Long view, short term bridging – selling the network asset

What do you know about NSW and Qld privatising their energy networks? Worst kept secret was the reply. ‘They’ intend to divest of the high cost responsibility as quickly as possible. Yet, when you speak to ‘them’ they are stunned that it is possible – the standard reply is it is a position statement to be tested, not ‘yet’ policy. Typically, the form of reply is: ‘we have not been told, but we have been asked to consider what would happen if’. Our immediate thought is it is more proof the public and sector is now saturated with ‘micro managers’ and their work is to be without purpose other than pedant corrections of the efforts the junior staff to innovate.

We now hear you say – how could synergy be possible in that sort of workplace? Reality takes over – it is not possible to have synergy as it involves a need for common purpose. In those sectors what is actually happening is the portrayal of a fictional character as being real. You see for the networks companies, they are operating on a model that has reached the end of its economic life. They must change to survive or to be counted as an asset. The secret word here is ‘asset’.

Co2Land org has always been told that if the bankable is present then there will be an opportunity for business. This is not meant to be a profound statement as such, but a good indication that in the background changes are afoot and plans are being set for change. Why is this important in this post?

The day after our discussion the following story was published 8 Oct 2014:

http://www.afr.com/p/special_reports/energy_security/strong_appetite_for_energy_sector_zmEISUe8FvDkd9uxACcK6M?utm_source=outbrain&utm_medium=cpc&utm_campaign=outbrain_amplify – Strong appetite for energy sector privatisations.

“This content is produced by Commonwealth Bank in commercial partnership with The Australian Financial Review.

Australia’s energy and utilities sector is moving towards its most significant period of privatisation since the Victorian and South Australian experience in the 1990s and early 2000s.

Subject to election outcomes, the governments of New South Wales and Queensland have indicated a desire to sell their mature electricity network assets in order to free up funds for new infrastructure projects.

Both states plan to privatise their electricity networks and in addition, Queensland may sell its power generation businesses.

Across the two states, six electricity network companies are being privatised, with Ausgrid in NSW the largest.

Each government has appointed advisers and indicated that if they are re-elected the process will begin almost immediately.

The NSW program is expected to end in the middle of 2016 and Queensland is expected to finish six to 12 months after that.

The scale of the programs with more than $50 billion in assets coming onto the market at the same time presents potential challenges, says Simon Ling, managing director Debt Markets Commonwealth Bank.

“Given both electoral cycles are running on similar time frames, there are market liquidity considerations and constraints depending on the size and the timing of the assets coming to market.”

Both states are engaging in asset turnover – selling mature assets now in order to invest in new assets for the future. They each have commitments for new road and rail infrastructure, and they also want to be able pay down debt.

Fortunately, the timing is beneficial. There is a lot of interest in the market from domestic and offshore super funds, pension funds and infrastructure investors.

However, given the scale of the programs there will be pressure on banks to accept a larger exposure than they would typically take on an interim basis, before longer term funding plans can be put in place.

In terms of the structure of the financing, Mr Ling says, “We expect that the arranging banks will have appetite for significant holds on most of the assets and the balance will be syndicated out to local and international banks with interest. There will also be a need for a short term bridging component to the bond markets.”

Challenges

In programs of this size it is important to appreciate the challenges faced by the governments and financiers.

For NSW and Queensland, the first order of business is certainty of execution. Governments need to be sure that there is enough liquidity in the market to get the deals done.

And of course the other big priority is to deliver the optimum price and return for their communities.

“That comes back to the question about sequencing,” says Mr Ling. “The governments are going to have to be sensible with sequencing because if they want certainty of execution and price tension they need to be careful how they bring this to the market.

“The good news, however, is that there is more than sufficient appetite for this.”

Domestic banks will run multiple teams supporting a number of key bidders in order to increase chances of successfully backing the eventual winners.

For banks, the key risk is the large exposure they will have to take at the close of the transaction, given that the largest companies could require senior debt acquisition financing around $10 billion.

“Once again there is cause for optimism. Global demand for these assets means that ultimately the debt will be able to be placed widely around the world,” says Mr Ling.

Who will invest

Most of the demand for these assets will come from investors looking for low risk, stable assets and regulated cash flows to invest in. Offshore bond markets are also expected to be more receptive and active in this latest round of privatisation than compared to the Victorian and South Australian programs, for instance.

US private placement investors are very familiar with regulated assets in Australia and are expected to have a large appetite for these new opportunities when they come on the market.

In the US, UK and Europe assets such as these would appeal to local capital markets because there is a very highly developed long end to those capital markets. The long dated market in Australia is less developed, therefore core long term funding will be dominated by offshore investors who recognise the unique opportunity to invest in these high quality infrastructure assets operating within a stable regulatory environment.”

All this sounds so admirable, why are we suspicious? Well the answer may come in the form of the inquiry into the senate’s power price inquiry. The Business Speculator asked, “Is the Senate’s power price inquiry a useless witch hunt?” This story is by TRISTAN EDIS 3 OCT, http://www.businessspectator.com.au/article/2014/10/3/energy-markets/senates-power-price-inquiry-useless-witch-hunt?utm_source=exact

The story quotes: “The Senate has agreed to launch a far ranging inquiry into the effectiveness of regulation over monopoly power network businesses to assess the extent to which consumers may be paying too much for poles and wires.

In addition, it will also examine whether the arrangements for the connection and pricing of network services discriminates against households and businesses that generate their own electricity – for example, via solar PV systems. (The full terms of reference are provided at bottom.)

This inquiry comes on top of countless other reviews and inquiries, with timeline below, including a Senate inquiry looking into electricity price rises just two years earlier. This naturally draws the question, what will yet another inquiry possibly achieve?”

So CO2Land org asks is the result a forgone conclusion? Nothing more than a rubber stamp to say regulation will assure the new buyer will make money and the consumer continues to pay too much?

This is especially relevant when Ernst & Young also reported in the ABC on 13 October 2014, that “the Federal Parliament has announced a Senate inquiry to investigate whether the so-called gold plating of Australia’s electricity networks is artificially driving up the cost of electricity.

Up to 60 per cent of some household electricity bills can be attributed to network costs, which is the amount passed on to consumers for maintaining infrastructure such as poles and wires.”

We also feel it is important to know a little history – If you did not know Australia has in recent times had a non-regulated network in the east. How could this be possible? You see the regulatory rules were written for AC (alternating current) wires connections. DC (direct current) is not AC regulated. So what if we wanted to build DC lines? You could speculate it would introduce competition – assuming competition was welcome!

Another interesting matter is the preoccupation in the story ‘Strong appetite for energy sector privatisations’ with the bank on saying” “However, given the scale of the programs there will be pressure on banks to accept a larger exposure than they would typically take on” – And, “the unique opportunity to invest in these high quality infrastructure assets operating within a stable regulatory environment.”

Forgive us but what about the inquiry! A fair go? Or is it a means to the end!

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s