Credit downgrades possible with energy reforms

Wednesday 19th August 2009

New Zealand's electricity companies face possible credit rating downgrades as proposed electricity reforms would make their operating environments riskier and more competitive, says the international credit rating agency, Standard & Poors.

Most at risk are Genesis and Meridian, but only if proposals to swap assets between the two state-owned generator-retailers go ahead.

All the power companies are expected to face additional business risk because of greater competitive pressures, decreased ability to raise tariffs, and increased costs caused by the emissions trading scheme.

Known risks such as dry years and national grid constraints would continue. With new market structures, "the gentailers' ability to mitigate these by regularly raising prices to preserve earnings will be more restricted than previously, in our opinion", S&P said.

If competition increases materially (and profitability is negatively affected), this will weigh on the credit quality of ... Contact Energy and MightyRiverPower, both with BBB/Stable/A-2 ratings, Meridian (BBB+/Stable/A-2) and Genesis (BBB+/Stable/-), said S&P.

Rated network companies such as Vector and Powerco would also risk downgrades if they made any move in energy retailing, as could happen under the proposals from the Ministerial Electricity Market Review, because retailing has a higher risk profile than their current regulated monopoly businesses.

The greater penalties proposed for dry year risk would also particularly expose Meridian and Contact to far higher costs if "caught out" during a period of low hydro inflows, since the proposed reforms would put a high $500 per Megawatt hour floor under wholesale market spot prices and require payments to customers forced to save energy in any national campaign.

While the likely deferral of the ETS on stationary energy to January 2011 would give thermal generators more time to prepare for its introduction, thermal generators Contact and more particularly Genesis would be exposed to new costs associated with carbon pricing.

Factors influencing the extent of any ETS impact included how restrictively carbon emission permits were issued, how closely linked the New Zealand ETS was to international markets because of attendant exchange rate risk, the ability to pass on additional costs to customers, and the flexibility to pursue renewable energy options in the future.

S&P expressed particular concern about the suggestion that Meridian and Genesis could swap hydro, wind and thermal assets to give both companies a greater regional and fuel spread in an effort to enhance national competition and improve dry year risk management.

The agency identified significant risks in the following areas:

Timeframe. The longer any transition, the better for managing risks associated with the change;
Transfers of retail customers and the Tiwai Point aluminium smelter contract would introduce timing, load management, complexity and cost risks;
Erosion of grid constraint risk mitigation by reducing both companies' current concentration of customers near their generating plant;
Quality of management and operational expertise challenges created by portfolio reconfiguration and the need for new hedging and trading strategies.

Businesswire.co.nz

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