Standard and Poor's has cut the outlook for Mighty River Power Ltd's BBB plus long-term rating, citing the offshore expansion plans of the state-owned energy company as a reason.The rating itself was affirmed. The changed outlook followed the company's an
Standard and Poor's has cut the outlook for Mighty River Power Ltd's BBB plus long-term rating, citing the offshore expansion plans of the state-owned energy company as a reason.
The rating itself was affirmed. The changed outlook followed the company's announcement yesterday that with its international partner, GeoGlobal Energy (GGE), it was acquiring an interest in a US geothermal energy development company, EnergySource LLC.
EnergySource is building a 49.9MW geothermal power station in California. GGE’s investment of up to $US107 million ($NZ145.5m) provides most of the equity for the Hudson Ranch I project.
"Although Mighty River Power's offshore growth strategy has been known for sometime, we expected these investments to occur in stages and through a funding strategy that would not place pressure on the company's financial profile," Standard and Poor's credit analyst Parvathy Iyer said.
"We note that Mighty River Power's total offshore investment in fiscal 2010 is likely to be above our expectations, with further investments possible in the coming years given the increase in Mighty River Power's commitment to the GeoGlobal Energy fund to $US250 million."
Debt funding would affect the company's financial ratios. The ratings could be lowered if the key funds flow to interest cover and fund flow to total debt ratios remained below four times and 25 percent, respectively, on a sustained basis.
The rating could return to stable outlook if Mighty River Power's usage of debt was moderated so as to operate with adequate financial headroom.
"Although the offshore projects are undertaken on a non-recourse basis, we believe that these projects heighten Mighty River Power's business risk until they are completed and begin to accrue cash flow."
Mighty River Power said it was comfortable with the change in outlook.
Chairwoman Joan Withers said it was a reflection of the significant geothermal energy growth, both domestically and internationally, the company was currently planning.
"Geothermal projects are very capital intensive with the earnings contributions usually coming three to four years after the initial capital is deployed.
The GGE investment in EnergySource is being made at a later stage in the project development cycle resulting in faster capital deployment than in a typical development.
However, this results in a shorter lead time, just 21 months, to earnings contribution with an accompanying lower development risk," she said.
