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A quick search of the Vector website brought up only two hits under the search term "environmental strategy" - both related to its investment in NZ Windfarms, which means that this must be a very new strategy indeed. In fact, as a lines company it is hard to see just what sort of contribution Vector could make to the environmental debate, given that its main job is to manage the reticulation of electricity and gas.
The investment by Vector in NZ Windfarms is part of a wider capital raising that will see the wind company's market cap increase from around $20 million to nearly $100 million, via the raising of $75 million.
The cash will be used to acquire wind generation and associated plant for its Te Rere Hau wind farm near Palmerston North. NZ Windfarms has a 50 per cent stake in this wind farm, the other partners being Babcock & Brown Windpower and NP Power. It will take about 500 wind generators to complete the wind farm.
These will be supplied by Windflow Technology, a Christchurch company that listed on the NZX Alternative Market in 2001. This name may ring some bells with some readers as NZ Windfarms was spun off from Windflow Technology in 2005 and also listed on the NZX Alternative Market.
Windflow Technology owns 43 per cent of NZ Windfarms, but with the capital raising, its holding will drop to around 10 per cent. The market cap of Windflow Technology is at present slightly smaller than that of NZ Windfarms.
Not all the cash raised will be used to develop the Te Rere Hau wind farm, as the company also plans to acquire interests in other wind farms and possible wind farm sites around the country. The company has a 16 per cent stake in the Maungatua wind farm project in Otago. Windflow Technology also has a 16 per cent stake in this wind farm. Maungatua will have a capacity of 20MWh, about half the projected capacity of Te Rere Hau.
Presumably some of the cash raised will be used to get control of this project, possibly by buying out its sister company and other investors in the project. Other wind farm sites will also be under consideration, but no information is available at this time.
The capital raising of $75 million will require shareholder approval and a prospectus. ABN Amro has been retained to advise on the capital raising and issuing a prospectus.
Existing shareholders in NZ Windfarms will be offered a priority pool, with the balance being offered on a firm basis to institutions and brokers. There is not expected to be a public pool.
It's hard to know what this means in terms of earnings for the company till the prospectus is delivered. Going from having a few wind turbines working to 500 or more is a major change in the nature of the business, so it is hard to know what the earnings or dividends might be. Since the announcement the share price has risen appreciably, so investors have some inkling that the earnings profile is going to get better.
As part of the capital raising, the company will also be moving from the NZAX market to the main NZSX market. The idea seems to be that by moving to the main board it will attract more investors and possibly some broker coverage.
It could also be an indication that this first capital raising is not the last and that the company has bigger plans over the medium term.
Indeed, Vector has indicated that it will conditionally subscribe for a further 20 per cent of another $25 million capital raising between now and the end of 2009. So over the next 20 months NZ Windfarms is expected to raise at least $100 million in equity capital. One presumes that it will be raising debt at the same time, and it would be conservative to estimate that it could raise $50 million in debt. So an all-up haul of $150 million could be on the cards.
Surprisingly, that doesn't necessarily spell a whole lot of wind farms, given some of the figures bandied around for projects by Contact and Meridian, but it is a pretty impressive start for a company currently capitalised at just over $20 million.
But what of Vector? The company sees that it has a role in developing sustainable energy solutions and tackling issues such as climate change. But why? Is it doing this only because it makes good PR mileage, or because it can earn a higher return than its cost of capital in an unregulated part of its business?
One would hope the latter, but there is a sneaking suspicion that it is the former. Why? There is no identifiable environmental policy on Vector's website about investing in alternative supplies of energy. Also, there has been a big push by the energy sector about getting on the climate change bandwagon.
Also, it deflects from other issues, such as the Commerce Commission and recent Auckland price increases. That may be too cynical, but there is cause to wonder.
PR stunt or sound investment? Maybe a bit of both.
Bruce McKay is the director of niche banker Saffron Capital.
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