Demand likely to be high for assets

Mighty River Power generation facilities will be part of the state-owned enterprise's listing...
Mighty River Power generation facilities will be part of the state-owned enterprise's listing expected by the middle of next year. Photo supplied.
Prime Minister John Key has indicated that Mighty River Power and Genesis Energy will be the first of the state-owned enterprises to be partially sold off. Business editor Dene Mackenzie looks at the process.


New Zealand investors will get the chance during the next three years to take a stake in four of the country's energy producers and depending on timing, demand is expected to exceed supply.

Prime Minister John Key has used National's election victory last week to claim a mandate to continue with the policy of the mixed ownership model (MOM) for Mighty River Power, Genesis, Meridian and coal producer Solid Energy.

The Government's stake in Air New Zealand, about 75%, will also be reduced during the next term of Parliament.

The Government will continue as the major stakeholder, holding at least 51% of the companies.

Labour campaigned hard to stop the partial sell-down but it now seems inevitable the sales will proceed and the debate was seen as a defining election issue.

The partial listing of Mighty River is expected to happen in the second quarter of next year, followed by Genesis later in the year.

Even before the election, sharebrokers and consultants had been employed to consider how best to tackle the partial sale of the assets. Just before the election, an Australian consulting firm which includes former Australian prime minister Paul Keating on its payroll, was taken on to provide further guidance. It seemed that Mr Key had the ultimate confidence in the election result.

Brokerage fees and other expenses are expected to cost up to $100 million. The Government says those firms that want the business must keep fees down, but based on previous floats of public assets, the costs of sale are typically up to 2%.

The Government has placed a $5 billion to $7 billion price tag on the assets being sold over the next three years. Volatile markets may keep the price down initially and could lead to the Government retaining more than 51% if the right price is not reached. However, the pressure to repay debt without borrowing - as promised by National during the election campaign - will weigh heavy on the minds of the new Cabinet.

This week, the OECD gave its approval to the plan to partially sell the assets, saying the Government needed to get back to budget surpluses, improve controls on the quality of social spending and seek to sell some state assets.

Brokers contacted by the Otago Daily Times this week said it was important for the Government to get the first sale away successfully, to build interest in the market. The first sale needed to create momentum which saw demand for the remaining assets grow as they were released to the market. The NZX would receive a major boost with the listings.

The Government was not likely to look around the world for guidance on the sale price.

This sell-down would be different from Contact which was sold off completely, brokers said.

Mighty River, valued at between $3.7 billion and $3.8 billion, owns nine hydro stations along the Waikato River and was the leader in geothermal generation in partnership with iwi.

The Maori Party, which is holding talks with its constituents, says iwi want a major stake in any asset sales.

Mighty River also has a commercially driven board chaired by Joan Withers and includes professional directors Sandy Maier and Kevin Smith.

Genesis is chaired by former National prime minister Dame Jenny Shipley with only professional director Rob Fisher being an easily identifiable name on the board.

Genesis mainly relies on renewable energy, including thermal, wind and hydro. It does, however, have the Huntly coal-fired plant in its portfolio.

The generator has total assets of $3.8 billion and total equity of $1.7 billion.

The Government needs to carefully analyse investor demand for the assets. New Zealand stocks had outperformed on the international market, and appeared expensive to foreign investors.

Sam Stubbs, chief executive of Tower Investments, said SOEs were a rare commodity to put on the market and would create confidence in the investment community.

"They are big, stable, liquid assets with the likelihood of a consistent dividend stream. Listings will be positive for the capital markets."

Money could not stay in cash forever, he said. Once global markets were more stable, people would look for reliable and stable assets.

Mr Stubbs was confident that the Government would structure the assets so Kiwis would get a decent opportunity to buy stock.

Markets love stability, and that is what the National election win provided, the fund managers said.

Tower announced two weeks ago it was planning a $200 million pre-Christmas spend-up on the New Zealand and Australian sharemarkets.

Mr Stubbs said Tower planned to trim its northern hemisphere equity investments and to reduce its holdings in cash in favour of increasing its New Zealand exposure to shares, bonds and property to 55% of its total funds under management from the current 45%.

About $160 million of the $200 million increase would be re-directed towards New Zealand.

"We have a strong home bias now. If you run the numbers and do the modelling, it all stacks up. We are relatively bullish."

Mr Stubbs had earlier tipped strong demand from local investors for the state assets - thanks to the growth in KiwiSaver and to the inability of interest rates to keep up with inflation.

"If these stocks look like they are going to pay reasonable dividends in the long-term, we think the mum and dad Kiwi investors will be encouraged to come back into the stock market in a way that we have probably not seen since the last major round of power company listings," he said.

The dividend yields of the state assets was also a major point of debate during the election campaign.

Traditionally, Mighty River Power, Genesis and Meridian have not been good dividend payers to the Government shareholder, despite some of the claims made in the heat of the campaign.

Mighty River had a dividend yield of 8.3% last year but to achieve that, it paid out 311.1% of its net profit of $85 million. That meant it either used reserves or borrowed to pay the dividend.

Mighty River had a total shareholder return (TSR) of 7.5% last year and 55.2% in 2009, a year the directors called exceptional.

Genesis had a dividend yield of 2.6% last year and paid out 34.8% of its profit of $69 million. Genesis had a 15.6% TSR last year and -15.6% in 2009.

A more commercial model will see those dividends improve.

Some of the figures used during the election campaign showed that the SOEs up for partial sale returned on average 17.6%. However, that return included the capital gain of the assets which cannot be realised until the assets are sold.

While the figures used put a glow on revaluations, they did not take into account the fact that sometimes assets are revalued downwards.

One of the complaints being made about the sale process is that the companies will have the ability to put up power prices to households already struggling to pay their bills.

However, the brokers talking to the ODT said that competition would more than likely keep prices down. It had become so easy to shift power companies that any price spike would see droves of customers leave, as happened to Contact Energy after the timing of increases in both retail prices and directors' remuneration.

The latest PwC Leading Energy report shows there are two million ICPs spread across five major retailers and their subsidiaries, and several smaller companies, in New Zealand.

The ICP is a unique number given to the connection point between your site and the network company's line. It can be found on the middle right-hand side of your bill.

Genesis has the largest market share with 23% of individual ICPs on its books along with 3% from its Energy Online subsidiary.

Contact is next with 25% market share followed by Mighty River power with 21%.

PwC said that after nearly 13 years of wholesale market reforms, the retail sector had yet to find its true modus operandi.

Underlying the retail electricity market was a set of characteristics typical in many other retail markets in New Zealand such as: the overall market is small in size; most retail organisations lack scale; cost to serve compared to Australian comparator companies is high; retail is heavily influenced by many wholesale market constraints; and there is a historically relatively low churn rate.

Over the past three years, the winner in the customer acquisition stakes is Mighty River Power. When its Mercury Energy customer base is combined with Bosco Connect - its wholly owned subsidiary - net ICP growth was an impressive 84,000 in 2010.

Powershop has grown to 16,500 ICPs since starting operations in early 2009. When coupled with its parent company Meridian Energy, this has been the driver of their combined growth of 24,000 ICPs. Meridian is looking to change its retail portfolio make-up and during 2010 increased its North Island customer base by 17%.

Genesis decided to reduce its dependence on uneconomic generation plants to back its large retail customer base and sought additional flexibility to supply the wholesale market. As a result, it is now looking to undertake a more selective customer acquisition campaign, particularly in the South Island.

Genesis' ICPs have dropped by some 48,000 in the past three years, offset to some extent by the growth in Energy Online's ICP numbers.

- dene.mackenzie@odt.co.nz

 

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