Special Report: Electricity - Worth A Flutter?

By Perry Williams, ShareChat Wellington Correspondent

Friday 8th December 2000

Sharemarket investors would probably have to go back to May 1999 to get a feel for why electricity companies are regarded with slight caution these days. 'It seemed like such a good idea at the time' is a familiar refrain. But this week former National Party energy minister Max Bradford admitted aspects of his radical reforms had hurt both companies and consumers. Perry Williams charts the state of the industry and looks at the companies which analysts are giving the nod to as we head into 2001.

It's now widely regarded that Max Bradford's electricity reforms took much of the fizz out of New Zealand's electricity companies. Until last year, electricity was one of the most actively traded market sectors. But consumer wariness, coupled with a complex array of mergers, share swaps and takeovers, has doused much of the initial spark.

Probably the two biggest issues dogging the sector have been the consumer confusion about how to swap from one power company to another and, in the financial markets, massive dividend flows offshore have been seen as a disincentive to invest. But all is not lost and despite the huge upheaval of the past 18 months there are still a few bright hopes in the market.

The NZSE lists six electricity companies with a combined market capitalisation of $4.69 billion. Leading the group is Contact Energy (NZSE: CEN), 42-percent owned by US-based Edison Mission and with a market cap of $1.7 billion. The largest electricity distribution network nationally is UnitedNetworks (NZSE: UNL), mainly owned by US-based Utilicorp. It has a market cap of $1.2 billion.

Natural Gas Corporation (NZSE: NCH), with a market cap of $900 million, theoretically hit the jackpot during the year when it completed its buyout of TransAlta, the country's largest electricity retailer. It won a huge customer base with the deal but tough competition and a number of public relations disasters, including a troubled call-centre performance, has seen customers leaving the company in droves.

Tauranga-based TrustPower (NZSE: TPW) (market cap $560 million) has been quick to notice the chinks in TransAlta's armour and has made a strong push into the Wellington and Christchurch retail markets, touting customer service rather than low prices as its strong suit.

Powerco (NZSE: PWC), new sharemarket entrant this week, makes a substantial entry with a market cap of $290 million while Horizon (NZSE: HED) - rich with dividends - trails the field at $40 million.

The premise of the electricity reforms, which split electricity companies into lines companies (who own the lines but can't generate power) and retailers (who sell the electricity and are permitted to own power stations), seemed simple enough. However the truth in hindsight is that Bradford's reforms created widespread confusion.

Take the state owned ECNZ. Post reform, it was split into Meridian, Genesis and Mighty River Power. All three were suddenly repositioning to compete for retail business and sell off powerlines. From that point on, it was a matter of first in, first served. Companies raced to rebrand themselves, almost overnight - sometimes without having the necessary switch-over technology in place.

However none of those are listed companies, so let's concentrate on companies which are traded, starting with the three listed lines companies - Powerco, Horizon and UnitedNetworks.

According to one analyst the main problem with all three companies is a lack of liquidity. Just over a year ago, UnitedNetworks looked to issue over 12 million new shares in an attempt to create an active market amongst financial institutions. Only 1.1 percent of the company's shares had traded in the previous 12 months and less than 3 percent were available for trading on the New Zealand Stock Exchange - despite a market cap of $1.2 billion.

"They're an outstanding company in every other sense but in an investment sense, they're not going to be your first target," said the analyst.

Despite trading at a fair value, another analyst picks Horizon to be a good growth option. Based in Whakatane, Horizon recently formed a joint venture with Gisborne company Eastland Network and is on the hunt for other electricity networks and utility assets. Horizon is currently trading at a year's high and could be solid long-term.

Powerco got off to an adventurous start with its listing on Monday when utilities investor Infratil decided not to sell its 4.9 percent stake at the offer price of $1.20, claiming the price was not high enough, although it sold down its stake the following day. Alliant International sold its 8 percent holding at $1.20.

After trading on the exchange's secondary board for several years with about 14,500 shareholders scattered throughout the North Island region, the main listing is a good chance for investors to buy. Although the company says it will not seek new capital from the listing, analysts agree Powerco should push up over the $1.40 mark once it's settled down.

Contact Energy, with the largest market cap of any electricity company, is the second-largest retail company with about 420,000 customers. Earlier this year chief executive Paul Anthony, who has since left the company, said only the top three retailers in New Zealand were big enough to have profitable businesses.

Contact is often cited in sharemarket circles as a finger-burning exercise for many individual investors who bought into the stock after a strong IPO promotion. The shares listed at $3.10, the top of the range, but its market performance has not matched the hype.

Despite the poor performance industry analysts believe Contact's thousands of shareholders should stick with the stock. The company is seen as a strong long-term business and is likely to put its hand up as a potential buyer for Fletcher Energy's oil and gas fields when they're sold by Shell as part of the agreement to buy Energy.

Natural Gas Corporation, based in Wellington, is also seen as a good growth stock. NGC, along with state-owned Meridian Energy and Contact Energy, all submitted bids to the Canadian-owned TransAlta late last year with NGC winning the battle. It gives them around 520,000 customers but also a bag of troubles.

NGC has lost thousands of customers since taking on TransAlta but expects to achieve considerable cost-saving synergies by combining both companies. Analysts say the big question mark surrounding the TransAlta portion of the company does not make a compelling stock.

"They've been dragged around a bit by the media which might be a bit unfair but their retail margins are obviously being squeezed and as long as that lasts we forecast their prices will remain fairly low," said one analyst.

NGC has also faces considerable competition throughout the country with Wellington company Todd Capital launching a subsidiary, Fresh Start Energy, who have made an aggressive bid to snaffle customers with cheap pricing.

The other fierce competition has come from Tauranga-based TrustPower. Although comparatively small with a market cap of only $560 million, it's been a big growth player in recent years. Arising from the reforms, TrustPower sold its line business and aggressively built up a series of small hydro plants and a wind farm. This year, they've been focusing on the retail market buying a string of rival customer bases throughout the country.

"Once again, they're a good growth story. It will be interesting to see how quickly they can grow their customer base. That will play an important part."

While many have been left feeling disinterested by what remains a complex array of electricity companies, Contact and TrustPower seem to be the winning stocks. But even then there's a feeling that the sector as a whole needs more investment interest before individual winners have their day.

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