State owned Meridian Energy may lose ownership of the Manapouri power station, pictured here, under the latest shake up proposal for the energy sector. Photo / Kenny Rodger
Proposals to increase electricity sector competition may affect New Zealand power companies' credit worthiness, but Government backing of the state-owned companies would mitigate against an actual downgrade, says Standard & Poor's.
The ratings agency yesterday published commentary on last week's Government proposals to restructure the electricity industry, which include the
proposal for a swap of significant assets between state-owned Meridian and Genesis.
"If adopted by the Government, the recommendations may affect the credit quality and ratings of generator retailers operating in the sector," S&P said.
S&P gave prominence to the asset swap proposal which would see Meridian transfer its Manapouri hydro plant and White Hill wind farm to Genesis in exchange for that company's e3p gas combined cycle plant at Huntly, and a small 40MW gas-fired plant at the same site.
Any effect on the two companies' BBB+ ratings would depend on how such a transaction was implemented.
Of particular concern to S&P was whether the companies were given sufficient time to adjust to their new structure, the transfer of obligations and contracts, including Meridian's supply contract with Rio Tinto's Tiwai Point aluminium smelter and "increased uncertainty around the future earnings of gentailers (generator-retailers) ahead of the Government's final decision".
While S&P's commentary does not mention any implicit Government support for the state-owned gentailers which might mitigate against a negative revision of their ratings, Standard & Poor's analyst Chris Cudsi said this had been taken into account.
"It could be that you get increases in operational risk for one or more of the businesses but some of the supporting factors, including the level of Government support, can offset that so that the rating doesn't change."
The asset swap plan was one of a number of proposals put forward by the six-member Electricity Technical Advisory Group which reported that retail electricity price rises had been excessive in the past seven years.
The group said price rises were mainly the result of the increased cost of gas after the depletion of the Maui field, a lack of competition among retailers and dry years.
The group also proposed measures to improve wholesale and retail competition, including changes to tariffs, encouraging customers to switch suppliers, and allowing lines companies to move into retailing.
S&P said a "material" increase in competition and resultant effect on profitability would weigh on the credit quality of Contact Energy, Mighty River Power, Meridian and Genesis.
