Mighty River Power has released what is being described as a solid result for the past year just weeks before up to 49 per cent of it could be sold. Energy reporter Grant Bradley looks at how the state-owned enterprise is tracking.
The company's net profit fell from $127 million to $68 million. What happened?
The company must account for what is known as an adverse change in the non-cash value of financial instruments.
In Mighty River Power's (MRP) case these added up to $118 million ($13 million of which came in the second half of the year).
The company is accounting for paper losses of borrowing for a $1 billion spend on geothermal plants which began in 2007, before the global financial crisis hit and interest rates tumbled from about 7 per cent on corporate debt to about 4 per cent.
The company is like a home owner marooned on a high fixed interest rate.
Under accounting rules it must show the value of the equivalent of a break fee. If interest rates go up MRP's accounts will look better by being able to show non-cash gains.
Did Mighty River Power get it wrong when it committed to fixed rates five years ago?
Before the GFC there were signs interest rates would keep climbing.
MRP's chief executive Doug Heffernan says it was the prudent thing to do at the time and without borrowing the money it would not have been able to build geothermal plants which are operating at 95 per cent capacity and now providing close to 40 per cent of the company's generation.
What figure do analysts say is more important?
Underlying earnings after tax. These are adjusted for one-off or infrequently occurring events exceeding $10 million of net profit before tax, impairment and fair value changes, and increased by $500,000 to $162.7 million, which is seen as a solid result in a tough market where electricity consumption is flat among residential consumers and declining among large industrial users.
Revenue was up by 31 per cent to $1.52 billion. Why?
The figure reflects higher underlying prices in the wholesale market which the company received for its generation.
Low lake levels in the South Island through much of the year pushed up wholesale prices.
Because MRP generates power in the North Island at its geothermal, Waikato River hydro scheme and a gas unit in South Auckland, it was able to take advantage of this. But the company did have to pay more for electricity it had to buy, some of which it supplied to its retail customers.
Why did expenses increase?
Operating expenses increased by $31 million due mainly to increased maintenance costs, higher professional and insurance costs and the termination of a long-term contract which the company says is confidential and is not releasing details. It is believed to be less than $10 million.
The failure of its gas turbine at Southdown towards the end of the financial year cost $12 million. Heffernan says the plant has now been upgraded ahead of a scheduled overhaul.
How is the $120 million dividend calculated?
The company presently pays the Government a dividend equivalent to 75 per cent of net profit after tax, adjusting for the impact of fair value of financial instruments net of tax. This year's dividend is up 8.5 per cent and will be paid on September 28.
How about operating performance?
Retail sales performance increased by 5 per cent on the prior comparable period. Increased volumes were achieved through an increase in sales to business customers - up 14 per cent on last year.
Mighty River is focused on acquiring and retaining higher volume residential customers as it expands south of Auckland. While the company is concentrating on quality rather quantity, customer numbers are on a par with the same time last year.
What's happening to power prices?
Results briefings emphasise how power companies have a different message for different markets.
MRP told business journalists and financial analysts it had put up its prices 5 per cent in the past year and although it could not comment on the coming year because of listing rules, under questioning Heffernan did point out analysts had noted MRP was holding its own with already listed Contact Energy and TrustPower.
Mighty River is building a new power station near Taupo. How's that going?
The $466 million Ngatamariki geothermal plant should be commissioned next year. However, MRP is having to allow $18 million more contingency to allow for the possibility more injection wells may have to be drilled.
How are international ventures tracking?
MRP has spent US$225 million of a US$250 million fund for international geothermal developments through the GeoGlobal Partners Fund, investing in a power station in California and exploration work in Chile and Germany. It says it is considering investing more in the fund but will not say how much.
Sister SOE Genesis Energy says it is concentrating on New Zealand activities but MRP sees potential for higher growth if overseas plays come off and stresses the investment so far is a fraction of its $5.4 billion asset base.
Why can't the company release its financial forecasts for the coming year?
MRP is now in the "prospectus window" and can't make any forward looking statements at all, according to Financial Markets Authority rules.
And because New Zealand's hydro-dominated market is weather- dependent most energy companies are reluctant to look too far ahead with much authority anyway.By Grant Bradley Email Grant