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Utilities face power break-up as commodities fall

Some of Australia's largest utility and energy companies will face investor pressure to restructure their businesses in 2016 as falling commodity prices and technological disruption pile pressure on balance sheets, according to PwC.

Speculation is increasing in the market that Origin Energy may look at the potential of a demerger to boost the value of its cash-generative utility business with its exploration and production division to be run as a stand alone unit.

PwC said companies in Australia may increasingly face calls for restructuring after similar moves in Europe where utilities RWE and E.ON have hived off units to respond to a changing power mix including renewable energy.

"There is a lot of market talk about Australian corporate restructuring mirroring what has happened with the big utilities in Europe, where we've seen demergers and the floating of growth assets," said PwC energy, utilities, and mining leader Mark Coughlin. "If this does happen here we expect it to happen quite quickly and most likely during 2016."

'Huge appetite' for utility and infrastructure assets

With Asia Pacific power and renewables deal value nearly doubling from US$31.3 billion in 2014 to US$61.1 billion ($87.6 billion) in 2015, PwC said there is huge appetite for utility and infrastructure assets.

"Whether it is in Europe or the US, we are seeing transactions where there are spin offs of growth assets in Germany, there's restructures being looked at in France, there's consolidation in the US. We have a sector that is disrupting, transforming, changing and there will be corporate response strategies to make sure they get the best access to markets," said Mr Coughlin.


"​Our expectation is that given where things are at with regards to commodity prices, things will hasten in the industry pretty quickly if those transactions do occur. The critical thing is those companies have a reputation for doing things that create value. They will be transactions for the benefit of the shareholder – whether they are retail or institutional."

PwC said it also expects more pressure to be placed on state governments in Australia to consider privatisation options for their electricity assets as the $10.2 billion sale of Transgrid by the New South Wales government in November was the third-largest power deal globally in 2015.

"I think there was some market talk post the Transgrid deal about whether other states needed to think about it," said Mr Coughlin.

"It does focus owners' attentions – whether they are government- or privately-held – on what does the value mean for those types of businesses. The Queensland network businesses will be merged in 2016 so we have to expect there will be a sharper focus on returns and efficiencies in the government owned sector as well."

A report by professional services firm EY on Monday said Australia's renewable energy sector was on the cusp of a $10-billion revival as global infrastructure players from around the world prepare to invest into new wind farms and solar projects.

But PwC said while there is huge interest in the renewables sector globally, it does not expect a flurry of activity.

"The holders of those assets now are going to hold onto them," said Mr Coughlin. "Most Australian power and renewable assets are in the hands of long term players so it is hard to see much new activity coming from these portfolios any time soon."

The report also said it expects advances in battery technology to challenge the traditional electricity networks' business model.

"In our view they [batteries] are here to stay particularly because customers like them: customers like having control and I think batteries as they become viable and economic, it's just going to continue," he said. "Having solar, batteries and increased renewables is putting more and more pressure on the traditional generation sources. We are in an industry in transition."