Pipes & Wires
THE JOURNAL OF GLOBAL ENERGY
& UTILITY HAPPENINGS
Issue 55 – November 2006
From the director…
|
|
Welcome
to Pipes & Wires #55. This issue examines the concluding stages of five
major deals and the front end of a further possible deal. Three of these
deals relate to the recent theme of consolidating the Australian gas pipes
industry. We also
take a quick look at the LNG terminal that could emerge in New Zealand and
examine British Energy’s rocky journey back to financial health which appears
to be far from over. This issue finishes with the first in a series of
historical profiles of people born in the 1800’s that have significantly
shaped the energy sector. I’d also
take this opportunity to thank my many clients for their continuing support throughout
2006 and wish you all the best for Christmas and New Year. Hopefully Pipes
& Wires will be back in early February 2007. |
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy
networks…
|
|
|
|
|
|
To be sent a detailed profile of
recent projects, pick
this link.
New publications
Utility Consultants is pleased to
offer two new publications specialising in regulation of pipes & wires
utilities. These publications deal specifically with cost of capital (WACCWatch) and
key conclusions of regulatory determinations (RegulatoryRoundup).
Conference papers
Utility Consultants has recently
presented the following conference papers which are available upon request…
·
“Tariff
control of Pipes & Wires utilities – where is it heading??” – presented
at the NZIGE Spring Technical Seminar, October 2006.
·
“Setting
service levels for utility networks” – presented at the Electricity Network
Asset Management Summit, November 2006.
NZ – 2007 electricity asset management
plans
The Commerce Commission has recently advised the
following…
·
That
the format for AMP disclosure in 2007 (ie. during the year ending 31 March
2008) will be based on the Requirements that were promulgated on 31 March 2006.
Hence there will be no change from the disclosure format required for the year
ending 31 March 2007 including the disclosure date of 30 August (which will be
30 August 2007 for the year ending 31 March 2008).
·
Given
that this will be the second disclosure under the revised Requirements the
Commission expects AMPs to be fully compliant.
·
The
Commission expects to complete its assessment of the 30 August 2006 AMP’s early
in 2007.
For help with your AMP pick here
or call Phil on (07) 854-6541.
Aus – the race for GasNet is over
Introduction
Back in June merchant bank Babcock & Brown Infrastructure made
an offer for GasNet valued at $2.55 per
share which was rejected by GasNet’s board. More recent events have seen a
competing offer from the Australian
Pipeline Trust (APT) overtake BBI’s offer. Pipes
& Wires #53 describes BBI’s bid and investment model in detail.
APT’s bid for GasNet
By early November APT had
exceeded the 90% threshold for compulsory acquisition and is now proceeding to
acquire the outstanding shares. APT expects to pay $452m for all of GasNet, and
interestingly enough gazzumped a $481m offer by Colonial First State Global
Asset Management.
Consolidation of the gas industry
Readers may recall that back in
May there was much talk of industry consolidation and soon after this GasNet
was “in play”. The three bids for GasNet came from a merchant bank, a managed
fund and a gas utility which leads to the fairly obvious conclusion (in the
absence of any other transactions) that acquisition by another gas utility was
the only way that industry consolidation was going to occur.
The theme of consolidation of the
Australian gas pipes industry continues in this issue with articles on APT’s
acquisition of Queensland gas distributor AllGas
and Alinta’s advances on APT.
UK – and the race for Thames Water is
over
Background
Pipes
& Wires #48 introduced RWE’s intended
exit from Thames Water and American
Water. This intended exit merited special attention at a time when other
European utilities seemed to be spending up large in the UK.
RWE’s basis for selling
Very simply RWE had set a
strategic direction of levering off the consolidation of the EU electricity and
gas markets (similar to rival E.On’s “On Top”
strategy). The most obvious practical out-working of this strategy is the sale
of low-synergy activities like Thames Water, but there are two other less
obvious aspects…
·
Boosting dividends to maintain investor interest.
·
Retiring debt – certainly debt levels seem to gravitating toward
more modest levels from the highly levered acquisitions that were popular in
the UK in the mid and late 1990’s.
RWE’s exit strategy
RWE had initially planned an IPO for
Thames, which was valued somewhere between £8b and £12b. However after
identifying strong interest from trade buyers, a trade sale approach was
adopted.
And the successful bidder is…
After many rumors that included
Aussies from down under, the successful bidder emerged as Kemble Water Ltd, a
consortium led by Macquarie Bank who
will pay £4.8b and assume £3.2b of debt. The transaction is still subject to
regulatory approval and is expected to be completed in December 2006.
Aus – and the race for AllGas is over
Introduction
Readers will be well aware that
the Australian gas pipes industry has significantly consolidated in recent
months with Australian Pipeline
Trust’s (APT) acquisition of GasNet
(refer previous article in this issue). The sale of Energex subsidiary AllGas by
the Queensland government added a further opportunity for consolidation. This
article examines the bidders and examines the attractiveness of AllGas to the
winning bidder, the Australian Pipeline Trust.
What is AllGas
AllGas owns and operates 2,200km
of gas distribution pipelines in South East Queensland and the very northern
area of NSW, an area which is experiencing high growth. The AllGas network
stretches from the Gold Coast in the south and as far west as Towoomba. AllGas
was thought to be worth about $500m.
The bidders
Short-listed bidders included…
·
Alinta which owns
distribution networks in WA, NSW and Victoria. Possible synergies could be
limited to operational experience and consolidation of overheads.
·
APT which is predominantly a transmission utility. Although the
synergies from operational experience and overhead consolidation may not be so
great, vertical integration synergies from assets such as the Roma – Brisbane
pipeline could be significant.
·
Envestra which owns
distribution networks in South Australia, Queensland, NSW, NT and Victoria. In
addition to synergies from operational experience and consolidation of
overhead, Envestra may also have been able to derive synergies from its gas
distribution activities in Brisbane.
·
Spark
Infrastructure which owns electricity distribution networks in Victoria and
SA. Synergies may have been limited to consolidation of overheads.
APT emerged as the successful
bidder for AllGas with a bid of $521m which has drawn criticism from some parts
of the industry as being rather high. However the AllGas acquisition does give
APT access to a high growth market and regulatory certainty until 2011.
Aus – and the race for Sun Retail is
over
Introduction
Pipes
& Wires #51 outlined the sale of the Energex (Sun Retail) and Ergon Energy (PowerDirect Australia) retail
electricity business in the Australian state of Queensland. This article
examines the partial sale of the Energex retail business Sun Retail to Origin Energy and the sale of Sun
Gas to Australian Gas Light (AGL).
Sun Retail’s businesses
Sun is a wholly-owned subsidiary
of Energex and comprises the following…
·
An electricity retail business supplying about 1.2m customers in
the high-growth area of south-east Queensland.
·
A (reticulated) retail gas business supplying about 80,000
customers in Queensland, northern New South Wales and Victoria.
·
An LPG business supplying about 53,000 customers.
Sun was sold by the Queensland
state government in two separate packages as follows…
·
Package #1 comprising two-thirds of the electricity retail
customers, the entire LPG business and the permits required to build a 450MW
within the supply area.
·
Package #2 comprising entire (reticulated) gas retail business.
In a move similar to the
privatisation of the Victorian gas industry the two Queensland retail
businesses were configured to straddle the network boundaries.
The bidders
Not surprisingly bidder’s for the
two-thirds of the electricity business (and the LPG business and generation
permit) included AGL and TRUenergy.
However Origin emerged as the successful bidder paying $1.2b for 833,000 retail
customers (valuing the residential customers at about $1,100 or about 10x their
annual margin) whilst AGL paid $75m for 70,800 Sun Gas customers. The Sun
purchase will boost Origin’s total customer numbers toward 2.7m, with over 1m
of these customers in Queensland.
Origin’s strategy
The principal value drivers of an
electricity retail business are tied to improving individual customer margin in
the following ways…
·
Driving down the underlying cost of wholesale electricity purchase
through owning low cost base-load generation with secure primary energy.
·
Reducing customer churn (keeping customers is hugely less
expensive than winning them back).
·
Capturing organic growth in customer numbers through a strong
incumbency.
·
Managing wholesale price volatility exposure through owning or
controlling peaking plant.
Origin seems to have the first
three drivers sorted (but could need additional base-load generation) but it is
not clear how the last driver will be managed. Readers may recall that the
article in Pipes
& Wires #51 mentioned that the privatisation of Snowy Hydro may have formed a key part
of managing this driver, but alas it was not to happen.
Pipes & Wires will make
further comment as the sale of PowerDirect proceeds early in 2007.
UK – and the race for ScottishPower is over
Introduction
Pipes
& Wires #45 and #47
examined German giant E.On’s unsolicited bid
for ScottishPower which was
rejected as being too low. This article examines Spanish utility Iberdrola’s successful £11.6b bid for ScottishPower.
The deal
Iberdrola
will pay £7.77 per share for ScottishPower comprising £4 cash, a 12p special
dividend and 0.1646 shares of new Iberdrola stock (resulting in ScottishPower
shareholders eventually owning about 21% of Iberdrola). This price represents a
16% premium over the previous days’ closing price and a considerable advance on
the £5.75 that E.On and the rumored £6 to £6.50 that Scottish & Southern Energy were
prepared to pay late last year.
This
price represents an EBITDA multiple of 11x, compared with 6x for E.On’s bid for
Endesa. At least one City analyst commented
that it is an “expensive deal” for Iberdrola (but then again, premiums are
always relative to strategies and synergies).
Iberdrola’s strategy
A
key plank of Iberdrola’s strategy is development of wind power ahead of the
tightening on CO2 emissions across the EU. The ScottishPower
acquisition gives Iberdrola a stronghold in the UK renewables market as well as
access to the US renewables market through ScottishPower unit PPM.
The
acquisition also makes Iberdrola’s earnings less dependent on the Spanish
market and provides a strengthened defense against takeover.
Aus - and the race for APT begins
Introduction
Following
an intense theme of consolidating the Australian gas pipes industry this
article takes a look at a “deal upon a deal” … Alinta’s pursuit of the Australian Pipeline Trust (APT)
which comes hot on the heels of APT’s very recent acquisitions of GasNet and AllGas.
Background
Pipes
& Wires #49, #51
and #53
chronicle Alinta and AGL’s tussle that
eventually resulted in an agreement that inter
alia resulted in Alinta owning a 26% stake in APT. Alinta then went on to
buy a further 10.25% stake in APT on market.
Regulatory issues
The
Australian Competition & Consumer
Commission (ACCC) had originally ordered Alinta to sell its stake in APT
but just within the last few days has accepted an undertaking from Alinta that
could allow Alinta to retain or even increase its 36.25% stake in APT. This
undertaking requires Alinta to do one of the following within a confidential
time period…
·
Dispose
of its stake in APT.
·
Persuade
APT to dispose of the Moomba – Sydney Pipeline, the Parmelia Pipeline and all
of GasNet.
This
issue highlights regulatory concerns over the consolidation of the industry
which appears to be leading to formerly competing pipelines being owned by a
single entity or vertical reintegration to the possible detriment of
non-vertically integrated players.
Pipes & Wires will be closely watching
what Alinta does with its APT stake over the next few months and will make
comment as events unfold.
NZ – Taranaki might get an LNG terminal
Introduction
Although LNG is a fairly mature
industry globally it seemed to be little more than an obscure curiosity in New
Zealand until about 4 years ago. This article examines the recent increase in
activity surrounding the possible importation of LNG to the Port of Taranaki at
New Plymouth.
Background
New Zealand’s largest indigenous
gas reserve (the offshore Maui field) is declining at a rate subject to much
conjecture and although new reserves have been discovered and bought to
commercial production levels it would seem the days of “cheap gas” are drawing to
a close. Importing and regasifying LNG was seen as an important backstop option
for maintaining a secure supply of primary energy, so several years ago Contact Energy and Genesis Power commissioned a study
into the feasibility of importing LNG to either New Plymouth or Whangarei.
The project
It is important to understand
that the Gasbridge project is about
preserving options, and will only proceed if a domestic shortage of gas emerges
and imported LNG is still the best option.
If the project does proceed to an
importing and regasification terminal, the terminal will be built at the Port
of Taranaki close to gas handling and storage facilities at New Plymouth Power
Station and would import about 60PJ per year. Given that electricity generation
consumes about 60PJ per year, new generation technologies that shift away from
gas will obviously be a key driver of whether Gasbridge proceeds.
UK – British Energy encounters some
bother
Introduction
British Energy has had a rather
difficult history to say the least, a history that has seen it privatised,
renationalized and bought to the brink of partial privatisation again in the
space of only a few years. This article examines the UK Government’s recent
intention to sell off part of its 65% stake thought to be worth up to £6b and
how this might have been gazzumped by a number of plant performance issues.
Background
The privatised British Energy
performed very well until the four following factors converged around 2002…
· A decline
in the UK wholesale price since the introduction of NETA, a slight over
capacity, and a downward shuffle in the industry’s cost structure as gas-fired
generation increases.
· British
Energy’s high fixed cost structure had remained almost constant.
· British
Energy’s sale of the SWALEC supply
business to Scottish &
Southern Energy removed a natural hedge against declining wholesale prices.
· Market
and operational difficulties with Bruce
Power, the Canadian investment that was thought to hold a brighter future
than UK investment.
These factors pushed British
Energy to the brink of administration which was narrowly avoided when a sudden
upsurge in wholesale prices made British Energy’s equity more attractive. In a
complex deal worth about ₤5b, the UK government ended up holding about
65% of the shares with existing bond holders assuming a 33% shareholding
through a debt-for-equity swap. This left existing shareholders with a 2.5%
stake. British Energy successfully re-listed on the LSE in January 2005.
The planned sell-down
In July of this year the
Secretary of State for Trade & Industry announced that the Government was
considering selling its 65% in British Energy which was estimated to be worth
between £2b and £3b. This figure subsequently rose to about £6b as British
Energy’s shares surged on the back of higher-than-expected earnings
announcements.
However last month revealed a
number of boiler tube cracks at Hunterston, Hinkley Point and Hartlepool which required
shutdowns, and also prompted a reduction in output of similar units. This has
had a two-fold effect … generation targets are likely to be missed and the
retail demand profile will need to be filled by wholesale market purchases.
Talk around the City was that these recent events are likely to dampen
investors’ enthusiasm and may totally gazzump the sell down process. The most
recent news that British Energy’s chief nuclear officer resigned suddenly with
immediate effect has further depressed the share price. Pipes & wires will
make further comment as the situation progresses.
Wendell Willkie and the battle for
private power
This article is the first in a
series that examines the lives and times of people born in the late 1800’s who
played significant roles in bringing the electricity and gas industries to
where they are today. Some will be well known, whilst others may be obscure but
in their own way they shaped the industry.
This article examines the overwhelming
influence of the little-known Wendell L. Willkie on the US electricity sector
before his brief and unsuccessful spell as the Republican presidential nominee
in 1940.
Willkie’s meteoric rise to power electrical
Willkie was born in Elwood,
Indiana on 18 February 1892. After studying law at Indiana University and
fighting in WW1 he joined the Commonwealth &
Southern Corporation in New York in 1929 as a legal counsel and quickly
rose to become its president in 1934. At the time C&S was the largest
electric utility holding company in the US controlling 165 individual utilities
stretching from Maine to Florida.
The first threats to private power emerge
The first threats to private
power emerged after Franklin
Roosevelt was elected president in 1932. History buffs may recall that that
Roosevelt’s New Deal
program had two distinct electrical components…
·
Electrification (and flood control) based on the Tennessee Valley Authority.
·
Busting the supposed monopoly power of the utility holding
companies through the Public
Utility Holding Company Act 1935.
Willkie proved to be an ardent
opponent of both of these measures.
Battling the TVA legislation
The TVA would compete directly
with existing electric utilities in the Valley including C&S. Willkie had
publicly stated in 1930 that it would be unconstitutional for the federal
government to enter the utility business because of its unlimited borrowing
capability at low interest rates, and in 1933 his testimony against the TVA
legislation before the House of Representatives
compelled the House to limit the TVA’s ability to build competing transmission
lines. However Roosevelt persuaded the Senate
to remove that limitation and give the TVA a very broad power base.
Ultimately C&S couldn’t
compete with the TVA and Willkie oversaw the sale of part of C&S to the TVA
for $78.6m.
Battling the PUHCA
The thrust of the PUCHA was to
curtail the aggregation of non-contiguous electric utilities into holding
company arrangements which was thought to incentivise monopolistic pricing. Willkie
became a vocal opponent of the PUCHA leading to his eventual recognition as the
industry mouth-piece on such issues.
Eventually C&S was dissolved
in the late 1940’s with only the contiguous Alabama Power, Georgia Power, Gulf Power and Mississippi Power remaining with
the holding company now known as Southern Company.
Foray into power political
Although Willkie had been an
ardent supporter of Roosevelt in the early 1930’s his formal switch to the
Republican party after what seems a prolonged cooling of attitude toward
Roosevelt was not surprising. Moreover Willkie had never held public office
hence his emergence as the Republican presidential nominee in 1940 in
preference to Robert Taft
(son of former president “Big Bill” Taft), Thomas E. Dewey and Arthur Vandenberg was
rather surprising. Although Willkie captured 45% of the popular vote he only
won 82 votes in the electoral college compared to Roosevelt’s 449 votes. Willkie
then began to support Roosevelt’s war-time initiatives and although he sought
the 1944 Republican nomination he lost to Dewey as his somewhat liberal views
were out of touch with the increasingly right-leaning Republican party.
This period in politics was
interspersed by Willkie’s joining of New York law firm of Miller, Boston &
Owen (which was subsequently renamed Willkie,
Farr & Gallagher)
The later years
Sadly the later years came too
soon for Willkie who died of a heart attack at the age of 52 on 8 October 1944
after having survived several previous attacks.
Conferences and events
Corrosion, Durability
& Life Extension Techniques – 13th & 14th
March 2007 (Auckland)
The
seminar is an intensive examination of corrosion processes, corrosion
monitoring, corrosion control and corrosion prevention techniques, with
emphasis on extending the life cycle of critical infrastructure.
African Utility Week – 28th
May to 1st June 2007 (Capetown)
This
is expected to be the largest utilities conference held in Africa with about
1,300 attendees expected at the International Convention Center.
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…
·
Good
·
Average
·
Poor
If you get this is a hard-copy,
your comments can be emailed to issue#55@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
·
Free 6 Week trial of Dr Penny
Burns weekly “Strategic Asset Management”.
·
This link
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.