Mighty River turns bullish

By Richard Braddell

WELLINGTON - Electricity generator and retailer Mighty River Power is expecting a much better year than that suggested by the net $10.6 million profit from its first three months of trading.

One of the three new generator/energy traders created by the split of ECNZ, the company's first reported financial year ended in June.

Chief executive Doug Heffernan said that in addition to profit being held back by $4.4 million in one-off establishment costs, the company's generation capacity, which is largely based on Waikato River hydro, was constrained by the low level of Lake Taupo when it came into being.

As that improved, so to would Mighty River's generation capacity with the results going straight to the bottom line.

Dr Heffernan declined to offer any forecast on the current year's profitability, although the company yesterday forecast a return on assets, which currently stand at slightly more than $1.2 billion, of 7.9 per cent in the first year, rising to 10.3 per cent in its second year of operation and 11.3 per cent in the third.

But while Mighty River can claim to be fully up and running, there are still some structural issues to be sorted out.

It is still negotiating the acquisition of Vector's (formerly Mercury Energy's) 47.5 per cent stake in the 120MW Southdown co-generation plant, a deal that was agreed in principle when Mighty River bought the Mercury Energy retailing business.

Mighty River is now nursing some unfavourable long-term supply contracts with Southdown, and also the Stratford thermal station, both of which went badly out of the money due to an oversupply of electricity and a 30 per cent fall in prices following the breakup of ECNZ.

However, the company is close to completing the integration of the First Electric retail business with that of Mercury Energy.

While the two operations will maintain separate brands, they will be run as one entity, based on a new technology platform that was under development by Mercury when it was taken over. The result is that by the time the integration is complete in February next year, First Electric's Melbourne call centre operations will be run from New Zealand.

Mercury has 250,000 customers and First Electric 20,000. According to Mighty River, the Mercury retail business is an excellent fit with customer demand almost exactly matching generation capacity and enabling a degree of integration that insulates the company from the volatility of half hour spot market pricing. Furthermore, the close proximity of Auckland and the Waikato hydro facilities reduced the transmission risk.

On the accounting front, asset revaluations, combined with a $10.6 million net profit in its first three months of trading, have boosted shareholder equity from $378 million to $615 million at June 30.