Mighty river of gold unlikely

Power of one: Contact Energy's share price hasn't only gone one way.
Power of one: Contact Energy's share price hasn't only gone one way.

Architects are boning up on the design of wall-to-wall aquariums. Car dealers are stocking up on Bentley brochures. Cosmetic surgeons are sharpening their knives.

Expectations of money flowing from the Mighty River Power float are high. The Government, after all, has staked big political capital on it being a success - a bad investor experience with this one could hurt its chances with the next cabs off the rank.

OK, so I made up the stuff about aquariums, but I'll pin my colours to the mast. I intend to buy shares in the float, barring something unexpected happening.

However, Mighty River won't be a big part of my portfolio. Although I think the business is a good one and the price is likely to be acceptable, I don't expect it to be a sure thing or a mighty river of gold.

Despite the absence of a prospectus as yet, we already know a lot about Mighty River and we know a lot more about a similar company that we can buy right now - Contact Energy.

Like Mighty River, Contact was floated in a government share offer and, like Mighty River, it is a generator/retailer with a mixed portfolio of generation assets.

It has hydro stations on the Clutha River, geothermal stations in the Taupo area and gas stations at several North Island sites. Energy Link figures this month gave Contact a generation market share of 26 per cent, compared with Mighty River's 19 per cent. Contact's retail operation has a market share of about 23 per cent, while Mighty River has about 18 per cent.

Contact shares were trading around $5.43 last week, valuing the company at about $4 billion. The price is not far from the 12-month closing high in October of $5.54.

In each of the last two full years, Contact has paid a dividend of 23c a share and it appears to be heading for a similar payout this year - the interim was 11c - implying a net yield of about 4 per cent.

That's an overview, but, if you want to wallow in data, there is a huge quantity gushing out of Contact on a regular basis.

Notwithstanding the fluctuating effects of rainfall, or gas prices, or transmission constraints, the overall market is probably slightly oversupplied with power and will be for the next few years. In that respect, Mighty River is floating into a different market than Contact did in 1999.

In April that year, the public bought in at $3.10 a share, while United States utility Edison Mission bought a 40 per cent stake for $5 a share, or $1.2b.

It wasn't an immediate gravy train for investors - during the year the shares traded as low as $2.90 - but, after 2002, there was good capital growth and the shares topped $9 in 2007.

One of the big factors in that growth was a redetermination of Maui gas reserves in 2003, which meant less gas was available for generation in subsequent years. With tighter power supplies, companies with a mix of generation, such as Contact, could make a lot more money - for a while anyway.

Today not only have more renewable energy power stations been built but electricity demand has eased with the decline of some big industrial users, and the potential shutdown of Tiwai Point aluminium smelter will keep the industry guessing for the foreseeable future.

One analyst said the issue would not be going away.

"Even if [power supplier] Meridian and Tiwai come to some sort of agreement, we will never really trust it again. So it will be a long-term overhang."

Another unfathomable overhang involves Contact's 52 per cent shareholder Origin Energy. Although Origin has previously tried to buy out the rest of Contact, speculation has lately focused on the possibility it could sell down, influenced by the strong New Zealand sharemarket and the huge capital demands of its Australian project to turn coal seam gas into liquefied natural gas.

As usual, this kind of speculation can only be met with a shrug. It could happen, but who knows?

The lesson here is that, as with Contact and Maui gas, Mighty River will be affected by the unexpected and its shares will go up and down like the water level in the Waikato.

And after the initial rush of enthusiasm from the float, investors seeking energy exposure should regularly review their holdings to see whether Mighty River, or Contact, or Trustpower for that matter, is best placed to deal with market conditions.

One pointer in that judgment is share trading by company directors. So what have Contact's board been doing lately?

As far as I can tell, the only director to trade over the last year has been deputy chairman Phil Pryke - and he's been selling. He sold at $4.66 last April and at $5.40 in October, realising about $221,000 in total.

He also sold in September when the company issued shares in a profit distribution plan for its final dividend and offered an immediate buyback at $4.87. He was among a minority of shareholders to sell - just 17.5 per cent of the issue was sold into the buyback.

If this means anything - and of course it may not - it could mean the board doesn't see any significant gains on the horizon.

Tim Hunter is deputy editor of the Fairfax Business Bureau. Disclosure: Interests associated with Tim Hunter own shares in Origin Energy.

Sunday Star Times