Home > Dollars & Sense, The Body Politic > A Clear Warning to Investors in SOEs…

A Clear Warning to Investors in SOEs…

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soe powercos

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The recent financial crisis and near-collapse of Solid Energy – one of the five, state owned enterprises planned for partial-privatisation – should serve as a warning for those investor-vultures circling to buy shares in any of the SOEs.

In fact, recent history regarding Air New Zealand, Kiwiwail, and (non-privatised) BNZ in 1991,  are indicators that privatisation of state assets is not a guaranteed roadmap to wealth,

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The Air New Zealand crash

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It is noteworthy that one of the cause of Air New Zealand’s collapse was it’s foolhardy buy-out of Australian airline, Ansett,

First, the decision by Air New Zealand to pay dividends and second, the decision to buy the second half of Ansett. Both moves turned out to be considerably more beneficial to the interests of Brierleys than those of Air New Zealand.

Take the Ansett purchase. In early 1999, Cushing announced that Air New Zealand was vetoing Singapore Airline’s bid to buy News Corp’s 50% of Ansett Holdings (Air New Zealand had held the other 50% of Ansett since September 1996). Instead, it decided to pay News Corp $A580 million and get 100% control.

It’s most likely true that Air New Zealand paid too much for the stake and that directors had too little information about Ansett’s financial and engineering state. These are well-aired opinions, but are secondary to the main question that should be asked: Why did Air New Zealand buy the second half of Ansett at all? It’s not just that it was hopelessly out of its depth buying an airline twice its size. It’s just hard to see any benefits – to Air New Zealand, that is.

Source: IBID

On top of that were big dividend demands from one of Air Zealand’s major shareholders, Brierley’s,

The at times cash-strapped investment company held between 30% and 47% of shares over the period so, based on the total dividend of $765 million, Brierley reaped an estimated $250 million to $380 million from the airline. And Air New Zealand’s decision to buy the second half of Ansett, cutting Singapore Airlines out of the deal, contributed to Brierleys being able to do its own deal with Singapore.

In April last year, two months after Air New Zealand bought Ansett, Brierleys sold Singapore Airlines all its Air New Zealand “B” shares for $285 million, or $3 a share. It was arguably the last exit option for Brierleys from these shares, and, apart from a spike at the end of last year, Air New Zealand shares have largely tracked downwards ever since – they were trading around 30 cents as Unlimited went to press.

Source: IBID

In other words, Air New Zealand had over-extended in unwise investments (as has Solid Energy), and was bled dry by rapacious demands for dividends (as did Faye Richwhite in NZ Rail in the early 1990s).

How does this relate to the upcoming partial-sale of Mighty River Power?

Recent revelations that Mighty River Power has shaky investments on Chile, should cause potential investors to pause for thought,

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Key struggles to push Chilean investments

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According to the TV3 story above, “Mighty River Power has spent $250 million at the geothermal plant in southern Chile, but has just written off $89 million as the investments struggle“.

To which Key responded casually,

There is always risk.”

Dear Leader  seems somewhat blase about investors’ risks? Of course he is. It’s not his money.

The Crown Ownership Monitoring Unit (COMU) reported,

Impairments

During the period, the Company recognised $91.4 million of impairments principally reflecting its investment in the GeoGlobal Partners I Fund (GGE Fund), and its greenfield explorations for potential developments in Chile and Germany.

This impairment followed higher than expected costs at the Tolhuaca project in Chile due to the worst winter in 40 years adversely affecting drilling performance and only one of the two wells having proven production capacity. The value of GGE’s investment at Weiheim in Germany, has been impacted by increased costs due to required changes in the drilling location following the 3D seismic surveys and delays from environmental court challenges which have been resolved post balance date.

The GGE Fund had not raised capital from other investors by the end of the 2012 and Mighty River Power made the decision not to invest further capital into the existing structure. Overall, the impairment charge of $88.9 million for the German and Tolhuaca assets and the management company of GGE LLC leaves a residual book value of $91.8 million.

Source: Mighty River Power LtdResults for Announcement to the Market

On top of  Mighty River Power’s dodgy investment in Chile, New Zealand is now experiencing what is being called the worst drought in seven decades  (see:  North Island’s worst drought in 70 years). As Climate scientist Jim Salinger said about New Zealand’s current weather patterns continuing, and becoming  similar to the Mediterranean,

What it means is that if it just doesn’t rain for at least four months of the year, it means you have to bring in your water from elsewhere.”

Source: IBID

As all investors should bear in mind; most of our power generation is generated from  hydro stations. Mighty River Power, especially, derives most of its electricity from eight  hydro-electric stations on the Waikato River.

Mighty River Power CEO, Doug Heffernan has given a clear warning,

Following the lower than average inflows into the Waikato catchment during the last quarter [to December 31], Mighty River ended the half year at just 69 per cent of historical average [hydro storage].”

And Equity analyst Phillip Anderson of Devon Funds stated,

The same period last year they got really strong inflows, and this is the exact opposite . . .

In the second half of this reporting year they’re going to have to buy a lot more electricity to feed their customers, either on the spot market at a lot higher cost or use their [Southdown] gas plant.

We expect the second half of this year is going to be a lot tougher for them, they should get their margins squeezed if that all plays out.”

Source: Parched Waikato could hit Mighty River Power

The equation is blindingly simple,

Less rain = less water = less electricity generation

The question that begs to be asked is; where does the risk of investing in SOEs fall – private investors, or the State?

The answer I submit to the reader is, that like Air New Zealand, it will be private investors who bear the brunt of all risk. The State will simply pick up the pieces,  buying up shares at bargain basement prices, should anything go wrong.

Electricity generators like Mighty River Power will simply never be allowed to fail. Had the Labour government in 2001 allowed Air New Zealand to collapse, the fall-out to the rest of the reconomy would have been too horrendous to contemplate, and flow-on effects to other businesses (eg; exporters and tourism) and the economy would have been worse than any bail-out.

But any bailout will involve a massive loss for investors, as their share-value plummets. Again, Air New Zealand was an example to us all.

As the impact of climate change creates more uncertainly for our state power companies, investors need to think carefully before committing one single dollar toward buying shares,

Do I really want to bear all the risk?

Those who lost out on their investments in Air New Zealand in the 1990s will probably answer,

No.

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References

The Air New Zealand crash (1 November 2001)

A history of bailouts (7 April 2011)

Foreigners important for SOE sell-downs: Treasury (30 June 2011)

No law stopping foreign investors (16 Dec 2011)

Parched Waikato could hit Mighty River Power (22 Feb 2013)

Mighty River Power shares float mid-May (4 March 2013)

Taking the plunge in Mighty River (9 March 2013)

Key struggles to push Chilean investments (9 March 2013)

North Island’s worst drought in 70 years (10 March 2013)

Other blogs

Seemorerocks: An Appeal for a New Zealand Risk Assessment

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= fs =

  1. SpaceMonkey
    11 March 2013 at 3:08 pm

    “There always risk”… unless you’re a bank or deemeed to-big-to-fail corporate, in which case risk = socialisable loss.

    • 11 March 2013 at 3:13 pm

      Sums it up nicely, SM.

      And in the process, the Nats collect a few billion along the way to help balance their books after two unaffordable tax cuts…

  2. 11 March 2013 at 3:21 pm

    Not a good investment at all for Kiwi mums and dads

    • Paul Carruthers
      11 March 2013 at 3:33 pm

      Money is the only thing in life that flows uphill. The more of it you have, the more of it you make. Privatisation is VERY profitable, but only if you own the asset.

  3. Sentient Headmounted Laser
    11 March 2013 at 3:45 pm

    Mum and Dad investors? More like a bailout funded by the middle class.

    • 11 March 2013 at 11:17 pm

      @ Sentient Headmounted Laser – I think that’s one of the most apt insights yet.

  4. Paul Carruthers
    11 March 2013 at 11:16 pm

    A favourite strategy of this particular circus…

  5. Priss
    12 March 2013 at 12:32 am

    Hah! It’ll serve investors right if their share-prices start to drop because of lower profits! I have no sympathy for them at all!!

  6. Notamushroom
    12 March 2013 at 4:55 am

    Great blog and great article.

  7. 13 March 2013 at 4:47 pm

    A stunning article Frank…..lots of ideas for L2Ed there – called trigger material 🙂
    Now take an extreme position. We can’t live without water, it is needed for life giving properties plus for crops which provide food for life. We can live without electricity – I know, perish the thought – but if/when the proverbial hits the fan I know electricity will have to take a back seat. Forget the “investors” it will be our strongest instinct kicking in, survival.
    On a less scary note, maybe we could try blackmail 🙂 Time to advertise JK’s connections with Goldman Sachs as a shareholder, who also happen to be the umbrella co. for ML and BofA, all who happen to work with Lazards Australasia in the sale of privatization of SOE’s, who happen to be the front Bank for sale of the energy companies. JK will no doubt benefit personally with these sales. Also isn’t it time MP’s were prevented from having Blind Trusts? Conflict of interest has to be the prime reason, the lack of transparency when making government decisions and held to account ?

  1. 13 March 2013 at 7:53 pm
  2. 14 March 2013 at 1:06 am

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