Pipes & Wires
THE MONTHLY
CLIENT NEWSLETTER FROM UTILITY
CONSULTANTS
Issue 53 – August 2006
From the director…
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Welcome
to Pipes & Wires #53. In this issue we examine 4 deals – three very close
to home and one in far-off Europe. As part of these analyses we also have a
quick look at some of the regulatory concessions involved and how the nature
of these concessions has changed since E.On’s acquisition of Ruhr Gas in
2003. Following
last month’s heat wave in California we also have a quick re-cap on some of
the major issues they have faced over the last 5 years or so. This month’s
final article examines the opening of the nuclear debate in Australia. Finally
– just a quick heads up that I will be speaking at an asset management
conference in November on the subject of setting service levels for utility
networks. |
About Utility Consultants
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management consultancy specialising in the following aspects of energy
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Aus-NZ – Contact-Origin ends merger
plans
Introduction
Pipes
& Wires #50 and #51
examined the planned merger of Contact
Energy with majority-owner Origin
Energy to create an $8.8b energy giant that would have rivaled the merged AGL - Alinta.
Following on from the abandoning of the Snowy
Hydro float a few months ago this article examines the recent decision to
abandon the Contact – Origin merger.
Background
The core of the deal was to
create an enlarged energy utility known as Contact-Origin that would be 75.7%
owned by Origin’s current shareholders and 24.3% owned by Contact’s other
existing shareholders. In addition the enlarged company would be dual-listed on
both the ASX and the NZX. This ratio of ownership proved a sticky
point, and almost right from the start there was much disquiet among Contact
shareholders that Contact was being undervalued. Several institutional
investors labeled the merger as a “takeover in drag” and also questioned
various relationships between Origin and Contact.
The deal collapses
Not surprisingly the existing
Contact shareholders were not persuaded of the merger merits and the decision
was made in late June to abandon the merger before incurring the costs of
seeking shareholder approval. The independent directors clearly stated that the
regulatory issues (outlined in Pipes & Wires #51) did not influence the
decision to abandon the merger.
Origin has since indicated that
it will not attempt a hostile takeover of Contact.
Aus – Babcock & Brown bids for
GasNet
Introduction
As new gas fields drive organic
growth in the Australian gas transmission industry, many participants and
commentators are suggesting that some consolidation of the industry would be
appropriate. In late May GasNet
publicly indicated a willingness to take part in industry consolidation with
emphasis on the high quality of its assets. This article briefly examines a
recent bid for GasNet and highlights the difference between two predominate
utility investment models – growth and yield.
Babcock & Brown’s offer
In June merchant bank subsidiary Babcock & Brown
Infrastructure offered 1.545 of its own stapled securities in exchange for
each GasNet share, effectively valuing GasNet at $2.55 per share. Although this
was slightly less than GasNet’s closing price alternative offers may be
gazzumped by the 14.2% stake in GasNet already held by BBI and the Australian Pipeline Trust (APT).
A key feature of BBI’s offer is
both the diversity and depth of earnings of the BBI securities in comparison to
the relatively high exposure of GasNet to the mild winters and regulatory reset
in Victoria, but what may not be so obvious is the clear distinction between
the GasNet yield model and the BBI “managed fund” growth model.
GasNet’s rejection of the offer
GasNet’s board quickly rejected
BBI’s offer, stating inter alia that
the offer under values GasNet, doesn’t include a premium for control and adds
complexity to what is a simple yield model. I’d be surprised if this was the
last word, so Pipes & Wires will make further comment if anything emerges.
US – demand soars in California
Introduction
As many of us in New Zealand
emerge from the heaviest snowfalls since 1945 and a record demand of 6,748MW this
article reviews our previous comments on California as their demand soared to
around 47,000MW in 51oC heat during the last week of July. A quick
look at the Cal ISO’s demand projections
for 26 July revealed virtually no surplus generation capacity (but since the
heat wave has eased projected demand has also softened by about 15,000MW) and
it is this issue that forms a key part of this article.
Previous issues examined
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Pipes & Wires #1 examined the establishment of what I believe
was a flawed market model – imposing a wholesale - retail interface, capped
retail tariffs and forced divestment of generation by retailers such as SoCalEd and PG&E.
Pipes & Wires #2 went on to record how PG&E filed for Chapter 11
Bankruptcy as it bled about $300m per month.
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Pipes & Wires #6 and #11 examined various calls for
re-regulation in the wake of California’s difficulties including questioning the
very raison d’être of for-profit utilities and the possibility of allowing
county’s and municipalities to re-enter the energy markets.
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Pipes
& Wires #26 examined Governor
Schwarzenegger’s view that 13 energy regulatory agencies (in addition to
the FERC) was too many and that some form of
rationalisation was needed.
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Pipes
& Wires #33 examined Assembly
Bill 2006 which would have substantially re-regulated California’s power
industry and shut out merchant generators from all but small niche
opportunities. Pipes
& Wires #36 went on to record that after a tortuous passage through the
Democrat-dominated Assembly and Senate, Governor Schwarzenegger (who strongly
favors allowing merchant generators to enter the industry) finally vetoed the
Bill.
Lack of new capacity
Soon after Governor
Schwarzenegger’s election I recall he made a comment along the lines of “it’s
easier to build a new energy regulator in California than it is to build a new
power station”. This lack of new capacity was even the subject of a spoof of
the Eagles hit “Hotel California”
called “Welcome
to the ISO California” in which the very telling lines “So I called up the
Gov’nor please energize this line. He said we haven’t build a new plant since
1969” say it all (obviously some artistic license there about the date 1969 but
we get the picture). In the absence of some coherent policy and sensible
regulation that enables a predictable and fair return on investment we could be
singing this song for a while longer and not just in California either.
Aus – the nuclear debate begins
Introduction
It seems that an increasing
number of prominent individuals and institutions are proposing nuclear power as
a serious answer to CO2 emissions. Following on from the discussion
of the UK nuclear debate in Pipes
& Wires #40 and #47
this article examines the opening of the nuclear debate in Australia.
Howard calls the opening shots
In early June Prime Minister John Howard announced a review
of government policy on nuclear power that would include security, health &
safety, environmental aspects, economic viability, enrichment and disposal. The
review team expects to circulate a draft report for public comment by the end
of November and make its final report by the end of the year.
The issue of waste disposal
The issue of radioactive waste
seems to be a continuing sticky point for nuclear powers’ opponents. Much of
the myth surrounding nuclear waste was dispelled by prominent environmentalist James Lovelock in his article “Our nuclear
lifeline” which appeared in the May 2005 edition of Readers Digest. In this
article Lovelock describes the emissions from a power station capable of
supplying half the needs of a large city like Paris for a year…
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Fuel |
Source |
Emissions |
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Coal |
High-cost underground mines. |
More than 1b m3 of
CO2 and 600,000 tons of ash. |
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Oil |
Unstable areas of the world. |
Nearly the same quantity of CO2
as coal along with SOx. |
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Gas |
Unstable areas of the world. |
About the same quantity of CO2
as coal. |
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Uranium |
Stable countries like Canada
and Australia. |
A few bucketfuls of high-level
waste much of which can be re-processed. |
Lovelock’s article is certainly
worth reading and dispels many of the myths that the anti-nuclear lobby seems
founded on. Hopefully Pipes & Wires will be able to make further comment as
the Australian draft report comes to hand in a few months time.
Europe – E.On finally catches Endesa
Introduction
Pipes
& Wires #49 and #52
discussed E.On’s “surprising but not really
surprising” €29.1b bid for Spanish utility Endesa.
Readers may recall that rival Spanish utility Gas Natural had also launched a hostile
bit for Endesa but this bid has been tied up in court by some complex EU
competition concerns. This article examines the recently announced conditions on
the deal and also reviews some of the mounting reasons why such concessions are
being sought.
Conditions on the Endesa deal
The following conditions have
been imposed on E.On…
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Keeping Endesa as a separate business unit.
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Divest almost 7,400MW of generation capacity including stations
that burn Spanish coal.
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Maintain Endesa’s proposed investment program.
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Limit Endesa’s debt to within specified parameters.
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Divest several energy supply businesses.
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Divest ownership of Endesa’s single fully-owned nuclear plant and
relinquish operational control of a second nuclear plant in which Endesa has a
controlling stake.
The prima facie basis for extracting regulatory concessions is to broadly
limit market power however E.On’s acquisition of Ruhr Gas in 2003 high-lighted national
sovereignty and security of supply issues which have played an increasing part
in the regulatory concessions extracted from recent deals. The CNE’s concern over public safety risks
surrounding nuclear plants adds a not-unexpected dimension to this argument.
How does it fit with the “On Top” strategy
As discussed in Pipes & Wires
#49 Endesa is a perfect extension to the 5-pronged “On Top” strategy. Combined with
E.On’s disciplined approach to acquisitions (as was borne out with the
abandoned ScottishPower bid) this will
ensure that the Endesa deal will create value for shareholders.
Aus – AGL & Alinta’s regulatory
concessions
Introduction
Following on with the theme of
regulatory concessions from E.On’s bid for Endesa, this article examines the regulatory
concessions extracted from the AGL – Alinta deal discussed in Pipes
& Wires #48, #49
and #51.
We also note the possibly complicating effect of Babcock & Brown
Infrastructure and the Australian
Pipeline Trust’s bid for GasNet
which was discussed in detail previously.
Background
The tussle between AGL and Alinta
to form an energy giant that sort of gazzumped AGL’s planned demerger finally came
together in May with the signing of a binding heads of agreement. Right from
the start the ACCC noted that formerly
competing (and therefore unregulated) gas transmission pipelines could be
controlled by the same entity and could therefore require either divestment or
some measure of access regulation.
Regulatory concerns
The ACCC’s concerns were that if
the merger went ahead as planned there would be a lack of competition in the
following gas transmission markets…
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In NSW due to Alinta gaining 30% control of the Moomba – Sydney
Pipeline through APT as well as controlling 20% of the Eastern Gas Pipeline
through Alinta Infrastructure Holdings.
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In WA with Alinta being able to influence the Parmelia and
Goldfields Pipeline through APT as well controlling 20% of the Dampier –
Bunbury Pipeline.
Alinta made several “behavioral”
commitments to the ACCC such as foregoing its right to appoint directors to the
AGL board, and separating pricing and marketing functions from ownership. The
ACCC however was looking for structural separation of competing pipelines, and
a final decision is still awaited as we go to print.
Conferences & events
Complex
Infrastructure Project Performance –
Conferenz is pleased to present
a specialist conference on developing tools & techniques for enhanced
project performance. This will include a separately bookable workshop on 24
August on identifying, evaluating and mitigating your project risks.
4th
Annual Gas Industry Summit – Wellington (25 – 26 September)
Conferenz is pleased to
announce the 4th annual Gas Industry to be held at the
Intercontinental Hotel in Wellington. Expected speakers have been drawn from
the exploration, delivery, advisory and regulatory sectors of the gas industry
to provide what promises to be an exciting event.
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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Free 6 Week trial of Dr Penny
Burns weekly “Strategic Asset Management”.
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connects to the (time-delayed) Australian energy market
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.