Power shares keep falling

Photo / Mark Mitchell

Investors take seriously Labour and Greens' plan to shake up the electricity market

Uncertainty created by the Labour Party and Greens' plans for the electricity market helped drive the share prices of the main NZX-listed power generators sharply down yesterday, creating more doubt about the likely pricing of shares in Mighty River Power and the other energy assets the Government has up for partial sale, analysts said.

They said the market had taken seriously the Labour-Greens plan to replace the current system with a model where a government-owned single buyer would set prices for generators, and that the share prices for the main power companies had responded accordingly.

The parties said that if they won next year's election they would establish a new agency called New Zealand Power which would act as a single buyer of wholesale electricity. The agency would have the power to set prices based on generators' operating costs and a fair return on capital.

Nick Lewis, an analyst at Wellington-based brokers Woodward Partners, said it now looked increasingly likely that Mighty River would be priced at the lower end of the $2.35 to $2.80 price range.

He added there may also be a problem as to how overseas investors - which the Government sees as an important part of the partial privatisation process - would view a possible change in the regulatory framework.

Lewis, a former risk manager and analyst responsible for leading debt and equity analysis of US utilities at JP Morgan, said there could be a "chilling" effect for potential overseas investors.

"If it comes to be, as proposed, it would absolutely require a writedown of the generation assets by all the generator-retailers in the market - the three state-owned enterprises, plus Contact and TrustPower," he said.

Shares in Contact Energy, the biggest listed energy generator and retailer, dropped by 15c, or 2.75 per cent, to $5.31, having already fallen by 26c on Thursday. TrustPower dropped 38c or 5 per cent to $7.18. Utilities investor Infratil, which has a majority stake in TrustPower, dropped 3c, or 1.3 per cent, to $2.30.

Brokers said the three stocks had attracted higher-than-usual volumes and that it looked like a mixture of retail and institutions selling.

Contact, which is 52 per cent owned by Australia's Origin Energy, has seen its market capitalisation drop by $301 million since the proposal was announced on Thursday.

Analysts said the week's political developments would add another element of uncertainty in a market that was already questioning the future of the country's biggest power user, the Tiwai Point aluminium smelter, and the impact that its possible closure could have on supply and demand.

They said the possibility of a new regulatory regime coming into being, either at the next election in 2014 or the one after in 2017, or even a watered down version coming into force at some point, was bound to influence how the Mighty River shares were priced. A so-called book-build, or auction style bidding process, which involves institutions putting in their bids within the indicative $2.35 to $2.80 range, is to start on May 7, and the week's developments meant bids were likely to be at the low end.

"It's a reasonable assumption that bids will be lower," BT Funds Management portfolio manager Matt Goodson said.

JB Were investment strategist Bernard Doyle said a move to a state buyer of power risks being a retrograde step for the New Zealand economy.

"Secondly, we believe it will prove damaging for New Zealand capital markets, and comes at an unfortunate time given the significant progress made here since 2010."