It has been just over a year since the NSW Government passed the Electricity Generator Assets (Authorised Transactions) Act 2012 to facilitate the sale of the remaining State-owned electricity generation assets – with those assets already subject to GenTrader Agreements to be sold first to their respective GenTraders (i.e. Origin Energy and EnergyAustralia).
Origin Energy have now acquired the Eraring and Shoalhaven power stations for $50 million having previously paid the Government $609 million for the output of those generators under a GenTrader Agreement. 1 Origin Energy will also receive $300 million in break costs as a result of the Government's termination of the coal-supply agreement with the State-owned Cobbora mine negotiated under the GenTrader Agreement. 2 The Government has also advised that while the Cobbora coal contracts with Macquarie Generation and Delta Electricity have also been terminated, no compensation will be required as those entities have alternative arrangements in place. 3
While there are rumours that some renewable assets may be sold next, the eventual sale of the other GenTrader generators – Mount Piper and Wallerawang power stations – to EnergyAustralia will nevertheless pave the way for the remaining assets and development sites to be sold. It has been reported that Macquarie Generation may be sold to an potential offshore consortium for up to $3 billion. 4 However this appears to be at odds with the NSW Government's earlier statement as to the sale process.
Although the timing for the next round of sales may still be uncertain, now is a good time to recap some of the current issues facing a prospective bidder for the generation assets of Macquarie Generation and Delta Coast.
CURRENT ISSUES
- Employee costs: the legislation provides for job guarantees for existing employees for a period of between two to four years, and also requires the future acquirer to cater for 30 weeks' pay to any employee transferred to its books as a result of an acquisition. One set of calculations estimate that staff costs may average $110,000 per employee per year and transfer payments could total around $108 million across all the large generators. 5 Potential acquirers need to cater for these costs in their bids.
- Competition issues: the ACCC have two main points of concern relating to market share: 6
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- First, as Macquarie Generation has 30% market share in NSW (and 18% in the NEM), it may not – depending on the purchaser – be sold as a whole. As a result the sale of its assets may be broken-up: split into its two plants (i.e., the Bayswater and Liddell plants).
- Second, existing players (i.e., AGL, EnergyAustralia and Origin Energy), with already significant generation ownership in NSW and the NEM more generally, acquiring another generator. This may be considered unlikely, at least in the case of the larger generation assets.
That the ACCC is hoping for more players in this market is a positive sign for the potential investor so far as competition issues are concerned.
- Carbon tax: Both Delta Electricity and Macquarie Generation have noted that the impact of the Federal carbon tax (currently at $23 per tonne) has or could result in significant reductions in the value of their power plant assets. The uncertainty over the future of this scheme – with either a floating price to be introduced earlier or the tax abolished altogether after the federal election – will also affect the ultimate price potential bidders will be prepared to offer.
Other issues potential bidders will need to consider include, among other things, market projections of the price of electricity, FIRB approvals (if applicable), the remaining life of the generators, obtaining financing for a coal-fired power station and the nature of the coal supply arrangements that have been put in place.
FUTURE SALES OF ELECTRICITY ASSETS - "POLES AND WIRES"
The Government have previously indicated that it would announce whether or not it will privatise the State-owned electricity distribution assets (i.e. the poles and wires) prior to the next election scheduled. This may not be plain sailing, however, as at their state conference in June 2013, the NSW National Party unanimously voted against such a sale. 7 More information with be forthcoming on future sales as we approach March 2015.
Footnotes
1Origin Energy, ' Origin to acquire Eraring Energy and enter into new fuel supply arrangements' (Media Release, 1 July 2013).
2Origin Energy have entered into an alternative agreement with Centennial Coal for 24.5 million tonnes of coal for eight years commencing 2015.
3Nicholls, S. '$75m taxpayer burden avoids $1.75b liability, says Treasurer', The Sydney Morning Herald – Business Day, 2 July 2013, 23.
4Durie, J. ' Turning liabilities back into assets', The Australian, 2 July 2013.
5'Buyers face extra imposts in NSW power sell-off', The Australian Financial Review, 19 November 2012, 16.
6Macdonald-Smith, A. ' Regulator warns on power mergers', Australian Financial Review, 25 May 2012.
7Foschia, L. ' NSW Nationals party opposed to selling poles and wires', ABC online, 17 June 2013.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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