Qld Audit Office identifies risks to energy businesses from State debt reshuffle

In a report published today on Queensland’s government-owned energy businesses, the Queensland Audit Office has flagged risks associated with the Government’s debt reshuffle (on the debt reshuffle, see this QEW post from December last year). Here is the relevant extract from p.3 of the QAO report with emphasis added:

“The state government continues its position of 100 per cent of net profits after tax from government owned corporations (GOC) being returned as dividends, except for CS Energy which returns 80 per cent. GOC fund these dividends through cash and borrowings, and out of realised and unrealised reserves.

Over the last two years, $1.7 billion in cash has been taken out of energy entities and $3.7 billion in new borrowings has been drawn to fund the payment of dividends.

The energy sector will meet the increased interest expense caused by the 4 per cent increase in debt position this year. In the longer term, if dividends continue to be funded through borrowings and unrealised reserves there is a risk that reserves will be depleted. This may result in a reduced ability to fund future dividends and service the increased debt levels.

Additionally, if expenses continue to grow at a rate greater than revenue, there will be less profit to pay for asset replacement and repayment of debt, and ultimately lower returns to shareholders through dividends.”

The Government has artificially improved its budget bottom line by shifting debt on to the GOCs and forcing them to pay interest expenses that otherwise would directly impact the budget balance. And it is requiring the GOCs to pay a high rate of dividends based solely on their accounting profits, without regard to the actual cash they have available (noting that cash might be needed to fund CAPEX or repay debt), meaning the GOCs have had to borrow to pay dividends to the Government. As the QAO has suggested, this is not a sustainable long-run strategy.

qao_energy_report

The QAO has flagged risks with the Government’s debt reshuffle

Advertisements
This entry was posted in Budget, Queensland Government, Uncategorized and tagged , , , , , . Bookmark the permalink.

2 Responses to Qld Audit Office identifies risks to energy businesses from State debt reshuffle

  1. Alistair Robson says:

    As a shareholder in numerous companies I would be very concerned any company handed out 100% of profits in dividends. I often vote against increases in dividends. Some profits need to be retained for investment or pay down debt. It sends the wrong market signals and incentives to operators of these SOC’s (or GOC’s as you call them north of the Tweed).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s