From the director…
Welcome to Pipes & Wires #78
… hopefully those of you in the southern hemisphere had a good break at the
beach and those in the northern hemisphere weren’t too overwhelmed with snow. A
few interesting things have happened on the M&A front since the last Pipes
& Wires (some big deals have been completed whilst others have emerged), as
well as a few interesting regulatory and policy decisions that will be relevant
to New Zealand and Australian readers. So until next time … happy reading !!!
About Utility Consultants
Utility Consultants Ltd is a
management consultancy specialising in the following aspects of energy and
infrastructure networks…
|
|
|
|
|
|
To be sent a detailed profile of
recent projects, pick
this link.
Regulatory determinations
Aus – draft NSW and ACT wires decision
Introduction
In early December 2008 the Australian Energy Regulator (AER) released
its Draft Decisions for the electricity distributors in New South Wales and the
Australian Capital Territory. This article briefly reviews the background to
the Draft Decisions, and compares the Proposals with the Draft Decisions.
Background
The legal framework for
electricity price decisions is the National
Electricity Rules (NER), which includes the following requirements…
·
The requirement for an electricity distributor to submit a
Proposal for the next price control period 13 months prior to the start of that
period. The next control period for the NSW-ACT distributors (Integral Energy, EnergyAustralia, Country Energy and ActewAGL) starts on 1 July 2009, hence
their Proposals had to be submitted by 31st May 2008.
·
Setting out what a Proposal must contain.
·
The requirement for the AER to make its Final Decision at least 2
months prior to the start of the next control period.
Comparison of Proposals and Draft Decisions
The following table compares the
Proposals and the Draft Decisions (and leaves a blank column for the Final
Decisions)…
|
Parameter |
Integral Energy |
EnergyAustralia |
Country Energy |
ActewAGL |
||||||||
|
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
Prop. |
Draft |
Final |
|
|
Opening RAB ($m) |
3,835 |
3,678 |
|
8,218 |
8,188 |
|
4,236 |
4,247 |
|
593 |
588 |
|
|
CapEx ($m) |
2,953 |
2,914 |
|
8,659 |
8,435 |
|
4,008 |
3,955 |
|
287 |
278 |
|
|
OpEx ($m) |
1,477 |
1,460 |
|
3,047 |
2,638 |
|
2,160 |
1,975 |
|
306 |
296 |
|
|
Depreciation ($m) |
482 |
568 |
|
609 |
600 |
|
716 |
784 |
|
87 |
89 |
|
|
Revenue ($m) |
4,695 |
4,632 |
|
10,009 |
9,447 |
|
5,978 |
5,819 |
|
823 |
779 |
|
|
WACC |
9.76 |
9.72 |
|
9.76 |
9.72 |
|
9.76 |
9.72 |
|
10.7 |
9.82 |
|
The AER should be releasing its
Final Decisions by the end of May 2009, Pipes & Wires will complete the
above table and make further comment probably in June or July.
Energy policy
NZ – overturning the new base load thermal moratorium
Introduction
The much-debated moratorium on
new base load thermal generation barely saw the light of day before being
repealed by the incoming National-led Government. This article examines the
moratorium’s background, the introduction of the Bill, its enactment and its
repeal.
Background
The NZ
Energy Strategy sets out a clear goal of boosting the contribution of
renewables from the current 65% to about 90% by the year 2025, with a clear
emphasis on reducing CO2 emissions (many would say to the exclusion
of all other issues). This had the obvious consequence of a reduced
contribution from thermal plant, which led to the controversial prohibition on
new thermal plant rated at more than 10MW and using more than 20% fossil fuel.
The Bill becomes the Act
Initially introduced to Parliament as Part 2
of the Climate Change (Emissions Trading & Renewable Preferences) Bill, the
Bill was split with Part 2 becoming the Electricity
(Renewable Preference) Amendment Bill. The Bill proposed to insert a new Part
6A into the Electricity Act 1992 making it an offense to connect new
thermal generation to the national grid or to an electricity distribution
network unless the Minister of Energy has issued an exemption. s62G of the
insertion sets out the criteria that must be met for the Minister to approve
new thermal plant. The Bill was passed by Parliament and received Royal Ascent
on 25th September 2008 and became the Electricity
(Renewable Preference) Amendment Act 2008.
The Act’s repeal
In what must be one of the
fastest pieces of legislation around (which dealt to what must be the shortest
surviving piece of legislation), the Electricity
(Renewable Preference) Repeal Act 2008 repealed the newly inserted Part 6A
of the Electricity Act 1992. From introduction to Royal Ascent took 4 working
days, whilst the inserted Part 6A lasted just shy of 3 calendar months.
Regulatory
policy
NZ – a new range of regulatory instruments
Introduction
Many of us have undoubtedly
followed the review
of Part 4, 4A and 5 of the Commerce Act 1986 with great interest. Now that
the Commerce
Amendment Act 2008 has been passed (but in some specific instances has not
yet taken effect), the Commerce Commission
has published a Discussion
Paper setting out its’ take on it all (which is not a bad read actually …
it’s got some useful historical stuff in it). This article briefly notes the
new range of regulatory instruments that the Commission will be able to use in
the particular context of electricity lines businesses.
Background to the review and the amendment Act
The Minister of Commerce
announced in May 2006 that Parts 4 and 5 of the Act would be reviewed. In
September 2006 Cabinet agreed to a recommendation to include Part 4A in the
review as well in order to keep Part 4A consistent with the provisions of Parts
4 and 5. The Bill was granted Royal Ascent on 16th September 2008.
In the specific context of
electricity lines the Bill proposed to rewrite the existing Parts 4 and 4A of
the Commerce Act 1986 which broadly sets out the price and quality regulatory
framework for electricity lines businesses. A key thrust of the Bill was to inter alia encourage investment in
essential infrastructure.
The range of regulatory instruments
The range of instruments
available to the Commission is set out in Subparts 4 to 7 of the new Part 4 of
the Act…
|
Instrument |
Act ref. |
Discussion Paper ref |
|
Information disclosure |
Subpart 4, s53A to 53F |
Para’s 361 – 387 |
|
Negotiate / arbitrate
regulation |
Subpart 5, s53G to 53J |
Para’s 388 – 399 |
|
Default / customised
price-quality regulation |
Subpart 6, s53K to 53ZB |
Para’s 400 – 445 |
|
Individual price-quality
regulation |
Subpart 7, s53ZC |
Para’s 446 - 453 |
It should be noted that each of
the Subparts has its own purpose statement. Readers will remember that the old
Part 4A had a purpose statement, and that much legal analysis focused on
exactly what that statement meant and what priority should’ve been given to the
3 elements (readers will probably also remember the running battles over the
intended inclusion of a 4th element to encourage investment).
Disclaimer
Readers should obtain the Commerce
Amendment Act 2008 and the Discussion Paper and read them in their entirety. Utility
Consultants Ltd accepts no liability for actions or failures to act made on the
basis of this article.
Mergers,
acquisitions & take-overs
US – the battle for Constellation Energy
Introduction
Pipes
& Wires #76 introduced the story of Electricité
De France’s (EDF) and MidAmerican
Energy Holdings battle for the embattled Constellation Energy. This
article provides a quick update on the battle.
Background
Part of EDF’s goal of becoming a
global leader in nuclear power was a joint venture to build nuclear generation
plants with Constellation Energy that included a 5% shareholding in
Constellation. The credit crunch of late 2008 proved to be a double-edged sword
for Constellation, because while it eroded Constellation’s stock price to the
point where EDF easily doubled its stake in Constellation to almost 10%, it
also left Constellation bleeding cash to the point where MidAmerican’s
substantially lower offer was tempting because it would’ve provided an
immediate $1b cash injection.
As of early October, EDF was
considering increasing its’ bid to out-gun MidAmerican, and Constellation’s
stock rose to $26.04, narrowing MidAmerican’s premium. Constellation, however,
still seemed to prefer MidAmerican’s bid, possibly because of the promised
immediate cash injection and because the expected regulatory hurdles were
fewer. From a shareholders perspective, however, the difference between EDF’s
and MidAmerican’s offers (about $10 per share) would require those hurdles to
be pretty big to merit accepting so much less.
The deal closes in time for Christmas
In mid-December, Constellation
announced firstly that it had terminated its negotiations with MidAmerican and
that secondly it had agreed to EDF acquiring 49.99% of Constellation’s nuclear
business that would include an immediate $1b cash injection and a total
consideration of $4.5b. So another potentially long and bitter struggle comes
to a short and sweet end.
Holland – RWE acquires Essent
Introduction
RWE’s
growth ambitions are certainly no secret, so its’ €9.3b bid for Dutch utility Essent didn’t come as a great surprise. This
article examines RWE’s strategy and the deal to set some context for future
analysis.
Background
The giant European utilities
(RWE, E.On, EDF
and Vattenfall) seem to be constantly
on the prowl for acquisitions as part of their well articulated growth
strategies. The pressure on individual EU member states to unbundle their
vertically integrated utilities has proved to be a great source of
acquisitions, and the failure of Essent to merge with fellow Dutch utility Nuon appears to have provided this opportunity
(and of course, RWE narrowly missed out on the race for British Energy).
The strategic aspects of the deal
Essent is a vertically integrated
electricity, gas, heat and waste management utility with annual revenues of
about €6.4b from activities in Holland, Belgium and Germany. A key plank of
Essent’s strategy is to reinforce its position as a leading European energy
company (which presumably includes being absorbed into a large group if the €€€
are big enough, and in this instance they appear to have been).
Given that RWE is also a
multi-utility with strategic growth ambitions within Germany and in the UK, it
would seem that Essent is a good fit with RWE’s strategy.
Details of the deal
RWE will pay a total
consideration of €9.3b for 100% of Essent, or about 9.6x EBITDA. This is
towards the top end of the €6b to €10b price range rumored amongst brokers and industry
comment suggests this was a rather generous offer given the soft market
conditions. It appears that this deal will progress to a very straightforward
conclusion, so unless it goes round the table a few times, this article will
conclude coverage of this deal.
Aus – BG Group catches Queensland Gas
Introduction
Pipes &
Wires #77 noted BG Group’s poke at
the Queensland Gas Company
(QGC) in an effort to secure upstream gas supplies. This article reviews BG’s
very recent move to compulsorily acquire the outstanding shares in QGC.
Background
In February 2008 BG Group
announced an alliance with QGC in which it would take a 10% equity stake in QGC
as well as well as stakes in other QGC components. In late October news emerged
that BG had made a $5b bid to takeover QGC and that Australian Gas Light (AGL) would sell its
24.77% in QGC into the deal (there was already speculation of a deal involving
AGL and QGC as both had requested trading halts on the ASX). It was expected that the QGC board would
recommend BG’s $5.75 cash per share offer to shareholders in November (which
they did in a target statement lodged with the ASX on 11th November)
unless a better offer emerged.
BG’s latest moves
The successful acquisition of
AGL’s stake gave BG a 35% stake in QGC from which it acquired a further 61.6%
on market. From this starting point BG announced on 8th December
that it would begin compulsory acquisition of the outstanding 3.4% of QGC
shares, and by close of business on 15th December had 97.8% of the
shares. In mid-January the compulsory acquisition process concluded and the
remaining QGC shareholders were paid out. So that ends that story rather
succinctly, presumably much to BG’s relief.
Readers may also be interested in
the article on consolidating the upstream gas industry in Australia, which
appeared in Pipes
& Wires #77.
Holland – will Nuon follow Essent?
Introduction
It often only takes 1 deal to set
the M&A train in motion, as disappointed bidders go hunting for other
acquisitions and potential acquiree’s think “Hmmm … why not”. This article
examines the rumor that Dutch utility Nuon
might be up for sale in the wake of RWE’s
offer for fellow Dutch utility Essent.
Background
In the race for Essent that was
won (or at least appears to have been won) by RWE, one of the unsuccessful
bidders was Swedish utility Vattenfall
that has now turned its sights on Nuon. Other possible bidders that have been
ruled out include EDF (which is likely to cool
its heels after successfully completing 2 deals recently) and Electrabel (which would
probably run foul of competition constraints).
The industry restructuring behind the deal
Holland has required its
vertically integrated utilities to unbundle in the face of EU pressure, which
usually always prompts a flurry of M&A activity. Readers may recall
previous articles describing the lurches of progress on unbundling.
The strategies behind the rumored deal
Nuon is (or at least was) an
integrated electricity and gas supplier in Holland, Belgium and Germany and has
a clear strategy of consolidating that north-west Europe market position
through organic growth and cooperation with other utilities. This would seem to
fit well with Vatenfall’s vision of being a leading European energy company.
Details of the deal
Industry comment has indicated
that if the premium paid for Nuon was similar to Essent, Nuon could fetch about
€7.2b. It also seems that only Vattenfall has the financial capability to close
a deal that big. Nuon is considered to have slightly better investment
characteristics due to its high density metro markets, however the ownership by
55 regional and municipal authorities is likely to make closing a deal very
hard work. It is likely that accumulation of 100% of Nuon would be a gradual
process over several years as individual authorities decide to sell their
shares.
Pipes & Wires will make
further comment as this deal progresses.
CapEx – general interest stuff
Levels of service and their impact on CapEx
This presentation was made at the
Infrastructure CapEx Summit in November 2008. If you’d like a copy, pick here.
Upsizing – the other half of the hidden side of CapEx
This presentation was made at the
Electricity Engineer’s Association
conference in June 2008. If you’d like a copy, pick here.
Getting the CapEx right in the infrastructure sectors
This presentation was made at the
NZIGE Spring Technical Seminar in
September 2007. If you’d like a copy, pick here.
Renewals – (half) the hidden side of CapEx
This presentation was made at the
Electricity Networks Asset Management Summit in November 2007 on the broad
topic of asset renewals. If you’d like a copy, pick here.
PAS 55 – the emerging standard for asset management
To find out more about improving
your asset management activities through adopting the emerging global standard
for asset management PAS 55-1:2004 pick here
or call Phil on +64-7-8546541, or to request a Slide Show on implementing PAS
55-1 pick here.
Website promoting best practice CapEx
Utility
Consultants is pleased to announce the release of a specialist website
dedicated to promoting best practice CapEx policies, processes and planning in
the infrastructure sectors.
Assorted 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.
Opt out from Pipes & Wires
Pick this link
to opt out from Pipes & Wires. Please ensure that you send from the email
address we send Pipes & Wires to.
Disclaimer
These articles are of a general nature and
are not intended as specific legal, consulting or investment advice, and are
correct at the time of writing. In particular Pipes & Wires may make
forward looking or speculative statements, projections or estimates of such
matters as industry structural changes, merger outcomes or regulatory
determinations.
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.