Victoria Electricity
Frequently Asked Questions
What is the history of Victoria Electricity's retail business?
A retail electricity licence for Victoria was secured in 2002 and first customer revenues were secured in 2004.
A gas licence for Victoria was granted in December 2004.
A retail electricity licence for South Australia was granted in 2005 and retailing commenced that year through a subsidiary South Australia Electricity Pty Ltd.
A retail electricity licence for Queensland was granted in 2006 and retailing activities are planned for that market place through a subsidiary Queensland Electricity Pty Ltd.
A retail electricity licence for New South Wales was granted in March 2007 and retailing activities are planned for that market place through a subsidiary New South Wales Electricity Pty Ltd.
Victoria Electricity (VEL) has been 100% owned by Infratil since early 2007.
How is the Infratil's manager incentivised to focus on VEL given the small investment scale and high maintenance requirement for this startup business?
Infratil has invested A$13m since 2002. Startup businesses require a lot of management oversight and time. Infratil established a venture capital structure to incentivise its Manager, HRL Morrison & Co, to pursue startup businesses which are, by definition, both risky and subscale in their early years.
Under the venture capital structure Infratil's Manager, Morrison & Co receives an incentive fee based on 20% of realised gains in excess of a 17.5% pa benchmark. The Victoria Electricity investment was approved by Infratil directors for inclusion as a venture capital investment in 2002.
Why is Victoria Electricity a good fit for Infratil?
Infratil's experience has been that there are opportunities for new entrants to become established in energy retailing during the initial years after competition is first introduced. Customers are open to changing retailer and incumbent retailers are normally reactive in establishing customer retention strategies. Over time, it becomes harder to win customers and new entry becomes less attractive.
Infratil's Manager, Morrison & Co has had an Australian office for over ten years and has had significant experience in the Australian market. This includes operational experience trading Southern Hydro's generation into the Victorian market, governance over listed Australian companies and major advisory assignments for industry players.
The Victoria Electricity management team bring with them the proven capability to grow and operate a successful electricity retail business and Infratil, through its Manager, Morrison & Co, brings the knowledge and governance expertise for success in electricity and gas purchase risk management.
Why the Australian electricity market?
The Victorian reforms of the mid 90s have established conditions for a viable competitive retail market. These reforms and subsequent national reforms have widened the competive retail of the market to all Eastern States.
The Victorian market was opened to full retail competition in January 2002. Over the medium term Victoria, and the Australian market generally, offers greater scope for independent energy retailers than New Zealand:
The Australian commercial regulator, the ACCC, is standing against generator-retailer integration, which shut out independent retailers in New Zealand. The generation market is more diversified, there are more participants, and there is more wholesale contract liquidity. Victoria Electricity is better able to tap competitively priced wholesale energy to package up for retail users. Opportunities for generation development are freely available based on deep markets for fuel supply, particularly gas in contrast to New Zealand. Victoria Electricity is looking for a relatively small share of the retail gas and electricity markets in Victoria. The State of Victoria has provided a good base for the establishment of a regionally based national retail operation.
What is the ownership of Victoria Electricity?
Victoria Electricity (VEL) is a wholly owned subsidiary of Infratil.In late March 2007 Infratil purchased an option from its Partners, which, it exercised in April to purchase all ownership interests of the Partners and gave Infratil 100% ownership.
Infratil purchased the 42% (fully diluted) it didn't already own for aaprox A$40m for the shares and options held by the partners (the options were cancelled).
What does the purchase imply for valuation of Infratil's investment?
Infratil moved to 100% ownership in April 2007.
An additional A$10m was payable if certain growth targets (300,000 customers) were reached, this was achieved in April 2008. There is also possible a further A$6m if additional stretch growth targets are reached over the next two years.
Infratil has invested $A13m for a business with an estimated value of A$80-90m for Infratil's 58%. Implied 100% valuation of VEL is A$120-142m (allowing for working capital this is approximately A$720 per customer at 31 December 2006 billed customer numbers).
Is an incentive likely to be paid and how much could this be?
VEL has been the most successful startup retailer in Australia. Infratil has invested $A13m for a business with an estimated value of A$80-90m for Infratil's 58%.
Infratil's Manager has been instrumental in driving this success and in risk management of the new venture over its five year startup phase. A performance fee is expected to be paid under the venture capital structure. The performance fee is assessed if the asset is sold or a fair market value is established and the asset is transferred into the more general utility portfolio. VEL may or may not exit the venture capital fund at this time. Infratil will give consideration to these issues in the near future. If the transaction valuation (as above) was to be adopted for exit from the venture fund an incentive payment in the range of NZ$10-15m may arise.
How does $720 per customer compare to other retail business transactions?
Infratil's purchase is based on a belief that VEL can continue to grow and win customers which add value to VEL. As customer numbers grow the purchase cost per customer averages down. The $720 per customer is based on December 2006 customer numbers of around 150,000 - by mid March 2007 customer numbers are approximately 180,000.
Other transactions, such as the purchases of retail customer bases in Queensland, have been at prices well over $1000 per customer and these customer bases are expected to need considerable investment in marketing to retain market share and they are not expected to grow.
Is Infratil committed to grow the business because of the earnout structure?
Infratil has no obligations to pursue growth but expects to continue investing in customer base growth as long as market conditions remain acceptable.
How does the VEL retail business currently relate to Infratil's 100% owned generation business Infratil Energy Australia (IEA)?
The IEA business is based in the same premises as VEL. IEA undertakes all wholesale trading for VEL as an agent of VEL. The IEA business sells wholesale power contracts to VEL (and also to other parties). These contracts form a minority but growing part of VEL's wholesale portfolio.
Will the generation and retail businesses be merged as Infratil owns 100% of both?
Infratil intends that the retail business will maintain a service/sales culture separate from wholesale operations and generation development. With 100% ownership Infratil would consolidate wholesale portfolio management and risk management with its generation business and establish a common Board for governance, however no material synergies are expected from any consolidation of VEL's retail business with Infratil's generation business.
Is Victoria Electricity exposed to spot market risks?
Victoria Electricity purchases wholesale energy hedge cover from a variety of Victorian generators and also futures contracts on the Sydney Futures Exchange. Residual spot market exposures are a small percentage of total purchases and are carefully managed to be within policy limits, allowing for customer load variations.
Victoria Electricity believe that a sustainable retailing operation needs to be based on diversified purchasing and that means active management of wholesale risk and purchasing from a wide variety of available risk management products in the market.
Victoria Electricity's forward spot risk is analysed on a weekly basis and reported to the Board each month, with immediate reporting of any non compliance with risk management policies.
Is Victoria Electricity exposed to shrinking supply of hedge contracts?
It is correct to observe that standalone retailers have found that the New Zealand market did not offer adequate ongoing access to wholesale hedge contracts. Vertical integration and the small number of players in New Zealand are considered the primary cause of these problems in New Zealand.
In Victoria the market is more diverse and there is a far lower level of vertical integration. Nonetheless there is a potential for the availability of hedge cover to decline if vertical integration and generator concentration continues to advance in Australia.
Victoria Electricity is ensuring it has sufficient time to organise a fully planned and unstressed sale of the business, or alternatively it may integrate into generation ownership, as part of its response to any developing deterioration in hedge availability.
Does Victoria Electricity have any connection with TrustPower?
Victoria Electricity is completely independent of TrustPower but the industry familiarity and goverrnance competencies of Infratil have clearly benefited from the long term involvement with TrustPower in New Zealand.
What are the key aspects for successful energy retailing?
Successful electricity retailing entails:
Customer service of a high standard and processes that are fully compliant with all regulatory requirements. Excellent information systems and processes with fully tested IT disaster recovery plans. Victoria Electricity has a proven low cost customer management / billing system developed and used in the electricity, gas, internet, and telecommunications sectors in three countries. Ongoing access to competitively priced wholesale electricity. Infratil's management has considerable expertise in understanding and managing electricity price risk and the ability to understand these issues. This is a key reason Infratil has been willing to progress this investment. Access to funding for sales and marketing, for the growth in working capital and for prudential security. Skilled management to bring together the retailing, systems, risk, and financing expertise. Victoria Electricity's experienced team is complemented by Infratil's managers.
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