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!

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