Pipes & Wires



Issue 45 – October 2005


From the director…


Welcome to Pipes & Wires #45. Firstly apologies to those who received multiple copies of #44 … hopefully we’ve got to the bottom of the problem now.


We start this issue with a summary of the New Zealand Business Council for Sustainable Development’s recent energy scenarios report and follow that up with a discussion of a couple of global deals. We then have a quick update on the planned 400kV lines from Whakamaru to Auckland and then conclude with a look at the shift to International Financial Reporting Standards and what it could mean for the pipes & wires sectors.


So until next month … happy reading.



About Utility Consultants


Utility Consultants Ltd is a management consultancy specialising in the following aspects of energy networks…


·      Mergers & acquisitions


·        Asset management

·      Strategic studies


·        Financial analysis

·      Economic regulation

·        Risk management


For a detailed profile of recent projects, pick this link.



NZ – developing a long term view for energy

The New Zealand Business Council for Sustainable Development recently identified the following four energy scenarios for New Zealand


Energy Demand



















GDP Growth


The detail of these scenarios is as follows…


·   Growth - New Zealand develops local coal and gas resources and energy prices remain competitive, we use more energy, including imported oil, and dilute climate change policy. The economy is still-based on energy-intensive industries. Living standards remain high.


·   Transformation - the economy moves from energy-intensive industries to a service-based economy. Energy prices rise to much higher levels. The Government sets stringent energy efficiency standards. Some industries relying on cheap power decline.


·   Shielded - New Zealand moves to produce more of its own energy with Government support, where security supply is the top priority. We develop more hydro power, local coal resources, biomass energy and biofuels. Energy-intensive industries are attracted and protected by subsidies and the resulting high taxes hinder economic growth.


·   Conservation - environmental protection is paramount and energy prices are high. Government intervention drives change in energy use through major energy efficiency policies. New Zealand slashes dependence on fossil fuels and energy-intensive industries decline. Economic growth is low.


The full NZBCSD report can be downloaded by picking here. Underpinning this work is a report by Frazer Lindstrom Ltd which in my view is both very readable at only 24 pages, and gives excellent coverage of the issues.



Aus – Alinta does a partial float




Recent months have seen a flurry of trade sales of both generation and pipes & wires assets right across Australia including rumors both that Singapore Power and Cheung King Infrastructure may float some of their regulated Australian assets. This article examines Alinta’s recent floating of its power stations and gas pipelines through the Alinta Infrastructure Holdings entity (AIH) and considers why it has done so.




Alinta emerged from the privatisation of the gas distribution industry in Western Australia. A significant follow on from this was the entry of Aquila into the Australian energy industry. Following Aquila’s exit from Australia a complex series of transactions (pick here to download a research report) resulted in a circular ownership arrangement in which AMP held a significant stake.


Alinta then went on to acquire Duke Energy’s Australian and New Zealand assets in a deal that was judged harshly by the markets at the time.


The float


Several months ago Alinta revealed that it was examining methods of selling down a partial stake in some of its recent acquisitions. The assets to be included in the sell-down include the Port Hedland, Newman and Glenbrook power stations and the Queensland, Eastern and Tasmanian gas pipelines. Alinta’s stated reason for spinning off these assets was to reduce debt and fund further growth whilst retaining the management contracts. One of the key features of these spin-offs is establishing a trust structure that enables earnings to be distributed before tax.


The market’s response


When the float plan was initially unveiled it was expected to raise about $550m which was subsequently revised upwards to $674m. However the book-building process was 200% over-subscribed as institutional investors scrambled for a piece of AIH. In the end Alinta netted a healthy $711m from the sell-down.


Although analysts are describing AIH as a yield stock rather than a growth stock, comments from AIH management say AIH is well positioned for both organic growth (mainly through increased pipeline throughput) and for further acquisitions.



Europe – E.On eyes ScottishPower

E.On’s bid for ScottishPower


Long-time readers will recall how E.On significantly re-shaped the electricity distribution sector in the former Soviet-block countries as utilities were successively privatised. This article examines E.On’s recent confirmation that it may make a cash offer for ScottishPower. This acquisition would be an excellent fit with E.On’s “On Top” strategy that we discussed in Pipes & Wires #23 in conjunction with E.On’s successful bid for what was then Aquila Networks (the MEB wires business).



ScottishPower – why so attractive ??


Well for a start it is one of only three independent electricity utilities in the UK (the other two are Scottish & Southern Energy which may also have its eye on ScottishPower and United Utilities which is focused on growing unregulated activities) – all the others are already owned by E.On, US utilities, RWE or EdF. Further reasons may be that ScottishPower is cash-rich after selling Pacificorp in order to focus on its’ UK business and that ScottishPower’s MANWEB distribution business will have at least some operational synergies with E.On’s Central Networks business.


How would it shake the industry out ??


About 3 years ago Utility Consultants compiled a research report that considered the shake-out of ScottishPower and Scottish & Southern Energy, so it’s convenient to discuss the conclusions here.  Assuming that E.On was to gain full control of ScottishPower and consolidate the operations, the following would probably occur…


·   Integration of SP Distribution and SP MANWEB into Central Networks, giving E.On about a 33% share of the distribution market. It may well be possible that significant cross-boundary synergies exist between SP MANWEB and Central Networks.


·   Integration of the SP and E.On generation and supply businesses into a single business with a market share of about 37%.


As part of our analysis 3 years ago we had also considered the following possibilities…


·   That RWE may attempt to acquire S&SE in retaliation for E.On acquiring ScottishPower.


·   That S&SE and ScottishPower might merge, possibly through S&SE acquiring ScottishPower.


Regulatory issues


Long-time readers will recall that OFGEM will impose a £32m revenue reset on merging distributors over the first five years to off-set the loss of public benefit arising from having a reduced number of industry players to compare. No doubt if a formal offer is made, OFGEM will release a discussion paper.


NZ – update on the 400kV lines




Back in May 2005 Pipes & Wires #40 discussed progress on Transpower’s 400kV line from Whakamaru to Auckland. At that stage Transpower had identified the most feasible route as a 190km long corridor passing just west of Morrinsville of which the last 9km of the line from Ormiston into Otahuhu will be underground cable.


Recent progress


Since May, the final route has been confirmed as the route passing just west of Morrinsville. As required under Part F of the Electricity Governance Rules, the Electricity Commission has consulted on the investment proposal through a series of public meetings in communities along the proposed line route. The Commission has also outlined what its next steps will be on their website.


An interesting adjunct to the whole Auckland Security of Supply debate is the recent announcement by Genesis Power that a site has been secured for a 360MW gas-fired station between Helensville and Kaukapakapa. However this in itself will require expansion of the main gas transmission pipeline to Auckland which can currently only supply enough gas to fuel 240MW of capacity.


Finance – making the shift to IFRS




In December 2002 the Accounting Standards Review Board announced that NZ Equivalents to International Financial Reporting Standards (NZ IFRS) would apply to all reporting entities within New Zealand for reporting periods beginning on or after 1 January 2007 although entities may “early adopt” from 1 January 2005. In November 2004 the ARSB approved the “stable platform” of NZ Equivalents to the NZ IFRS which set out the recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general purpose financial reporting.


This article examines the background to the transition to IFRS and how reporting entities might manage the transition if they haven’t already started.




The Financial Reporting Act 1993 requires all reporting entities to prepare financial statements that comply with generally accepted accounting principles (GAAP). This means that financial statements must be prepared in accordance either with applicable financial reporting standards, or in the absence of applicable standards, in accordance with accounting policies that are appropriate to the circumstances of the reporting entity and have authoritative support within the NZ accounting profession.


Adoption of IFRS as required by the ASRB’s 2002 announcement will require reporting entities to prepare their general purpose financial reports in accordance with standards and interpretations approved by the ASRB which include IFRS, IAS and international interpretations.


Key implications


NZ IFRS address a wide range of issues from valuing inventories to recognising stock options. Key implications for the pipes & wires sectors will be…


·         Accounting for property, plant and equipment currently done in accordance with FRS 3 that will need to be prepared in accordance with NZ IAS16. Key changes will be the requirement to account for revaluations on an asset by asset basis rather than on a class of assets as occurs under FRS3 and requirements around testing assets for possible impairment in value.  This can create difficulties, for the pipes and wires sectors when determining at what component level infrastructure assets should be broken down to for recognition as individual assets.


·         Accounting for government grants and donated assets, and their disclosure in accordance with NZ IAS20. Entities that meet the definition of Public Benefit Entities will not be required to comply with this standard.  For all other entities the receipt of any non-monetary government grants or donated assets such as infrastructural assets will no longer be recognised in revenue at the time of receipt.  These will be either recorded as deferred income and earned over the life of the asset or netted off the fair value of the asset received.


·         Accounting for financial instruments in accordance with NZ IAS32 and NZ IAS39. This will have implications for recognising and measuring hedged positions in commodities such as electricity, fuel or foreign exchange.  On implementation of IFRS entities will need to recognise all derivatives (such as interest rate swaps, foreign exchange contracts and CFD’s) on the balance sheet and measure them at fair value.  Unless hedge accounting is achieved, this will result in P&L volatility because changes in fair value of the derivatives will be recorded in P&L.  Hedge accounting will reduce any P&L volatility but the rules around hedge accounting are prescriptive and complex.  This is a material difference from the position in FRS 21and SSAP 21 where the hedge is not fair valued and exchange differences are taken to a translation reserve.

·         Accounting for deferred taxes in accordance with IAS 12.  Accounting for deferred taxes is very different under IFRS and is likely to result in the recognition of previously unrecognised deferred tax liabilities, particularly for those entities which currently revalue infrastructure assets.


Timeframe for adoption


Compliance with the ASRB’s announcement of December 2002 will require financial reports (for 31 March balance dates) to be prepared in accordance with NZ IFRS no later than…


·         Reports for all half years ending on 30 September 2007 (including comparatives for 30 September 2006)


·         Reports for all full years ending on 31 March 2008 (including comparatives for 31 Mach 2007 incorporating a 1 April 2006 IFRS balance sheet)


NZX continuous disclosure requirements require issuers to immediately release information to the market that would have a material effect on price.  To date there have been no specific requirements to disclose the impact of adoption of IFRS other than when releasing financial statements to the market.


Next steps


A good first step would be to access the PwC IFRS site.  More information can be obtained by contacting Mike Schubert. Thanks to PricewaterhouseCoopers for their assistance with this article.



Conferences & events


International Infrastructure Management Summit (Rotorua, 17 – 19 October)


This summit will bring together infrastructure leaders and decision makers from around the world. It offers a unique opportunity to network and learn more about managing, maintaining and future-proofing infrastructural assets, from energy and water to buildings and transport. The information being shared and offered makes this a must attend event for those working in all areas of infrastructure management, from both the public and private sectors including those involved in:


  • Asset management


  • Engineering
  • Strategy & planning


  • Finance & investment
  • Operations management


  • Policy
  • Consulting


  • Contracting
  • Information systems



The summit features an optional asset management workshop on Monday 17th October. This is followed by two days of innovative, challenging presentations and special interest groups, featuring national and international experts in a variety of areas of infrastructure asset management, and concludes with optional presentations from practitioners on Thursday 20th October, to hear about asset management practices in action.


Don’t miss this unique opportunity to hear from, and work with, this impressive team of presenters and facilitators, as together you learn the lessons of the past and benchmark the future of infrastructure management. For further information pick the bold link above, pick here to email Ross Vincent from Ingenium or call Ross on +64-7-8683960.


Any old books in your library ??


I’m looking for old books and magazine articles on electricity industry and borough council history, especially books like jubilee celebrations of utilities or back copies of the old “Live Lines”. If you’ve got any old books like this that you don’t wish to keep please send them to me.


Tell me how good this issue was…


Please pick one of the links below to tell me what you think of this issue of Pipes & Wires…


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If you get this is a hard-copy, your comments can be emailed to issue#45@utilityconsultants.co.nz If you receive this second-hand by email, you can receive Pipes & Wires directly by picking here.


Hot links to cool stuff


·         Centre for Advanced Engineering – subscribe to Energy21 News (distributed generation & demand response).


·         Centre for Advanced Engineering – download the report on “Energy supply in the post-Maui era” (file size is about 780k).




These articles are of a general nature and are not intended as specific legal, consulting or investment advice. They are correct at the time of writing. Utility Consultants Ltd accepts no liability for action or inaction based on the contents of Pipes & Wires including any loss, damage or exposure to offensive material from linking to any websites contained herein.