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Where did Mighty River get that spare $50m?

Written By: - Date published: 7:57 am, October 16th, 2013 - 44 comments
Categories: energy, privatisation - Tags:

So, Mighty River Power has so much spare cash at the moment that it just doesn’t know what to do with it. Rather than pay out a special dividend, they’re going to buy back some shares (it’s more ‘tax-efficient’ than dividends, because it allows investors to pocket profits without paying tax, and it will support the spare price during the Meridian float). This, naturally, has raised eyebrows because these shares were only just sold to ‘mum and dad’. But the bigger question is: where did Mighty River get a spare $50m in the first place?

From you and me, of course. By charging too much for power.

Now, seventh form economics was a while ago, but I’m pretty sure that efficient market hypothesis says that a company that is making excessive profits (thanks to the Randian heroes running the show, no doubt) will lower its prices in an attempt to garner more market share, thus eliminating the super-profits and delivering a better result for customers.

But Mighty River isn’t doing that. It’s sitting on so much spare cash it’s using inventive methods to get rid of it.

What does the majority shareholder, the Government, think of Mighty River preferring high profits over lower prices. Seems Johnny Key’s just fine with that:

3. METIRIA TUREI (Co-Leader—Green) to the Prime Minister: Does he stand by his statement that Mighty River Power’s buy back of $50 million worth of shares is “highly normal”?

Rt Hon JOHN KEY (Prime Minister) : Yes. Air New Zealand, for example, started the share buy-back programme last year and is planning to purchase up to $45 million of its shares. Infratil is planning a $65 million share buy-back. Telecom did a $200 million share buy-back last year. Comvita did a buy-back last year. This is normal business practice and the decision is made by the board in the interests of the company and its shareholders.

Metiria Turei : If Mighty River Power is charging so much for power that it has $50 million lying around and nothing better to do with it than buy back shares, what action has the Government taken, as the majority shareholder in the company, to ensure it reduces electricity prices for families and for businesses?

Rt Hon JOHN KEY : We have a very competitive electricity market in New Zealand. People are free to choose. The member is making a huge mistake in showing her complete lack of knowledge of financial markets if she wants to conflate pricing with the capital structure of the company.

Metiria Turei : When power consumption in New Zealand is falling but electricity prices are rising at four times the rate of inflation, such that electricity companies are using the surplus cash to buy back their own shares, does he honestly believe that the electricity sector is working for New Zealand families and businesses?

Rt Hon JOHN KEY : Yes. I think we have a competitive electricity sector. I say this to the member: it will be interesting to see when she goes knocking door to door to tell the least well off families in New Zealand how much they are going to enjoy paying $500 a year for her emissions trading scheme.

Metiria Turei : Can the Prime Minister confirm—[Interruption ]

Mr SPEAKER : Order! I have called Metiria Turei, if she wants to continue with her supplementary question.

Metiria Turei : Can the Prime Minister confirm that the Government, as the majority shareholder in Mighty River Power, prefers that it distributes $50 million in extra profits to shareholders in a share buy-back, rather than lowering its electricity prices by $50 million for families and for businesses?

Rt Hon JOHN KEY : Whether the company engages in a share buy-back is a matter for the board.

44 comments on “Where did Mighty River get that spare $50m?”

  1. darren 1

    It has it on its books, its merely a blip on the horizon, you worry too much about nothing.

  2. Lanthanide 2

    “But the bigger question is: where did Mighty River get a spare $50m in the first place?

    From you and me, of course. By charging too much for power.”

    Of course, had MRP still been owned by the government, it is very likely it would have the same $50m. Only it would be going to the government as a dividend, rather than used for a share buy-back. But the outcome is the same: households and businesses paying more for power than they should be.

    • Lightly 2.1

      which is why we need NZ Power. Over-priced power is a tax (and a bad tax) no matter whether its going to public or private coffers.

      • Draco T Bastard 2.1.1

        NZ Power is a waste of time. Renationalisation would be much better.

        • Tamati 2.1.1.1

          +1

        • The upside of New Zealand power is that you don’t have to splash out as much capital on the power companies, and nobody can accuse you of being too radical and anti-capitalist. The downside is that you still have a lot of essentially free money going to overseas investors care of our private power companies.

    • felix 2.2

      Yep, as long as these entities are set up to behave as corporations for profit that’s exactly what they’ll do.

      Such important pieces of infrastructure should never have been treated this way.

      • Draco T Bastard 2.2.1

        +1

      • Lanthanide 2.2.2

        Yes, but the flip-side is that a profit motive is an effective method of ensuring finite resources are used in the most productive fashion.

        Not the only method, but a proven one.

        • Draco T Bastard 2.2.2.1

          Yes, but the flip-side is that a profit motive is an effective method of ensuring finite resources are used in the most productive fashion.

          Incorrect, the profit motive is, as a matter of fact, an effective method to ensure that finite resources are used up ASAP and not efficiently either. It’s why we have cars rather than good public transport and why National is looking to dig up all our resources and sell them.

    • Draco T Bastard 2.3

      That would depend upon if it was run as a government service or as an SOE. As a government service the government doesn’t get to demand a dividend and so the surplus can be decreased making prices lower but still maintaining enough income to maintain existing infrastructure and building new infrastructure as needed. Even the latter could be removed from the electricity price if the government paid for new infrastructure through taxes.

  3. ghostwhowalksnz 3

    Its not just a ‘share buyback’ but its also a reduction in the number of shares on issue, months after they just issued a whole swag.

    Seems like the board has advisors who say one thing and then say another- which is of course code for politicians.
    Then again, it makes it easier for a corporate takeover of MRP by one of the other power companies, which is what this whole share sale schmozzle is about

    • Lanthanide 3.1

      Yeah, I think Key saying it’s just a normal part of business is being disingenuous.

      I think you’d be hard-pressed to find any companies that had a share buyback within 5 months of an IPO.

    • bad12 3.2

      No it’s not a reduction of the number of shares on issue, that reduction only occurs if the shares bought back are cancelled,

      Mighty River have already stated that as a result of the share buyback they have no intention of cancelling the shares,

      Which then of course begs the question of where the shares are destined to be ‘onsold’ to…

      • ghostwhowalksnz 3.2.1

        Thats interesting, that contradicts one of the other reasons the market likes it.

        “Share buybacks typically reduce the number of shares on issue in a company, boosting the value of the remaining shares.”- So thats not the reason
        As well they say the amount involved is too small so they need to spend more !

        This was interesting from English before the float, when he was taunting Labour about their opposition to asset sales

        Bill English says he is still waiting for Labour to pledge to buy back the shares that National is planning to float in four state-owned companies. The Minister of Finance is waiting in vain.”
        Armstrong in The Herald -http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10814415

        Buyback the shares ? Who would have guessed.
        Seems like a good question to ask English in parliament- ?

  4. Saarbo 4

    John Key quote:

    “…The member is making a huge mistake in showing her complete lack of knowledge of financial markets if she wants to conflate pricing with the capital structure of the company.”

    I am trying to work out why Key would have made the above statement because “pricing” drives profitability, which directly affects “capital”…so of course “pricing” affects “capital structure”, he is just trying to do the classic National Party baffle with bull shit.

    Metiria has not made a “huge mistake in showing her complete lack of knowledge of financial markets…”, quite the opposite, John Key is showing his lack of knowledge.

    Ultimately they have $50m surplus cash because they have over charged customers.

    • Lanthanide 4.1

      I think the point Key is making is that decisions about capital *can* be independent of those about pricing. He hasn’t established that this is the case in this instance, however.

      • Tracey 4.1.1

        It’s also unusual for such a large majority shareholder to be so disinterested in Board decisions and the future direction of their company.

        • ghostwhowalksnz 4.1.1.1

          Not really, Solid Energy Comes to mind

          • Draco T Bastard 4.1.1.1.1

            This government had a lot to say about the direction that Solid Energy went. Most of what they said increased Solid Energy’s debt so that the government could pull out larger dividends.

    • Draco T Bastard 4.2

      John Key is showing his lack of knowledge.

      No, John Key is lying.

      Ultimately they have $50m surplus cash because they have over charged customers.

      Exactly.

  5. Tracey 5

    Infratil and Air New Zealand, have they just had a huge portion sold to market by NZers?

    Is it normal for this to happen immediately AFTER a large stock exchange float and sale?

  6. geoff 6

    Electricity price increasing at four times the rate of inflation!

    Utterly criminal.

    Not that you’ll hear much from the country’s comfortable commentariat. Probably the Mora’s, Armstrongs and O’Sullivans etc have small or non-existent mortgages, well insulated houses, and secure income. What problems, they ask?

    Disconnected. Out of touch. Ruining the country one smug remark at a time.

  7. Ozymandias 7

    Seventh-form economics should have taught you that a commerical company’s first responsibility isn’t to its customers – it’s to its shareholders. Under capitalism a commercial entity needs only to ‘look after’ its customers to the extent necessary to build or maintain its market share or, in other words, charge as much as the market will bear. In the electricity sector that means the market price is just below the cost of the most expensive generation from time to time.

  8. Plan B 8

    The 50 million has to have come from borrowing if the company owes any money at all then not paying off the debt is the same as borrowing more. So they are leveraging up – each share now has more debt

  9. Bill 9

    Duly noted that JK only seems able to use ‘dead hand’ business speak in response to Metirea’s more social-centric questioning.

  10. Draco T Bastard 10

    Now, seventh form economics was a while ago, but I’m pretty sure that efficient market hypothesis says that a company that is making excessive profits (thanks to the Randian heroes running the show, no doubt) will lower its prices in an attempt to garner more market share, thus eliminating the super-profits and delivering a better result for customers.

    Not exactly.

    Theory starts it with a monopoly making super profits which encourages other companies to come in to the market with lower prices to try to capture some of the market from the existing monopoly. This will lower profits across the board. If we take the efficient market hypothesis to its logical conclusion then there are no profits (to be more correct, profits will be infinitesimal).

    Of course, Steve Keen has proved that even competitive firms use monopoly pricing to garner super-profits. This would be especially true in a demand monopoly situation such as electricity.

    Rt Hon JOHN KEY : We have a very competitive electricity market in New Zealand.

    No we don’t, we have the illusion of a competitive market with all the added costs that that brings but none of the theoretical benefits. Prices are going up, profits are increasing and people are suffering because of it.

    Time for renationalisation and the efficiencies and cost savings that that brings about.

    • Lanthanide 10.1

      “Of course, Steve Keen has proved that even competitive firms use monopoly pricing to garner super-profits. This would be especially true in a demand monopoly situation such as electricity.”

      I’m now effectively in the market for re-carpeting my house, and have noticed the plethora of carpeting companies with ads on TV and all the different places that sell carpets and floor coverings.

      I can only conclude from the massive advertising spend, that all of these companies are raking it in and there’s no true competition going on – if there was, surely we’d see fewer companies, bigger companies and less advertising?

  11. darren 11

    Of course this all became possible under Labour, where dividends were extremely high because of record high prices, 78% in 9 years..shamefull.

    • Draco T Bastard 11.1

      Ah, the old but Labour did it toooo whinge which completely ignores the facts that 1) nobody here want Labour to continue doing it and 2) that Labour has promised to change things.

  12. tricldrown 12

    During the clark years thetr were droughts and electricity shortages due to a rapidly growing economy .
    The clark govt gave these profits back to the people as working for families the cullen fund huge increases in R&D etc.

  13. darren 13

    rubbish, just as many droughts when national was in, and not the increases in power, 78%

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    Kiwis are still paying too much for ACC so that the National Government can balance its books, Labour’s ACC spokesperson Iain Lees-Galloway says. “ACC Minister Judith Collins told Cabinet levies were too high but ACC’s proposed cuts would impact the...
    Labour | 21-04
  • Collins’ memory recovery raises further concerns
    Judith Collins sudden memory of briefing the New Zealand Ambassador to China about her dinner with a Chinese border official and her husband's fellow Oravida directors raises further concerns about exactly what was discussed, Labour MP Grant Robertson says. "This...
    Labour | 21-04
  • MP to attend progressive politics conference
    Labour MP Grant Robertson will attend the Progressive Governance conference in Amsterdam later this week. “This conference brings together Social Democratic parties from around the world to discuss how progressive politics should work in the post global financial crisis environment....
    Labour | 20-04
  • Storm fans fire service commitment
    Further damage from the huge storm that battered the West Coast was prevented by the great work of our volunteer Fire Service and locals will be extremely grateful, Labour’s MP for West Coast-Tasman Damien O’Connor says. “Our region has been...
    Labour | 19-04
  • Time for Ryall to fix mistakes and help families
    Families who won a long and lengthy Court battle for financial help to support their disabled daughters and sons are now facing a new battle with health system bureaucracy and need the Health Minister's help, Labour's Disability Issues spokesperson Ruth...
    Labour | 18-04
  • Time for greater ministerial accountability
    The Green Party has today released a proposal to introduce a ministerial disclosure regime in New Zealand to improve the transparency and accountability of government.The proposal, based on the system used in the United Kingdom since 2010, would require all...
    Greens | 18-04
  • Power prices soar on the eve of winter
    On the eve of winter as New Zealanders are turning on their heaters, power prices have soared sky high, Labour’s Energy spokesperson David Shearer says. “Energy Minster Simon Bridges claimed in Parliament that prices were estimated to rise 2.4 per...
    Labour | 18-04
  • Workers can kiss goodbye to Easter Sunday off
    The Government’s decision to “reprioritise” scarce labour inspector resources by abandoning the enforcement of Easter Sunday Shop Trading laws means workers can kiss goodbye to a guaranteed day off, says Labour’s Associate Labour Issues spokesperson Darien Fenton. “The Labour Minister...
    Labour | 18-04
  • Businesses need to respect workers this Easter
    Businesses intent on flouting Easter shopping laws should face stiff penalties, Green Party industrial relations spokesperson Denise Roche said today. This Easter, at least one major garden centre chain intends to open on Good Friday despite this being in breach...
    Greens | 17-04
  • Time to deliver on 26 weeks Paid Parental Leave
    Today marks two years since Labour MP Sue Moroney's Bill extending paid parental leave to 26 weeks was drawn from the members' ballot. “It’s time the Government acted in the interests of families,” Sue Moroney says. “National has tried every...
    Labour | 17-04
  • Taxpayers robbed of $130m in Genesis sale
    Kiwi taxpayers have been robbed of $130 million by the Government in its final failed asset sale, says Labour’s SOEs spokesperson Clayton Cosgrove. “National set the price for Genesis far too low in a desperate attempt to beef up demand....
    Labour | 17-04
  • Work visa problems need monitoring
    The Government is handing out temporary work visas to migrants to work in jobs that could easily be filled by unemployed Kiwi workers in the Christchurch rebuild, says Darien Fenton, Labour’s Associate Immigration spokesperson. “In the past 12 months, temporary...
    Labour | 17-04
  • Resignation rates among cops soar
    The number of frontline officers quitting the police force is at a four-year high, with more than 350 walking off the job in the past y