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UBS analyst's report suggests electricity sector would experience credit downgrades and reduced dividend payouts, including from SOEs

UBS analyst's report suggests electricity sector would experience credit downgrades and reduced dividend payouts, including from SOEs

The electricity sector will likely be hit by credit downgrades and reduced dividend payouts if the Labour/Greens power policy is implemented, according to UBS analyst Wade Gardiner.

In a report, Gardiner said that because Labour/Greens had estimated the cost to the power sector at NZ$500-NZ$700 million it was "hard to imagine this will not result in credit rating downgrades".

"Credit downgrades and reduced [operating earnings] would essentially mean the sector needs to reduce debt, and accordingly we expect distributions will be materially effected for several years. This includes SOE distributions to the Government," he said.

At the moment there is a "blackout" on most analysts giving out up-to-date information and analysis on Mighty River Power because that company is offering shares to the public.

However, the analysts are not prevented from doing reports on other companies in the industry.

Gardiner's report is specifically on Contact Energy (which itself was once an SOE). He has slashed his valuation of it, based on what he believes a Labour/Greens coalition could do to the value of it. He has also changed his recommendation on Contact from a "buy" to a "neutral" recommendation. He reckons the Labour/Greens plan would sheer about NZ$110-NZ$150 million off Contact's operating earnings.

Even though the Labour/Greens plan is only a proposal, the election's not till next year, and the two parties would need to win the election before the plan could be implemented, Gardiner has already sliced NZ78c off his valuation per share of the company, though he doesn't say what his new given value is. And he has also taken NZ78c off  his 12-month "target price" for the Contact stock, dropping it by about 12.7% to NZ$5.34.

The actual price of Contact shares on the NZX did drop by as much as 10.5% on Thursday and Friday last week after the Labour/Greens policy was announced. It has since recovered but at the time of writing was still some 6% down on Wednesday's closing price of NZ$5.72.

"It is hard to see the [Contact] price rising with such a potentially negative overhang on its valuation," Gardiner said.

He arrived at his new valuation of Contact by applying a 40% probability of the Labour/Greens policy being implemented. This was comprised of a 50% chance of Labour/Greens being elected, and 80% of them actually following through with the plan.

Gardiner thinks that if followed through on the Labour/Greens plan will lead to forced industry "consolidation".

"...We think this central planning model will not be attractive for private sector investors and will make it more difficult for new plant to be built," Gardiner said.

"The saviour for Labour/Greens will be if this policy derails the SOE sale process and leaves 40-60% of the sector still in Government ownership – in other words SOE Balance Sheets could be used to fund new investment the private sector is unwilling to make.

"In that event we would expect central control of investment has the potential to result in ongoing overinvestment and over-supply – ie for political reasons the Government would not want the lights to go out!

"In that event we would argue that the cost to investors (in this case tax payers) will ultimately be far higher than under the existing market-based model," Gardiner said.

The new power policy came at a time when the electricity lines sector was nearing a more stable regulatory regime after 12 years of review and change," he said.

"The practicality of approving asset management plans for the 29 different lines companies seems inefficient in our view, and we also question the incentive for private sector investment in the future. We think forced-sector consolidation is a potential outcome."

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21 Comments

Well, not another?- the financial boys thought they were on to a promised brokerage/fee gravy train winner - some must think otherwise now - I can smell the burning bitterness - but not as bad as being short JGB's back a week or so ago -now those boys and gals were burnt within an inch of their BPV lives.

At what stage do NZX listing rules kick re an orderly market run pre ipo.
Or does suppl material coming out ex mrp address that?

C'mon guys , Labour and the communists masquerading as the Greens ( hell bent on reducung us to the economic  level of Fiji and Samoa.)  will never get to nationalise the Electricity sector without sinking the entire ship and putting us into a severe recession .
Destroy Contact Energy on the NZX  through this and you write off a massive % of the NZX and ruin any chance of developing a strong Capital market such as the ASX
And with this nonsense from them  , and idea of ever catching up with Austrlalia economically is dead in the water, in fact we would be lucky to stay ahead of Fiji, Samoa and Tonga
With such ill- advised and frandumb ideas from these clueless idiots  we now know that they have to be kept out of powkly er at any cost .
The unintended consquences of this utter stupidity will be massive Capital flight leading to a credit crunch, higher interest rates to try and bring the money back ( higher mortgage repayments AND  fewer Kiwis in home -ownership ), a drop in the NZ Dollar , which will push the cost of petrol and diesel and other  energy forms into the stratosphere , and destruction of the NZ Super which relies on dividend streams from the likes of Contact Energy to pay pensions to the aged .
It shows a total lack of any rational forethought ,  intelligence or depth of skill in these ideologically driven parties
GOD HELP US IF THIS COMES TO PASS
 

The old armageddon threat. Don't challenge or regulate us or we the all powerful faceless market will rain down fire and brimstone on your impertinent heads. Same threat the banks use, and every other corporation that wants government protection to maintain its profits. Same people who used to say "better dead than red" are happy to bow their head to the markets.
 
Neo liberal financial capitalism is in its death throes. Good riddance. The sooner we return to a mixed market the better.

Well said.
Lets look at where all the improvements in our world economy has gone in the last 30 years, why to the top 10% at best with the top 2% taking virtually all of it. Its quite simple really if the top 2% cabt get the huge profit margins they require off our backs they wont come, oh what a big deal that is.
So if there is no advantage to 90% of us to have the top parasitic 2%'s money here why worry about it, good riddence.
regards
 
 
 
 
 
 

 
You are getting a little carried away with yourself there Boatman
best you read what Labour /Greens are  proposing,

Boatman, get it together.
 
If you wany to hit the Lab/Greens, hit Grant Robertsons claim this morning (Morning Report) that they're promising economic growth.
 
They can't deliver, it's a sitter.
 
Silly rhetoric about communists, god, clueless etc, are just gutter-level, and folk will judge you on that.
 
Of course, if those you lie down with have the same flea - the need to promise economic growth,  the only point of difference being that they are busy mopping-up under a sinking lid - then I admit you've got a problem.

1) I thought catching up with OZ was the make believe world of Act and Donny "blow the election" Brash in particular?
2) God doesnt exist, its like your free market economics, its not rational to believe is such stuff when the weight of evidence is against it and non for its existance.
3) Credit crunch and the housing market are not the same thing, or even linked to what the SOE's can borrow off rational and logical ppl.  SOEs can go out to "market" and borrow and have to pay it back and have an intrinisic guarantee of the Govn behind them...investors like that.
4) In the last 30 years the only ppl who have benefited from the productivity gains have been the top 1% while the 99%  got no where. If you are in that top 1%, well frankly I dont care if you leave, getting rid of a parasite is a good thing.
5) Ranting on about non-existant communists when in fact the Green party has a democratic 11% of the vote to represent just makes you look like a extremist right wing nut job.
6) "destroy Contact energy" Govn policy has always been a risk factor and opportunity for any business. If you dont factor in that as a risk and get caught with your pants down, well grin and bear it. I did factor the risk and sold my shares, made some money....grow up....
regards
 
 
 
 

"4) In the last 30 years the only ppl who have benefited from the productivity gains have been the top 1% while the 99%  got no where. If you are in that top 1%, well frankly I dont care if you leave, getting rid of a parasite is a good thing."
 
Heh..   I just had a vivid mental image of 99 fleas voting to get rid of the 1 dog, claiming it was a parasite for hogging all the blood!
 

Well, I'd Luv ter see a Gummint Food Production and Distribution Agency - after all, the current duopoly is quite untenable.
 
On behalf of the nutriently challenged, the halt, sick, lame, the unemployed, the chemically propelled, and them as what lives under Bridges, there is no alternative but to impose Central Food Production and Planning for the Good of All. 
 
Oh, wait, TINA was a Thatcherism...
 
Mixed market or mixed metaphor....but tolerance of Duopolies (supermarkets, building materials) is surely a Bad Thang.....

I only use imported electricity. It is so much nicer, it runs more smoothly, you really can tell the difference.
The point being electricity by nature of how it is generated and distributed, is not like other things we buy and sell.
We all have no alternative. That is a fact for basically all of us. Until technology is perfected to allow for distributed generation at or near point of use at a reasonable price we are stuck with what we have.
The market hasnever ever built a hydro station anywhere in the world. The actual building of the station , the dam the generators is usually provided by The market but the will to get it done is political, it has to be - these things are really big, they use/need  the geography of entire regions to actually work.
We are being bled dry by power prices and many other prices that are out of line with prices in countries that we compete with - or used to compete with. Lets face it we are loosing our edge pretty fast our costs are blowing out and we are covering up the fact with crazy borrowing of bank created money

"Lets face it we are loosing our edge pretty fast our costs are blowing out and we are covering up the fact with crazy borrowing of bank created money."
Very true and tragic PlanB. However, we can change it. Remenber the plan to save electricity by the Clark government immediately after the Auckland power crisis. The goal was to save 15% of usage, and it had such success it was halted! Within a few days of implementation the goal was reached much to the chagrin of the promoters, who immediately saw their revenue drop by a proportionate amount, prompting a cancellation. 
The power of the consumer to conserve, or boycott, electric power is immense. Imagine the power saved if we turn off the electric water heaters we run 24/7, if we turn off the light every time we leave the room, if we dim public lighting. If 15% reduction scares the beejivers off investors, imagine what a 30% reduction would do. The power would still be available and suficient, and the prices would stop rising. We'll benefit, as opposed to investors!
HGW

However while true that,
"Lets face it we are loosing our edge pretty fast our costs are blowing out and we are covering up the fact with crazy borrowing of bank created money."
Its the same for everyone else...so its relative loss/problem isnt a biggee really. Until you factor in the probable losses in the housing sector, but then we have done that to ourselves...
regards

To do so kimy you need an adequate infrastructure plan, the Capital to fund it, the available expertise to implement it......what we have been doing ,particularly in Auckland is the completion backwards principal, post imigration...just doesn't cut it...too many redo's again and again the Mt. Wellington quarry  stormwater for one.....
More pressure on substandard facilities, inadequate roading plans, half assed public transport......nooooo, just wont do at all.
 But I can see why you'd like it....more pressure on housing ...more demand better returns....ad nauseum.

Jeepers kimy,
 
Bizarro logic (unless you happen to be part of the growth lobby who benefit from a population ponzi scheme)
 
 
Australia has about 5 times the population and a gazillion times the land mass
 
If you extrapolated on comparable population terms Australia would be taking in 250,000 per year.
 
And there are a few New Zealanders who are happy with the population size the way it is.
 
And would be happy to see immigration balanced towards a stable population goal. 
 
That is,
 
net immigration Vs emmigration Vs  (difference between births and deaths) = 0
 
Thus if emmigration is high, immigration would also likely be high (in the absence of an explosion of births over deaths)
 
But if emmigration was low, immigration should also be low.
 
But, I'm guessing, as you are invested in property, and have a bias towards never-ending demand for your property,  you will push the increased migration barrow for all it is worth

Well KimY, have you checked the lay of the land lately?
 
Australia has been accepting between 200,000 and 400,000 migrants annually. In addition it is absorbing 20,000 asylum seekers annually, which go straight onto government support. In the past week the current Labor Government has revealed that it is in a $300 billion debt hole. The expected 2013 surplus has evaporated and turned into a $10 billion deficit since the budget update 5 months ago.
 
Immigration doesnt seem to have helped. Fine while the tide is in and the good times roll, but when the tide goes out EVERYONE suffers, as is happening now.
 
PS1: There are currently 1,700,000 people in Australia on Temporary Visas
PS2: There are 600,000 new zealanders on temporary visas. Local are starting to grumble

You should laminate that an pin it on your wall
Immigration looks good while the tide is in and the good times are rolling
But when the tide goes out EVERYONE suffers, as is happening now
 
 

Perspective - Synchronicity - Published today in nzherald
Nearly 40 per cent of immigrants from China gaining New Zealand permanent residence last year were aged 50 or over. The number of elderly Chinese migrants arriving in the country is nearly four times the 10.7 per cent average of permanent residents in the age group from all other countries. At the same time, those leaving the country are much younger.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10879156

Australian banks will demand Gillard and Co send them back home with their deposits so they are added back to the local OBR depositors pool to fund local Australian bank resolution. Equally they will then be off the Australian retail deposit guarantee scheme.

So never ending infinite migration, infinite growth, infinite energy use, infinite food, inifinite population so you also believe in a flat earth then.
Maths not something you did in school?
regards
 

 

Demographer Bob Birrell says Kiwis in Australia on temporary visas should be given permanent residency, but only if future Kiwi migration is limited.
http://home.nzcity.co.nz/news/article.aspx?id=164922&fm=newsmain%2Cnrhl

Days to the General Election: 20
See Party Policies here. Party Lists here.