CLP Holdings Limited – Annual report – 31 December 2020
Financial Risk Management (extract)
1. Financial Risk Factors (extract)
The Group’s approach to managing credit risk for trade receivables is discussed in Note 19.
On the treasury side, all finance-related hedging transactions and bank deposits of the Group entities are made with counterparties with good credit quality in conformance to the Group treasury policies to minimise credit exposure. Good credit ratings from reputable credit rating agencies and scrutiny of the financial position of non-rated counterparties are two important criteria in the selection of counterparties. The credit quality of counterparties will be closely monitored over the life of the transaction. The Group further assigns mark-to-market limits to its financial counterparties to reduce credit risk concentrations relative to the underlying size and credit strength of each counterparty. In an attempt to forestall adverse market movement, the Group also monitors potential exposures to each financial institution counterparty, using VaR methodology. All derivatives transactions are entered into at the sole credit of the respective subsidiaries, joint ventures and associates without recourse to the Company.
19. Trade and Other Receivables
Trade and other receivables are recognised initially at transaction price and are subsequently stated at amortised cost using the effective interest method, less allowances for expected credit losses. The Group measures the loss allowance for its trade receivables at an amount equal to the lifetime expected credit losses. The amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to its recognised amount is recognised in profit or loss, as an impairment loss or a reversal of an impairment loss. Trade and other receivables are written off (either partially or in full) when there is no reasonable expectation of recovery.
Expected credit losses are a probability-weighted estimate of credit losses (i.e. the present value of all cash shortfalls) over the expected life of the trade receivables. Expected credit losses on trade receivables are calculated by using the provision matrix approach. Trade receivables are categorised by common risk characteristics that are representative of the customers’ abilities to pay all amounts due in accordance with the contractual terms. The provision matrix is determined based on historical observed default rates over the expected life of the trade receivables and is adjusted for forward-looking estimates. At every reporting date the historical observed default rates are updated and changes in the forward-looking estimates are analysed.
If there has no significant increase in credit risk since initial recognition, impairment on other receivables is measured at 12-month expected credit losses. If a significant increase in credit risk has occurred, then impairment is measured as lifetime expected credit losses.
Critical Accounting Estimates and Judgements: Recoverability of Trade Receivables Provision for expected credit losses is made when the Group does not expect to collect all amounts due. The provision is determined by grouping together trade debtors with similar risk characteristics and collectively or individually assessing them for likelihood of recovery. The provision reflects lifetime expected credit losses i.e. possible default events over the expected life of the trade receivables, weighted by the probability of that default occurring. Judgement has been applied in determining the level of provision for expected credit losses, taking into account the credit risk characteristics of customers and the likelihood of recovery assessed on a combination of collective and individual basis as relevant. While the provision is considered appropriate, changes in estimation basis or in economic conditions could lead to a change in the level of provision recorded and consequently on the charge or credit to profit or loss.
(a) Trade receivables
The ageing analysis of the trade receivables at 31 December based on invoice date is as follows:
* Including unbilled revenue
Movements in provision for impairment
Credit risk management
The Group has no significant concentrations of credit risk with respect to the trade receivables in Hong Kong and Australia as their customer bases are widely dispersed in different sectors and industries. The Group has established credit policies for customers in each of its retail businesses.
In Hong Kong, electricity bills are due within two weeks after issuance. To limit the credit risk exposure, customers’ receivable balances are generally secured by cash deposits or bank guarantees from customers for an amount determined from time to time by reference to the usage of the customers, and in the normal course of events will not exceed the highest expected charge for 60 days. At 31 December 2020, such cash deposits amounted to HK$5,895 million (2019: HK$5,677 million) and the bank guarantees stood at HK$854 million (2019: HK$834 million). For all the deposits held, customers are paid a floating market interest rate equivalent to the HSBC bank saving rate. The customers’ deposits are treated on the statement of financial position as current liabilities on the basis that they are repayable on demand.
In Australia, customers are allowed to settle their electricity bills in no more than 45 days after issue. EnergyAustralia has policies in place to ensure that sales of products and services are made to retail customers (including residential and commercial customers) of an appropriate credit quality and collectability is reviewed on an ongoing basis.
Trade receivables arising from sales of electricity to the offtakers in Mainland China and India are due for settlement within 30 to 90 days and 15 to 60 days after bills issuance respectively. The offtakers of these regions are mainly state-owned enterprises. Management has closely monitored the credit qualities and the collectability of these trade receivables and consider that the expected credit risks of them are close to zero.
Expected credit losses
For trade receivables relating to accounts which are long overdue with significant amounts or known insolvencies or non-response to collection activities, they are assessed individually for impairment allowance. CLP Power Hong Kong and EnergyAustralia determine the provision for expected credit losses by grouping together trade receivables with similar credit risk characteristics and collectively assessing them for likelihood of recovery, taking into account prevailing economic conditions and forward looking assumptions.
CLP Power Hong Kong
CLP Power Hong Kong classifies its trade receivables by nature of customer accounts. These include active accounts and terminated accounts.
* Expected credit loss is close to zero as these trade receivables are mostly secured by cash deposits or bank guarantees from customers and there is limited recent history of default.
EnergyAustralia categorises its trade receivables based on their ageing. EnergyAustralia recognises lifetime expected credit losses for receivables by assessing future cash flows for each group of trade receivables including a probability weighted amount determined by evaluating a range of possible outcomes based on twelve month rolling historical credit loss experience by customer segment, geographical region, tenure and type of customer and applying to the receivables held at year end. The determining factor impacting collectability is customer attributes. The impact of economic factors, both current and future, is considered in assessing the likelihood of recovery from customers.
In light of COVID-19, additional provisions have also been recognised at the reporting date, requiring management to apply significant judgement in assessing the impact to recoverability of the Group’s receivables caused by the pandemic.
As at 31 December 2020, the Group had total receivables of HK$1,774 million (2019: HK$1,268 million) relating to unpaid Renewable National Subsidies. The application, approval and settlement of the Renewable National Subsidy are governed by the relevant policies issued by the Central People’s Government. All of the Group’s Mainland China wind and solar projects are qualified for renewable energy subsidy in accordance with the prevailing government policies. There is no due date for the settlement of Renewable National Subsidies as the collection is subject to the allocation of funds by relevant government authorities to local grid companies, which takes a relatively long time for settlement. The expected credit loss is close to zero as continuous settlements have been noted with no history of default and the subsidy is funded by the Renewable Energy Development Fund set up and administered by the Ministry of Finance.
(i) Renewable receivables
At 31 December 2020, CLP India’s renewable projects have trade receivables of HK$771 million (2019: HK$805 million) of which HK$680 million (2019: HK$704 million) were past due. The expected credit loss is close to zero as there are no history of default and continuous payments received. In addition, the offtakers are state-owned enterprises and the exposure is therefore considered a sovereign credit risk. Trade receivables in dispute are assessed individually for impairment allowance in order to determine whether specific provisions are required.
(ii) JPL – Disputed charges with offtakers
JPL has disputes with its offtakers over applicable tariff of capacity charges and energy charges relating to transit losses. At 31 December 2020, total disputed amounts were Rs3,105 million (HK$329 million) (2019: Rs3,034 million (HK$331 million)). The Group considers that JPL has a strong case and hence, no provision has been made.
In September 2013, JPL filed a petition to Central Electricity Regulatory Commission (CERC) against its offtakers. In 2016, CERC pronounced its judgment in favour of JPL, which supports the Group’s decision that no provision should be made. The offtakers filed an appeal against the CERC’s order in the Appellate Tribunal for Electricity (APTEL) and JPL filed an appeal challenging certain findings of the CERC. The APTEL hearing concluded on 16 June 2020 and the matter was reserved for judgment. However, the tenure of the Technical Member on the APTEL bench expired before the judgment was passed and the APTEL’s bench had to be reconstituted. The matter will be reheard by the APTEL and is now listed for hearing in April 2021.
Other disputed receivables of HK$165 million (2019: HK$163 million) were provided in full as there is no reasonable expectation of recovery.
(iii) Paguthan – Deemed generation incentive payment
The Supreme Court in India pronounced its judgment in May 2020 on the dispute for the “deemed generation incentive payments” between CLP India and its offtaker Gujarat Urja Vikas Nigam Limited (GUVNL). Both appeals by CLP India and GUVNL were dismissed. Accordingly, the amounts withheld by the offtaker of Rs3,796 million, for which a full provision was made, were written off in 2020. There was no financial impact to the Group’s results and financial position, and no related contingent liabilities in respect of the time-barred portion of Rs4,737 million.
(b) The current accounts with joint ventures and associates are unsecured, interest free and have no fixed repayment terms.