Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 47 – December 2005
From the
director…
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|
Welcome
to Pipes & Wires #47. A common theme of this issue is deals, deals and
more deals – we examine three major deals at various stages in the We also
examine the appeals against the recent final wires price determination in the
Australian state of I’d
take this opportunity to wish you all a merry Christmas and a happy New Year
and hopefully Pipes & Wires will be back in February 2006. |
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 – Customer Consultation and AMP’s
Just a
quick reminder to follow up on last months’ article on Customer Consultation
and Asset Management Plans. In the decision papers released
on 13 October 2005, the Commerce
Commission signaled likely changes to the requirements for both aspects
which are outlined below.
Customer Consultation
The requirement to consult with
customers on the issue of supply quality and price is embodied in paragraph 6(1)(c) of the Commerce
Act (Electricity Distribution Thresholds) Notice 2004. Section 7.2 of the PB
Associates report from April 2005 contained a number of recommendations
that may be incorporated into a revised Notice.
Asset management plans
The requirement to disclose an
asset management plan is embodied in Section 24 and Schedule 2 of the Electricity
(Information Disclosure) Requirements 2004. Possible changes to these
requirements were signaled in paragraphs 480 to 483 of the Commission’s 13
October decision paper entitled Review
of Information Disclosure Regime Decision Paper,
Next steps
As outlined above changes to the
current requirements are likely, and will occur through the Commission’s usual
consultation process over the next 6 weeks or so. We will be continuing to
liaise with the Commission to ensure that we stay on top of the current
requirements, so to discuss the likely changes or to get help with your
Customer Consultation or AMP pick here
or call Phil on (07) 854-6541.
Introduction
Pipes
& Wires #45 examined E.On’s recent
announcement that it might make a cash offer for ScottishPower plc. This article
examines Scottish & Southern
Energy’s more recent refusal to deny that it too is considering trying to hitch
up with SP.
E.On’s cash offer fails
As outlined in Pipes
& Wires #45, SP’s spectacular growth in EBITDA and EPS and the strong
operating synergies with Central
Networks were an obvious fit with E.On’s “On Top” strategy. However the
directors of SP felt that E.On’s initial offer of £5.75 per share (a 9% premium
at the time of the bid) less any dividends paid before settlement date (and two
subsequent revised offers) would be unacceptable to shareholders hence
negotiations with E.On were terminated. Whilst E.On commented that a hostile
bid would be unlikely due to the added complexities, it has not ruled out that
possibility.
Scottish & Southern enters the race
Meanwhile excitement ran hot in
the City in early November as S&SE refused to deny that it was considering
trying to merge with SP. As SP closed at
£5.78 on the LSE speculation
intensified that S&SE’s proposal could be worth between £6.00 and £6.50 to
SP shareholders (much to the surprise of some City analysts who figured that
S&SE probably couldn’t justify paying any more than E.On)
The markets’ reactions
E.On shares rose 2.65% to close
at €80.65 on the announcement that discussions with SP had been terminated (whilst
SP sank 5.45% to close at £5.45). This would seem to endorse E.On’s disciplined
approach to acquisitions and suggests that the available synergies and future
growth prospects had already been fully valued into SP’s stock price. The fact
that E.On’s shares rose on news that negotiations with SP had been terminated
would seem to support the view that even a 9% premium may have been excessive.
Given that SP’s future growth prospects
would presumably have a similar value to both S&SE and E.On, S&SE’s
rumored premium suggests that some significant synergies must be available to
S&SE that are not available to E.On, and it is thought that these synergies
may lie in consolidating both transmission grids in
Other possible suitors
Speculation has also mounted that
EdF, RWE and
ENEL may also be interested in SP. Pipes
& Wires will make further comment as the bidding process unfolds.
Aus – appeals to the Victorian wires
decision
Introduction
The ease of access to a “matter
of course” appeals process to regulatory determinations was the subject of a
recent newspaper article in the Australian state of
Background
Pipes
& Wires #42 and #46
examined the draft and final wires determinations respectively. Readers may
recall that the final determination included significant reductions in the
initial re-set for all 5 distributors, and an approximate halving of the
year-on-year reduction for AGL Electricity.
Legal basis for appeals
Section 55(1)(c)
of the Essential Services Commission Act 2001 provides for a person who is
aggrieved by a determination of the ESC
to make an appeal on the following two bases…
· That
there has been bias.
· That the
determination is based wholly or partly on an error of fact in a material
respect.
A particular feature of Section
55 is that it requires the determination to be complied with irrespective of
the filing of an appeal ie. an applicant cannot delay
the commencement date of a determination simply by filing an appeal.
Appeals to date against the determination
Four appeals against the
determination have been lodged with the ESC Appeal Panel which are summarised as
follows…
|
Distributor |
Basis of appeal |
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· That
the ESC has significantly underestimated the costs of complying with the
Electrical Safety (Electric Line Clearance) Regulations 2005. · That
the ESC has underestimated the loss of revenue from more customers adopting
TOU metering associated with the mandatory roll-out of interval metering. · That
the ESC included an incorrectly calculated MAIFI based on incorrect data
originally provided by AusNet despite AusNet subsequently providing correct
data. |
|
|
· That
the ESC has underestimated the costs of complying with the Electrical Safety
(Electric Line Clearance) Regulations 2005. |
|
|
· That
the ESC has significantly underestimated the costs of complying with the
Electrical Safety (Electric Line Clearance) Regulations 2005. · That
the ESC underestimated the Employee Entitlement Provision Adjustments. · That
the ESC underestimated the OpEx requirements arising from load growth. |
|
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· That
the final determination contains twenty two errors of fact, of which many
relate to the ESC’s claim that the various relationships between United and Alinta were not entered into on a
competitive basis and that United may therefore have an “inefficient” cost
structure. |
These appeals are scheduled to be
heard during the week beginning 5th December, so Pipes & Wires
will hopefully make further comment in the February issue.
Introduction
The last few weeks have seen renewed
media attention on the new generation of nuclear power stations proposed by Tony
Blair after he was successfully re-elected in May this year. This article briefly
re-visits the key issues and examines the current direction of the
Background
Pipes
& Wires #37 examined the Blair government’s plans to release a white
paper proposing the construction of a new generation of nuclear power stations
in the
The key issues
Demand is currently increasing at
about 0.7% per year, and it is expected that by 2015 demand may exceed capacity
by about 20% whilst nuclear generated electricity will fall from 25% of the
UK’s total to only 4% if the closure of aging plants proceeds as planned. Hence
the problem is significant and the time is short. The scientific community
acknowledges that renewables and low-emission fossil generation will play a
role but also acknowledges it is unlikely that they will be able to meet
demand.
Recent policy directions
The scientific and business
communities are increasingly pushing for a clarified role of nuclear power
within overall energy policy to provide certainty of supply. Even the chief
science advisor has advocated “giving the green light” to new nuclear plants
whilst the minister for the environment admits that there are “lots of
concerns” about nuclear energy.
Most recently, Tony Blair hinted
that he was likely to approve the construction of a new generation of nuclear
plants. As this issue developed Pipes & Wires will provide further comment.
Aus – more on the AusNet and Spark floats
Introduction
Pipes
& Wires #46 examined the build up to the floats of SP AusNet and Spark Infrastructure (CKI) which follows on from a number of deals
in the Australian power sector. This article further examines the floats in the
build-up to listing later this month. For the avoidance of doubt this article
is not to be considered as professional or investment advice.
Background
It was long rumored that SingPower would probably sell down
a partial stake in its Victorian grid company SPI PowerNet, with a possible driver
being the need to avoid holding a prohibited interest under Section 68 of the
Electricity Industry Act 2000 (Victoria). While the float of Spark
Infrastructure was not a total surprise it wasn’t surrounded by the same hype
as the SP AusNet float.
Comparing the two floats
Just to re-cap, there were some
differences between the two floats which are summarised in the following table…
|
Feature |
SP AusNet |
Spark Infrastructure |
|
Funds sought by investors. |
A$1.6b in one tranche. |
A$1.2b – A$1.3b initially with
a further A$500m in April 2007. |
|
Underlying activities. |
Electricity transmission, gas
distribution and electricity distribution. |
Electricity distribution. |
|
Organic growth prospects. |
Expected to be at least 2.5%. |
Between 1 and 2.5%. |
|
Growth strategy. |
Balanced between organic and
acquisitive growth (which will be limited to |
Global acquisitions due to
limited organic growth prospects. |
|
Exposure to regulated
activities. |
About 87%. |
About 70% to 80%. |
|
Investor payment plan. |
Fully paid. |
Two installments. |
|
Projected yields. |
7.0% to 8.5% in first year,
rising to 7.2% to 8.7% in second year. Includes management and success fees. |
10.05% to 11.2% in first year
due to partially-paid basis, falling to 8.3% to 9.25% in the following year.
Excludes management and success fees. |
|
Tax characteristics. |
68% tax deferred in year one,
65% tax deferred in year two. |
20% tax deferred. |
|
Management fees. |
Total fee to be capped at 0.75%
of enterprise value. |
0.5% on the first A$2.443b of
enterprise value, 1% thereafter and a success fee of 20% of the out-performance
of the S&P/ASX 200 Accumulation index |
|
Investment strategy. |
Traditional sell-down, SP to
retain 51% stake and continue to operate, will depend on dividends. |
CKI to retain only 9.9%, income
heavily dependent on fees. |
Institutional interest has been
strong in the build up to the floats later this month, so Pipes & Wires
will provide further comment in February.
NZ – update on the 400kV lines
Introduction
Most of us are well aware of Transpower’s proposal to build a new
400kV line from Whakamaru to Otahuhu. This article outlines the range of
generation, transmission and demand side alternatives proposed by the Electricity Commission for
analysis as part of approving Transpower’s plans.
Background
An estimated shortfall of
transmission capacity into
A similar estimated shortfall of transmission
capacity into
The alternatives proposed by the Electricity Commission
The alternatives
proposed by the Electricity Commission broadly cluster into three groups –
locating generation in or north of Auckland, upgrading existing transmission or
building new transmission into Auckland, and reducing Auckland’s demand as
follows…
·
The generation alternatives include base-load coal generation at
Marsden, co-generation at Marsden, gas-fired generation in and around
·
The transmission alternatives focus strongly on increasing the
thermal rating of the existing 220kV lines from Whakamaru to Otahuhu supported
by a number of tactical modifications to the existing 110kV and 220kV grids.
These options acknowledge that a new 400kV line or possibly an equivalent HVDC
line will be needed in about 10 to 12 years time.
·
The demand side alternatives include better penetration of
interruptible load, substitution by gas and solar and increased penetration of
energy efficiency measures.
Pipes & Wires will make
further comment as progress is made.
Introduction
Pipes
& Wires #46 discussed the pending float of 15% of Electricite de France. This article quickly
follows up last month’s float.
Background
As readers may be aware EU
directive 96/92 required all member states to liberalise their energy markets
by 2007. The French government had been widely criticised for making slow
progress on liberalising the French market whilst allowing EdF to expand its
operations across the EU. In 2004 the French government decided to corporatise EdF,
list it on the Euronext exchange and
sell 15% of the equity.
The EdF float
Brokers estimated an opening
price of between €28.50 and €33.10 which valued the 15% stake at about €7b. EdF
listed at €31.05 on the opening day of 21 November (which was very close to the
expected opening of €32.00) and after a few days of heavy trading has since stabilised
at about €31.80, which values EdF’s equity at about €57b at the time of writing.
Conferences & events
Check back here in February 2006
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.
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Hot links to cool stuff
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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.