Just one problem

November 12th, 2013 at 4:00 pm by David Farrar



The Greens released a “public owners report” into Mighty River Power with a photo of Gareth Hughes in front of what one would assume is an MRP wind turbine.

There’s only one small problem.

I’m told Mighty River Power doesn’t have any wind turbines.

Now if an energy company that didn’t actually have any wind turbines, used a photo of one on their annual report cover, I’m pretty sure the Greens would condemn them for green-washing and false advertising. So will the Greens condemn their own annual report?

Energy sector share prices

September 26th, 2013 at 2:00 pm by David Farrar

A broker has sent through a research note on Contact Energy and Mighty River which I found interesting. The notes look at what the base price of the two companies should be, and the effect in their prices of Tiwai Point and the Labour/Green nationalisation policy.

They say:

  1. Base case scenario – MRP a target price of $2.60, 17% higher than current market price of $2.22, and Contact a target price of $6.00, 12% higher than current market price of $5.37
  2.  Should Tiwai Point be fully exited, our analyst sees this applying an 8.5% hit to his Contact valuation, but only 6.6% to MRP
  3. The Labour / Green proposal, if implemented, is far more damaging, resulting in a 23.3% drop in his Contact valuation but a far larger 31% hit to MRP (dropping the valuation to $1.78)


That’s an (un)impressive amount of sabotage. So not only would we end up destroying the market for power generation, and increasing the risk of black outs, we’d also wipe out a quarter to a third of the value of investors in those two companies.

MRP shares

May 10th, 2013 at 12:49 pm by David Farrar

MRP shares are now at $2.73. Labour and Greens scared off some smaller investors but larger investors have worked out their nationalization policy will never be implemented, and are valuing shares higher.

Share price set at $2.50

May 8th, 2013 at 8:47 pm by David Farrar

The Govt has announced:

113,000 New Zealanders will become shareholders in Mighty River Power following a successful share offer, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall say.

The final price will be $2.50 per share.

Of the shares issued, 86.5 per cent will be New Zealand owned: 26.9 per cent by New Zealand retail investors, 8.6 per cent by New Zealand institutions and with the Crown retaining a majority 51 per cent shareholding. That leaves 13.5 per cent for overseas institutions.

“This is an outstanding result and fulfils our commitment to ensuring at least 85-90 per cent New Zealand ownership of the company,” Mr English says.

“The share offer will raise $1.7 billion, which is a very good return for New Zealand taxpayers. Those proceeds will go into the Future Investment Fund, allowing the Government to control debt while continuing to invest in public assets. More details will be announced in next week’s Budget.

“The Government has achieved all of its objectives for the Mighty River Power share offer, so the company will list on Friday.

“Given the strong response to the share offer, and the price we have set, Mighty River Power will have a market capitalisation of $3.5 billion.

“And with over 110,000 New Zealand shareholders, it will have the largest share register – by some margin – of any New Zealand company on the exchange.”

Mr Ryall says that due to the strong level of demand, some scaling has been necessary.

“We have decided to apply progressive scaling, which means that larger applications are scaled more than smaller ones,” Mr Ryall says.

“That means that more than 80 per cent New Zealanders will get what they applied for.”

Yay, this means I’ll get all the shares I applied for. It also means I picked up the shares for around $600 cheaper than they might have been, thanks to Labour and Greens.

I will get 2,000 shares, which is 214 more than I would have got if the price was $2.80. Assuming the real value is $2.80 if the nationalisation policy never eventuates, then those 214 bonus shares are worth $600.

68% of applicants did not have a CSN number, which implies they are first time investors. That is great, because having more people invest in capital markets is a good thing.

Roughan says investors should thank Greens and Labour

May 4th, 2013 at 1:00 pm by David Farrar

John Roughan writes in NZ Herald:

Investors in Mighty River Power should send the champagne next wnment!eek to Russel Norman, Green Party, Parliament Buildings, Wellington.

The stock looked a good buy even before he talked the Labour Party into threatening price control on electricity. It looks an even better one now.

Yep I reckon they saved me $600 or so.

Brokers and fund managers expect the bids from institutions to be at the bottom or even below the range the Government considers fair value. Taxpayers should send the Greens’ financial larrikin something else – a bill.

Brian Gaynor has estimated the likely cost to the public purse at $400 million.

And that’s just what they managed in opposition. Think what they can do in Government!

Shearer is a sensible man. To enact Norman’s scheme or Labour’s version of it, he would need to ignore all the economic advice available to him.

Electricity is the prime fuel of every modern economy. It is hard to think of a more important price.

The elaborate market that established a price every 30 minutes at numerous different points on the grid might not be perfect – none are – but it is bound to be better at matching supply and demand than a panel of public servants in Wellington.

That is they key point. California with its rolling black outs is an example of what happens when supply and demand get out of sync.

Incredibly – and I mean that – this omniscient agency would pay generating companies different prices based on what it reckoned their costs of production to be. That would leave the companies no reason to contain their costs and every reason to increase them.

Having the Government set the price of power will not lead to it being cheaper, just more expensive in the long run. And that’s not just my view – but the view of Labour’s David Parker when he was Minister of Energy!

Even if they win, the nationalisation may never happen

April 24th, 2013 at 1:00 pm by David Farrar

Stuff reports:

Professional investors, while still nervous of the proposal, have begun to question whether it will be implemented, even if the Opposition wins next year’s election.

AMP Capital’s head of equities, Guy Elliffe, estimates it will take at least five years to design and implement the plan, exposing it to the same policy about-face that has National so concerned.

“Most people think it is [going to take] more than one electoral term … but then what is the probability of a Labour-Green coalition being elected twice?” he asked.

Mr Moghe, meanwhile, has maintained his recommendation that investors subscribe to the share offer, which closes on May 3 for retail investors.

I think Mr Elliffe is largely correct.

To implement this policy, first Labour and Greens need to get 61 seats between them. If they have to rely on NZ First, he may not support the policy.

Secondly implementing the policy would be massively complex, probably the subject of huge litigation, and take years to do. It is most unlikely to be done in one term. And with Green/Labour policy veering radically leftwards (printing money, nationalising industries) the economy could be seriously tanking after three years.

But also look at who the Labour and Green energy spokespersons are, who would be the ones to implement this incredibly complex and controversial policy – Moana Mackey and Gareth Hughes. Now I like Moana and Gareth, but a policy like this would need a Michael Cullen or Steven Joyce to implement.

So I think the chances of this policy ever being implemented are in fact quite low.

Hence why I am increasing the amount of Mighty River Power shares I was planning to purchase. Thanks to Greens and Labour, they are likely to be priced more towards the bottom end of the indicated range. This means I’ll pick up the shares for a discount. This is of course bad for the taxpayer, but good for me as an investor. Thanks Russell and Davids.

Feel free to comment below if you are pre-registered and if you still plan to invest.

Note that this blog post is not financial advice.

The MRP share offer

April 5th, 2013 at 12:50 pm by David Farrar

Finally, it is out. The announcement:

New Zealand retail investors in the Mighty River Power share offer will receive one loyalty bonus share for every 25 shares they hold for two years from the offer, up to a maximum of 200 bonus shares, Finance Minister Bill English says.

Mr English also announced that the indicative price range for the shares is $2.35 – $2.80 per share, with the final price expected to be announced on 8 May after the retail offer has closed and the institutional offer has been conducted by a book-build process.

“The loyalty bonus scheme that I am announcing today is another way to encourage widespread and substantial New Zealand ownership of shares in MRP,” Mr English says.

“It also recognises the loyalty of those New Zealanders who retain their shares and contribute towards the country’s savings culture.”

The loyalty bonus scheme is available only to New Zealand retail investors – not to institutions in New Zealand or overseas.

A 1 in 25 bonus is basically a 4% premium for holding on. Experienced investors will buy and sell regardless as potential gains are greater than 4% but for first time investors, the bonus will probably encourage them to hold onto their shares for at least the initial period.

People who pre-registered will be posted or emailed copies of the share offer document once the offer opens, expected to be Monday 15 April.

686 million shares are up on offer.

A useful summary of risks is here:

  • The availability of the fuel (mainly water, geothermal fluid and gas) that Mighty River Power requires to generate electricity may reduce for a wide number of reasons;
  • Mighty River Power’s power stations may not be able to generate electricity as expected if they cannot operate in the normal manner or at all;
  • If the Tiwai Point aluminium smelter were to significantly reduce its electricity consumption or cease consumption altogether, the resultant drop in demand could lead to a sustained reduction in electricity prices in general;
  • The wholesale price at which Mighty River Power sells the electricity it generates, or buys electricity to sell to customers, is subject to significant variability and may be unfavourable;
  • The volume and price at which Mighty River Power is able to sell electricity to customers may be adversely affected by competitor behaviour, economic conditions, changes in customer demand or regulatory changes;
  • Investment in geothermal development activity requires significant early stage capital and may encounter unexpected delays, increased costs, a requirement to impair assets or not be commercially viable;
  • International geothermal development faces additional risks associated with operating in jurisdictions outside of New Zealand;
  • Changes in the regulatory environment that adversely impact Mighty River Power;
  • A single (or multiple) catastrophic event generating losses not covered by insurance;
  • Insufficient access to future capital; and
  • Treaty of Waitangi and other Māori claims relating to ownership and governance of land, water and geothermal resources that directly or indirectly impose additional restrictions, conditions or additional costs

I plan to buy shares, despite those risks. There are no rewards without risk. I’m pleased that I will be able to make an individual choice as a citizen about whether to invest my money into Mighty River Power, rather than have the decision solely up to the Government,

MRP’s answers

March 10th, 2013 at 2:00 pm by David Farrar

John Armstrong writes:

What on Earth does the management at Mighty River Power think it was doing with its blanket refusal to answer questions posed by the very parliamentary committee to which those running the power generator are supposedly accountable?

Although it might seem relatively trivial in the grand scheme of things, such obstructive behaviour must technically come close to contempt of Parliament. It was certainly an affront, if not an outright insult, to the commerce select committee and thus to Parliament as a whole.

Mighty River Power’s unwillingness to respond to nearly 100 of the 133 written questions submitted by the committee was rationalised on the flimsiest, most ridiculous but ultimately the most dishonest of grounds – a pedantic and childish interpretation of what are standard annual queries.

It is a terrible precedent, which other Crown entities will be tempted to follow.

I think John is over-stating the case here.

I do think Mighty River Power was unwise to antagonize MPs by not answer the questions supplied in writing to them, but it is worth pointing out that the Opposition MP who wrote the questions allowed them to do so by just cutting and pasting them from those used for departments without using the correct terms.

A typical question was:

Did the Department/ Ministry and its associated agencies undertake any restructuring in the last year; if so, what? How much was spent on restructuring costs and what are the estimated savings as a result of restructuring in 2012/ 13?

MRP’s response was

Not applicable to Mighty River Power as Mighty River Power is not a Department, Ministry or associated agency.

And another was:

What new services, functions or outputs did the Department/ Ministry and its associated agencies introduce in the last financial year? Describe these and estimate their cost.

And the response again was:

Not applicable to Mighty River Power as Mighty River Power is not a Department, Ministry or associated agency.

Now I agree MRP could and should have been more forthcoming and could have answered the question on restructuring costs rather than be pedantic over the term used to refer to them.

However on the latter question, the question is not one suitable for an SOE. SOEs do not have outputs. Government Departments do.

The Oppositon MP who asked these questions should have taken half an hour to customise the questions so they are appropriate for an SOE. A diligent MP would have done so.

The MRP risks

March 9th, 2013 at 9:00 am by David Farrar

Jason Krupp at Stuff reports:

In addition, some energy sector commentators have questioned MRP’s decision to actively pursue geothermal projects in Chile and the United States as opposed to passively investing via an investment fund structure as it has done in the past.

Energy analyst Molly Melhuish said investors needed to be aware the strategy shifts MRP’s risk profile away from a “safe, utility-type investment prospect”, which is how the firm is being marketed to investors.

Countering those negatives is the company’s position within the New Zealand market, with MRP generating and selling about a fifth of the country’s power, a position that gives it fairly defensive earnings.

It is worth making the point that Mighty River Power does have risks around its investment plans. I don’t say that as a bad thing – it is in fact the risk which is one of the reasons the Government should not be sole shareholder.

Some people think running a company is easy. Just produce your product, mark it up, and sell it. Bang – guaranteed product.

Solid Energy is a good example of how quickly things can change. The global price for coal dropped 30% over two years. While power prices are less volatile, demand can be variable and you can end up with over-supply.

I am looking forward to reading the prospectus.

100,000 pre-registered

March 6th, 2013 at 3:00 pm by David Farrar

Tony Ryall announced:

As at 8.30 this morning, 100,000 New Zealanders have pre-registered their interest in buying shares in the Government’s partial share offer of up to 49 per cent of energy company Mighty River Power. …

“This compares with the ten days it took for pre-registration to reach the 100,000 mark with the Contact Energy share offer in 1999.

Superb. And there are 16 days still to go.

I wonder when Labour will announce their policy on whether they will compulsorily acquire any shares purchased by New Zealanders and return the companies to 100% government ownership?

All will they say, after all their huffing, that in fact they will do nothing to change the level of private shareholdings if they win the next election?

If Labour are going to have a policy of compulsory nationalisation, they should make this clear before the offer document is tabled.

Why we should not own commercial competitive companies

February 16th, 2013 at 11:00 am by David Farrar

Jason Krupp at Stuff reports:

Mighty River Power says years investing in overseas geothermal projects have given it the confidence to go it alone internationally at a time when Kiwi development opportunities are drying up.

The state-owned energy company yesterday announced it had reached a deal with GeoGlobal Energy (GGE) to withdraw from the GGE Fund after five years.

Mighty River is taking two Chilean development projects and a minority stake in US firm EnergySource with it, currently held by the GGE fund. In exchange, GeoGlobal will take control of the fund’s interest in Germany, and other non-EnergySource related assets in the US.

Mighty River has been a big investor in the GGE Fund for more than five years, with the bulk of the US$250m committed to the venture already invested. It will also pay GGE US$24.8 million (NZ$29.1m) to exit the fund.

“The fund was a way to learn about the international market, and we learned about what works and doesn’t work, and it is timely for us to move on,” said MRP chief executive Doug Heffernan.

NZ taxpayers should not be having their money at risk in a company that is investing in risky projects overseas. I don’t think there is anything wrong with MRP investing as they have. Business always has a degree or risk. Only those with no business experience fail to understand this. They think business is a licence to print money.

The only companies the Government should own are those that provide some sort public service (Radio NZ but not TVNZ) or maybe monopoly infrastructure providers (Transpower – but once could actually have that as a club-type membershp).

Take Solid Energy. That used to be a profitable company. But it has been hit by two major external factors. A drop in the price of coal due to China over-supply and a global move away from coal as fracking has opened up shale gas as an alternative energy source.

If Solid Energy had been sold some years ago, then private owners would bear the risk of the business downturn. There is no strategic reason for the Government to own a mining and energy company.

But now the taxpayer is going to be left having to finance a likely bailout of Solid Energy. Rather than spend money on hospitals or schools, the taxpayer is going to have to bail out a mining and energy company that it shouldn’t even own. I doubt it will ever be sold now – the global market has changed fundamentally. So we will be left with a dog that will cost taxpayers money.

I want a Government that invests in schools and hospitals – not coal mines and hydro-dams. It’s a great pity they were not all sold many years ago.