RAJ REPORT

VOODOO BUDGETING 2015—-increasing the DEBT OF ELECTRICITY COMPANIES will put them at great RISK which the TAXPAYER will have to PAY according to Treasury ——However, a revised dividend and gearing policy must also consider the risks and impacts of potential changes to the market in which these businesses operate. That is, the structure should be both efficient and prudent. Again, the emergence of substitution energy technologies and competitors represents a major challenge to the electricity GOCs in particular

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8.4 CAPITAL  STRUCTURE  AND  RETURNS The  ability  to  pursue  commercial  strategies  for  capital  structuring  should drive  superior   returns  for  the  shareholder  while  at  the  same  time  ensuring  the  businesses  operate   efficiently. The  current  approach  to  management  of  the  capital  structures  has  been  to  ensure  that  the   businesses  maintain  an  investment  grade  rating  (BBB/Baa2).    The  gearing  levels  are   however significantly  below  their  private  sector  counterparts,  as  highlighted  in  the  table   below.     This  is  in part  due  to  the  funds  that  were  retained to support  high  levels  of  capital   expenditure.    These  capital  expenditure  requirements  have  moderated  significantly  over   recent  years.    This  inefficient  use  of  capital  has  resulted  in  reduced  financial  performance. Table 8.1 GOC  Sector  Benchmark  Gearing  Levels Sector Private  Sector  Peer  Gearing  Levels Indicative  GOC  Gearing  Levels1 Networks 70%  -­  85% 55% Generation 30%  -­  40% 50%2 Ports3 ~75% 31%4 Water5 65%  -­  70% 40%6 1. Financial  year  2013-­14.   2. Average  -­  significant  variance  in  gearing  levels from  30%  -­  70%.   3. Debt  capacity  depends  on  growth,  business  model  and  level  of  operating  risk.   4. Only  includes  GPC  and  PoTL.    Significant  range  in  gearing  levels  of  all  GOC  Ports  ~20%  -­  40%.   5. No  water  comparables;;  gas  pipelines  used  as  most  relevant  comparables. 6. SunWater  only  –  excludes  $208.1  million bridging  loan and  includes  Bulk  Water  Assets.   Source:    Queensland  Treasury  Corporation Gearing  the  GOCs  to  a  more  commercial  level  in  line  with  their  private  sector  peers,  and   using  those  funds  to  reduce  General  Government  debt,  has  the  benefit  of  more  efficiently   utilising  the  capital  available  to  the  State.    This  would  be  achieved  by  raising  debt  in  the   GOCs  and  using  that  debt  to  return  equity  to  the  State. This should  have  no  impact  on  their  capacity  to  deliver services  at  the  expected  level  of   quality. 2015 Review of State Finances 91 The  majority  of  GOCs  operate  regulated  businesses,  either  directly  or  indirectly.    The  capital   structure  and  dividend  payment  policies  applied  by  Government  to  the  GOCs  are  different   from  the  approaches  used  by  the  private  sector  which  traditionally  looks  to  generate  superior   cash  distributions  to  shareholders.    Private  sector  regulated  businesses  typically  use  higher   leverage  and  fund  higher  levels  of  distributions  by  borrowing  against  an  annual  asset   revaluation,  while  maintaining  investment  grade  credit  metrics  and  a  constant  capital   structure.    This  is  consistent  with  regulated  revenue  models  which  treat  the  ability  to  borrow   against  the  increasing  asset  base  as  a  source  of  returns  for  equity  holders. In  contrast,  the  approach  adopted  by  the  GOCs  of  paying  dividends  as  a  percentage  of   adjusted  net  profit  after  tax,  has  resulted  in  gearing  levels  falling  below  what  is  deemed  to  be   an  efficient  capital  structure  because  cash  that  would  otherwise  be  distributed  to  equity  is   instead  retained  in  the  business.    Similarly,  the lender  oversight  by  QTC  has  been  ineffectual   as  a  means  of  encouraging  cost  efficiencies  because  the  required  investment  grade  credit   metrics  are  easily  met. Adopting  a  dividend  policy  aligned  more  closely  with  the  private  sector  approach should   result  in  an  increase  in  dividends  paid  to  Government. However,  a  revised  dividend  and  gearing  policy  must  also  consider  the  risks  and  impacts  of   potential  changes  to  the  market  in  which  these  businesses  operate.    That  is,  the  structure   should  be  both  efficient  and  prudent. Again,  the  emergence  of  substitution  energy  technologies  and  competitors  represents  a   major  challenge  to  the  electricity  GOCs  in  particular

 

 

 

 

 

https://www.treasury.qld.gov.au/publications-resources/review-of-state-finances/review-of-state-finances.pdf.

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