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NSW electricity privatisation enters final stages

The sale of the New South Wales government-owned Macquarie Generation is getting nearer to completion with ERM Power (ASX: EPW) advising the market that it had been shortlisted by the NSW government for the final round of the sale process. Currently ERM Power — which is Australia’s fourth largest buyer and seller of electricity — supplies around 30% of the energy requirements for NSW via two baseload power stations.

In commenting on the potential acquisition, the Managing Director of ERM, Mr St Baker noted that, “At the right price, generation can increase financial returns and deliver significantly vertical integration benefits. These include improved hedging efficiency through greater use of physical hedges, accelerated sales growth, greater contracting flexibility and a significant reduction in prudential and working capital.”

Given the strategic nature of the Macquarie Generation asset, ERM is expected to be up against some still competition including from AGL Energy (ASX: AGK), which according to reports has also been shortlisted. Fellow electricity provider Origin Energy (ASX: ORG) is not believed to be bidding as in August it completed the acquisition of Eraring Energy, another NSW government-owned power generation asset.

According to figures released by the NSW Audit Office, the combined profits from NSW’s electricity assets rose around 50% to $1.54 billion in the year to 30 June 2013, which highlighted why these types of assets are so coveted. With NSW’s electricity retailing operations now privatised and the power generating assets nearly all privatised, the NSW government is expected to in the not-to-distant future to also put the remaining power distribution assets up for sale.

Foolish takeaway

While the price paid of course matters, the opportunity to purchase strategic assets being sold by the government can be very appealing and only happens once. The benefits that could accrue to shareholders from the current round of asset privatisations have the potential to boost incremental shareholder returns for years to come.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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