The government's $1 million ad campaign for the partial privatisation of Mighty River Power began in earnest last week.

The campaign kicked off just as many Kiwi households were getting news that further hikes in power prices are on the way.

The partial sell-down of Mighty River has been promoted as a chance for "Mum and Dad" investors to get a share of the company's future profits. But on current trends, potential investors may be wondering whether the dividends earned from the yet-to-be issued shares will be enough to offset future rises in their power bills.

Statistics NZ data show domestic electricity prices have risen by an average of 5.1 percent a year since 2005. For a medium-sized household spending $2000-plus annually on electricity, a further 5.1 percent rise this year would add at least another $100 to the bill.

Net after-tax returns on a $2000 investment in Mighty River (people who apply for up to $2000 of shares are guaranteed that amount) will have to equal this just to compensate.

Return v risk

Actual returns will depend on both the share price and any dividend, less tax. Dividends on shares are currently taxed at the top rate of 33 percent.

The share price itself won't be known for some weeks. So far, potential investors have been invited only to register their interest in buying shares. Details of how the share price will be set are intended to be disclosed in the "Share Offer Document", which the government expects to publicly release in April.

The offer document will also have to divulge details of the company's financial prospects as well as the risks of investing.

Mighty River, along with other state-owned power companies poised for partial sale, has been making sizeable profits. But returns have been on the back of rising electricity prices and increasing demand. Electricity demand is now flat-lining, indicating companies will have to rely more heavily on price rises to maintain or improve profit margins in future years.

The Electricity Authority's briefing to the incoming Minister of Energy and Resources Simon Bridges describes electricity demand as "subdued and uncertain" and flags "continuing concerns" in the market about softening industrial demand. Residential and commercial demand remains static.

Mighty River's fortunes are also linked in part to its offshore investments, which include projects in Chile and Germany. For the six months to December 2012, the company says the performance of these investments has been "mixed". While it earned cash income of $140 million, it also recorded a $89 million "non-cash accounting impairment" as a result of higher estimated project costs.

The bigger picture

The partial sale of Mighty River isn't intended to have any significant effect on power prices. The government believes "it’s not who owns the energy companies that influences prices, but the regulatory environment".

Our view is that the current light-handed regulatory environment isn't sufficient to ensure fair prices and a sustainable electricity system.

Despite weakening demand, domestic prices have continued to head upwards. Some of the increase has been blamed on rising transmission costs passed on by Transpower. But that's only part of the story. Consumers should expect to see electricity prices at least stabilise if not decline as a result of weakening demand. But there's no sign of that happening yet.

 

Timeline


  • Pre-registration: from 5 to 22 March, individuals can pre-register their interest in buying shares at www.mightyrivershares.govt.nz or by phone on 0800 90 30 90.
  • Offer period: the offer period is expected to start in mid-April and run for three weeks. The share offer document will be available before the offer period opens and will provide information on how to apply for shares.
  • Share market listing: Mighty River is expected to list on the share market by mid-May, prior to the 2013 Budget.

 

Who's in charge?

Most of Mighty River's seven directors have been appointed since 2009. All have management experience and most hold or have held positions on the boards of other government-owned bodies. Their profiles on the Mighty River website include the following details:

  • Current chair Joan Withers was appointed to the Mighty River board in August 2009. Withers is a former chief executive of Fairfax New Zealand and the Radio Network and is also chair of Auckland International Airport and deputy chair of TVNZ. She's one of several former directors of Feltex Carpets who are defendants in a civil class action brought by investors in relation to Feltex's initial public offering.
  • The deputy chair is Trevor Janes. A chartered accountant, Janes is also chair of the Public Trust, Abano Healthcare, and deputy chair of ACC. Between 30 March 2005 to 31 October 2006, he was a director of Capital + Merchant Finance, which went into receivership in late 2007.
  • Other directors include Michael Allen who has a background in geothermal engineering consulting; Prue Flacks, a barrister and solicitor specialising in commercial law; James Miller, a former director and head of NZ Wholesale Equities with Craigs Investment Partners and former chair of investment companies Barramundi, Kingfish and Marlin Global; Tania Simpson, a member of the Waitangi Tribunal and deputy chair of Landcare Research; and Keith Smith who is the chair of Tourism Holdings and Goodman (NZ) as well as deputy chair of The Warehouse Group. He was previously a director of PGG Wrightson and NZ Farming Systems Uruguay.
Electricity price increases graph

Guide to the graph
Data are from Statistics NZ Consumer Price Index and show percentage increase for years to December.

 

Member Comments


Got a question or comment on this topic? Share your views and experiences with other Consumer members...

To add a comment you need to be a member of consumer.org.nz. Login or Join.

Real Competition- How to Achieve Posted by: Ray W G 23 Mar 2013 4:29pm

Until such time as the generators are separated by law from the retailers there is never going to be any real competition and therefore very little likelihood of power prices being realistic. It would mean the retailers going to the generators and buying in bulk to satisfy their demand and competing against each other for customers

Buy Mighty River Shares Posted by: Susan Merrett 22 Mar 2013 4:45pm

Whether you agree with the sale or not...If you have some money available, buy these shares. Keep the shares long term to prevent overseas interests from buying them & you will be rewarded. If you can afford some & don't buy them, you will be allowing overseas buyers the opportunity to own them rather than Kiwis.
Sue

someone has to provide balance Posted by: Patrick Scullin 21 Mar 2013 8:47pm

Anyone objecting to your easy to understand situation on Mighty River Sale,must have their head firmly imbedded in the sand [blue sand] and have little or no grasp of what makes a genuine kiwi,or how our country has evolved and progressed,with essential assets such as power and water in state ownership for very obvious reasons.I regard the sale of these assets as Treason

Financial Adviser Posted by: Jancol 18 Mar 2013 12:56pm

It appears consumer is giving Financial Advice. Is is registered to do so?

History Posted by: Dirk Jansen 18 Mar 2013 12:45pm

Look at all public utilities world wide. Privatization followed by increased prises, decreased service and in the end tax payer bail out. Do we never learn?

Another Bruce Posted by: Bruce Parkes 18 Mar 2013 12:19pm

Your tax comments are misleading. Full imputation credits should be available and those on less than the 33% rate will be able to claim credits on their end of year tax return.

realistically, one should not expect an after tax return of more than 5% - that is $100 on a $2000 investment.

Why would electricity prices rise more with a MOM? All governments have milked SOEs for every cent they can get and have been able to do so without the public scrutiny faced by a listed company

private companies Posted by: Bruce 18 Mar 2013 11:45am

So called "private companies" have seen some huge collapses. I personally like the idea OF SOEs. Efficient govt departments, I am going to buy shares. Do my bit to keep as much as possible in NZ hands. Since the semi privatisation of the power companies, power prices have zoomed up. Thanks Max Bradford.

Unpublished risk. Posted by: Crash 18 Mar 2013 11:33am

There is a risk I have not seen covered by media - that minority shareholders in any company that is majority-owned by the government have no protection on governance issues. The only reason to invest is to get dividends.

The government (as the single majority shareholder) have total control. No director can be appointed without Government approval.

A future Government may direct the company to reduce profitability (and dividends) as a means of addressing the political need to cap or reduce power pricing.

There is always the possibility that the minority shareholders will have the ability to elect directors without government approval but even then the board will consist of a majority of government-appointed directors.

Join Consumer now and make your decisions easy on a huge range of products and services

  • Over 500 reports, plus interactive tools and calculators
  • Independent advice from NZ's trusted source of information
  • Join over 65,000 members who help us get all NZers a fairer deal

from just $28

Join now
Read what our members say