Alan Moran, The Age, 28 August 2000
The Victorian Electricity Industry
Worldwide, the gales of competition lashing electricity supply are transforming opportunities and corporate strategies. Last week's $2.4 billion sale of Victorian electricity assets by Scottish Power to Hong Kong Electric illustrates the volatility in ownership and valuations that the process is bringing about.
The Victorian privatisation process took place during a window of opportunity:
Of the fourteen major entities sold between 1995 and 1999, nine have undergone or have pending subsequent major ownership transformations. There have been several reasons for this:
The pattern is illustrated below.
|Entity||Date sold||Sale Price||Original Purchaser||Subsequent Events|
|United Energy||August 1995||$1.553 billion||AMP/ Axiom/ Utilicorp||42% floated 1998; current value $2.5 billion(1)|
|Solaris||October 1995||$950 million||AGL/ GPU joint venture||GPU sold its share to AGL 1997|
|Eastern Energy||November 1995||$2.08 billion||Texas Utilities Australia|
|Powercor||November 1995||$2.15 billion||PacifiCorp||Pacificorp acquired by Scottish Power and sold to Hutchison Whampoa for $2.3 billion|
|Citipower||December 1995||$1.575 billion||Entergy Corporation||Sold to AEP for $1.6 billion 1997|
|Yallourn Energy||March 1996||$2.426 billion||PowerGen (50%), ITOCHU, AMP, Axiom and Hastings Fund Management||Powergen considering selling non-UK assets|
|Hazelwood/ Energy Brix||August 1996||$2.357 billion (net proceeds). Equity valued at $860 million||National Power, Destec, PacifiCorp and others||Pacificorp/Scottish Power share (20%) sold for $90 million|
|Loy Yang B||April 1997||$84 million ($1.1 billion inc. obligations)||Edison Mission Energy|
|Loy Yang A||April 1997||$4.746 billion||CMS 50% NRG 25% others 25%||CMS seeking to sell its 50% stake|
|PowerNet Victoria||October 1997||$2.555 billion||GPU||Sold in 2000 to Singapore Power for $2.1 billion|
|Southern Hydro||November 1997||$391 million||Infratil Australia/Contact Energy Consortium||1999 Consortium restructured with Contact exiting|
|Westar and Kinetik Energy||January 1999||$1.617 billion||Texas Utilities|
|Multinet / Ikon Energy||March 1999||$1.97 billion||Consortium---Utilicorp United Inc, AMP|
|Stratus / Energy 21||March 1999||$1.67 billion||Boral / Envestra|
|Transmission Pipelines Australia||May 1999||$1.025 billion||GPU Inc||For sale|
1. Planned partial float of UeComm values this part of the business at $1 billion.
Australian Regulatory Framework as Reasons for Sales
Though many of the decisions to pull out of the Australian market were ostensibly due to particular issues confronting the firms' operations, also figuring strongly have been the market and regulatory factors confronting the firms in Australia. These include a long period of exceptionally low prices in the linked New South Wales/Victoria market. This has been due to several factors, notably overcapacity---privatisation brought efficiencies in production, virtually augmenting previous capacity. In addition, the higher cost NSW government owned generators were slow to pare back production in the light of unprofitable operations. Electricity pool prices have however lifted markedly over the past few months.
A further factor may have been the regulatory risk. For regulated assets, the Australian price is usually expressed in terms of the permitted pre-tax Weighted Average Cost of Capital (WACC).
Under the initial privatisations a WACC of 10.9% was common. Partly due to lower interest rates, Australian regulators have tended to reduce the WACC. Decisions on gas in 1998 reduced the rate to 7.75%, while in 1999 the New South Wales regulator specified 7.5% for electricity distribution. The Victorian price regulator has recently made a draft determination on electricity distribution for a WACC at 7.3%. A final determination is due in September.
The high initial levels of permitted profits and vesting contracts struck at high prices may have inflated original sales values, especially of the transmission and distribution businesses. The electricity transmission business, Powernet, has already sold at a discount of 17% of its original price. By contrast, one of the distributors, United Energy, realized $1.55 billion at privatisation and subsequently partly floated and is presently valued at $2.7 billion, almost 60% above its privatisation price. Although, like all the privatised businesses, United Energy achieved a price considerably in excess of its asset backing, it sold at a lower multiple to profits than subsequent sales and the business has been radically altered by diversifying into telecommunications and restructuring the ownership of its retail arm. Indeed, a partial float of its telecoms arm (UeComm) value is expected to value this at $1 billion, leaving the rest of the business notionally valued at only $1.7 billion.
The sale of Powercor offers a better market test, albeit still an ambiguous one, to the Victorian regulator since it comes only weeks before his final decision on the price re-sets. Hong Electric/Hutchison Whampoa bought Powercor for $2.3 billion, slightly more than the $2.15 billion that Pacificorp paid in 1995. As retailer, Powercor has been highly successful and this would be worth some premium. Nonetheless, at a price of $2.3 billion the Victorian price regulator is likely to be comfortable with the ball-park of his draft determination.
With respect to the generation businesses, some very radical devaluations have been mooted. As part of its deal for Powercor, HK Electric paid $90 million for a 20% stake in Hazlewood. Discounting the worth of a control premium, this values the equity in Hazelwood at $450 million, just over a half of the original value of a business that is considered to have been well run. The long period of low prices has bled one NSW generator (Pacific Power) of most of its value but evidently also taken its toll on the Victorian generators' values.
Generally the more sober market view may also reflect an end to some special conditions that caused a buying frenzy during the original privatisation. Electricity retains a special place in public perception of governments and although we are now far removed from the stodgy government controlled entities, there remains a risk that governments will rein in high profits either by jawboning or arms length regulation.
Electricity differs from other commodities due to its non-storability, a short term demand that is unresponsive to price. In addition, there is thought to be market power, or natural monopoly, in transmission and distribution of electricity and potentially frequent occurrences of market power by particular generators. Even so, Australia's experience with second round sales of electricity businesses indicates it was government, not the new owners, that has made out like bandits.
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