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.
- 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.
Guide to the graph
Data are from Statistics NZ Consumer Price Index and show percentage increase for years to December.
Got a question or comment on this topic? Share your views and experiences with other Consumer members...
Read what our members have to say close
To save money on essentials and make buying decisions easy, you can't go past Consumer. We're proud to have over 65,000 members all enjoying our independent information online or in Consumer magazine.
Here's what some of them say...
"Just wanted to let you know that I find your site excellent! Easy to find my way around, everything at my fingertips - just a click away.
I only took out a 3 month membership as I wasn't sure but it is actually really easy to use and if I want it on paper I can print the
reports. Thanks again".
Denise Watkinson - Waitakere
"My mother (74) got a renewal letter from her insurance company for her car insurance, wanting $570. After reading
your article on car insurance, I contacted one of the companies you recommended, who quoted her $318 for the same
level of cover. I just wanted to stay thank you very much for your article, as it has saved my mother a substantial amount of money".
Adrian Lane - Kapiti Coast
"I've been a member to the magazine since 1997 and enjoy reading it a lot. I've found lots of helpful information on different issues...
Thank you for being so helpful".
Peter Kovalenko - Porirua
"I have been a member of the Consumer NZ for 20 or more years and have enjoyed much reliable advice.
I turn to their tests before making significant purchases".
Lyndal Print – Auckland
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