Buller Energy takes stake in struggling electricity retailer

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West Coast lines company Buller Energy will take a controlling stake of at least 65 per cent in the struggling NZAX-listed electricity retailer Pulse Utilities New Zealand, which said it is suffering a "cash crisis".

The deal, which will require shareholder and Takeovers Panel approvals, will see Buller swap debt for equity and participate in a rights issue in a series of transactions that will cost Buller a net $3.42 million.

The NZAX-listed company announced a $6.6 million loss for the year to March 31 last week, but only revealed today it had been "reliant on the financial support of Buller Electricity Ltd. for several months".

"This arrangement is not sustainable," said Pulse managing director Dene Biddlecombe, who told shareholders to expect full documentation and an independent expert's report within six to eight weeks.

Buller will capitalise $1.12 million of loans to Pulse at an issue price of 0.05 cents a share, and will subscribe for $5 million of shares in a $7.5 million rights issue at the same deeply discounted price to the share's last traded price of 38 cents a share.

Buller will claw back $2.7 million in fees for a $9 million guarantee that will allow Pulse to meet prudential deposit obligations that it must pay to participate in the wholesale electricity market.

The two year guarantee effectively imposes an annual interest rate of 15 per cent on Pulse on the aggregate value of the guarantees, by issuing 54 million shares at 0.05 cents per share.

"Completing the capital-raising is essential to putting Pulse back on a sound financial footing and allowing it to get through its current cash crisis and achieve its potential," said Biddlecombe in a statement.

"Pulse has been unsuccessful in its latest attempts to raise capital privately, given the recent volatility in and lack of understanding of electricity markets by potential investors."

Pulse has struggled with the impact of volatile spot prices because of their impact on the size and variability of the working capital sums required for prudential deposits with the NZX, which runs the wholesale electricity market.

The company's rapid customer growth has exacerbated the problem and it is cutting back customer growth targets for the year to March 2013 from 61,000 to 54,200.

Making matters worse, upper North Island wholesale electricity market spot prices spiked to over $20,000 per Megawatt hour during a planned transmission outage on March 26, prompting an Electricity Authority investigation which declared the event an "undesirable trading situation".

Prices will be reset at $3000 per MWh - still five to 10 times higher than spot prices on normal trading standards - but the volatility is proving a turn-off for investors.

Pulse convertible note-holders will also switch 75 per cent of their holdings into shares, and convert the remaining 25 per cent to most of their holdings to an interest free five year loan.

In the last year, Pulse has grown from just 3000 customers to 24,573 in May, and switched focus from smart meter offers to cut-price electricity deals through its Just Energy sub-brand.

The lower customer targets coincide with a strong spike in inquiry from would-be customers in response to the Electricity Authority's campaign encouraging price comparison among retailers.

"We have had almost 3 times the amount of interest in online sign ups, sales coming in through the call centre have approximately doubled and we have had about 200 more requests than usual from the Powerswitch website," Pulse's marketing director, Anna Moore, said last week.