Labour-Greens power policy at least five years off - MRP prospectus change

Tuesday 23rd April 2013

MightyRiverPower expects it would take at least four years for the Labour and Green party electricity policies to be enacted. With more than a year until the next scheduled election, that could make the promised power price cuts as much as five years away.

The MRP estimate is based on the parties' own statements about the complex process such change would involve and suggests the new policy would not be fully implemented by the time of the general election currently scheduled for 2017.

While MRP says the Opposition party proposal for a single buyer, centrally planned electricity system is "likely to have a material adverse effect on the value and market price of the shares", it sees no reason to change its profit forecasts for the next two financial years which are published in the offer documents for the partial privatisation in May.

The proposals, announced last week, warn "that a future government may enact legislation that materially changes the structure of the New Zealand electricity industry."

The disclosure was deemed necessary under securities regulations requiring additional information in the event of a "significant adverse event" potentially affecting the target company.

The disclosure notes the Green Party policy document says the proposed reforms "will take time to fully implement" and refers to Ministry of Economic Development analysis in 2006 that suggested a two year-pre-launch timetable, followed by single buyer gradually replacing the existing wholesale market over the following two years."

Energy sector analysts believe the transition could take longer because it would require large numbers of commercial and industrial users' electricity contracts to be renegotiated, which could in turn spark legal challenges.

Assuming the election of a Labour-Green government at the election scheduled for November next year and a four year implementation, the earliest the fully implemented policy could be in place would be in late 2018 - a year after the next general election.

"The company and the Crown cannot quantify (including by reference to the two political parties' estimates of savings and reductions), in a manner that they believe is reliable, the potential effect of the announced proposals on the company's future business and financial results or on the value of the shares."

The disclosure allows the share offer to reopen after being temporarily closed overnight. Investors who had already registered to buy shares now have five days to change their minds. The offer remains open to retail investors until May 3 to apply for shares in minimum lots of $1,000 and will be eligible for a loyalty bonus top-up if they hold the shares for two years.

MRP's update noted "these proposals are in respect of the electricity industry generally, and are not specific to Mighty River Power."

"However, the announcements increase regulatory uncertainty for Mighty River Power by raising the possibility that a future government may enact legislation that materially changes the structure of the New Zealand electricity industry."

The government has placed an indicative range for the issue price of between $2.35 and $2.80, but the few investment analysts who are not constrained from discussing the float because of their involvement in it suggest the float will go off at the lower end, or possibly below the bottom end of that range.

However, while predicting a 10 percent reduction in the indicative range, Woodward Partners' Nick Lewis suggests in a note to clients that the Labour-Greens single buyer model may appeal to dedicated infrastructure investment funds, even if power companies are reluctant to invest in new power stations under a centrally planned model.

"Provided they were confident of low political risk in New Zealand post their investment, infrastructure investors are attracted to RRR (regulated rate of return) structures," said Lewis, a long-time energy market participant and analyst in a 30 year career spanning some 15 different jurisdictions.

"But in return for accepting more modest returns, they need to be confident of reliable, repeat cash flows. Therefore, they would look for the enabling legislation that creates New Zealand Power (the proposed single buying agency) to be able to survive economic cycles and changing political environments."

Contact Energy shares fell almost 10 percent last week immediately after the announcements, but regained ground late on Friday and yesterday, to $5.39, but are still 8.6 percent lower than it was a week ago, before the Labour-Greens announcement.

Prime Minister John Key said at a press conference yesterday there were four key factors to consider: the likelihood of a change of government, whether the policy could be practically implemented, how long it might take to implement, and what its likely effect on electricity prices would be.

In a research note last Thursday, investment bank UBS gave the policy a 40 percent likelihood of being implemented, based on a 50/50 chance of a Labour-Green government being elected and an 80 percent chance "of them actually following through."

BusinessDesk.co.nz

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