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Bernard Hickey reviews the progress so far of the Government's partial float of two SOE electricity companies and finds few goals being achieved

Bernard Hickey reviews the progress so far of the Government's partial float of two SOE electricity companies and finds few goals being achieved

By Bernard Hickey

The low turnout and the low price set in the Meridian Energy float this week has confirmed the failure of the Government's 'Mixed Ownership Model' (MOM) on its own terms, as well as in the conventional terms of being an an exercise in national financial planning.

Just 62,000 investors signed up for the float, little more than half the 113,000 who invested in Mighty River Power in May and around a quarter the 225,000 who invested in Contact Energy when it was floated in 1999.

That is a dismal response and if the trajectory is continued for Genesis Energy in the first half of next year then around 30,000 would sign up for the last of the energy floats, most of whom would already be stock market investors.

The Government's argument that it wanted to widen and deepen both the ownership and the make-up of the stock market was the only good one for the asset sales programme.

It rightly argued New Zealanders were too reliant on leveraged investments in housing and needed to spread their eggs around and get a taste for investing in stocks.

Selling 49% of the biggest electricity generator in the country to just 1.4% of the population is not a democratisation of the stock market. It has allowed the likes of Labour's State Owned Enterprises spokesman Clayton Cosgrove to accuse National of running a "Government for the 1%."

The MOM programme also failed to strengthen the share market. Instead, the decision to press ahead with the sales of the last big state-owned electricity 'gentailers' without political consensus triggered a backlash that has wiped a combined NZ$1.3 billion or 13% off the stock market values of Contact Energy, Mighty River Power and TrustPower.

This was at a time when the rest of the stock market rose more than 10%.

The Government is blaming the Labour-Green opposition's NZ Power plan for the poor result and turnout, but its own decision to press ahead with the asset sales without first making the electricity market truly competitive made that backlash inevitable.

Both sides of politics allowed the status quo of an uncompetitive market to continue for nearly 20 years because the super-profits were mostly returned to the public in the form of dividends to the government. Selling these shares to private investors broke the political reasoning holding together the status quo.

The MOM programme has also failed to raise the amount the Government expected and has wiped more than NZ$1 billion from the value of Meridian measured by Treasury before the Labour-Green intervention.

At current market prices, the Government is on track to receive a total of just NZ$4.9 billion for the sale of stakes in Mighty River, Meridian and Genesis, and that's before sale costs estimated by Treasury of NZ$143 million.

So far the MOM programme has cost taxpayers and private investors more than NZ$2.4 billion in the form of lower valuations for energy companies and asset sale costs.

And the benefits?

Treasury estimated in the May Budget that the forgone dividends from state owned enterprises over the next five years would be NZ$810 million and the reduced interest costs because of debt repayment would be NZ$780 million, producing a net benefit of NZ$30 million over five years.

By its own measures of success, the Government's MOM programme was an epic fail.

It blew away NZ$2.4 billion of shareholder value to save NZ$30 million of interest costs and failed to democratise or strengthen the sharemarket.

So what was that all about again?


A version of this piece was also published in the Herald on Sunday. It is here with permission.

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Any company that was seen to be bribing a major customer to hold up share prices prior to a float would surely attract the attention of the SFO.
And the electricity supply is a UTILITY and that is why I do not believe that it should be providing profit to the wealthy and most definitely should not be providing profit for foreigners.
The only way we got to have big hydro schemes was because the govt did it. For govt read, the people 

The Italian Job. (as compared to the New Zealand float)
Why a Government (read taxpayers), has to bail out Bankers and pay twice plus for the priviledge.
Similar to the New Zealand public etc buying out half of what they already own at fire sale prices, owned since they were built by taxpayers  money, all those years ago.
Please note who winz (oops another taxpayer loss).
Who winz,  why,  UBS and any others helping to re-float and re-inflate the leaky boat, with their hand in the till.
And the over paid Government lac-keys of course.
read very carefully, why these fiascos happen.
Fraud plain and simple. Derivatives and the same fraudulent transactions between like minded people. Scamming themselves, but mostly the public.
When will it end.
Why, when the fraudsters and their accomplices go to jail and do not collect 200 million and a get out of jail free card.
Its monopoly, those who own the taxpayer, wins.

Bit of a big call there Mr Hickey! We will only know if it was in fact a good idea or not in about ten years time when we will be able to see what happened after the dust settled and the real effects become clear.
Change is usually bad for everyone in the short term precisely because we have all adjusted to how things are before the change.

Journalists are tasked with feeding a constant stream of sensationalist articles to the adoring public , which has a voracious appetite for them .... Bernard's audience has an attention span that'd make a goldfish look positively Einsteinian ....
...  Bernard fails to ask the probing question , if this float was so unsuccessful , why were investors scaled back in their applications ! .. .He's just looking at the gross number of applicants and arrived at an erroneous  conclusion ..
... but by way of comparison , on occassion when Brian Gaynor writes , they are informative , and measured articles ... he's thoughtful , and long looking .... and as such , he'll never have a career as a titillationistic journo .... he will only ever be good for actually creating wealth for investors , sadly ...
On the bright side of things , from the photo accompanying this article , I see that the cooties have cleared up from the back of Bernie's scalp ... congratulations to Warren & Tarquin at the Salon on K Road ...

C'mon GBH - those purportedly representing the taxpayer's capital interests utterly failed in their understanding of price discovery outcomes in a climate dominated by speculative excess and financial leverage.
Ultra-loose financial conditions tend to benefit the most aggressive investor, speculator and company management team - there is no doubt easy zero bound QE money, from the Fed and BOJ @ $160bn per month forces conservative investors into risk investments.
Why would we expect anyone to act in their “long-term self-interest” when the monetary backdrop is ripe for incredible fortunes to be accumulated in the short-term?
Witness your repeated reference Xero's onward  and upward price trajectory over the last week and Brian Gaynor's cautionary tale in yesterday's NZ Herald
The ideas expressed are blatantly cherry picked from Doug Noland's Credit Bubble Bulletin.

Where I see the Gnats utterly failing is in encouraging investors away from rental properties .... but the private sector , through XERO and through Pacific Edge , is showing the way , thankfully  ..
...but  the utiliities still fill a useful niche in the investment spectrum , namely for investors seeking generous and steady dividends ( off-set by low capital growth ) ....
As David Hargreaves pointed out , the total sum raised by the SOE sell downs is paltry , compared to the mega billions of tax the government rakes in annually .... and as such , I think they're daft bozos for trying to squeeze every last penny out of MRP & Meridian ...

It's an interesting subject though. Lots of different threads and strands to think about:
The infinite value of any income stream in a 0% interest rate world;
Why we get excited or worried about the hydro plants but not about Fletchers buying Formica;
Why National chose to push the sales through despite the likely significant political cost;
Issues about the vastly overpaid central planners being abusive owners of assets and misallocating capital without any personal consequence;
Issues about the destruction of the commons;
Issues about future energy usage/wastage;
Issues about monopoly/duopoly pricing and customer abuse.
All good stuff.

The "democratisation" of the sharemarket excuse was always a croc. I'm sure all NZ brokers will easily give clients access to the NZ and ASX sharemarkets; so there was plenty of choice already. A couple of million on an advertising campaign would have achieved this aim far better than wasting hundreds of millions (and billions if you look at the valuations), on selling our hydro power assets.
The only possible good reason would be if in fact the government knew that either the cost of producing electricity through alternative means was going to collapse; or demand was about to decline even faster than it has been. 
While demand has been slowing, largely presumably encouraged by the far higher than inflation price increases charged by the current cosy oligopoly, there are very good reasons to believe that demand will return in a 5 to 10 year window. As oil becomes harder and more expensive to extract, electricity will become the alternative of choice for many oil based current activities.
Gummy frequently tries to argue that the government has achieved a good price based on price to earning multiples. But these earnings are after the financial jiggery pokery of revaluing assets and then allowing depreciation against those assets. So the companies are always a cashflow EBITDA story, and on that basis, they are being given away (and actually a great buy).
The only reason you can conclude for the sales, is capture of the National Party by a wealthy cohort, largely foreign based.

TDB Advisory drew up a report on Meridian , and put a mid DCF value on the company of $ 1.90 / share ...
... but they stated " our analysis indicates the gentailers ( generator and retail electricity companies ) like Meridian do not exhibit the stable revenue and cashflow of a typical utility "
And on their net cash provided by operations figure , $ 417 million , Meridian shares will trade on a 9.22 ops. ratio .... OK ... but hardly a fantastic bargain ...
... further , they concluded that the risk of a Tiwai shut-down ( i.e. low electricity demand ) , gave a $ 1.73 share price ...
All the jiggery-pokery of Meridian's accounting aside , any company which pays out more in dividends than it earns in net income , gives me the heebee-geebees ....

All the accounting jiggery-pokery of re-valuing assets, and then extracting those values out of the enterprises, in the guise of dividends, is a replication of the Allco and Babcock and Brown models, and look where they are today

Good point. Those companies of course leveraged up their assets with huge debts, and the management ran off with big early payouts. You would hope the power companies here will not be allowed to be quite so reckless, or management self serving, even with the Nats in charge.

I don't know about that. The lines company Powerco is seemingly being hollowed out by pillaging foreign owners.

by Stephen Hulme | 21 May 13, 12:10pm

In this instance we are talking about critical infrastructure assets - grow up
Who is going to rescue this outfit once those playing with it are finished?
Powerco, for example, is a highly profitable business but has paid next to no tax for the last three years. Here are the numbers.
In the nine months to March 2012, Powerco reported earnings before interest and tax of $79.6m. The previous year to June its ebit was $118m and the year before that it was $136.3m.
Nevertheless, over those three years Powerco had an interest bill totalling $465m, which converted those operating profits into huge losses and obliterated its tax bill. Indeed, Powerco reported a net tax benefit for those years of $32m.
The arrangement is beneficial to Powerco's owners - Brookfield and Queensland Investment Corporation - because more than a third of the company's debt is related party, allowing owners to extract profits from the business as interest while paying no tax.
There are tax rules designed to limit the ability of overseas owners to do this, known as thin capitalisation rules, but Chalkie reckons they have been as useful as a fart in a fishtank.
For example, Powerco's debt at the time fell well within the allowable ratio of debt to total assets of 75 per cent, but that did not seem to hinder its ability to create large tax losses.
Another overseas-owned lines company, Wellington Electricity Distribution, has an even higher proportion of related-party debt than Powerco and in Chalkie's reading of its accounts has paid no company tax at all since its sale by Auckland-based Vector in 2008.
The tax losses came despite healthy profits at ebit level of close to $50m a year.
Wellington Electricity Distribution, incidentally, is owned by Hong Kong-based Cheung Kong Infrastructure through a holding company in the Bahamas.
From last month the thin capitalisation threshold has fallen to 60 per cent.
It will also be interesting to see whether the NDRC gets in the way of future New Zealand transactions. For now, Chalkie reckons anyone who sees no difference between overseas and local buyers needs their head read. Read original article


Meridian has $ 7737 million of total assets , and $ 3049 million in debts .. ..
... that's hardly a " lazy " balance sheet ...
Share equity is $ 4688 million .. ..

So roughly a 10% return; (and 15% for the first year), somewhat better than the 4% you can get in a bank. (I wonder what the D figure was that TDB used in their DCF model, but wouldn't be shocked to find it a bit higher than 4%).
The Tiwai Pt risks are probably mainly for the other power companies; Meridian I'm guessing would actually get a better price on the open market than they do from Rio Tinto. By the by, I expect the smelter to stay open beyond 2016, but time will tell. Pollution in China just might mean aluminium production is one industry they do not hold on to at any cost.
Meridian might not be the prime target of Labour and the Greens, given their largest customer already gets a cheap price.
So yes there are modest risks; but also a chance that the Nats will get back in and happily allow more inflation plus increases in price. Or at some stage that general inflation has another burst.
Mighty River Power now looks cheap, even with very high management salaries, and ever expanding directors' fees. Expect after the next election some reduction in costs there, which would mitigate any price reduction slack.

MRP might also get a more dynamic board. The current lot do look like the best they could find when no one without a tainted background in failed companies could be found.

a) jobs for peasants
b) and they want to do it all on theor own soil.
Id say no, but who can tell these days.

well watch the referndum and polls, Id bet on a Labour / gree govn myself.

Treasury estimated in the May Budget that the forgone dividends from state owned enterprises over the next five years would be NZ$810 million and the reduced interest costs because of debt repayment would be NZ$780 million, producing a net benefit of NZ$30 million over five years.
Can you check your maths there Bernard. We lose $810 million but save $780 million so the result is a net loss.
So what was that all about again?
If you look at the way the assets sales are being treated in our national accounts you will see that the income from the sales is revenue but the asset value is not reduced - simply shifted to 'minority' interests.
Such accounting helps if you wish to mislead over a return to surplus.

"(In the parlance of) Monopoly, we picked up a 'Get out of jail free' card, and managed kick that can down the road several months and probably not before 2015," said David Rosenberg, chief economist at Gluskin Sheff, who famously predicted the last U.S. housing crash.
"Household debt ratios are problematic, and the central bank knows it, but ... the good news out of bank is we've been told we have a little more time to get our finances in order before the debt to service ratio starts to play some catch-up."
House of cards, or just a game of Monopoly.

Some reckoning, going on somewhere. 
 Credit Suisse warned in a report this month entitled “House of Debt – Revisited.
Particularly like the comment.
Asset sales – Key for de-leveraging for most of these – have still not taken off

That's it GBH - run with the fox and hunt with the hounds.
What does the fox say?

.. sooner be a fox on this one ... but having said that , the likelihood is much greater that Meridian will give investors a quick profit than MRP did ..
Gensis would be the float to watch closely , if those old Gnatty dogs get this one wrong too ...

If the price of Meridian settles well above the issue price then everyone and his dog will want Genesis. Nothing like feeling you've missed out to get people moving.

Well, given,
1) the P/E I have to wonder why it would.
2) referendum
3) Not recovering the money they said they would.
4) Labour/Green govn quite likely, 60% plus

Ah yes, but we are half in the realm of irrational pricing and half in the realm of politics, so the outcomes are many and varied. As regards the politics we are well out from the election and I see no reason why National won't choose to copy Labour and buy a third term with gifts and goodies.

Oh I agree, after 5 or 6 years watching ive come to the conclusion the biggest short term unknown is ppl...Long term the fundimentals will the interim its a bit of a guess.
If you look at the poles pre-last election NAtional ran very strong all they way, now they are significantly lower, mana is on the scene, Green's x2.  If the Nats lose the asset sales referendum I think it will be the nail in the coffin....and Cunliffe etc will I think do a great job of ramming that home.
I mean take the elec price increases over the last few years while ppl have been struggling....I think that will tell.

That Roger W....was the whole idea of  Meridian landing at 1.50....there will be a bull run on  Genisis when Mom n Pop Shoulda Done  go after the gravy n peas.....they missed the pot roast  fearing it  would be overcooked. ( entree being a complete disaster)
 That said , the quantity  I ordered, ... was scaled back 15%, ummmm, a bit of dodge going on there...
 The dessert  "Jewel in the Crown"
 Air N.Z. to be a five minute wonder, it's been cut to the bone to make it look real pretty in that lil black number , but be warned it's been gutted as an ongoing concern of Intl' reputation.
 Emirates  will watch with quiet amusement....I'm sure.

Tee hee. Yes, and I quite agree about airlines - wonderful things but awful investments. Air NZ has done quite well since the last $500 million injection though. Funny that. Personally I thought it was all rather unfair on Origin Pacific, they got destroyed, their State owned competitor got $500 million and the people of Nelson have paid dearly for air travel ever since.
Why does it cost more to fly Nelson to Welly than from Auckland to Welly? Of course the polticians can't say a word as Air NZ have workshops in Nelson but the whole thing stinks of fish to me.

... absolutely Roger .... but if Meridian fails to fire , the Gnats will be under pressure to get Genesis away successfully , and it may be set at a bargain price ....
Which is where these stocks ought to be priced ... to keep Kiwi ownership , in the hands of private investors .... who's taxes helped pay for these SOE's anyway ..
... if they want us to buy them , don't squeeze blood from the stone ....

who's taxes helped pay for these SOE's anyway
From that comment, do I take it you feel that those who made their wealth through tax free capital gains should not be eligible for by shares (or at least buying them cheaply) as they didn't help pay.

No ... it was a generalisation that if they want SOE's to remain in our hands , don't overprice them ... as a society , we paid for and built these assets ...

Someone has to own them and NZ residents will pay tax on the dividend income and tend to spend the money in NZ, whether on consumption or investment goods. It is not a bad system when it doesn't get perverted.

tahts sounds like a lose, lose for them.
They will be acused of selling too cheaply.