The following post, while important in its way, is too boring to read. So be warned. Stop now while there's still time.
It's a sad paradox: there is no industry that's bigger, or more important than the energy industry. Yet it is so deadly boring that it's impossible to get anybody to read about it, let alone think about it.
No matter how much we hate those monthly bills.
The Dutch energy company Nuon posted a net loss for the third quarter.
This despite enacting rate hike after rate hike in the past several years.
What's going on here? And why should we care?
Well, Nuon calls itself a "company" but in fact its is owned entirely by city, province and federal governments.
So in one sense I suppose it doesn't really matter if this "company" makes or loses money. You have very little choice but to pay your electricity bill, and if Nuon loses money, the governments that own it will have to raise taxes to cover the difference. If it makes money, then governments can lower other kinds of taxes.
However, Nuon pays its executives and managers as if they were in the private sector, so to the extent they are doing a poor/ineffective/inefficient job, they are effectively throwing away money or stealing it from the public.
And now we come to the point:
I've read many and many an earnings report in my day, but never have I seen a report more lacking in transparency than what they published today. (Here it is in English, for anybody insane enough to care).
The only facts we are given are that sales were flat, while profit plummeted from EUR179 million profit to a EUR2 million loss.
Why is this?
They say part of the reason was losses on "fair value items" which I think means investments.
Here's another of the reasons for the loss, in Greek. Don't try to understand this, you cannot:
"The efforts in connection with strategic processes including the unbundling of Nuon into a network company and a production and supply company have led to an increase in, notably, ICT and personnel expenses. Other expenses concern the credit crunch, which necessitated a revaluation of an investment relating to a cross border lease."
Nuon spends a fair amount of its press release grousing about a Dutch government decision, that ordered energy companies to split apart their generation plants and delivery network (i.e. wires!) into two separate companies.
The government did that because they are imagining a future when lots of generation companies (read: alternative energy companies) will want access to the grid, and they don't want the big energy co's playing dirty tricks to keep them out.
So, to make sure everybody plays nice, in the future the grid will be run independently.
Nuon fought that decision tooth and nail, like the other 3 generation companies, to protect their monopoly. But Nuon (and Essent) had a special secret second reason.
Here's where it gets complicated, but it's juicy if you can understand it:
Before this decision came down the pipe, Nuon had struck a deal with U.S. companies to help them cheat U.S. tax authorities _ sorry, I mean 'take advantage of a U.S. tax loophole' _ and split the proceeds.
How did this work? The exact details and numbers have never been made public, but here's the basic idea:
Nuon sold its network to the U.S. companies, and then immediately leased it back for 100 years. Huh?
Because the U.S. "owners" were able to claim a tax deduction for depreciation of the assets.
An electricity network is a valuable thing, and the tax savings on its depreciation was a huge number.
There's a lot of room for variations on the theme above, but that's the basic idea.
Returning to the idea of Nuon as private "company": this kind of scam, I mean deal, called "Cross Boarder Leasing" is a very much private sector behavior. Organizations on two sides of the Atlantic colluding, I mean, cooperating, to lower their combined taxes. One can wonder why Nuon and Essent were allowed to do this. An answer would be LITTLE OVERSIGHT and LITTLE COMPREHENSION of the deal among their shareholders, i.e., governments; and of course little interest or understanding by the public.
The two things go hand and hand, n'est pas?
There was a buyback clause somewhere in the 100-year lease agreement, just in case Nuon had to repossess the network for some reason. Say, for instance, by order of the Dutch government.
Which is what happened, effective July 1, 2008.
So now Nuon
a) no longer gets the expected benefit of its side of the deal
b) probably has to pay its U.S. partners for the unexpected losses on their side of the deal.
Without the details of the deal, it's impossible to know how much money Nuon lost as a result; things could have been hedged or insured in various ways.
But I believe the company itself bandied about numbers like 1 billion euros as their 'worst case' loss when they were lobbying against the Dutch government doing this.
How do I know all this stuff? A little bird told me. Otherwise stated: Nuon, feel free to contact me to deny it.
Or maybe I'm dead wrong. Still sure would be nice to understand why it is that Nuon is hiking rates, & energy prices were sky high for most of the 3rd quarter but they are still losing money.
Nuon shareholders, are you listening?
Dutch press? NRC?
Monday, November 3, 2008