Fitch Ratings has warned that the credit quality of New Zealand's power and utility sector will be harmed in 2009 because of price controls, sizeable capital expenditure on transmission projects and tighter economic conditions. Many utility and power companies are planning to raise hundreds of millions of dollars from individual and institutional investors through bond issues in the coming months. Offshore funding has become harder to come by, leading some to look for funding sources closer to home, including Genesis Energy's recent NZ$225 million retail bond issue. See our full list here. "Fitch's credit outlook for the sector continues to be negative, as it has been for the last few years. Regulatory decisions made in 2008 were broadly negative, although the agency welcomes legislative changes which should reduce future regulatory risk," Associate Director of Fitch's Energy & Utilities team Sajal Kishore said.
"Utilities, particularly those with regulated revenues, are often viewed as a safe haven for both debt and equity investment in times of market turmoil and economic slowdown. The lenders and investors in NZ power and utilities, particularly regulated utilities, continued to demonstrate their appetite for refinancing of these companies and equity investment in 2008. Fitch expects the NZ power and utility companies to remain relatively well placed to manage their refinance risk and liquidity in 2009, albeit at a higher cost," Kishore said. Kishore said that in the long term, the credit rating for the sector outlook is more positive, with the Commerce Amendment Act leading to more transparency and certainty of earnings. "A number of regulatory decisions announced in 2008 will lead to tariff adjustments which are unfavourable to some regulated entities, resulting in deterioration of their credit metrics. However, Fitch believes that the Commerce Amendment Act will lower regulatory risk from 2009 and beyond by providing greater transparency and certainty of earnings, leading to a positive impact on the regulated utilities' credit quality in the long term," he said. Kishore also said the new Government's review of the Climate Change Bill was likely to increase risk profile's of businesses in the sector, as it may improve the growth rate of companies. In doing so, this would expose them to more market risks. "Fitch expects the review committee to recommend a more pragmatic and business"friendly approach to meet NZ's greenhouse gas emission reduction obligations under the Kyoto Protocol. The Electricity Industry Reform Act proposes that the regulated companies be permitted to invest in renewable generation. Such investment should improve the growth rate of these companies, but exposes them to market risks "” and therefore increases their business risk profile," Kishore said.