The Z Energy IPO – One to stay away from

The Z Energy IPO must rank as one of the most outrageous IPO’s seen on the NZX.

Z Energy comprises the former Shell fuel retailing business in New Zealand. Shell exited the country in 2010, selling its package of service stations and distribution network to a 50/50 partnership of Infratil and New Zealand Superannuation Fund.

The Shell network was subsequently re-badged as Z Energy and shares in Z Energy are now being offered in a non-underwritten IPO.

Infratil and New Zealand Super are marketing it as a high-yield play, forecasting an effective dividend of 3.5 cents per litre of fuel that Z Energy will sell in the current year. That implies a profitability of 3.5 to 6 times on a per-litre basis than what Caltex Australia with its long established brand name and own refinery can achieve.

The Prospectus was launched on 26th July and it will be listed on both the NZX and the ASX.

In this note, we look at why the Z Energy IPO is one to stay away from.

Huge Uplift For Infratil & NZ Super

With 213 branded service stations and a well-developed distribution network, Z Energy commands a touch under 30% of the NZ market.
The IPO will raise $650 million to $900 million. All of that cash will go to Infratil and NZ Super, who also will retain a total of 40% to 50% of Z Energy.

None of the IPO proceeds are going into Z Energy for growth capital or to retire debt.
That means the whole business will be valued at $1,300 million to $1,500 million. If we add in the $430 million of debt that Z Energy has now issued, that takes the total enterprise value up to between $1,730 million and $1,930 million.

A little bit of detective work finds us the 2010-11 financial statements of Aotea Energy Limited, the ultimate holding company of Z Energy. Aotea is ultimately owned 50/50 by Infratil & NZ Super.

According to those accounts, Shell sold the package in 2010 for $891 million. That was financed by $420 million of equity – $210 million of new shares issued to each of Infratil & NZ Super. The balance came all from $498 million of new bank debt within the Z Energy group of companies. By the end of 2010-11, new retail bonds had been issued and existing cash balances used within Z Energy, so that the debt then stood at just $356 million.

In other words, Infratil & NZ Super were able to put debt against the previously unencumbered Shell assets to pay for over half of the cost of acquisition.

From the Infratil & NZ Super perspective, the cost of buying the Shell package was just the $420 million of equity. That included the 17% shareholding in NZ Refining (17.1%) which Z Energy will buy from Infratil & NZ Super after the IPO for $100 million.

On that basis, the net cost of the equity in Z Energy was just $320 million in 2010. In other words, the ‘market capitalisation’ of Z Energy has more than quadrupled in three years.

That just doesn’t make sense.

Fuel distribution is a low or zero growth business in an active market place. Z Energy is up against BP, Caltex and Mobil in the New Zealand fuel market, global brands with well-developed skills and the best supply chains. In addition, there are several smaller independent operators in the local market. In that environment, it’s just not possible to garner above industry rates of return. In the recent analyst’s conference to discuss the half year results, the Infratil CEO talked about the ‘hyper-competitive’ market place that Z Energy operates in.

And since the acquisition, Infratil and NZ Super have had to re-badge it – giving up the well-known Shell name and starting from scratch with the new ‘Z’ branding. That means cost in re-branding all the service stations and trucks, and of course, starting to re-gain the customer’s trust. That process has seen Z Energy go backwards both in market share and absolute fuel volume since changing from the Shell branding. Z Energy’s petrol market share has slipped from 31.6% to 29.0% now even though it has built five new service stations, all with above average volumes.

But Infratil and NZ Super did quite a bit of financial engineering as well over the past three years as well. When they acquired the Shell business, it had no debt and was asset rich. So the new owners have geared up the balance sheet by swapping the bank debt for $430 M of retail bonds. In addition, they will have taken out over $224 M in dividends by the time of the IPO.

Failing the First Credibility Test…..

My BS-detector was alerted by the plethora of hard to decipher financial information in the Prospectus, so I decided to dive in and take a look.

First up, a quick check for credibility. It is always good to look at other similar listed stocks as they give a guide both to industry performance and also how the sharemarket values companies in the sector. There’s a useful comparison stock listed on the ASX – that is Caltex Australia. Caltex is the only listed Australian fuel retailer. It sells about seven times as much fuel as Z Energy. Caltex and Z Energy have broadly similar market shares in their respective home market, and therefore, Caltex serves as a useful cross-check on a valuation of Z Energy.

A good starting point was to see how much cash margin that Caltex is able to extract from each litre of fuel to pay as a dividend to shareholders. Remember, the profit margin on fuel sales has to cover all the operating costs plus the capital expenditure program, marketing costs, debt servicing and tax. Caltex, which is a well-run and mature company, has been able to pay out between 0.5 cent and 1 cent in dividends for each litre of fuel it has sold over the past five years.

But Infratil and NZ Super are pitching the Z Energy float as a high dividend yield play. The Prospectus says that Z Energy is forecasting to pay a dividend of $88 million, equal to 3.5 cents for every litre it sells in 2014.

In addition, it is paying Infratil and NZ Super $70 million as dividends in the first three months of the financial year before the IPO. That’s a total of $158 million in this financial year, equivalent to 6 cents per share, much higher than what Caltex is able to do.

So, either the NZ fuel market is a lot less competitive than Australia, allowing Z Energy to consistently extract higher margins, or the Prospectus dividend forecast is unrealistic and not sustainable.

Leveraging Up the Balance Sheet

With my spin-detector on high alert, I dived in to see what I could untangle. The Prospectus is heavy going and goes overboard to present a vast number of figures, including different accounting perspectives.

Going back to those Aotea Energy holding company accounts for 2010-11, it is interesting to see that post the acquisition, Infratil & NZ Super revalued up the former Shell book value of property, plant and equipment by a third to $433 million. This was a pre-cursor of another big favourable revaluation just before the IPO.

There’s a big difference between historical cost accounting and replacement cost accounting for fuel retailing business as inventory values swing so much with changes in oil prices. A treatise on that allows the Prospectus to offer several different versions of financial statements, without adding much value.

But here is what I could discern.

When Infratil and NZ Super bought the package from Shell three years ago, the balance sheet had no gearing and was asset rich. Over the past three years, there has been an intensive program to add leverage to Z Energy’s balance sheet:

  • Creation of debt, with the issue of NZ$430 M of retail bonds in three tranches (which replaced the bank debt). That effectively went to Shell to cover a large part of the acquisition cost.
  • A program of selling and leasing back service stations. In 2012-13, Z Energy sold $87 million worth of service stations which have been leased back. Again, the use of that cash is not obvious.

Z Energy is selling around 2,500 million litres of fuel per year. Most of that comes from the only NZ oil refinery, NZ Refining, but it also imports refined products such as petrol and diesel as well. It has 213 branded service stations making Z Energy the largest in NZ, just ahead of BP, Caltex and Mobil in New Zealand.

There will be 400 million shares on issue after the IPO – some will be new shares issued by Z Energy and some will be newly created shares sold by the current holding company.

You Have to Dig To Find the Pre-IPO Transactions

The 31 March 2013 accounts are shown. But there is no pro-forma balance sheet to show the effect of the IPO and related transactions. And these changes are not trivial – as far as I can discern, significant actions between the 31 March financials and the July IPO include:

  1. Payment of the $70 million dividend to Infratil and NZ Super;
  2. Upward revaluation of the fixed assets by $170 million. At 31 March 2013, the fixed assets were valued at $311 million. So a $170 million revaluation is a massive 54% uplift (!);
  3. Settling all the intercompany loans. The March 31 2013 balance sheet shows receivables of $720 million and payables of $315 million to the parent companies. All of this will be settled prior to the IPO, but there is no explanation as to why or how this will be achieved.
  4. Transitioning the share capital from the existing 10 million shares to 400 million shares. The mechanics of the IPO are not straightforward. There are two variables at play – the offer price itself (between $3.25 and $3.75 per share) and how much the existing owners keep (between 40% and 50%).

We’ll do some numbers on a mid-offer price range of $3.50 and assume Infratil and NZ Super keep a 50% stake in Z Energy. That means:

  • Before the IPO, Z Energy will issue 269 M shares to ZEHL, the current holding company, taking ZEHL’s holding up to 279 M shares;
  • Z Energy will directly issue 121 million shares to the incoming investors. This component raises $422 million into Z Energy. All of that cash will be paid by Z Energy to Infratil and NZ Super. It’s not clear what the basis for this payment is.
  • ZEHL will sell 79 M shares to new investors in the IPO, reducing its holding to 200 M shares, or 50%; and
  • Incoming investors then hold 121 M + 79 M shares for 200 M shares in total.

After the IPO, Z Energy will buy a 17% stake in listed company NZ Refining, the only NZ oil refinery from (you guessed it) Infratil and NZ Super for $100 million. The casual reader of the Prospectus might think that this stake on NZ Refining was already part of Z Energy. But it is not. The current two shareholders in Z Energy do own it, but have chosen to sell it for cash to Z Energy after the IPO.

And Watch the Key Assumptions….

There are some delightful statements in the Prospectus, which you might be tempted to brush over, but actually are quite significant. For example:

  • Prior to the date of this Offer Document, intercompany amounts owed to Z Energy by AEL totalling $554.8 million were distributed by Z Energy to ZEHL as an in specie distribution…” (Section 1.3)   AEL (Aotea Energy Limited) is the holding company through which Infratil & NZ Super hold their shares in Z Energy. How does that work?
  • Two assumptions underlying the financial forecast for 2014 are key changes from historical values:
  1. The historical gross profit margin was 15.3 cents per litre in 2012-13. Going forward, Z Energy forecast this will increase to 16.5 cents per litre in 2013-14. On forecast sales of 2,500 Ml, that 1.2 cpl increase equates to an extra $30 million of gross profit per year.
  2. The amount of working capital is forecast to reduce and this frees up cash. There is a forecast reduction of 1 day in average receivables and 5 days for payables. Those changes mean that $55 million of cash would be freed up in 2013-14.
  • Putting the extra margin and reduced working capital needs together, that indicates that an extra $85 million of cash will be available in 2014. And to put that into context, the total forecast operating cash flow in 2014 is $76 million.
  • There is this delightful footnote to the latest financial statements:  “These are the historical financial statements for the 12 months ending 31 March 2013. Because of adjustments in anticipation of completion of the Offer, these financial statements do not reflect the position of the Z Energy Group as at the date of this Offer Document or on completion of the Offer. You should read Section 5.1 (Introduction to Operational and Financial Information) to understand the adjustments that have occurred and that are projected to occur.”  Section 5.1 by the way is mostly about the difference between historical and replacement cost accounting. The ‘adjustments in anticipation of completion of the Offer’ that I quote above have been found elsewhere in the document, well buried, and there are no doubt some that I have missed. Why not just show a pro-forma set of accounts as would be usual?

How Would An Analyst Value Z Energy?

Let’s go back to that Caltex Australia comparison. Caltex is a mature business and is a good guide to the profitability of fuel distribution and retailing. It owns and operates the Lytton refinery in Brisbane, is 30% owned by Chevron and has a network of 2,000 service stations in Australia. It is well understood by Australian investors and is a useful case-study for valuing Z Energy.

And remember – Z Energy is not an integrated refiner-distributor like Caltex Australia. It does not own a refinery and post-IPO will buy the 17.1% interest in NZ Refining

Here are three benchmarks:

  1. Net profit per litre – Caltex’ profitability has ebbed and flowed over recent years. On a historical cost basis, Caltex’ net profit after tax has ranged between 2.1 and 2.7 cents per litre sold. That would suggest a sustainable net profit for Z Energy of around $55 M to $70 million.  Caltex trades on a prospective P/E of around 11 times on the ASX. So applying the same metric to Z Energy would give a market capitalisation of $600 million to $770 million. From that, of course, we need to deduct the $100 million which Z Energy is paying for its 17% stake in NZ refining from the IPO proceeds. On that basis, a reasonable market capitalisation for Z Energy would be $500 million to $670 million.
  2. A size comparison – Caltex has nine times the revenue of Z Energy. It also has nine times as many service stations. If we said that Z Energy should have one-ninth the market cap of Caltex, that would value Z Energy at NZ$630 million.
  3. Cash surplus for dividends. This means looking to what a sustainable dividend flow could be in terms of cents per litre sold. Caltex has managed to stream between 0.6 and 1 cent of every litre out to shareholders as dividends over the past four years. Remember, Z Energy is forecasting a dividend of 3.5 cents per litre sold this year – and that is after paying to Infratil & NZ Super a special pre-IPO dividend of another 2.5 cents per litre.

If Z Energy’s profitability and dividend stream matches Caltex Australia, then that would be a total dividend flow of $15 million to $25 million per year, well under the $88 million proposed in the Prospectus. A 4% yield on that would see Z Energy valued at only $375 million to $625 million.
So on those numbers, the Z Energy IPO looks well overvalued. It looks like $400 million to $700 million would be a value which an analyst might come up with – equivalent to only $1.00 to $1.75 per share.

A Optimistic Return for Infratil & NZ Super

Infratil and NZ Super have clearly leveraged up the Z Energy balance sheet and streamed cash up to the parents by way of dividends and perhaps some other methods which are not fully disclosed.

And now they are asking incoming shareholders to pay well more than they paid for it three years for a just a 50% to 60% stake.
Infratil has published a little on Z Energy in its reporting over the past three years, and it is interesting to look at it from their perspective. The Z Energy investment is in Infratil’s books for $324 million. The IPO itself, at our mid case above, will deliver to Infratil a total value of $700 million – cash of $350 million and 25% of the listed Z Energy, valued at $350 million.

That is in addition to the $112 million in dividends it will have already received and the $50 million for its share of the NZ Refining stake. That adds up to $862 million. Plus, there is an unknown amount of cash through other means.
This compares to the net $160 million which Infratil put up to acquire its 50% stake in the Z Energy equity three years ago.

So Stay Clear of this One

“So what?” you say – Infratil and NZ Super will probably get the float away anyway. I mean, look at the market dynamics. Infratil has 23,000 shareholders, virtually all in New Zealand. It also has 16,000 holders of its retail bonds. NZ Super as well has a big client base. So the Z Energy float will have a wide following.

They have the A-team of NZ’s stockbrokers working on it, and the Z Energy brand is highly visible.

But here is the rub – some smart analyst somewhere will do the sums eventually. The Caltex comparison is an obvious one, and that will be circulated in the NZ market.

And eventually it will be clear that the cash margins in fuel retailing are much tighter than indicated by a casual reading of the Z Energy Prospectus. There will be a cash squeeze in Z Energy as it will just not be able to keep the dividend flow up.

At that stage, the house of cards will come tumbling down.

A good play – go long Caltex Australia and short Z Energy.

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Solving a Problem That Doesn’t Exist

As a politician, it’s not enough to just announce a ‘policy’ these days. Any politician worth his salt delivers a ‘package’.  Even if that ‘package’ means creating an imaginary problem that only you can fix.

Case in point – the Clean Energy Finance Corporation.  In 2011, the Australian Labor Government embellished its controversial Carbon Tax by launching it along with the CEFC as part of the ‘Clean Energy Future’ package.

The CEFC is brand new Australian Government-owned vehicle, set up specifically to invest in clean energy projects with $10 billion of taxpayer’s funds.  After 18 months in gestation, the CEFC became operational at the start of this month.

The CEFC says it is “helping overcome the financial barriers that have previously prevented clean energy investment at scale.”

Straight away back in 2011, Australia’s political Opposition began asking – “what will CEFC do that Australia’s commercial banks or very active stock exchange can’t do?”  It’s a fair question, as there is no obvious financing gap that needs filling.

You see, here’s the rub – the CEFC has to operate on a commercial footing “The CEFC makes its investment decisions independently, based on rigorous commercial assessments”.  It won’t take a risk on unproven technology.

And if our politicians had said back in 2011 that the CEFC would be lending to Europe’s largest bank, voters would be saying “huh…?”

But indeed, this just what CEFC has done, within days of opening its doors.

The CEFC began operations on 1 July 2013, complete with a board, an ex-banker CEO and a full suite of CIO, COO and CGSO (that one means Chief Governance and Strategy Officer).  And it clearly already had a nice backlog of projects ready to run.

Anxious to prove its worth, the CEFC got straight down to business within days.  It immediately announced its participation in two deals – lending an aggregate of $87.5 million to offshore owners of two Australian wind farms.

Wind farms in Australia are only viable because of another piece of Federal Government legislation called the Renewable Energy Target.  The RET mandates that all electricity retailers have to purchase a rising proportion of energy from renewable sources.  The extra cost of that compared with coal-fired power is passed through to Australia’s electricity consumers.  The RET legislation has single-handedly dragged Australia’s  wind generation from zero fifteen years ago to 62 wind farms now with 1400 turbines.

From the lending perspective, a RET-backed wind project is a pretty good risk as developers can lock in future electricity prices, underpinned by Government legislation.

So wind farms in Australia have quite successfully been able to attract finance well before the CEFC came along, so long as the wind resource was viable and local environmental and grid connection issues able to be tackled.

On this score, the Opposition is right.  Given that history, there hardly seems to be any need for the CEFC.

The first CEFC deal, hot off the blocks on 1 July, was announced as an “Australian wind farm refinancing’’.  CEFC in its media release said it had provided senior debt financing to Meridian Energy for the existing Macarthur wind farm.

Yet three days before that CEFC announcement, Meridian said it had sold its stake in Macarthur to Malakoff Corporation Berhad, a Malaysian company.

It seems that financing was really provided to Malakoff to buy Meridian’s stake in the project.  Nothing wrong with that, but did CEFC try to obscure what it was actually doing?  It was more forthcoming about the scale of its activity – CEFC provided $50 million of a $529 million loan, as part of a seven bank consortium.

With six other banks in the lending group, it is hard to see why the Australian Government-owned CEFC was needed.  Macarthur is an existing wind farm, there was no new renewable generation involved and CEFC participated on the same terms as the other six banks in assisting an offshore company buy the Australian asset.

The next day, 2 July, CEFC announced it was to provide a loan for development of a new wind farm.  This one, the 107 MW Taralga Wind farm, is a $280 million development in New South Wales with construction getting underway shortly.

Once again, CEFC is playing a minority role in a lending consortium along with commercial bank ANZ and offshore lender EKF.  CEFC is simply doing what other commercial banks are doing.

And then came this interesting twist. The Taralga wind farm is 90% owned by Santander, the giant Spanish bank, the largest in Europe and the 2012 “Best Bank in the World”.  The junior partner with a 10% stake is CBD Energy, a small ASX listed company.

CEFC will no doubt be looking to the 90% partner in the Taralga project, Santander.  And why not – after all, Santander is a world leader in financing wind farms and large scale solar projects.  It knows how to extract a near risk-free return from Government sponsored clean energy schemes world-wide.

So we now have the Government-owned CEFC providing minor funding to offshore groups profiting from the Government’s own RET legislation.

A nice circularity in that, but it hardly looks like a financing gap that needed filling.

The Carbon Tax – Extra profit for our electricity generators

Well, that’s what the Energy Users Association of Australia says.

The EUAA last month published “The impact of emissions prices on electricity prices in the National Electricity Market”.

A cumbersome title, but its theme is clear – that electricity generators have been profiting from Australia’s Carbon Tax.

As time goes on, the Australian Carbon Tax is looking more and more flawed.  This policy is notable for its failure to stimulate any investment in cleaner technology.  And remember, Australia is the country which is the world’s largest exporter of coal and growing. And will soon be the second biggest exporter of liquefied natural gas.

Long term certainty to underpin investment in cleaner technology would be needed if the scheme is achieve its goals, but this scheme is far from stable.  This week’s plan from Prime Minister Rudd will see it morph into a hybrid emissions trading scheme and home for cheap EU carbon units in 2014.

Instead of recognising Australia’s strengths in energy endowment and encouraging them, we have a Labor Government which is proud of this Carbon Tax mess.  It’s hard to understand why a union-backed Government promotes this policy making-on-the-run which pushes up retail electricity prices and enriches the generators.

Background

The $23/t Carbon Tax was initiated in July 2012.  That led to an immediate jump in electricity prices at the generator level, more than doubling.

Fair enough, you say.  The whole idea is that electricity prices should lift, and therefore encourage wind and other higher cost renewable generation to expand.

Yes, says the EUAA, but the price rise has been so high that coal-fired generators are benefitting, even after paying their share of Carbon Tax.  To quote the EUAA: “If the outcomes observed in the spot market persist then it can be unequivocally concluded that both fossil fuel generators and renewable generators will have gained as a result of emission pricing, at users’ expense. Surely this is not what was intended.”[i]

It’s not hard to quickly find out that the EUAA, if anything, is understating their case.  In Victoria, the Carbon Tax seems to be handing super-profits to our least efficient coal generation.

Queensland generators benefiting by $900 million per year

A quick review of National Electricity Market prices in the state of Queensland tells me that the average electricity price jumped by an average of around $38/MWh since last June.

Of course, this price increase got passed through to consumers.  But it’s how the electricity generators fared that we are more interested in.

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The majority of electricity in Queensland comes from reasonably efficient black coal-fired generation.  Let’s assume an average emissions intensity of 0.85 t CO2 per MWh.  That means an average cost impost of approximately $19.50 per MWh for Carbon Tax liability.  After the increase in wholesale prices last year, that left an additional gross margin of $18.50 per MWh on average for the Queensland generators.

So, yes, the EUAA was right in this case. The Queensland generators are more than recovering actual carbon costs.

Overall demand in Queensland is approximately 50,000 GWh/yr.  So, in total, that means there has been an extra margin of $925 million/yr to be shared around for the Queensland generators, assuming all wholesale electricity was traded at NEM pricing.

Okay, the electricity generators were making losses at the unreasonably low sub-$30/MWh wholesale prices before the Carbon Tax.  But, it’s hard to imagine that anyone thought that the Carbon Tax would have been their salvation.

 But Victorian brown coal generation looks like the real winner

In the southern state of Victoria, the situation is even more bizarre.  There, the majority of electricity comes from the four large brown-coal fired stations in the La Trobe Valley.  These units, Hazelwood, Yallourn and Loy Yang A & B have low operating costs and supply 25% of the total energy in the NEM. But they emit much more carbon dioxide and are the highest emitters amongst Australian generators, around 1.3 tonnes of CO2 per MWh of energy produced.

Knowing that these units would be badly affected by the Carbon Tax, and anxious to avoid them shutting altogether, the Australian Government devised the ‘Coal Fired Generation Assistance’ package for them.  Under this program, the Government is giving out 42 million or almost $1 billion worth of free Carbon Units each year – but only to the dirtiest generators.

Yes, that’s right.  You had to be one of the inefficient coal fired generators at the high end of CO2 emissions spectrum to qualify for this hand-out.

Highly efficient natural gas-fuelled generators emit 0.5 tonnes of CO2 per MWh of energy.  The black coal generators in NSW and Queensland emit more CO2, around 0.8 to 0.9 tonnes of CO2/MWh.

But to get the free Carbon Units under the ‘Coal Fired Generation Assistance’ package, only generators with an emission intensity of more than 1.0 t CO2 per MWh qualified.  And that was shared amongst them according to their size and how much CO2 they produce compared to a more efficient black coal fired power station.

A list of companies getting those free units is published by the Clean Energy Regulator[ii].  There were a total of nine power stations that qualified – the big four brown coal plants in Victoria, and five other much smaller plants.

A little bit of maths tells us that the four big brown coal plants in Victoria are receiving by far the majority share of free Carbon Units, around 37 million of the 42 million free Carbon Units each year.  That is $850 million/year of free Carbon Units to these big four.

Now, NEM electricity prices in Victoria jumped post Carbon Tax.  In fact, they more than doubled, up by an average of $30/MWh, from $27/MWh to $57/MWh.  And there’s mathematical logical to that – the extra cost at a carbon intensity of 1.3 is just under $30/MWh.

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That suggests that the brown coal stations are recovering all of the Carbon Tax impost through the wholesale price rise.

But – what about all those free Carbon Units? Well, that is just pure profit for the Victorian generators.

Let’s do the maths.  We’ll use the Loy Yang A station as an example.  From the published data, it’s not hard to work out that it is receiving 10 million free carbon units per year.

Loy Yang is running at around 15,000 GWh per year currently.  Let’s assume operating costs of $22/MWh.  With wholesale electricity prices of $27/MWh last year, that meant a slim margin of just $5/MWh in 2011-12.

After Carbon Tax though, the average electricity price was $57/MWh in 2012-13.  That makes a healthy margin of $35/MWh or $525 million for Loy Yang A before Carbon Tax costs in 2012-13.

Now, with a carbon intensity of 1.3, Loy Yang faces a gross Carbon Tax cost of 19.5 million carbon units.  But it is getting 10 million free Carbon Units each year.  That means Loy Yang has a net carbon cost of just 9.5 million units/yr, valued at $220 million/yr.

Which means, after Carbon Tax, Loy Yang had a gross margin of $305 million in 2012-13.

Assuming similar metrics apply to the other brown coal generators, this sum shows this group, the biggest contributors pro-rata to Australian greenhouse gas within the electricity sector were able to increase their margin by more than $15/MWh thanks to the Carbon Tax.

But it gets even better for these brown coal generators……….

You see, there was yet another bit of ‘industry assistance’.  This was a cash payment under another package called the Energy Security Fund to the less efficient coal-fired power stations – essentially the same group of nine stations which received the free Carbon Units under the ‘Coal Fired Generation Assistance’ package.

Yes, that’s right – a cash payment. It totalled $1 billion for the power stations which emit the most carbon dioxide for each unit of energy produced.  The four brown coal plants in Victoria picked up the bulk of this, $880 million between them. That cash was paid in June 2012.

 So the EUAA is right…

It sure does look like that Australian electricity generators are better off with the Carbon Tax.

The real question though is this – is the Carbon Tax encouraging the generators to make investments to reduce the carbon emissions from generation?

So far, the answer to that is no.  Frankly it seems that $23/t  and with the likelihood of going lower once emissions trading starts in 2014, there is insufficient incentive to invest in CO2-reducing technology in Australia.