A recently announced transaction has a price that shouts out disfunction in our energy system. This is the sale by the New South Wales Government of electricity distribution business Endeavour Energy for A$7.6B to a consortium led by Macquarie Bank and AMP.
This price valued the company at 1.6 times its regulated asset base. This premium is particularly high – but other regulated energy asset sales in Australia are usually at prices which reflect material premiums over regulated valuations.
The to us obvious conclusion is that regulators are systematically being fooled by the industry as to its true cost of capital. If they got this right, assets would sell for around regulated value. That therefore means that tariffs are grossly in excess of what they should be.
This issue arguably contributes as much if not more to current high energy prices than the high price of gas, mandated renewables, etc. However, it receives no political or media attention, due to:
- Political collusion in the outcome – getting more money now from an asset sale outweighs longer term higher energy prices for consumers.
- The issue seems arcane and boring.
- The regulated companies have enormous incentives to put unlimited resources into arguing their case with the regulators. The latter has much less to spend on fighting its corner.
- Australian regulators seem culturally much more likely to be captured by the thinking of their “clients” than is the case in the likes of the US or UK.
Oil prices rose around 1% overnight, with Brent closing at US$50.77 and WTI at US$47.83. Some media sources attributed the rise to the “Trump sacks Comey” factor – concluding that this FIFA-esque event will distract Washington from effecting changes to taxes, infrastructure, etc. Result – the US dollar falls and the oil price rises.
Henry Hub had a good day – up 3.4% to US$3.38.
LNG and international gas
Bloomberg has recently published a story which puts a dollar figure on the ludicrous situation at Queensland’s Curtis Island, where 3 LNG projects were built side by side with no material cooperation. The money accordingly over-spent has been calculated to be US$9B – which has not only been lost by shareholders, but also is deductible against tax revenues which would otherwise have been paid.
Bloomberg went on to conclude that others like Mozambique will not let such things happen in its country – but we do not underestimate the likely desire of some in the industry in the next boom to sacrifice shareholder value on the altars of testosterone and ego.
Company news – AGL
A minor story – but illustrative of seriousness of intent – was a recent posting by AGL on LinkedIn seeking a Manager to specifically deal with its proposed FSRU project. Some may still scoff about this, but this makes a lot more sense to us than proposals to build pipelines from the West, etc.
Company news – Quadrant Energy
The plans by its private equity owners to IPO West Australian E&P company Quadrant Energy are progressing, judging by news about the ranks of investment bankers appointed to the sell job. They arguably have a tough sell: “roll up, roll up, pay much more than PE itself did a few years for a business with a depleting asset base!”
Quote of the day
An admonishing quote from Berkshire Hathaway’s Charlie Munger:
“I’ve never heard an intelligent cost of capital discussion”
And as its Friday:
“I get no respect. The way my luck is running, if I was a politician I would be honest.” – Rodney Dangerfield