Issue 45 – October 2005
From the
director…
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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 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
Energy Demand |
Hi |
Shielded |
Growth |
Lo |
Conservation |
Transformation |
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Lo |
Hi |
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GDP
Growth |
The detail of these scenarios is
as follows…
· Growth -
· 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
-
· Conservation
- environmental protection is paramount and energy prices are high. Government
intervention drives change in energy use through major energy efficiency
policies.
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
Introduction
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.
Background
Alinta emerged from the
privatisation of the gas distribution industry in
Alinta then went on to acquire Duke Energy’s Australian and
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
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.
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’
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
Introduction
Back in May 2005 Pipes
& Wires #40 discussed progress on Transpower’s
400kV line from Whakamaru to
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
Finance – making the shift to IFRS
Introduction
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.
Background
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:
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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…
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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
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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).
Disclaimer
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.