A Carbon Tax Down Under

Australia’s plan to introduce a tax on carbon emissions cleared a major political hurdle last week, as the country’s lower legislative house voted 74-72 in favor of the law, which virtually assures its passage through Parliament.

“It will provide business and investors with the certainty and confidence that they require to make long-term decisions about the future allocation of their capital.” That was the reaction of Australia’s Institute of Chartered Accountants when the federal government first proposed a price on pollution.

Reaction from some leaders in affected industries–in February 2011, when the plan was first introduced, and in mid-July, when Prime Minister Julia Gillard fleshed out final, critical details–hasn’t been so clinical. Heather Ridout, chief executive of the Australian Industry Group, said that the timing of the bill couldn’t be worse given weaker economic circumstances, the lack of global and domestic consensus on issues related to climate change and the existing structural pressures on manufacturing.

The Business Council of Australia, which represents big companies, wants amendments to the measure so that Australia acts only in tandem with other nations over time and adjustments to make Australia competitive in case of economic shocks. But Frank Jotzo, Director of the Center for Climate Economics and Policy at the Australian National University, concurred with the view that carbon pricing legislation will give businesses more certainty for their investments.

If American experience is any guide, this particular set of environmental regulations won’t be as debilitating for business as some interested observers would have you believe.

The wisdom of the Land Down Under assuming a leadership role on an issue of planetary scale is questionable, particularly considering the impact it will have on industries that have driven the country’s economy for a decade. But in whole Australia’s “Clean Energy Plan” seems relatively benign. Here are details of the Plan.

Beginning Jul. 1, 2012, Australia’s 500 biggest polluters will pay a tax of AUD23 per metric ton of carbon emitted. The carbon tax will rise by 2.5 percent per year before Australia transitions to the largest cap-and-trade scheme outside Europe in 2015. The market will then set the price of carbon emissions and emissions credits.

The carbon permits part of the plan is based on the global theory that because greenhouse gas emissions move around the earth at high altitudes, it doesn’t matter where emission reductions take place as long as fewer greenhouse gases enter the world’s atmosphere. As businesses reduce their output the price they pay for permits will decline, theoretically incentivizing investment in energy efficiency.

The government has set aside AUD9.2 billion over the first three years to help industries adjust to the new tax, including AUD5.5 billion for upgrading coal-fired power plants that aren’t closed down; AUD1.3 billion for coal mines to target high-methane emissions; and an additional AUD1.3 billion to create jobs at the mines most affected by the tax.

High-emission exporters, such as steel, aluminum and pulp and paper makers, will get free carbon permits to help them through their pollution abatement period. The steel industry, which will receive funding from the AUD9.2 billion “Jobs and Compensation” package, was granted an additional AUD300 million in “adjustment payments.”

The government will buy out and close down the worst coal-fired power plants, which in total have an output capacity of 2,000 megawatts of electricity, including the controversial Hazelwood power plant in Melbourne, Victoria, reputed to be the least carbon efficient power station in Australia. A AUD10 billion Clean Energy Finance Corporation will be established to invest in new energy technology. And AUD3.2 billion is earmarked for the Australian Renewable Energy Agency.

Fuel for most business and personal transportation is excluded from the carbon tax, but owners of heavy transport vehicles will start paying the tax in 2014. The government originally planned to impose a carbon tax on automobile fuel but later decided it would be a politically risky issue. Domestic aviation fuel taxes will be increased by an amount equal to the carbon tax. Agriculture isn’t subject to carbon pricing.

Average assistance to households under the plan is forecast to offset the cost-of-living increases that will result as carbon-tax-paying polluters pass on costs to customers. This will form the cornerstone of Ms. Gillard’s defense of her Clean Energy Program, which still faces considerable public opposition.

The carbon tax will land squarely on coal-fired power plants that produce 77 percent of the country’s electricity and iron and mineral mining companies that account for 35 percent of Australian exports. “Mid-carbon” companies that have relatively low emissions-generation portfolios and exposure to “brown” coal are likely to do well under the government compensation scheme.

The ADR List

the great majority of the companies comprising How They Rate have US symbols, many because they actively seek to raise capital here on their own accord. That means they comply, to varying degrees, with US Securities and Exchange Commission filing requirements for foreign companies and with US accounting principles. Others trade here because a sponsoring institution has effectively created a secondary market for the shares, without the underlying company’s active participation.

Shares traded on US over-the-counter (OTC) markets bearing a final “F” in their five-letter symbols are basically home-listed shares trading in a market created by and for US institutions. Individuals can buy and sell here, too. Prices basically reflect Australian Securities Exchange (ASX) prices and also reflect changes in the relationship between the US dollar and the Australian dollar. One “F” share represents one ASX-listed share. The dividend you receive in respect of an “F” share is the dividend paid in respect of the ASX-listed share, adjusted for currency effects.

An American Depositary Receipt (ADR) is a certificate that represents stock of a foreign company. ADRs are listed on US stock exchanges or the OTC Bulletin Board or Pink Sheets. Those that trade OTC have five-letter symbols ending with the letter “Y.” All transactions, including dividend payments, are conducted in US dollars.

One ADR certificate may represent one or more shares of the foreign stock; it can also represent a fraction of a share. For example, one Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY) ADR, which trades under the symbol TLSYY, is worth five ordinary shares that trade on the Australian Securities Exchange under the symbol TLS. Australia & New Zealand Banking Group Ltd’s (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) ADR, ANZBY, is worth one Australia-listed ANZ share.

Because many ADRs don’t have a one-to-one ratio between the depositary receipts and the shares of stock, financial ratios are often not included in stock listings. Data in Australian Edge Portfolio tables and How They Rate is derived based on Australian Securities Exchange symbols so is as complete as you’ll find anywhere.

Foreign companies themselves often “sponsor” the creation of their own ADRs. These are called “sponsored ADRs.” There are three levels of sponsorship.

A Level I sponsored ADR is created by a company because it wants to extend the market for its securities to the US. It does not, however, want to register with the Securities and Exchange Commission (SEC) or conform to generally accepted accounting principles (GAAP). Level I ADRs trade on the OTC Bulletin Board or Pink Sheets trading systems, usually but not exclusively by institutional investors. Australia & New Zealand Banking Group’s is a Level I ADR.

Level II and Level III sponsored ADRs must register with the SEC, and financial statements must be reconciled to generally accepted accounting principles. A Level II ADR requires partial compliance with GAAP, while a Level III ADR requires complete compliance. A Level III sponsorship is require if the ADR is a primary offering and is used to raise capital for the company. Only Level II and Level III sponsored ADRs can be listed on the New York Stock Exchange (NYSE), the American Stock Exchange or Nasdaq. Telstra Corp sponsors a Level III ADR in the US, meaning it’s actively seeking to raise capital here.

An unsponsored ADR is created by a US investment bank or brokerage that buys ordinary shares on the underlying company’s home market then deposits them in a local custodian bank. This depositary bank then issues shares that represent an interest in the stocks and handles most of the transactions with American investors, serving both as transfer agent and registrar for the ADR.

The shares of the foreign stock held in the custodian bank are called “American Depositary Shares,” although this term is sometimes used as a synonym for “American Depositary Receipts.” Unsponsored ADRs can’t be listed on the major American stock exchanges because they aren’t registered with the SEC and lack other necessary qualifications.

The price of an ADR is determined by supply and demand but will generally track the price of the underlying ordinary share. When dividends are paid, the custodian bank receives it and withholds any foreign taxes, exchanges it for US dollars and then sends it to the depositary bank, which then sends it to the investors.

The US depositary bank handles most of the interaction with US investors, including rights offerings, stock splits and stock dividends. Sponsored ADR investors may receive communications, including financial statements, directly from the company.

Here is a list of companies in the How They Rate coverage universe that have an ADR listing in the US.

Dividend Watch List

The business of Australian Edge is to identify businesses capable of paying sustainable and growing dividends over time. The corollary of this mandate is to identify those businesses that are not capable sustaining or growing dividends. Next month, in the November Australian Edge, we’ll debut The Dividend Watch List.

For now, here’s a look at changes in How They Rate–Safety Ratings and advice, including “buy under” prices–since the Sept. 27 preview issue.

Amcom Telecommunications Ltd (ASX: AMM, OTC: None) now has an AE Safety Rating of 3, up from 2 because it has little debt and no maturities through 2013. It’s payout ratio is also below the “Very Safe” threshold for its industry, Telecommunications. Buy under USD0.85.

APN News & Media Holdings Ltd (ASX: APN, OT: None) is a sell because of the deterioration of its outdoor advertising business. SELL.

Aquarius Platinum Ltd (ASX: AQP, OTC: AQPBF, ADR: AQPTY) now has an AE Safety Rating of 2, up from 1, because it has no maturities before 2013, and its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials. Aquarius Platinum remains a hold.

Billabong International Ltd (ASX: BBG, OTC: BLLAF) now has an AE Safety Rating of 2, down from 3 because of its debt coming due before 2013 exceeds 10 percent of market capitalization. Hold.

BlueScope Steel (ASX: BSL, OTC: BLSFF, ADR: BLSFY) maintains its 1 Safety Rating but is downgraded from “hold” to “sell” because of the extent of management’s incompetence. BlueScope Steel is a sell.

Cardno Ltd (ASX: CDD, OTC: COLDF) now has an AE Safety Rating of 4, up from 3, because it has low debt and no maturities before 2013. Its payout ratio is below the “Very Safe” threshold for its sector, Industrials, and a solid cash position as well as sound underlying fundamentals suggest 18 to 24 months on clarity on the dividend. Buy under USD5.25.

Coal & Allied Industries Ltd (ASX: CNA, CAIQF) is the subject of a AUD125 per share joint takeover offer by Rio Tinto Ltd (ASX: RIO, NYSE: RIO) and Japan-based Mitsubishi Corp (Tokyo: 8058, OTC: MSBHF, ADR: MSBHY). Hold.

CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY) is a new addition to the AE Portfolio Conservative Holdings. It’s now a buy under USD35.

Fisher & Paykel Healthcare Corp Ltd (ASX: FPH, OTC: FSPKF) is generating solid revenue and investing in the future of its business. Hold.

Foster’s Group Ltd (ASX: FGL, OTC: FBRWF) is the subject of a AUD9.9 billion takeover offer from SABMiller. Hold.

Goodman Field Ltd (ASX: GFF, OTC: GDFLF, ADR: GDFLY) is a sell because of the magnitude of refinancing needs and the weakness of its business. SELL.

Independence Group NL (ASX: IGO, OTC: IPGDF) now has an AE Safety Rating of 2, up from 1, because it has no maturities before 2013, and its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials. Independence Group remains a buy under USD4.50.

Iress Market Technology Ltd (ASX: IRE, OTC: None) now has an AE Safety Rating of 3, up from 2 because it has no debt and therefore no maturities before 2013. It also has zero dividend cuts over the past five years. Buy under USD7.50.

Medusa Mining Ltd (ASX: MML, OTC: MDSMF) now has an AE Safety Rating of 4, up from 1, because it has no debt and therefore no maturities before 2013. Its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials, and a solid cash position as well as sound underlying fundamentals suggest 18 to 24 months on clarity on the dividend. Medusa Mining is a buy under USD7.50.

Minara Resources Ltd (ASX: MRE, OTC: MREJF) now has an AE Safety Rating of 2, up from 1, because it has no maturities before 2013, and its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials. Hold.

New Hope Corp Ltd (ASX: NHC, OTC: NHPEF) now has an AE Safety Rating of 5, up from 2 because it has no debt and therefore no significant maturities before 2013, its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials, and a solid cash position suggests the payout is sustainable for the next 18 to 24 months. Crucially, there have been no dividend cuts during the past five years. New Hope is a buy under USD6.

Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY), a new addition to the AE Portfolio Aggressive Holdings, is a 3 under the Safety Rating System, up from 2. Because of a low payout ratio, good visibility and no cuts in the last five years. Newcrest Mining is a buy under USD40.

OM Holdings Ltd (ASX: OMH, OTC: OMHLF) now has an AE Safety Rating of 1, down from 2, earning a point only because its payout ratio is below the “Very Safe” threshold for Basic Materials. SELL.

OneSteel (ASX: OST, OTC: OSTLF, ADR: OSTLY) now has an AE Safety Rating of 1, down from 2, earning a point only because its payout ratio is below the “Very Safe” threshold for Basic Materials. Hold.

Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) now has an AE Safety Rating of 3, down from 4 because its payout ratio exceeds the “Very Safe” threshold for its sector, Utilities. Buy under USD15.

OZ Minerals (ASX: OZL, OTC: OZMLF, ADR: OZMLY) now has an AE Safety Rating of 4, up from 2, because it has no debt and therefore no significant maturities before 2013, its payout ratio is below the “Very Safe” threshold for its sector, Basic Materials, and a solid cash position suggests the payout is sustainable for the next 18 to 24 months. OZ Minerals is a buy under USD12.50.

SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF, ADR: SMSUY) now has an AE Safety Rating of 3 because it has no debt and therefore no maturities before 2013. It’s payout ratio is also below the “Very Safe” threshold for its industry, Technology. Buy under USD6.

SP Ausnet (ASX: SPN, OTC: SAUNF) now has an AE Safety Rating of 3, down from 4 because of significant refinancings between now and the end of 2013. Hold.

TABCORP Holdings Ltd (ASX: TAH, OTC: TABCF, ADR: TACBY) now has an AE Safety Rating of 1, down from 2, earning a point only because its payout ratio is within the “Very Safe” range for its sector, Consumer Services. Hold.