Yield expectation – NSW Poles and Wires – for sale.

Ok, the NSW poles and wires lease sale is now into the detail phase. Well actually that detail is reported to be already decided. What are not known are what will be said to the public, and that should be not too far away from being known. In fact the Premier has not wasted any time in encouraging ‘mums and dads’ investors to take out shares. As with all investments the price must be attractive to encourage you to buy. But there is another side of the coin. The institutional buyer must know the price to the user is higher enough to guarantee a return before they buy into the infrastructure. How is that done?

In the case of the energy utilities: It is the federal body, the Australian Energy Regulator (AER). It happens that the AER, and very shortly after the NSW Election where the mandate has been won to sell off the 99 year lease of the ‘Poles and Wires’ to highest bidder, will be setting the price for the future with an interim decision by April 2015 or very near to that date. That decision would determine network prices for the next five years.

So if you think about that you can see that the NSW Premier is technically right – no price movements will be because of the ‘sale’. You might also see why the oversea of the ‘sale’, the former ACCC chair, can say prices will not be greater than the regulator (AER as it turns out) determines. You could find it argued you will pay more, but it is not the sale process that increased the prices. That may be a slight of hand from the politics, but it is still a fact.

Then to put a balance on what an investment might be expected to return, we have a story – Is the search for yield becoming unsustainable?

By business reporter Stephen Letts, 30 March 2015. “The rotation out of investing in high-yield dividend companies into ‘growth’-focused enterprises is gaining momentum. The past month has been particularly striking. One of the key engines of the yield story – the utilities sector – has gone into reverse, falling on average 1.5 per cent this month after a solid 12 months of outperformance.

At the same time, investors exiting the yield play are piling into information technology and industrial stocks hoping for more exciting returns.”

Co2land org now considers: Is the NSW Government too late in getting the float of the poles and wires to market. We use the story above again to quote: “Manufactured yield is not sustainable.” Also quoted is: “Goldman Sachs says the low risk approach is to avoid companies that have been “manufacturing yield” by relying on debt, assets sales and underinvestment in their businesses. Interestingly many of the companies with the largest “cash shortfalls” are the utilities that have been at the forefront for the search for yield. Leading the pack is the power utility and network operator, AusNet Services. Goldman Sachs has found AusNet Services experienced at a $2.2 billion cash shortfall over the past five years, which represents about 62 per cent of its average market capitalisation over the period.

Duet and APA – who are in the same line of business – have shortfalls of $1.1 billion and $650 million respectively.”

Therefore we see an ominous gathering of indicators that suggest the NSW float might not be the good it is promoted as being.

We think the ‘real’ issue will be the pressure to reduce the price by the user. The providers for a ‘demand response’ should also be persuasive to avoid prices rising by virtue they can determine the demand needs for energy. Why the later because, they have the power to defer capital investment needs assuming the network growth need dictate investment in the failings of the system.

The ‘elephant in the room’ is there too! It is of course the remodeling of the energy networks business model and the rise of cheaper embedded energy networks with renewable energy sources.

Tis interesting times!

Poles and Wires Apart – NSW style

Being it is an election issue – What do you think about privatisation of the electricity assets? A fair question we said, but the wrong one! We feel the ‘real’ question is will the price of supply go down either way? Then it becomes obvious if you use the word ‘redundancy’. In the Queensland election the word was replaced with an emotive ‘gold plated’. In the coming NSW Election there is no mention of either term. The political sides prefer to attack and defend on diverting money streams that would flow onto ‘infrastructure’ projects.

Our point here is that ‘poles and wires’ are infrastructure and there is a level of build required to a) Meet demand. B) Provide reliable pathways. The c) route is actually the political risk to an incumbent that makes the decision to support or reject a build decision and that might not have any basis of a) or b). So c) can be why redundancy is so important when they build.

It is time for a new incumbent politician to be elected. Both sides understand the previous administration built into the system excessive redundancy. This equates to – those assets offered for sale or lease will be attractive as very little needs to be done for another 5 years before meeting demand and system reliability becomes an issue (a and b).

If the current state government is re-elected they can honour their pledge that in 2019 no price rises will occur because of the assets passing into private hands. The potential buyer will find the ‘redundancy factor’ attractive in guaranteeing a profit.

If a new government is voted in they will ‘protect you’ from price rises and continue a revenue stream for the infrastructure needs of the state. They will simply have a different emphasis on what infrastructure to spend. For example less will be spent on Roads and Rail and more on other social needs. The new will be able to do this by avoiding spending as redundancy is built into the system.

How much redundancy is built into the NSW System? The question is not so easy to answer. Because Transgrid the transmission network had something like $15b to spend a couple of years back and the Distribution network companies spend considerable amounts on their needs. The ugly ducky in terms of the need to spend is still looking to be Essential Energy by virtue of the area and geographical spread of its territory. Essential is essentially regional NSW.

What neither party is telling you are what Essential Energy will do to address a new business model to meet the challenges in the next three years.

The question is really, will history repeat itself and will the need to further build after the redundancy period morphs into a massive rebuild program. Building program cost money and in any user pays system you will pay for the need to supply. You will pay either as a taxpayer or a direct cost. The politicization factor will decide what the koala will bear. Koala in this sense is the voter.

To back this up we read with interest the writings of Keith Orchison, 9 March 2015, ‘Who’s telling porkies about NSW’s poles and wires?’ You will find the story in the Business Spectator. He says, “Where the wheels fall off the propaganda cart, is when you look forward and also when you bear in mind what Mike Baird wants to flog. The Premier plans to sell half of Ausgrid and Endeavour Energy, the two largest earners, all of TransGrid, the high voltage business, and none of Essential Energy, which delivers power to 95 per cent of the state and has been declared untouchable by Baird’s National partners.

Broadly speaking, any loss of revenue will be about half the total networks income for the government. Then the question is how much income is that likely going to be?”

“You can then halve these numbers for ‘lost revenue’ because Baird proposes to hang on to half the distribution duo that delivers most of the moolah.

One way of looking at this is that there is about a $3bn to $4bn hole in the ‘anti’ brigade’s bucket on this issue over the remainder of this decade.

These campaigners have not been too fussed about accuracy in other respects, either.

For example, the $1m worth of advertising currently running on NSW television screens is supported by an assertion that power prices in Victoria have risen 60 to 70 per cent since electricity privatisation, but this ignores the fact that network charges in that state have fallen during this period.

Work done for the NSW Treasury by Ernst & Young shows that Victoria’s network charges fell 18 per cent in inflation-adjusted terms between 1996 and 2013. Over the same period, they rose 122 per cent in NSW.

Now the voters of New South Wales can’t be expected to go out and research all this stuff for themselves, so what is the role of the Electoral Commission in vetting the integrity of the campaign?”

We say no more – it has been said! Now you vote – clear as mud is it not!