Natural Gas is only power firm to show slippage in volatile times

Friday 22nd June 2001

DIRECT EFFECT: Natural Gas' forecast had a direct effect ...

By Peter V O'Brien

Power companies' share prices held up well this year in spite of the current volatility of the wholesale electricity market, with the exception of Natural Gas Corporation, which slipped 38.4% from late January to last Monday.

Prices for six companies on Monday are in the table. They are compared with those ruling on January 22, the date taken for The National Business Review's last review of the sector (January 26) and the highs and lows this year.

Natural Gas and Trustpower recently issued statements to the Stock Exchange, indicating profit reductions in the current financial period.

The former said it was unlikely the company would produce a profit for the six months ended June 30 as a direct result of the unforecast increase in wholesale electricity prices to "unprecedented levels" since late May.

The company compared that situation with the $31 million reported for the six months ended December.

Natural Gas' forecast had a direct effect on the retail consumer, with the company's On Energy subsidiary saying it would increase prices to customers.

On Energy (formerly TransAlta) customers had a yoyo ride over the past year. The kilowatt hour usage rate was lowered last year and the daily charge was raised.

Along came On Energy. It raised the usage rate while lowering the daily charge.

The company will lift the kilowatt hour rate from July 1, with the daily charge unaltered.

On Energy's full-page advertisements said it committed itself to review wholesale electricity prices regularly and would reduce prices to customers as soon as wholesale prices returned to "normal," but warned the new retail prices could remain over the entire winter, a comment which gave new meaning to the expression "cold comfort," particularly for the elderly on low incomes.

Trustpower's statement said the current drought (stated on June 15 before the downpour of last weekend and into the early part of this week) would have a material effect on the company's profit for the six months ended September.

It suggested there would be profit reduction of more than 50% compared with the corresponding period of the previous year.

The directors anticipated a return to "more typical" wholesale spot and contract prices in the second half, at which point Trustpower would be back on its profit plan for the latter part of the year.

The current situation was seen as a "temporary interruption" to the company's profitability.

That was one reason for the group's share price holding up. There were others, some more important.

The company foreshadowed pressure on current year profitability when it issued its preliminary report on May 31 for the year ended March.

It said the drought, particularly in the South Island, reducing generation output, and competing generators using dominant regional positions were likely to have an adverse effect in the early part of the current financial year.

Trustpower has a mix of electricity generation assets and a retail customer base.

The most important reason for the current share price would be the jockeying for control of Trustpower.

When US-based Alliant International said it would move to buy another 21% of the company from $3.20 to $3.60 a share from May 31 to July 31, Trustpower's share price immediately improved 32c to $3.37.

The price in the table is the midpoint of Alliant's range. Other companies in the electricity sector, particularly the distributors, those with diversification into generation gas or other assets were in better position to handle the ructions in the wholesale electricity market than those with heavy reliance on retail customers and little or no generating capacity.

Private investors probably understand the different structures of companies in the sector, but any who do not should get to grips with what each company does, because the distinctions are important when people make investment decisions.

The most reliant bet could be a distribution (lines) company, because its revenue comes from shifting the power, rather than involvement in trying to obtain or retain power users in the face of strong competition from other groups.

Wholesale electricity prices will settle down but there could be sharemarket volatility until that happens.

Electricity companies' share prices (c)
Company	Price 18.6.01	Price 22.1.01	% change 1.01-6.01	2001 high	2001 low

Contact	291	280	+3.9	315	262
Horizon	1115	930	+19.9	1170	900
Natural Gas	98	145	-38.4	148	95
Powerco	176	143	+2.3	190	130
Trustpower	340	301	+12.9	357	300
United	851	790	+7.7	940	762

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