Mighty angst

Opinion: Labour/Green political masterstroke gives would-be Mighty River Power investors even more to agonise over

18th Apr 13, 3:04pm by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By David Hargreaves

Anybody who has been agonising over whether or not to invest in Mighty River Power shares just might have let out a scream around lunchtime today.

This was about the time that In a truly fiendish political masterstroke Labour and the Greens put a bomb under New Zealand's power sector and potentially cast doubt on the worth of MRP shares currently being sold by the Government.

It doesn't end there of course because after the National-led Government has sold 49% of MRP it is planning similar sell-downs of Meridian Energy and Genesis Energy.

You don't have to be a genius to work out that if power prices to households are going to reduce by between 10% and 14% as Labour/Green are promising then MRP, Genesis and Meridian will be making smaller profits. Taking that further means they would likely have to pay smaller dividends.

There is no doubt this perfectly, if cynically, timed move by Labour and the Greens provides another great jolt of uncertainty to a sector that was already riddled with uncertainty through issues such as the unresolved future of the Tiwai Point aluminium smelter.

I am not a financial adviser so could not and would not offer a view in any case on whether MRP shares are worth a go. But there is no doubt that the latest developments simply add more complexity to the decision making process for the would-be investor. As if wading through that 260-page prospectus wasn't bad enough.

Labour leader David Shearer says that he has contacted MRP and the Government suggesting that potential investors be given supplementary information about the ramifications of the Labour/Green policy.

It would be very surprising if this was done because it would require complicated modelling exercises to give various outcomes that would a) Be difficult to work out based on what is known so far of the Labour/Green plan and b) Would be incomprehensible in any case to the average ma and pa investor.

When the Government promised full disclosure in the MRP prospectus about the Tiwai Point risks, I must confess I was looking for rather more than the bland two pages that in effect said, yes it is a risk but presented no sensitivity analysis on MRP's potential profit outlook in the event of a Tiwai Point closure.

So, if they weren't going to run scenarios on that very real risk then it is unlikely they would do so for the Labour/Green plan. Doubtless in a legal sense the Government and MRP are already well covered by the bit in the risks section that says: "Changes in the regulatory environment may adversely affect Mighty River Power."

The Government's already attempted to ridicule the Labour/Green plan and, interestingly has brought out the communist comparisons in an attempt presumably to scare people who might be attracted to the idea of cheaper power bills. Clearly as they have through such challenges as the Maori water rights issue, the Government will look to just ride this out and carry on with the float regardless while styling the Labour/Green plan as a bit of nasty political opportunism.

My best guess is that that the Labour/Green move will not have much impact on the MRP float when it comes to local investors. There were already a heck of a lot of risks around MRP. This is another.

But it might put off some overseas investors. If there's one thing that foreign investors don't like it is poetical uncertainty and regulatory risk in the countries they invest in.

In New Zealand there are now suddenly very clear battle lines in the electricity industry. We have the political party that hugely deregulated it still pushing that barrow in Government. And we have the perceived alternative government saying it wants to roll back time and regulate.

What we have then is a very clear election issue.

While the last election was arguably in some respects a referendum on National's partial privatisation plan the next one is likely to be all about a deregulated versus regulated electricity sector.

And also we now learn it is a clear choice between Labour/Green and National and others.

Because after the agonised would be investors have made their choices and the MRP float has been and gone, the lasting memory of this Labour/Green plan will be that it signalled the moment at which the two parties clearly signified they wanted to govern together. It is a high stakes game for both parties.

And given the way National quickly pulled the communist card out today, can we expect in next year's election campaign to see a return of the infamous 'dancing cossacks' that won National the election in 1975?

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16 Comments

by Happy123 | 18th Apr 13, 3:52pm 1366257170

A sharp swing to far left of centre for Labour following thier continuous falls the polls. They must have been scratching thiers heads at what to do and decided that they couldn't go any further toward the centre lest they become a right wing party.

The big question is will this win them more votes.

Some will see this as synical politics and a sabotaging of the NZ economy. Some will support this move but they are already left supporters so it's likely Labour will win voters off the Greens but the net result for the left will be nothing.

by Wolly | 18th Apr 13, 3:55pm 1366257350

So dammed if they sell and dammed if they don't...pretty obvious too little thinking went into this.

Key's mob had better think fast and think better...if cheaper power for families is an electoral winner...and it could well be...this current mob will need to do better.

Cancel the sale using this pinky green promise as the reason...and cut gst to 12.5 with a promise to cut to 10% when the surplus arrives.

If average power bills are $300 a month...$3600 a year...a 14% cut amounts to a fat number and remember, less gst theft as well.

by HereTic | 18th Apr 13, 4:02pm 1366257772

"There were already a heck of a lot of risks around MRP." When I carefully read the prospectus I was very surprised to see no mention of the earthquake risk to MRP's planned wind farms. Turitea and Puketoi will cost the thick end of a billion dollars to build but they are literally right on the Wellington, Northern Ohariu and Wairarapa fault lines. Where we live in Manawatu, less than 8 kms from the Wellington and Northern Ohariu faults, the city fathers are in a right tizz as the next major quake - there has not been one for over 140 years, which is the usual return time - will cause Christchurch style + damage. As just one example our iconic All Saints church has just been closed pending either demolition or very expensive earthquake strengthening. Much of the CBD has been identified as a risk. Why didn't the FMA pick up on the real risk to investors in these two wind farms? Deliberately putting them on fault lines and then flogging them off to unsuspecting and unsophisticated mums and dads is way more than cynical.

by Henry_Tull | 18th Apr 13, 4:15pm 1366258526

Well looks like L&G have learnt a few tricks from RIO.

by steven | 19th Apr 13, 8:53am 1366318382

Indeed....its a great piece of positioning IMHO......Im waiting for JK's counter, I cant see one...

regards

by Henry_Tull | 18th Apr 13, 4:21pm 1366258885

MRP. Thinking back we are drawn to its first use in our language. MRP Maximum Retail Price. We remember the white shield badges on everything and
W Freer etc...

by Kumbel | 18th Apr 13, 4:54pm 1366260890

...and there was a pronunciation: rhymed with "burp". Ah, happy days!

by Hevi Groswaite | 19th Apr 13, 7:05am 1366311942

An investment in shares should be viewed as a long term stream of dividends over the long run. Anyone buying shares with an expectation of short term gains from an IPO should have their head handed to them in a platter.

MRP is a mighty asset and a drop in revenue should not affect it too much over the long run. The benefit to the countries' economy of a drop in power prices should outweight the benefit of a few investors' short term gains.

Pulling the rug out from uunder their feet was a masterfully crafted move. It benefits the many, over the few!.Well done!!

Go Labour. You have my vote!

HGW

by steven | 19th Apr 13, 7:19am 1366312745

These are generalisations, and in fact over the long run shares dont seem to do as well as bonds

by Hevi Groswaite | 19th Apr 13, 7:46am 1366314417

And the fact that bonds are safer than shares makes them a better option. I like senior, secured, convertable bonds myself.

But then again, nothing safer than houses! And they have performed better than any other class over the past 20 years, here in New Zealand and many parts of the world.

On a DCF basis you can't beat housing, but this fact is a sign of the times and the imbalances in our economy. Is it any wonder one can't find a profitable business for a reasonable price, say 3 ot 4 years to get ones' money out, in New Zealand?

Regards,

HGW

by steven | 19th Apr 13, 8:51am 1366318270

If you go back to measure super cycles then really you shouldnt be missing the Great Depression in your calculation IMHO. Its a generation blind spot, ie the last 2 generations have seen unprecidented growth and prosperity. Now you can set that event aside if you are satisfied its of no importance, sure, but you should still make that a positive choice IMHO. I greatly beg to differ of course, as does Steve Keen, Nicole Foss and some others. ie we have a huge debt generated bubble like but in fact greater than the late 1920s and right now it looks ready to implode on us....so really housing and businesses, in fact anything illiquid isnt the place to be IMHO.

regards

by waymad | 19th Apr 13, 9:53am 1366322035

I'm still gonna grab my 2k's worth of MRP shares, just to poke a stick in the Lab/Watermelon eys, and to catch me a piece of the dividend flows that will still issue. And, to be perfectly Francis, to gum up even further the already-messy business of un-privatising a by-then-sold asset if this sorry bunch get voted in. There's gonna be some fun with all this.

I don't pretend to be economically rational about this, either.

I just think that that dosh is better employed foobarring the looney tuners, than cluttering up the balance sheet of a Four-Pillars bank.

After all, I'm about to spend around the same amount on ski passes for the extended fambly. Who's to say which is the better deal?

by Boatman | 19th Apr 13, 11:59am 1366329549

David , this looney idea by Labour will never materialise , and should be treated with the contempt it deserves for the following reasons

1) National needs to sell these ageing assets because Govt. cannot afford to upgrade , rebuild or recapitalise them with taxpayers or borrowed money . We need otside shareholders to take up rights offers for expansion , refurbs maintance etc

2) Most Kiwi's know the assets are not being given away , we will recieve the proceeds from them for use in expansion of other assets, be they new income generating assets like Oil rigs , or social assets like schools

3) Electricity generation is a mature industry , we have overcapacity , is expensive to establish with low yields / returns

4) There will be technoogical advances that affect the viability of old tech Power generators in years to come such as fuel cells which is green energy adaptable to household use

I am surprised at tge Greens support for Labour on this score , because someone in the Green party must have figured out that the value of these SOE's wil diminsh due to green technology in the future

5) There are 400,000 kiwis who have expressed interest in buyng shares . Given an average family of four , about 1,600,000 Kiwi families will have an interest in the SOE'S ,

THEN

add those who will hold shares indirectly in their KIWISAVER , then one can see that many of us would like the float to succeed.

by tony | 19th Apr 13, 8:09pm 1366358974

can anyone answer the question why a country with a population of nearly 5 million people needs 15 so called independant electricity companies to provide power ? By world standards we have the population of a smallish city.

by Stephen Keys | 19th Apr 13, 9:13pm 1366362833

We don't. One vertically integrated efficient SOE generating and supplying power and do away with the other 14 Head Offices, boards, executive salaries and bonuses, advertising etc etc. So much duplication its wasteful.

The Green's idea of a small cheap block of power to every household with a much higher unit price beyond that is progressive for low income families and pensioners and encourages conservation. Should be looking at solar for schools and government department buildingd too

by kiwichas | 19th Apr 13, 9:34pm 1366364084

Should one buy MRP shares, not as a great investment, but to stop them falling into the hands of foreigners?

Who will be able to buy them much cheaper after the announcements of Hugo Shearer and Russell Chavez, who, incidentally, are currently well ahead in the polls; by their own rhetoric they should be buying them up to stop the(admittently non existent in the future) dividends flowing offshore.

Yes, I reckon if MRP profit is down, dividends will fall.Or investment will stop.Or both.Unless Shearer takes a leaf out of Bill English's book and tells them to borrow money to pay dividends(as in Solid Energy), which will have a sad ending, especially if interest rates go up one day...