Flat earnings for Mighty River Power as milestone float looms

BUSINESSDESK: State-owned electricity generator and retailer Mighty River Power has reported flat underlying earnings for the year to June 30, with a tax-paid profit of $162.7 million, just $500,000 above that of the previous year.

The profit announcement doubles as a milestone event in the progress towards the government's intention to float up to 49% in the company, which is operator of the Mercury retail electricity brand and was awarded Energy Company of the Year at the Deloitte Energy Excellence Awards earlier this month.

The company is now free from regulatory restrictions that prevent the issuing of a prospectus in the lead-up to a major announcement, such as a profit disclosure, and the MRP accounts show the company spent $3.8 million in the latest year preparing for a possible sale.

Prime Minister John Key indicated yesterday the government remains determined to try to launch the MRP initial public offering, the first of up to five sales of minority stakes in government-owned energy companies and the national airline, Air New Zealand.

That is despite a Waitangi Tribunal report last week that called on the government to halt the process while a settlement is reached with Maori over legitimate claims to proprietary rights and interests in fresh water under the Treaty of Waitangi.

While a decision to proceed would almost certainly spark an attempt from the Maori Council to block the sale in the courts, the government appears increasingly confident that grounds for an injunction are slender and could be overturned, allowing the sale to proceed before Christmas.

Otherwise, no MRP float is likely until after the company reports its half-year profit, scheduled for late February 2013.

Sale of carbon credits

Earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments (ebitdaf) was up 4% to $461 million, assisted by the sale of $7 million of carbon credits and an accounting gain of $18 million on the sale of a 10% stake in the Nga Awa Purua geothermal power station to MRP's Maori joint venture partner.

Statutory profit, which includes the non-cash impact of sometimes volatile changes in the value of financial instruments, fell 46.7% to $67.7 million, compared to the previous year, reflecting the impact of falling interest rates on the value of borrowing held on the company's books.

In line with its policy of paying out 75% of underlying earnings as dividends, MRP declared a final dividend to the Crown of $45 million, taking total dividends for the financial year to $119.8 million, an increase of 8.5% on the previous year.

While construction of its next major geothermal plant, the 82 Megawatt Ngatamariki development, is on track, difficulties experienced with drilling two of three injection wells have led to an $18 million increase in the contingency fund on the $466 million project.

However, MRP says this will not affect the project's economics significantly, with "real long-run marginal cost" remaining competitive at below $80 per Megawatt hour.

Lower rainfall

Like its sector peers, the company was affected by low rainfall in South Island hydro catchments during the year, particularly owing to an "exacerbated wholesale price differential between the North and South Islands during the last quarter".

Price separation between the two islands has been a feature of the wholesale electricity market pending the upgrade, currently under way, of the Cook Strait cable linking the national electricity system, which is operating on restricted capacity.

Retail sales volumes increased during the year by 5%, largely thanks to a 14% increase in sales to business customers, and a focus on high-value customer acquisition outside its traditional Auckland market.

However, residential consumption fell to 2010 levels, and total customer numbers fell from 392,000 a year earlier to 386,000, despite taking on 5000 Meridian pre-pay customers in Christchurch, using MRP's award-winning Glo-Bug product.

Operating expenses rose $31.6 million over the year, partly reflecting a $12 million repair bill on a failed transformer and turbine at the company's Southdown gas-fired power plant and life cycle maintenance on its Waikato River hydro stations.

With its growing geothermal portfolio, MRP generated 61% of its electricity from hydro, 31% from geothermal and 8% from Southdown during the year, with the gas-fired plant running harder in the fourth quarter.

While today's profit announcement is in line with guidance to expect an increased performance, MRP gives no outlook statement for the year ahead.