Nuon Posts a Loss? Wake Up, Netherlands

(beat)

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:

(yewenyi)

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.


(yanivg)

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?
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Groenink strikes back

A fascinating interview with ABN Amro CEO Rijkman Groenink (see earlier post "hero or goat") in today's NRC Handelsblad, and a good scoop for the paper.

Unfortunately it's all in Dutch _ somebody would do the banking world a favor if they would translate it into English, but I couldn't do that here without violating fair use rules, I don't think.

Suffice it to say, he continues to prefer Barclays as a merger partner, despite the financially much better offer from the RBS consortium, which he views as hostile.

"The Consortium doesn't need to be concerned with us (management) at all, and it hasn't, right up to this moment. Even the discussion with the employees was done (over our heads) directly with the unions. I wouldn't call these negotiations, because they aren't: there's a un-asked-for and complete offer on the table, and we have nothing to say about it _ at most, we can say that we find some things unacceptable and that we'll make that public soon if we don't like it."

-NRC

Here's a link to the AP writeup in the Herald Tribune
He also says in the interview that:

-the talks were "businesslike" and he wasn't directly involved (no surprise there; the board committee is handling talks from here on out).

-ABN 'has performed fine with respect to comparable European banks.'

(there's truth in that _ in terms of financial returns, but not share price, I think, and that's what turned the company into prey. One wonders: would Groenink not be trying to acquire Fortis if it were on the ropes?).

-the Supreme Court decision "completely supported us"

(again, there's obviously truth in that: the decision said they had the legal right to sell LaSalle. But he doesn't mention the advice of the Attorney General, which declined to comment on whether the sale was a good or fair decision from a shareholders' perspective).

-He makes a good point that there hasn't been nearly the protectionist outcry in the Netherlands about 'losing' the country's largest retail bank that you might hear in France or even the U.S.

Imagine in the U.S. if Bank of America Corp. were bought by a Japanese bank.

For some people, the lack of worry by even the country's Socialist Party should be a compliment to the Dutch capitalist trading nation spirit. In any event it's probably a bit disingenuous of Groenink to suggest that ABN will be destroyed in the Netherlands by an acquisition _ whether it's Barclays-ABN or Fortis-ABN, the core business in Holland (and each region) will survive largely intact.

-Finally, one thing that came as a surprise to me was an NRC assertion that many Dutch ABN employees actually prefer Fortis to Barclays as a partner. Groenink seems to agree, saying "of course in a merger some divisions aren't so thrilled with the new partner," and that it boils down to who's likely to lose jobs, which vary in each scenario.

For me, the 1+1=2 logic has always been that the Fortis merger will lead to layoffs in the Netherlands as they combine retail branch offices, but I've never seen an analyst report breaking it down, and Fortis says otherwise. And it's true that having the Barclays headquarters in Amsterdam would boost the city's standing as a financial center.

Well, we'll see if Barclays doesn't have a last ace up its sleeve before the game is over.

In all, good fun on a Saturday.

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ABN CEO Rijkman Groenink, Genius or Goat?

This story has been dragging on for months now, but an end is in sight:

"The ruling clears away legal uncertainties and any bidder wishing to purchase ABN Amro's remaining operations -- plus the $21 billion in cash it is getting for LaSalle -- can step forward.

British bank Barclays PLC has the inside track. It already has agreed with ABN's management to buy the bank in an all-share deal worth 63.7 billion euros ($87.6 billion).

But a rival consortium led by Royal Bank of Scotland PLC, which had hoped to acquire LaSalle as well, said Friday it will bid before a July 23 deadline."

-Associated Press

So, there are few who will care to know the intricacies of this case, but the bottom line is, ABN Amro CEO Rijkman Groenink agreed to sell his bank's U.S. arm LaSalle for $21 billion in four days time.

Was that a stroke of genius, or mismanagement?

RBS will now probably bid EUR1 per share less for ABN ex-LaSalle (a number that is buried deep in their preparatory bidding documents) than otherwise. If that turns out to be true, Groenink will have lost around 3 percent for shareholders by favoring what he knew was very likely to be a worse deal.

His reasons have never been fully explained; he said he believes the worse deal will be better for ABN in the long run, but pretty much everybody else (analysts, employees, customers) disagrees or is neutral. He personally stands to LOSE money as a result, so you can't accuse him of financial self-interest. One possibility is that this was an ego-driven patriotic self-interest in preserving some kind of 'legacy' of ABN.

If so, that's weak for any number of reasons. Not least: in my experience, nobody is going to feel much nostalgia if ABN disappears completely.

On the other hand, at least Groenink made sure ABN got a reasonable price for LaSalle. At the shareholders meeting, he was challenged that only a fool would sell something worth $21 billion after four days of negotiations.

Groenink's response: (paraphrased) 'I wouldn't be prepared to buy something valuable that I don't own after four days of due diligence. But I would be prepared to sell something I do own and know the true value of.'

I think he can make a fair argument he knew _ or thought he knew _ what he was doing, even if later events prove(d) him wrong. At least he got a sane price for LaSalle, even if it enraged shareholders and brought a legal hell down around the company.

It's noteworthy that the CFO jumped ship very, very soon after this decision was made, and the board stepped in to handle future negotiations _ essentially putting Groenink on the sidelines.

After Friday's court ruling, the shareholders rights group VEB complained bitterly that the law allowing management to make major strategic decisions without shareholder consent ought to be changed.
Under the current system, management is expected to inform shareholders about its general intentions, but in the end it can generally do what it likes. Shareholders' only recourse is to throw the bums (well, the bums supervising the bums) out if they disagree.

I've heard impassioned arguments on either side of the argument as to whether that structure should be changed.

Et Tu?
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