Mighty River pays $67m to Crown

Mighty River Power's last earnings statement before its likely partial privatisation show a mixed picture of falling domestic revenues and problems with its international geothermal investments, but increases in net profit after tax and underlying earnings.

In its New Zealand business, lower prices paid for wholesale electricity helped offset lower total revenue and higher network costs to produce a $6 million improvement to $260.1 million in earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments for the six months to December 31.

In its international business, MRP received a $140 million cash distribution from its investment in the GeoGlobal Energy fund, but was forced to recognise an $88.9 million non-cash impairment on the value of its interests in stalled Chilean and German geothermal developments.

The net effect of that was a $57.8 million contribution to earnings from the GGE venture, which MRP announced last Friday would be dissolved just five years into a 10-year agreement with its US private equity partner, GGE.

Net after tax profit, reflecting the GGE overs and unders, was $75.5 million for the half year, a marked improvement on $17.7 million in the same period a year earlier, where the main negative impact was the unbooked impact of an $85.7 million changes in the fair value of financial instruments.

By comparison, negative movements on financial instruments in the latest period were just $12.4 million.

Underlying earnings, which MRP calculates to indicate performance shorn of unusual events, were up 31 percent on the previous period, at $32 million.

The company will pay a $67 million dividend to the Crown, reflecting a new higher payout ratio, but with payments loaded to the second half of the year.

The result was earned on total normal operating revenues of $706.3 million for the half year, down 3.1 percent on the same period a year earlier, after network charges, which rose $30 million to $244.3 million.

Public offering

The government hopes to use the audited results as the basis for a public offering of up to 49 percent of MRP's shares by mid-year, although faces logistical challenges because it is waiting first on a judgment from the Supreme Court on an appeal against the proposed sale by the Maori Council.

That decision was sought by last Monday, but is now not due before February 28. Costs associated with proposed sale during the half year clocked in at $3 million.

The financial statement shed further light on the reasons MRP sought to end its 10-year partnership with GGE, showing the fund had failed to attract other investors after MRP's initial $US250 million contribution.

Chilean developments, which MRP will take over 100 percent, had experienced higher than anticipated costs during a severe winter, while only one of two geothermal wells drilled in the period showed good production capacity.

"In Germany, delays in progressing Weilheim (a geothermal power station project) due to environment court challenges (now resolved) contributed to the impairment, along with the need to relocated the proposed drilling location."

MRP also booked a $22.4 million exchange rate loss on the GGE relationship because of adverse movements in the New Zealand dollar exchange rate against the US dollar since 2010.

Conducted a full review

These combined factors led MRP to conduct "a full review of MRP's investment in the assets of the GGE Fund," chief executive Doug Heffernan says in a statement. MRP paid $US24.8 million to exit the fund, saying it would avoid management fees in the future.

The accounts show MRP's $140 million first cash distribution from the GGE fund, was achieved from excess cash after a US investor joined the Californian Hudson Ranch geothermal development in a way that allows them to exploit tax losses, refinancing of the project's debt arrangements, and a US federal government grant.

The residual value of GGE fund investments is MRP's balance sheet at $91.8 million. It retains an approximately 30 percent stake in brownfield geothermal developments in southern California, takes full ownership of Chilean prospects, and retains an option to take a minority stake in the German development.

The accounts also show spending on the company's senior management and board has leapt by two-thirds to $4.1 million in the period under view from $2.4 million the previous half year.

The biggest change was in long-term benefits for Mr Heffernan and other senior managers, at $1.5 million, compared to $299,000 in the previous period. Salary and short-term benefits for senior managers rose from $1.9 million to $2.1 million, while directors' fees were $411,000 from $317,000 in the previous half.

Notes to the accounts say $600,000 of "employee compensation" were included in the $3 million cost in the half of preparing for possible part privatisation.

Chairwoman Joan Withers says the uplift in underlying performance reflects market share gains and increased hydro volumes, but the company gives no second half outlook other to note that water storage in MRP's North Island hydro system is significantly lower than the historical average.

High inflows in both the North and South Island hydro catchments contributed to lower use of gas-fired generation during the half year.

The company's financial ratios improved during the half, compared to the previous period, with net debt to equity sitting at 23.4 percent, from 27 percent previously, and interest cover at 5.7 times earnings, compared with 5.3 percent previously.


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18 Comments & Questions

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Are businesses and homes happy about Mighty River Power's prices going up 2% while the purchase price of their electricity dropped 22%?

While at the same time, Mighty River's net profit increased from $17.6 million to $75.5 million, enabling a $67 million dividend to the Government.

Should we be congratulating Mighty River for their business turnaround?

Or do we feel uncomfortable about being used as consumers to increase the value of Mighty River's float and to decrease the Government's deficit?

Does this result show that competition is working in the electricity market?


I wonder what $75.5m is as a percentage of the overall ROI?

Surely, that's the only financial metric that matters?


Depending on whether it is on actual Shareholder funds or an inflated revised theoretical value.
Actual s/h funds my understanding it is in excess of 25%
Revised valuation figures 11%


I'd call that size of dividend to the Government a further tax on consumers.


So what happens to this annual govt cash (grab - indirect tax) flow post-sale? It goes away. So where does the govt propose to find this cash from in future years?


Future dividend forecasts are built into the sale price.


It's worse.

Contact Energy can achieve more super-profits, 51% being exported to Australia through Origin.

Hardly working for the country; just their own vested interests.


JD --The electricity SOEs have been defacto tax gathers for years as they have increasingly hiked the consumer prices. i was looking for something the other day and came across a Nov 2002 power account.The unit rate was 9.86c/unit. Has inflation been that great in the intervening years. Anon is correct --there has never been competition in the market.


We all can thank the National government, and particularly Max Bradford, for the competitive model that we find ourselves in today.


Tell me again why the government is giving this cash cow?


They're not selling 100% - only 49% of it! In return for 49% of the shares, they're giving all of us the opportunity to invest in NZ.
The cash that the taxpayers get for the 49% that they’re selling has already been earmarked to be used exclusively on further public infrastructure - so we’re using an asset to raise cash for investment in additional seriously needed assets – great business and advantageous for the taxpayer.
With good solid private ownership of that 49%, we should see greater diversity in the company's governance, a lift in new technology investments, some highly intelligent international technology transfer, less tinkering in the company by politicians and bureaucrats and even better bottom-line results for the NZ taxpayer. In a very short time, taxpayers will be making more money out of their remaining 51% than they do now from the current 100%.
Additionally, our KiwiSaver will have a stable onshore investment opportunity (currently more than 90% of all KiwiSaver is having to be invested offshore due to the lack of solid investment opportunities on the NZ Stock Exchange).
The public/private ownership model works extremely well – Auckland Airport is a great case in point. The company will be a far more competitive in nature because the non-government shareholders will demand it!


And power prices will increase even more!


Goodness me! You sound awfully like someone from the National Party's PR department. Perhaps you are, no?


MRP has billions of dollars of assets - and it only makes a 75m profit for 6m. The capitalist in me says it isn't earning enough!

Though being a SOE, profits could increase just by cutting out the fat, no need to increase profits. They should start with the Board!


Please correct me if I'm wrong...

Net assets as at 31/12/2012 is $3,109,094,000 returning $75.5 m equals a 4.2% ROI?

Get much better return on $3.109Bn just by putting that money in the bank... No wonder NZinc needs a better return on these assets. Private sector involvement will ensure that happens.


But of the net assets how much is made up of revaluations?


You calculated for 6 months not 12
Maybe you should also calculate on cash basis not after Deprn etc and for 12 months


Doesn't it sound convenient the non-cash impairment balance sheet adjustments.

Could it be a convenient arrangement to lower the price expectations?


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