Power companies likely to ‘sue for peace’ if Labour-Greens take office

By Pattrick Smellie

Oct. 3 (BusinessDesk) – Electricity companies would be likely to “sue for peace” if a Labour-Green coalition government takes power at the 2014 election, to try to forestall plans to upend existing electricity markets, says Edison International Research in analysis of the Meridian Energy float.

Edison also suggests that electricity generators with large natural gas requirements to run some of their power stations would avoid “negotiations to contract further gas due to concern that, if the NZ Power proposal was implemented, they as thermal plant operators would not hold decision rights over when or even if they would be able to generate and dispatch to market.”

The Opposition’s NZ Power proposal would institute a central buyer system, rather than the current wholesale market, to determine the prices paid for electricity generation from each power station, based on its historic cost. Edison research analyst Bruce Mackay told a teleconference that, at this stage, the firm had taken no view on what form such a “suing for peace” might take.

“Any proposal to make changes on the scale contemplated has impacts on all the participants” in the electricity market, Mackay said. “I think there’s a range of options there. There are incentives for generator-retailers, even Transpower, to try and negotiate or engage to get an outcome that doesn’t impact on them as severely as it currently stands.”

Edison’s is the second of two independent research reports commissioned by the stock market operator, NZX, to give retail investors access to alternative sources of advice on the Meridian float, which is open for registrations until Oct 18.

NZX has had no influence over the content of the reports and commissioned them in response to concern there was too little independent advice available before the May float of MightyRiverPower.

Since Meridian owns older hydro-electric plant, most research reports suggest the impacts on its profitability would be the most severe from the Labour-Greens proposal, although most also expect the proposals to take years to implement because of their complexity and the number of existing contracts that would have to be unwound.

The Edison report notes that, since the government would continue to own at least 51 percent of Meridian and MRP, it would suffer financial consequences from lower dividends, as would private investors.

“The great imponderable is whether a Labour-Green government would push ahead with this proposal, given the extent of difficulties involved with implementation, the likely self-inflected damage to its own financial position and the disruption to market arrangements” the Edison report says.

The firm, which conducts fee-for-service analysis and does not trade shares, says Meridian is a “cash cow” and places a “fair value” on its shares of $1.81, the same mid-point picked by the other firm contracted by NZX to conduct research, Wellington’s Woodward Partners.

While Edison puts the impact of full implementation of the NZ Power proposal at 70 cents per share, it discounts that back to 15 cents a share on the basis that the risk is “low and that the offer price more than accounts for the current risk adjusted impact to Meridian.”

The 49 percent stake is being offered to New Zealand resident retail investor at a capped issue price of $1.60, with $1 due up-front and the remainder in May 2015, although if the issue price finally decided comes in lower than $1.60, retail investors will only need to pay the lower price.

It suggests the likelihood of the Tiwai Point aluminium smelter closing in the near future is “overblown” and that arrangements in place for the smelter to take less energy from 2017 may work in Meridian’s favour.

Above all, its valuation rests on the expectation that Meridian will be paying dividends based on operating cash flow, which will be well above reported net earnings, for the foreseeable future since it has a conservatively geared balance and sheet and limited plans for new capital expenditure.

For that reason, Edison does not put much store by its valuation on a price-earnings ratio basis for Meridian of $1.36.

“Given Meridian’s cash-rich investment profile, P/E is our least favoured valuation method. We think the market will trade Meridian primarily on a yield basis, given the attractive yield.

(BusinessDesk)

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