Windfall taxes on power companies may not be a good idea when advancing towards decarbonising the economy

Meridian Energy has chosen Australian resource firm Woodside Energy as its preferred partner to develop a green hydrogen project in Southland.

Meridian CEO Neil Barclay expects  broad, future economic gains from the project.

“We believe a large-scale hydrogen and ammonia facility in Southland, focused on the export market, will accelerate the development of a domestic hydrogen economy and strengthen NZ’s platform to contributing to decarbonising our transport and industrial sectors”.

The production of hydrogen and ammonia from renewable energy in the South Island has been touted as a suitable use of power whether or not the Tiwai Point smelter closes after 2024.

Observers  might have thought such a project would have drawn  applause from the Green movement. The Green Party in contrast  has been attacking what it calls the “excess profits”of the big energy companies and proposing windfall taxes on them, along with other major  corporates.

Some critics contend the big electricity companies are profiteering, and paying out high dividends as a result of  elevated  market prices, but as one authority pointed out, defining excess dividends in terms of net profits does not adjust  for “front-loaded” depreciation charges, which are non-cash items. Over the past five years, the industry dividend payout ratio relative to free cash-flow is about 80%.

 It should also be noted, major companies are investing in new energy plant,as the government sets the target of  becoming 100% renewable.

So it appears Meridian wants to push ahead with the hydrogen project, even if Tiwai Point keeps  operating.

Woodside was shortlisted, along with Fortescue Future Industries, to put forward proposals for large-scale hydrogen and ammonia production using renewable energy.

Barclay said Woodside had been selected because of its established track record.

“In addition to its operational and marketing expertise, Woodside has demonstrated climate change ambitions, and as we are a 100% renewable energy company and committed to sustainability, that was a key focus for us in selecting a partner.”

Contact Energy originally joined Meridian in the investigation, but has now opted out, although it would be available to supply electricity to the project.

However, Japanese industrial conglomerate Mitsui has joined the project to develop the potential market for ammonia. It is the largest importer of ammonia into Japan.

The three companies will now start the engineering design for the project, which is targeting the production of 500,000 tonnes of ammonia a year.Woodside CEO Meg O’Neill says the project is “right for the time”.

She added “Woodside brings the technical skill and operations experience to develop this project at pace to meet customer demand for hydrogen, which we expect to grow in the energy transition.”

Govt curries favour with farmers with climate change investments – but a collaborative strategy (don’t forget) led to Five Waters

Buzz from the Beehive

Governmental news for the farm and forestry sectors flowed too fast from the Beehive for your Point of Order team to quickly grasp all the implications.

At first blush, we are tempted to wonder if something that looks like good news for farmers has been deftly released to camouflage the not-so-good news buried in these announcements or in some yet to be released.

Many millions of dollars of government funding were among the goodies that might distract farmers from programmes designed to reduce their greenhouse gas emissions by reducing their output – and incomes.

The latest Beehive releases tell us the government is …

Expecting the newly launched  Climate Action Centre to help farmers to maintain their international edge

Prime Minister Jacinda Ardern and Minister for Agriculture, Damien O’Connor, launched the Centre for Climate Action on Agricultural Emissions alongside the primary sector partners today at Mystery Creek Fieldays.

 The bullet points emphasise

• New Climate Action Centre launched to support farmers reduce ag emissions through R&D investment
• 50:50 joint venture between Government and agribusiness to accelerate product development
• First Centre projects launched to get farmers the emissions reducing tools sooner
• Indicative funding commitment rising to $35 million per year by Joint venture partners, seeing at least $170 million invested over the next four years

THOMAS CRANMER: Mahuta ditches the ‘no surprises’ policy

As Cabinet Ministers have been blindsided by developments in the Three Waters legislation, the events of last Wednesday night give a glimpse of the power politics that are at play within government.  THOMAS CRANMER writes: 

As the furore over the government’s attempted entrenchment of the anti-privatisation provision within the Three Waters legislation continues to buffer the government, Ministers could be forgiven for thinking that their ‘no surprises’ policy has been replaced with something rather more dramatic.

Last week, the Prime Minister was blindsided when Barry Soper asked for an explanation about the expansion of elements of the reforms to include geothermal and coastal waters. Ministers Robertson and Woods similarly both confessed to not knowing anything about the change. It gave the impression of a Cabinet that had lost its grip on Three Waters. More broadly, it raised questions as to who is actually in charge.

F&P Healthcare lights up market, as its hefty R&D programme spurs fresh growth

Few listed companies on the NZ sharemarket can report a 60% decline in net profit, yet find investors reacting by bidding up the shareprice 13% in initial trading.  Yet that was the achievement of Fisher and Paykel Healthcare this week.

The company lit up the market, reporting revenue of nearly $700m for the half-year to September, most of it earned abroad and  ahead of guidance. It expects second half revenue for the 2023 financial year will be higher than in the first half. Net profit after tax for the first half was $95.9m, a 57% decline from the prior comparable period, or a 65% decline in constant currency.

F&P Healthcare experienced a surge in demand for its products during the pandemic, selling 10 years’ worth of devices in two years. However demand has now slowed as hospitals are overstocked and fewer patients are requiring treatment, which has seen profit retreat closer to pre-pandemic levels.

Undoubtedly one of the reasons for F&P Heathcare’s success  is its dynamic R&D programme, on which it is  spending $84m. CEO Lewis Gradon said it had been pleasing  to see a strong reception for the new Evora Full mask, which the company began selling into the US in April. “Initial feedback from clinicians and end users has been positive, and this provides added momentum for the team working hard on a robust product pipeline.”

Gradon is one of NZ’s outstanding business leaders, steering the  company on its  upward path. He reported the company reached a number of infrastructure milestones over the half to support continued growth. This includes an agreement to purchase a 105-hectare site for an additional campus in Karaka, Auckland.

Like other companies, F&P Healthcare has had to battle the “triple squeeze” of rising inflation, scarce and expensive talent, and global supply challenges.

Gradon  told the market while revenue was down 23% on the first half of the prior year (or 27% in constant currency), this was a 21% increase on the comparable pre-pandemic period, being the first half of the 2020 financial year ($570.9 million).

In the Hospital product group, which includes humidification products used in respiratory, acute and surgical care, revenue for the first half was $438.7m. This marks a decline of 35% on the prior comparable period, or 37% in constant currency. It represents an increase of 24% on the first half of the 2020 financial year. Of total Hospital product group revenue, 87% was from the sale of consumables and 13% was from the sale of hardware.

“Customer stock levels of hospital consumables continued to reflect purchases of considerable amounts during the prior half, in preparation for an Omicron hospitalisation wave which proved less severe than originally anticipated,” Gradon said.

“Through the first half, there are positive signs that our hospital customers are working through their excess inventory holdings, and total group sales of our hospital consumables have increased sequentially on a month-by-month basis since May. This trend has continued in the second half to date.

“While we believe the number of hospitals which continue to be overstocked is declining, ultimately, these stocking dynamics are short term, and the fundamentals of our sales strategy remain the same. Our teams are committed to helping improve clinical practice and ensuring the hardware our customers have purchased during the pandemic is used to benefit a broader range of patients requiring respiratory support.”

In the Homecare product group, which includes products used in the treatment of obstructive sleep apnea (OSA) and respiratory support in the home, revenue was $249.9m , a 10% increase over the prior comparable period, or 4% in constant currency. OSA masks and accessories revenue increased 16% on the prior comparable period, or 10% in constant currency.

Gross margin was 59.8%, down from 63.1% in the prior period and below the company’s long-term target of 65%. Although global freight rates are seeing prices soften, legs in and out of NZ lag this trend, which continues to weigh on margin. The company has also been impacted by manufacturing inefficiencies, as it carefully balances demand fluctuations while managing manufacturing throughput and higher rates of sickness-related absenteeism in the manufacturing workforce.

“Our second half will be impacted by a number of factors, including:
• The rate of COVID-19 hospitalisations and the related intensity of respiratory support required;
• The severity and duration of a Northern Hemisphere flu season;
• The magnitude of RSV (respiratory syncytial virus) hospitalisation surges currently experienced in some regions; and
• The impact of ongoing hospital staffing challenges on the surgical procedure backlogs in many countries”.

 Gradon  said the company expected second half revenue for the 2023 financial year will be higher than in the first half.

“In our Hospital product group, pre-COVID-19 seasonal patterns have typically resulted in higher sales of hospital consumables in the second half compared to the first half.

The company is now targeting constant currency operating expense growth of approximately 8% for the full year.

“We remain committed to sustainable, profitable growth,” said Gradon. “Our confidence in the future is unchanged, evidenced by the significant level of investment in new product development, our global sales force and our infrastructure.”

 As Point of Order sees it, F&P Healthcare is  an exemplar of business of which the rest of NZ can be proud.   

Govt has a busy day dishing out funding to causes it deems appropriate but a fog shrouds crime-fighting costs

Buzz from the Beehive

Biggish lumps of money featured in each of four announcements posted on the Beehive website, since Point of Order last checked on what our hard-working and big-spending ministers are doing.

The government will spend

• $10 million on public housing in Raumati (and there’s lots more where that came from);
•  $2,876,500 (from a trough labelled Government Investment in Decarbonising Industry Fund) for a boiler conversion project which used woodchips to make potato chips, while slashing emissions.

• $1.48 million to keep AM radio on air in the Northland region;

•  A “multi-million- dollar package” to tackle retail crime and reoffending. The exact cost to taxpayers is hard to fathom because it includes the provision of $4000 for all small shops and dairies in New Zealand who want a fog cannon installed, with shops to pay the balance. How many retailers will apply? Who knows?

• A new $4 million fund to support local councils in Auckland, Hamilton and Bay of Plenty with crime prevention programmes (which might  be the trough for the fog cannon funding);

• The expansion of eligibility to dip into a $6 million Retail Crime Prevention fund to include aggravated robberies, including those committed during the past 12 months.

Guess whose name pops up in connection with the law-and-order funding package?

None other than the PM, keen to get her name into the crime-fighting headlines alongside Police Minister Chris Hipkins.

Despite Labour polling below 30%, party strategists believe it can win Hamilton West, and general election next year

Although recent opinion polls have shown Labour’s support dropping below 30%, suggesting it is now the underdog going into election year, party strategists still nourish  the belief the Ardern government may  emerge from the general election  able  with allied parties to hold on to office.

They are convinced  the National  Party has  not won back the degree of support that would indicate it is  a shoo-in at next year’s poll.  This, they believe, will become clear after  votes are counted in the Hamilton West by-election on December 10.

They have taken heart, too, from the result of the elections across in Victoria at the weekend, where the premier Daniel Andrews swept aside the challenge of the Coalition, though with a reduced majority. Andrews, like Ardern here, had been ruthless with his lockdowns during the Covid pandemic, but although that incurred  some hostility, a majority thought he did a good job.

Back in Hamilton West Georgie Dansey, the Labour Party candidate, herself doesn’t believe the by-election will be a referendum on the government’s performance as much as a contest won or lost on local issues.

“Every electorate is different,” she says.Dansey is the chief executive of the Independent Schools Education Association and a small business owner. She  has  impressed in early campaigning and in defending a majority gained by Labour in 2020 of 6000, has a solid cushion.

The government, with plenty of cash  in its back pocket, has made sure some of it is earmarked to be spent in Hamilton West.

National candidate Tama Potaka has a  daunting task to shrink Labour’s majority to vanishing point, even if  he taps into a rich vein of dissatisfaction with the government.  The difficulty he faces is that National has not articulated clearly enough  the kind of solutions it would apply to resolve the range of economic problems that have enveloped the  country.

Of the other candidates, Dr Gaurav Sharma already has a high profile in the electorate, as the MP  who secured  the 6000-vote  majority for Labour in 2020, but then fell foul of the party for his criticisms of Ardern, and the party’s administration.  He seems to  think the voters who gave him such a resounding majority will support him again. Almost certainly he will discover politics  doesn’t work the way he thinks it  should.  

The ACT party has nominated a sitting MP Dr James McDowall to contest the by-election, and though he  attracted only 5.4% of the vote in a neighbouring electorate in 2020  the experience he has gained as a list MP  in the  House has  given the party’s leadership confidence in his candidacy. The former owner of an immigration firm in Hamilton, Dr McDowall has been ACT’s immigration and defence spokesman this term. He’s contributed to the party’s regular policy documents, including calling for more occupations to be placed on a fast track to residency and for defence spending to be increased to 2% of GDP.

McDowall’s performance in Hamilton West may give  some indication whether ACT can lift its support to the point in 2023 where it  could demand  as many  as  four ministerial places in a right-of-centre government.

The TOP party also has a candidate Naomi Pocock running  in Hamilton West.  Under a new leader Raf Manji, TOP has invigorated its policy position. Manji stood in 2017 in the Christchurch electorate of Ilam, coming second to National’s Gerry Brownlee,beating  the Labour candidate.

Notable absentees in Hamilton West are the Green Party and NZ First which may make  strategic  sense, but gives no clue on how  either will perform next year.

The by-election campaign  would have been enlivened  by a NZ First candidacy, particularly if it had drawn Winston Peters out of  his Northland lair.

 Despite lying low for over two years, there was little doubt  Peters would be  sniffing the political breeze again and deciding he could once more become the ringmaster he was in  2005 and 2017.

He shares  with Donald Trump the belief he has been the wronged victor, and voters will barely be able to wait to restore him to high office. The difference as he prepares for 2023 is that he is ruling out working with Labour again.  

Whether that is a message that may resonate with Hamilton West voters will not be known until December 10.

Too much fun is coming out of Otago – so the govt has put $2.25m into a trough for other regions to have a lick

Buzz from the Beehive

It’s a toss-up to decide which is more unnecessary –  the investment of $2.25 million of public money in an industry which has almost doubled its revenue over the past year or the drafting and legislating of a bill to have things done that could be done without a statute.

The investment is in the rapidly growing game development sector.  The latest data from the New Zealand Game Developers Association shows the total revenue for the industry is $407 million, compared to $276 million a year ago.

But hey. The government can’t stand by and let so much of this development take place in the city of Dunedin.

The public therefore is being called on to chip in to spread the workload to other centres.

This will be done by establishing a new trough:  the $2.25 million will help to establish new regional hubs to provide contestable grants and skills development to game development studios across the country.

New chapter for Fonterra as Parliament passes DIRA amending bill, but a fresh climate challenge looms

NZ dairy giant Fonterra expects to have its  new capital structure in place by March after Parliament gave a final reading  this week to the Dairy  Industry Restructuring Amendment Bill. It had the support of Labour, National, and Act, with the Greens and Te Pati Maori  voting against it,  as they did during the first two readings. 

It marks a new chapter for the big co-op at a time when the industry has been hit by soaring inflation-driven farm costs and the Ardern government’s move to tax farm methane emissions.

Fonterra  as a key element  of the dairy industry  has made significant progress with its turnaround 2030 business strategy; and the proposed capital restructure is designed to  ensure its many processing  sites remain full in flatlining, and predicted to decline, national milk production.

The  restructure needed Parliament’s approval because  Fonterra was created by enabling legislation in 2001, and because  a feature of it, delinking the farmer share market and the unit market, could have faced legal challenges.

Even though  the DIRA amending legislation  attracted  criticism in the Select Committee  hearings that it would  weaken competition  in the industry, Agriculture  Minister Damien O’Connor pushed it through Parliament. In the process, he took the  opportunity as he saw  it  to improve the transparency and robustness of the governance and operation of the current base milk price-setting regime.   

Meanwhile  Fonterra is  moving ahead with investment targets for sustainability, higher value  products  and research  and development. Its milk payment for last season totalled $13.7bn and after the sale of its Chilean asset Soprole, plans a return of capital to shareholders  and unit holders.

 As CEO Miles Hurrell told the company’s  annual meeting, the last financial year was a year like no other.

 Now, there  is  a new  challenge  looming. Fonterra has indicated it may set itself a target for scope 3 carbon emissions. Scope 3 encompasses carbon emissions not produced by the company itself,but by those it is indirectly responsible for, including  farmers.

Chairman Peter McBride points out that in setting  a scope 3 target Fonterra  can help itself to maintain competitive access to key international markets. “For example, the EU  has proposed a carbon border adjustment tax on certain carbon-intensive goods. They are  subject to a carbon-emissions price via  the EU’s Emissions Trading Scheme. Agriculture  is not currently in scope  but it is  possible  it will be brought into the scheme”.  

McBride  expects such barriers to become more frequent  as governments  respond to their own climate commitments.

(With acknowledgement to Andrea Fox  of the NZ Herald for material  in this comment).

THOMAS CRANMER: Labour reintroduces blasphemy laws

The government repealed blasphemous libel laws three years ago but now looks set to re-introduce something remarkably similar. It is an amendment that not even the Royal Commission has recommended.  THOMAS  CRANMER writes-

As the government was labelled “reckless and irresponsible” on Wednesday for attempting to rush through 24 bills, some without public consultation, the chances of bad law being made is extremely high.

Already this week we have seen the Prime Minister and her Cabinet colleagues so badly exposed on the Water Services Entities Bill, that it has required Minister Mahuta to make an amendment in an effort to quell growing public concern about the scope of the Bill.

That amendment, by the way, is merely a drafting sleight of hand that doesn’t change the substance or scope of the Bill but more on that next week.

Given the speed at which the government is moving we can be sure that it is not the only wrinkle that will make its way through the House and onto the statute books.

Banker’s job as chairman suggests the co-governance model has been eschewed for Kiwi Group – but there are more posts to fill

Buzz from the Beehive

When David McLean retired as Westpac New Zealand Chief Executive in June last year, he said it was the right time, both for the business and for himself personally to step down.

The industry was going through a period of change and that was an appropriate time for a new leader to take the helm.

His future?

He didn’t mention golf, bowls or a sea cruise, but did say:  

“.. I am looking forward to thinking about the possibilities and challenges ahead. I’ve just finished two weeks touring the country on my Vespa in a charity rally, which gave me plenty of time to reflect and consider what retirement might hold for my family and I.”

Actually, there’s plenty to  keep him busy.