating but should price in regulatory renewal risk.

9. Key Credit Strengths and Constraints

HKE’s first strength is the essential nature of the business. HK Electric supplies electricity to Hong Kong Island and Lamma Island and has 599,000 customers, extremely high supply reliability, and a long operating record. Electricity demand is mature, but it is essential to daily life and commercial activity, and even if sales volumes fluctuate with the economy, the underlying demand base is not easily lost.

The second strength is the SoC tariff framework. HK Electric has a framework under which it earns a Permitted Return based on 8% of electricity-related ANFA, manages fuel-cost differences through the FCRA, and smooths tariffs through the TSF and Rate Reduction Reserve. The 2024-2028 Development Plan has been approved by the government, and there is a regulatory route for investments in L13, the power grid, smart-grid upgrades, and customer services.

The third strength is that the bond structure connects to the operating credit through the HK Electric guarantee. HEFL is a funding SPV, but the Notes are unconditionally and irrevocably guaranteed by HK Electric. The guarantee obligations are treated as direct, unsecured, and unsubordinated, and provisions including cross default, ownership, and guarantee not in force can also be confirmed. This materially offsets the thin standalone credit of the SPV.

The first constraint, however, is borrowings and short-term maturities. HKEI consolidated borrowings are HK$50.6bn, the net debt ratio is 51%, and HK Electric standalone total interest-bearing borrowings are also HK$41.9bn. Current liabilities were large at end-2025, and execution of short-term refinancing is an important credit issue. Undrawn bank lines are HK$7.1bn, but they do not fully cover total short-term debt.

The second constraint is tariff acceptability and political sensitivity. The SoC supports cost recovery, but tariff adjustments require consultation with and approval from the government. In 2026, the Net Tariff declined due to lower fuel costs, but the Basic Tariff increased to reflect capital investment and operating costs. If fuel prices rise again and investment costs also expand, adjustments among the FCRA, TSF, Basic Tariff, and customer-support measures will be required.

The third constraint is capital expenditure and decarbonisation. L13 is a credit-positive decarbonisation investment, but it entails risks relating to construction, project costs, fuel procurement, and operation. The policy to phase out coal by 2035 is natural from a policy perspective, but higher gas dependence, LNG prices, take-or-pay contracts, and emergency fuel backup become important.

The fourth constraint is the regulatory framework after 2033. The current SoC runs until end-2033, and the government may change the regulatory framework thereafter. There is still time before the 2033 expiry, but for bonds maturing in the 2040s or 2050, it is necessary to assess the post-SoC framework, treatment of remaining regulated assets, handling of TSF/RRR/FCRA balances, and continuity of the tariff framework.

10. Downside Scenarios and Monitoring Triggers

The most realistic downside scenario is one in which higher refinancing costs and a concentration of short-term maturities occur at the same time. The short-term borrowing presentation at end-2025 is large, and HKE assumes access to the bank and MTN markets. If interest rates remain high, Hong Kong dollar and US dollar bond markets become unstable, and the rating outlook deteriorates, finance costs could rise, liquidity buffers could decline, and debt maturities could reconcentrate. Indicators to monitor include current borrowings, undrawn committed facilities, MTN issuance and redemption, finance costs, and the S&P outlook.

The second scenario is delay or cost overrun in L13 or grid investments. Total capex under the 2024-2028 Development Plan is HK$22.0bn, while HKEI consolidated contracted capex commitment is HK$8.935bn and authorised but not contracted capex commitment is HK$16.583bn. Delays in investment would affect supply reliability, decarbonisation, and asset renewal, while cost overruns would feed into the Basic Tariff or additional borrowings. Items to monitor include construction progress of L13, the target for commencement of operation in early 2029, capex commitment, changes to the Development Plan, and Basic Tariff increases.

The third scenario is a fuel-price shock and tariff-recovery lag. The FCRA is a mechanism for reflecting fuel-cost differences in tariffs, but pass-through to customer tariffs involves timing differences and social constraints. If fuel costs rise sharply as in 2022, transfers from the FCRA and the Fuel Clause Charge increase, making customer tariffs more politically sensitive. Monitoring items include the Fuel Clause Charge, FCRA balance, TSF balance, gross tariff revenue, fuel procurement contracts, and LNG prices.

The fourth scenario is a decline in confidence in the SoC framework. Post-2033 framework changes, a reduction in the permitted return, delays in Development Plan approval, constraints on the Basic Tariff, and triggering of the Excess Capacity Adjustment would affect investment-recovery assumptions. This is not a short-term risk, but it is important for long-dated bonds. Monitoring items include government reviews of the electricity market framework, SoC interim reviews, post-2033 discussions, and treatment of regulated assets.

The fifth scenario is individual covenant or structural risk in the bonds. HEFL notes are supported by the HK Electric guarantee, but the Pricing Supplement, tax gross-up, early redemption, governing law, clearing, rating of the specific tranche, and liquidity of each individual tranche require separate confirmation. If the issuer ceases to be wholly owned and controlled by HK Electric, the guarantee ceases to be effective, or cross default occurs, bondholders would be directly affected.

11. Credit View and Monitoring Focus

HKE’s current credit quality is viewed as high investment grade, supported by low business risk and the strength of the regulatory framework. The credit direction is not currently one of major improvement or rapid deterioration, but rather a stable base case that should be confirmed through short-term refinancing and execution of the 2024-2028 Development Plan. The probability of a rapid change in level or direction is not high, but because the short-term debt presentation at end-2025 was large, refinancing execution and capital-market access in 2026 are near-term monitoring points.

The support for HKE’s credit is clear. HK Electric is an essential electricity supplier to Hong Kong Island and Lamma Island, and maintained supply reliability of over 99.9999% again in 2025. The SoC continues until end-2033 and provides a regulatory route for cost and investment recovery through the Permitted Return, FCRA, TSF, Rate Reduction Reserve, and Development Plan Review. The 2024-2028 Development Plan has been approved by the government, and L13 and power-grid investments are treated within the framework.

At the same time, HKE is a refinancing-based utility credit. Cash balances are thin, and short-term debt is large at both the HKEI consolidated level and HK Electric standalone level. HK Electric has HK$7.1bn of undrawn committed banking facilities, and the HEFL MTN Programme balance is diversified across long maturities, but the assumption is that maturities from 2026 onward are dealt with smoothly. Therefore, credit assessment requires checking not only the stability of operating cash flow, but also bank lines, MTN issuance, rating actions, and reduction of short-term borrowings.

As of this note, HKE is assessed as a high-quality Hong Kong regulated utility bond supported by the SoC, but it should not be treated as an excessively safe asset. The Hong Kong Government is the counterparty to the tariff framework, not a debt guarantor. Power Assets, CKI, State Grid, and QIA are important shareholders and related parties, but no assumption should be made that they will pay debt beyond the legal scope of the HK Electric guarantee. For investment in individual bonds, the basic structure of HEFL issuance and HK Electric guarantee should be confirmed, followed separately by the Pricing Supplement, maturity, coupon, rating, liquidity, tax provisions, and market spread.

The monitoring priorities for the next reviews are, first, refinancing of short-term borrowings and MTN maturities in 2026; second, progress on L13 and the 2024-2028 Development Plan; third, movements in the Basic Tariff and Fuel Clause Charge; fourth, the S&P rating outlook; and fifth, discussions on the post-2033 framework. If these proceed smoothly, credit quality is likely to remain at the current level. Conversely, if refinancing becomes expensive, tariff reflection is politically constrained, and investment costs increase at the same time, financial flexibility and rating headroom would narrow.

12. Short Summary & Conclusion

HKE is a regulated utility credit centred on HK Electric, which supplies electricity to Hong Kong Island and Lamma Island, and bondholders should mainly read the exposure as unsecured debt issued by HEFL and guaranteed by HK Electric. The SoC, 8% Permitted Return, FCRA/TSF, and government-approved 2024-2028 Development Plan strongly support the credit, but they are not a Hong Kong Government guarantee. Short-term borrowings were large at end-2025, and L13 and grid investments are continuing, so this is an issuer whose holding and investment case should be assessed while monitoring refinancing, tariff adjustments, and investment progress from 2026 onward.

In conclusion, HKE has low business risk, but it is not an issuer for which funding analysis can be skipped. Cash is thin, short-term debt is large, and the SoC is not immediate liquidity. At the same time, HK Electric’s supply essentiality, stable operating cash flow, undrawn bank lines, MTN market access, and the external A- / Stable rating indication support its resilience as a refinancing-based utility credit. For investment decisions, it is safer to separately confirm the legal claim, HK Electric guarantee, individual Pricing Supplement, 2026 refinancing execution, and post-2033 regulatory framework.

13. Sources

• Hong Kong Electric Investments and HK Electric Investments Limited, Annual Report 2025, approved and authorised on 17 March 2026. Local file: issuer_summary/issuers/hong_kong_electric_investments/data/2025_HKEI_AR_E_Full.pdf. URL: https://www.hkelectric.com/documents/en/InvestorRelations/Documents/Financial%20Reports/2025/AR/2025_HKEI_AR_E_Full.pdf
• Hongkong Electric Finance Limited, U.S.$5,000,000,000 Medium Term Note Programme Offering Circular dated 7 May 2026, HKEX publication 8 May 2026. Local file: issuer_summary/issuers/hong_kong_electric_investments/data/20260508_hkef_mtn_offering_circular.pdf. URL: https://www1.hkexnews.hk/listedco/listconews/sehk/2026/0508/2026050800193.pdf
• HK Electric, 2026 Tariff Review Presentation, 18 November 2025. Local file: issuer_summary/issuers/hong_kong_electric_investments/data/20251118_hke_2026_tariff_presentation.pdf. URL: https://www.hkelectric.com/documents/en/OurOperations/SOC/Documents/DPlan%20and%20TR/HKETR2026PresentationEN20251118final.pdf
• HKSAR Government, Scheme of Control Agreement with HEC and HKEIL, current SoC term 1 January 2019 to 31 December 2033. Local file: issuer_summary/issuers/hong_kong_electric_investments/data/20170425_hke_scheme_of_control_agreement.pdf. URL: https://www.eeb.gov.hk/sites/default/files/en/node66/new_HKE_SCA_eng.pdf
• HKSAR Government, EEB and power companies announce 2026 electricity tariff adjustment, 18 November 2025. Local file: issuer_summary/issuers/hong_kong_electric_investments/data/20251118_hk_government_2026_tariff_adjustment.htm. URL: https://www.info.gov.hk/gia/general/202511/18/P2025111800787p.htm

14. Unverified / Pending

• S&P’s detailed rating rationale, rating triggers, and ratings of individual tranches have not been confirmed. Only the A- / Stable indication in the Annual Report was used.
• The execution status of short-term borrowing and MTN maturity refinancing from 2026 onward requires additional confirmation through the 2026 interim results, MTN Pricing Supplements, and bank borrowing disclosures.
• The Offering Circular includes references to joint and several guarantees by HK Electric and the ultimate holding company for certain MTNs, but the corresponding relationships among individual tranches, guarantors, and covered obligations have not been confirmed in this note.
• Pricing Supplements, tax provisions, early redemption provisions, governing law, change of control, clearing, liquidity, and secondary-market spreads for individual ISINs have not been confirmed.
• The post-2033 Hong Kong electricity regulatory framework, treatment of TSF/RRR/FCRA balances at the end of the SoC, and treatment of regulated assets are not yet determined.
• Current bond prices, yields, OAS, Z spreads, and same-tenor comparisons have not been obtained in this workspace, so investment attractiveness has not been assessed.