Utilities are often prized because in an investment sense they are boring. Steady and predictable income streams that (*ahem*) generate regular dividend streams. However the outlook for Ausnet Services (AST) is getting more exciting by the day. This could be bad news for investors.
Many investors know that Ausnet is an energy infrastructure company. Victorian based, it owns pipes and wires that carry gas and electricity. It is the wholesale provider of high voltage transmission lines and provides ancillary services such as metering to its utility clients. Boring.
The backdrop to this discussion is the potential for interest rates globally and locally to increase over the coming years. This makes the regular dividend streams that many investors treasure less valuable as annuity income becomes more competitive in interest rate markets. The better income on stocks comes at a higher risk. Shares prices can go down as well as up. This is exacerbated where debt is present. At its last report AST had more than $6.6 billion of debt on its balance sheet.That’s just the backdrop. The politics of this highly regulated sector is turning toxic. The Victorian state government locked up all conventional and unconventional untapped gas supplies just as Australia’s gas export industry ramped up. The electricity network is de-stabilised by a rush to switch off traditional, carbon dioxide intense generators. The Australian Energy Market Operator has publicly warned of potential power black-outs this summer in NSW, Victoria and SA.
While the economics of this rigidly ruled industry are not straightforward these developments are not a positive for AST. Disrupted supplies mean disrupted earnings. Then there is the potential for the Federal and State governments of differing political hues to strongly disagree over energy matters, while both eying substantial budget gaps, with AST caught in between.
In fact analysts are forecasting a drop in profitability for AST over the next two years, another negative. While nobody yet is arguing the state is a tinderbox, AST is also vulnerable to potential bush fire claims. The last payout of $5 million dollars is not significant in light of AST’s current profitability. But catastrophe is by nature unpredictable.
In short risks are rising substantially for AST, and its investors. The good news is that AST shares are trading nearer all-time highs than most stocks. Shareholders may wish to take advantage.