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1H profit shows mixed picture for MRP as partial sale nears

First-half profit shows mixed picture for Mighty River as partial sale approaches

By Pattrick Smellie

Feb. 21 (BusinessDesk) - MightyRiverPower'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 both 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 Dec. 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.

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 New Zealand Maori Council.

That decision was sought by last Monday, but is now not due before Feb. 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 US$250 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.

These combined factors led MRP to conduct "a full review of MRP's investment in the assets of the GGE Fund," said chief executive Doug Heffernan in a statement. MRP paid US$24.8 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 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.

Chair Joan Withers said the uplift in underlying performance reflected 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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