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FNZC slashes Trustpower target price on threat to sweetheart deal in Tauranga

Monday 29th January 2018

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 Trustpower's profit could drop by up to $30 million a year if the Tauranga Electricity Consumers Trust stops paying Trustpower customers in Tauranga around $500 a year in dividends that let the locally headquartered power company charge inflated electricity tariffs without major customer losses.

In a note to clients, First New Zealand Capital says Tauranga-based customers of Trustpower may only get a true benefit of around $50 to $100 a year from the annual TECT dividends, because of the high tariffs that Infratil-controlled Trustpower is able to charge because of the TECT arrangement.

TECT only pays the dividend of $400 to $500 a year to Trustpower customers, allowing it to dominate the local market. Electricity Authority figures show that of 83,816 customers in the Tauranga electricity network area, some 69 percent, or 58,157, were with Trustpower, with that number comprising 22.5 percent of Trustpower's total New Zealand customer base of 258,070, making it the country's fifth largest electricity retailer.

Genesis Energy was the next closest, with 11,142 customers.

"For many years, competitors have complained about that the scheme prevents them from gaining a strong foothold in that region, being unable to compete with Trustpower's embedded TECT cheque benefit," said FNZC analyst Nevill Gluyas. "The very low trader churn seen in the network supports that complaint." 

Now, however, TECT is proposing to change its model, offering Trustpower customers cheques totalling $3,940 over five years to extract itself from the current arrangement and, in future years, to fund community projects. The deal is sweetened by the offer of an initial $2,500 payment later this year, as long as trust beneficiaries vote to approve the change.

FNZC ascribes a 50/50 chance to the deal going ahead, with consumers having to weigh up the loss of future benefits with the large up-front cheque and the potential that "retail energy prices for customers in the Tauranga region could arguably reduce once the existing TECT distribution arrangements have ended, perhaps by as much as $500 p.a. per customer". 

Genesis Energy welcomed the proposal.

"The current rebate can cause confusion for customers and cloud competition when they are considering the best value provider for them," a spokeswoman said in an emailed statement. "Its removal would create a more level playing field for companies operating in the highly competitive electricity market."

FNZC lowered its target price for Trustpower shares from $5.33 to $4.86 and retained its 'underperform' rating. 

Trustpower shares were trading early this afternoon at $5.60 per share, having fallen 5 percent in the last week. 

"We see little threat to the current level of dividends and therefore expect it (Trustpower) may continue to trade well regardless of the valuation risks we describe."

Trustpower chief executive Vince Hawksworth said last week the company was seeking legal advice on the trust's intention to change its focus.

The TECT has a 26.8 percent stake in Trustpower and has the same-sized shareholding in Tilt Renewables, which owns mainly Australian wind farm assets and was spun out of Trustpower. FNZC presumes the trust may sell down part of its Tilt stake or assets in its $167 million diversified investment portfolio to fund the $145 million required to meet the initial payout of $2,500 per Trustpower customer in the Tauranga network.


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