They say a week is a long time in politics. It can be for companies, too.
Before Ed Miliband’s attack on the Big Six energy suppliers at last week’s Labour Party Conference, Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US ) and SSE (LSE: SSE) were two of my favourite stocks. At a stroke, a pall has been cast over their future.
Fortunately, National Grid (LSE: NG) (NYSE: NGG.US) survives unharmed as the safest stock in the high-yielding utility sector.
Uncertainty
It remains to be seen whether the 7% drop in the shares of Centrica and SSE will be a temporary blip – and a buying opportunity – or the beginning of a de-rating to reflect the political risk.
The threat to freeze prices for the energy suppliers’ downstream operations, and to impose a new regulatory regime, has already hit their cost of capital and put a question mark over future investment. Sentiment towards the shares will oscillate with the fortunes of the political parties between now and 2015.
In fact, Mr Miliband’s plan could conceivably lead to the companies being broken up.
Both Centrica and SSE say their upstream and downstream activities are a natural hedge for each other: one is more profitable as the other is less so, and vice versa.
If the downstream businesses are price-controlled, the upstream operations might be more profitable on their own.
SSE is heavily committed to renewable energy, the segment that politicians of every hue are eager to subsidise at any cost to consumers. Much of Centrica’s upstream activities look like any other international oil and gas company. The only certainty is that the two companies are now subject to much greater uncertainty.
Safe
That makes National Grid all the more attractive as a relatively safe utility. The monopoly provider of the UK’s high-voltage electricity and gas distribution networks doesn’t directly serve retail customers, so bashing it doesn’t have the same populist appeal.
Indeed, constraining National Grid’s investment programme would be one sure way of making the lights go out, with no political benefit.
What’s more, National Grid has recently agreed an eight-year price regime with the industry regulator. That puts any prospect of its profitability being squeezed well into the future.
National Grid’s UK regulatory asset base is expected to grow by 7% a year. That’s an increasing base on which to earn its permitted returns.
The regulatory picture is more complicated in the US, where National Grid earns a third of its profits, but overall the company has been confident enough to forecast that dividends will grow at least in line with inflation “for the foreseeable future“.