OVERVIEW In June 2014, the conservative-led New South Wales (NSW) Government announced an ambitious 10 year, AUD$20 billion infrastructure plan, called Rebuilding NSW. It would be funded, primarily, by privatising a number of Government-owned electricity transmission and distribution assets (T&D Businesses). With the upcoming NSW state election at the weekend (Saturday, 28 March), this bulletin focuses on the NSW asset opportunities. The sitting Government is seeking a mandate from the electorate for its proposal to privatise the T&D Businesses. The election in Queensland on 31 January 2015 resulted in a change of Government and a move away from asset privatisation. 1 The new Labor Government will retain public ownership of the Government-owned power networks, ports, rail lines and water pipelines. Two-thirds of the annual profits from these income earning assets will be quarantined into a ‘Debt Reduction Trust’ to be used to pay down general government debt. 2 OPPORTUNITIES If re-elected, the current NSW conservative Government has indicated it will proceed with a 99-year lease of the following T&D Businesses: TransGrid Ausgrid, and Endeavour Energy. The Government proposed that it would not divest its interests in Essential Energy. The Government is targeting these assets to generate about AUD$20 billion. The NSW Government is set to privatise several Government-owned electricity transmission and distribution assets as part of its 10-year, $20 billion infrastructure plan called Rebuilding NSW. 1 Queensland’s new Cabinet focuses on jobs, Qld Premier’s media release, 15 February 2015 2 Our States, our Assets: A Better Way for Queensland p 10 PRIVATISATION ASSET TARGETS 2 TransGrid, Ausgrid and Endeavour Energy are all Government-owned corporations, which were established under the State Owned Corporations Act 1989 (NSW) and Energy Services Corporations Act 1995 (NSW). TransGrid, Ausgrid and Endeavour Energy, all trade in the National Electricity Market (NEM), which is used by all Australian states and territories except for the Northern Territory and Western Australia to trade in wholesale electricity. Therefore, their respective distribution services are largely subject to the Australian Energy Regulation, which is responsible for the economic regulation of electricity networks in the NEM. TransGrid TransGrid owns, operates and manages NSW high voltage electricity network that connects generators, distributors and major end users in NSW and the ACT. TransGrid’s asset base is comprised of a network of more than 12,900 km of overhead high voltage transmission lines, 78 kilometres of underground cabling operating at voltages of up to 330 kV, as well as 97 bulk supply substations. The network is interconnected to Queensland and Victoria through six interconnectors, making interstate energy trading possible. 3 In FY 13/14 TransGrid reported to have: a net profit after tax (NPAT) of AUD$226.9 million earnings before interest, tax, depreciation and amortisation (EBITDA) of AUD$723 million capital expenditure of AUD$588 million, and a regulated asset base of AUD$6,076 million. 4 TransGrid’s network, which consists of 12,900km+ of high voltage transmission lines, is connected to interstate energy markets. Last year, TransGrid net profit after tax was AUD$226.9 million with an asset base worth AUD$6 billion. Fast Facts 3 Transgrid 2013/14 Annual Report 4 Transgrid 2013/14 Annual Report PRIVATISATION ASSET TARGETS 3 Fast Facts continued Ausgrid Ausgrid owns, operates and manages the electricity network that supplies power to about 1.6 million homes, businesses and industries located throughout Sydney, the Hunter Valley and the Central Coast of NSW. Ausgrid’s asset base is comprised of more than 200 large electricity substations, 500,000 power poles, 30,000 small distribution substations and almost 50,000 km of below and above ground electricity cables. In FY 13/14, Ausgrid reported to have: a NPAT of AUD$607.5 million an EBITDA of AUD$2037.2 million (including year end adjustments) capital expenditure of AUD$561.5 million, and total assets of AUD$16.2 billion (as at 30 June 2013) 5 Endeavour Energy Endeavour Energy supplies electricity to 2.2 million people across Sydney’s Greater West, the Blue Mountains, Southern Highlands, the Illawarra and the South Coast regions of NSW. Endeavour Energy’s asset base is comprised of a network spanning 24,500 square km made up of more than 413,000 power poles, 178 major substations and 30,000 distribution substations. In FY 13/14, Endeavour Energy reported to have: an operating profit after tax of AUD$301 million earnings before, interest, tax and depreciation of AUD$770 million capital expenditure of AUD$531.5 million, a regulated base of AUD$5.6 billion, and a return on assets of 8.7%. 6 Ausgrid supplies more than 1.6 million homes while Endeavour Energy supplies to 2.2 million people across NSW. In 2013/14, Ausgrid reported a net profit after tax of AUD$607.5 million with assets worth more than AUD$16.2 billion. In 2013/14, Endeavour’s operating profit after tax was AUD$301 million with an asset base of AUD$5.6 billion. 5 Ausgrid 2012/13 Annual Report 6 Endeavour Energy 2013/14 Annual Report, pages 2 - 3 PRIVATISATION ASSET TARGETS 4 While the shape of the NSW Government’s asset leasing program will become clearer following the election, we can draw the following threads together: TransGrid, the high voltage electricity transmission business, will be the first of the T&D Businesses to be privatised and will be 100% leased on a 99 year term while Ausgrid and Endeavour Energy will be 49% leased on a 99 year term. The NSW Government has already determined a number of conditions of the partial privatisation program: electricity network prices will be discounted by 1% off forecast regulated prices until 2019 the jobs of permanent award employees will be protected the transmission will have no adverse impact on electricity reliability, and the regional presence of the network businesses will be maintained In FY 12/13, TranGrid transmitted 65,200 GWH which placed it first on the electricity transmission statistics among the five NEM region networks.Ausgrid delivered 26,338 GWH (placing it first) and Endeavour Energy delivered 16,001 GWH (placing it third) on electricity delivery statistics among the thirteen NEM electricity distribution networks. In response to the Australian Energy Regulator’s (AER) draft determination date 27 November 2014 for the regulated period 2014-2019, Ausgrid’s AER submission has been revised and resubmitted on 2 February 2015. TransGrid and Endeavour Energy followed a similar path, with their revised submissions being submitted on 13 and 20 January 2015 respectively. Lay of the land TransGrid, the high voltage electricity transmission business, will be the first of the T&D Businesses to be privatised and will be 100% leased on a 99-year-term while Ausgrid and Endeavour Energy will be 49% leased on a 99-year-term. PRIVATISATION ASSET TARGETS 5 AER’s draft determination for AusGrid, Endeavour Energy and Essential Energy effectively sought a reduction in expenditure of more than $6.5 billion to bring them in line with States where electricity assets had been privatised. This reduction, more than 27% overall, was based on the reduced cost of capital, reduced operating expenditure, and more than a 60 per cent real reduction in the capital investment program compared to the previous five years. These networks’ operating expenditure was reduced by $2.3billion (or 35 per cent) in real terms largely based on a new AER benchmarking model. The outcomes of this model are yet to be tested with the industry but certainly concern the industry given the impact on pricing and capital programs. Notwithstanding the AER’s potential impact, and the expected reduction in electricity demand, these assets will be sought after targets for investors given the substantial importance of these assets within the NEM and NSW’s forecast annual Gross State Product growth of at least 3% over 2014-2015 to 2016-2017. 7 Another possible incentive for investors interested in leasing these transmission and distribution services would appear to be the potential to increase efficiency. A study conducted on behalf of the NSW Government showed that privately owned networks had outperformed the publicly owned networks both in terms of their operating and capital expenditure allowances (by up to 24% for operating expenditure and 39% for capital expenditure) between the years 2000 and 2010. 8 This certainly supports the approach taken by the AER.