Energy stocks surge on Victorian regulation reprieve

Energy utilities have received a positive charge in morning trade on hopes the sector will avoid full re-regulation in Victoria.

Electricity wires in Melbourne. (AAP Image/ Joe Castro)

Energy utilities are the best performing sector this morning in what might be a mini relief rally on renewed hopes of the sector avoiding full re-regulation in Victoria

News that the big three energy retailers — AGL Energy, Origin Energy and EnergyAustralia -had agreed significant rebates for retail customers with standing offers is being interpreted as reducing the likelihood of full re-regulation of energy prices in Victoria.

A review of the electricity sector by former deputy premier John Thwaites in August found prices have soared since the sector was deregulated in 2008 and sparked moves by the Andrew’s Government to force retailers to supply more affordable basic services.

In deals offered over the weekend, the big 3 retailers have agreed to significant rebates for standing offer customers and some expired market offer customers from January 2018.

Around 285,000 customers will receive a rebate of $250-440 a year. RBC Capital Markets analyst Paul Johnston says that $345 midpoint equals $98m of revenue/EBITDA (earnings before interest, tax, depreciation and amortisation across the big three retailers. As AGL has the highest market share in Victoria, RBC estimates it will strip $35-40m a year from its revenue.

With 2017-18 consensus net profit after tax at $1.02bn, the higher end of the range provided by AGL at its FY result in August of $940-1,040m (RBC says there is downside risks to consensus, earnings particularly given this agreement with the Victorian Government.

RBC has AGL rated an underperform, with a price target of $22 after a sustained rally fuelled by surging energy prices. AGL shares (AGL) are up 1.8pc in the first hour of trade, with the utilities sector up 1.4pc. Victorian network operators Spark Infrastructure (SKI) and AusNet Services (AST) are up 1.74pc and 1.1pc respectively.

Origin Energy (ORG), which is outside the index sector because of its large gas export operations, is down 4c to $8.54.

The Victorian Government is still considering its response to many of the recommendations of the Thwaites review into retail energy markets and will release its full response shortly.

“However, we suggest that given this announcement the Victorian Government is likely to stop short of re-regulating retail gas and electricity prices — this agreement has likely to come about to avoid the re-regulation of retail prices,” Mr Johnston wrote in a note to clients.

“We estimated the full impact of re-regulation of electricity prices in Victoria on AGL would be ~$75m pa. So this rebate agreement appears to have a less significant impact than complete re-regulation but nonetheless it is likely to be material.

“That said, we note the Victorian Government is still considering other suggested reforms from the Thwaites review.”