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Buying a chunk of Mighty River Power – smart or stupid?

Buying a chunk of Mighty River Power – smart or stupid?

Weighing up the prospects of the first SOE cab off the rank, selling off part of Mighty River Power looks to be a Cornucopia bloodbath.


 
If you’re looking at the prospect of having your own chunk of Mighty River Power, the first thing that might occur to you is what a pity it is that it’s this one that’s the first cab off the rank.

With an obvious risk around how the initial share price is going to play out, the ideal situation would be having the luxury to sit back and watch the circus around one of the other SOEs first.

Then, when the dust settles and Katniss has successfully gotten out of the Cornucopia bloodbath alive, picking off one of the other Tributes at a leisurely pace.

Mighty River Power is probably the most attractive of the beauty queens on the stage. It has 20 percent of the retail market through its brands and 90 percent of its generation is renewable (17percent hydro, 40 percent geothermal).

Its portfolio mixture means it’s sweet as in a wet year or a dry year. In fact, its biggest problem is probably simply making sure customers pay their bills.

It’s in the upper North Island, while other players are in the south, away from the population base. It’s got the whole world in its hands. Well, the Waikato River, at least.

And in 2010 it reported a 17 percent increase in electricity generation. If that doesn’t make you tingle in your naughty places, nothing will.

(But of course, the SOEs have been tidying themselves up for some time in anticipation of a sale – so naturally, they will be presented in the most positive light possible. Pinch of salt. Or a truckload.)

So, to buy or not to buy? Let’s assume that you’re one of these average New Zealanders, or Mum and Dad investors that the National government keeps banging on about, that you’ve got the spare $1,000 in a shoe box under your bed, and that you’re at liberty to throw it at an SOE. Well, do you?

Yes! You buy. Common sense tells you the government has a vested interest in making sure this is successful, not just so that the other SOEs also go off like a frog in a sock, but also because this is going to be National’s legacy for years to come. If Mum and Dad investors take a bath, they – and their kids – will remember it, not just at the next election but also a long way down the track.

No! Don’t do it. Or at least wait and see what the sale madness is like, watch how the dust settles, let the chips fall where they may. Invest in some clichés instead. Then go for the next SOE to be auctioned off. Forewarned is forearmed, and all that.

Yes! Get in there. Fill your boots! Everyone wants a piece of the action and it’s hot property right now, so buy, buy, buy! Also known as the Harvey Norman Approach and to be accompanied by plenty of shouting and starbursts.

No! You’re mad. Electricity consumption is looking to decline. Ministry of Economic Development figures indicate that consumer energy demand will likely grow at around 1 percent per annum over the next decade. Contrast that with the 1.4 percent we’ve seen since the 90s. And energy use relative to GDP is getting better all the time. By 2030, the rate of gigajoules used per $1,000 of GDP could improve by more than 20 percent.

As for the uptake of solar PV? We’ve been slow so far, but MED reports say we have excellent solar resources just waiting to be tapped. Nelson has our highest solar capability, just behind Madrid and LA but ahead of Nice and Barcelona.

“Investment in PV generation would allow further diversification of New Zealand’s electricity supply, hedging against increased fuel cost, availability of fuel and carbon prices,” says an MED report. Meanwhile, the poor old grid suffers from an imbalance of generation in the South Island, despite the majority of demand being in the North Island.

“Many of the remote lines that were installed under government subsidies during the 1940s-1980s are nearing the end of their design life. The replacement of these lines with a stand-alone power systems may, in some cases, be a more economical means of providing electricity than replacement and ongoing maintenance of these remote lines [Empower Consultants, 2008].”

In other words, solar PV for the win.

Other issues around the power companies? There’s a lot of hype and political influence going on around asset sales right now – an understatement. And there’s only one way to find out whether or not the initial share price will end up a fair one.

That said, the industry is an oligopoly and the Commerce Commission is always wary of ensuring sufficient competition and keeping prices sensible. The current water rights debate is an issue in the sales, even if Key doesn’t want to admit it, and Mighty River is essentially reliant on or in bed with (choose your term) local iwi for access.

“We continue to work in partnership with Maori land trusts across a range of geothermal resources, and we continue to explore opportunities for future development options and expanding economic participation,” the company said diplomatically in its latest annual report. “In the Waikato River catchment, our interests around water quality, guardianship with kaitiaki and contributing to the protection and enhancement of the river, are closely aligned with local iwi.”

It remains that Mighty River is probably the best horse to bet on, if you were the gambling type. Its only problem will be getting customers, keeping customers, and getting them to pay their bills. A power company’s ideal customer is a Remuera house with 15 bedrooms, a heated swimming pool and a spa pool, but a likely customer under Mercury Energy is a small South Auckland home with equally small usage.

Moreover, the retail sector is very volatile with lots of customer churn. All the power companies are looking for the silver bullet that will make customers loyal, regardless of price.

And Mighty River’s new Glo-Bug pre-pay gimmick hasn’t exactly had the most positive media coverage in terms of user-friendliness.

Still, with a new geothermal station due for completion next year and investments in the US, Chile and Germany through GeoGlobal Energy, Mighty River Power is the one to watch – for more reasons than one. And based on our highly scientific reader poll this week, just over half of you so far say you'll be looking to get a piece of the share pie.

Will you get yours?