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Mighty River Power Reports EBITDAF And Dividend Growth 2012

28 August 2012

Mighty River Power Reports EBITDAF And Dividend Growth
Financial Results For The Year Ended 30 June 2012¹


EBITDAF up 4% to $461 million, in line with the Company’s guidance

Electricity sales prices and volumes to customers both increased 5%, offsetting the effects of 2% lower hydro generation

Net Profit After Tax decreased to $68 million, reflecting significant change in non-cash fair value of financial instruments

Underlying Earnings at $163 million consistent with FY2011

Declared total dividend up 9% from the previous year to $120 million

Mighty River Power’s Chair, Joan Withers, today said the Company had reported a 4% increase in EBITDAF² on the previous year, in line with the revised guidance, raised following the half-year results. The uplift was achieved, despite a decrease in hydro generation, and was supported by 5% gains in both electricity sales prices and volumes to customers.

Mrs Withers said Mighty River Power’s Board of Directors was pleased to continue the trend of dividend growth by approving a final dividend of $45 million to the Crown, taking the total dividend³ declared for the year to $120 million - up 9% on the previous year.

Financial Results

EBITDAF increased 4% on the previous year (up from $443 million in FY2011 to $461 million in FY2012). Contributions also came from one-off gains during the year: Revenue of $7 million from the sale of carbon credits, and the accounting gain of $8 million from the sale of a 10% stake in Nga Awa Purua. Improved EBITDAF absorbed a 14% ($32 million) increase in operating expenses, mainly reflecting increased maintenance costs of $16 million (the majority of which occurred in the second half of the year). Other cost increases were due to the early termination of a long-term contract in the last quarter of the year, and expenses of $3.8 million borne by the Company during the year, relating to the preparation for a potential listing.

Net Profit After Tax was reported at $68 million (2011: $127 million), mainly reflecting a significant fall in interest rates in the first half of the year, which resulted in the recognition of an adverse change in the non-cash fair value of financial instruments of $118 million ($13 million of which came in the second half of the year). Given the long-term nature of generation assets, a significant portion of the Company’s exposure to interest rate changes on its debt, both domestically and through its international interests, is managed through the use of interest rate derivatives, meaning the average cost of funds is largely insensitive to interest rate changes. Given Mighty River Power and its related international investment companies do not hedge account; these financial instruments are fair valued at the end of each reporting period with the change recognised in the income statement.

Underlying Earnings, which adjusts for the effects of significant one-off items and the change in fair value financial instruments, were consistent with FY2011 ($162 million in FY2011 to $163 million in FY2012).

Mrs Withers said the Underlying Earnings demonstrated a strong operating performance, with the Company’s flexible generation and contract portfolio responding well to changing market conditions, but this was partly offset by a $13 million increase in Depreciation and Amortisation from upward revaluations of the Company’s assets in prior periods.

Operating Performance

Retail (FPVV) sales volumes increased 5% on the prior comparable period. The uplift in volumes was achieved through an increase in sales to business customers - up 14% on FY2011 to 2,412GWh - and through Mercury Energy’s focus on acquiring and retaining higher-volume residential customers as it expands into areas south of Auckland.

The average retail (FPVV) sales price increased 5% on the previous year from $110.09/MWh in FY2011 to $115.48/MWh in FY2012.

Wholesale purchase costs for the full year increased from $56.76/MWh in FY2011 to $94.68/MWh in FY2012. Mighty River Power was negatively impacted by the exacerbated wholesale price differential between the North and South Islands during the last quarter, due to high South Island reserve offers from other generators and limited North-South Island transmission capacity (in advance of the HVDC upgrade).

The Company benefited from above-average inflows into its Waikato River catchments during the first three quarters of the year, following above average volumes in FY2011. This pattern was in contrast to the record low inflows experienced by competitors’ South Island hydro stations throughout the year.

Mighty River Power’s Chief Executive, Doug Heffernan, said the Company had a strong performance in the first half of the year, but due to adverse impacts in the last quarter, hydro generation was down 2% on the previous year.

“We increased the use of our gas-fired plant by 116% year-on-year in response to higher wholesale prices in the market, and geothermal generation remained firm with 95% availability across our stations,” said Mr Heffernan.

Domestic & International Development
Mighty River Power’s development of the 82MW Ngatamariki geothermal plant remains on track for commissioning in mid-2013, with three injection wells and two production wells now drilled. However, some challenges with drilling the second and third injection wells were experienced, which utilised a significant portion of the contingency within the estimated $466 million project cost. As a consequence, the Company has increased the contingency by $18 million, to allow for the possibility that an additional well may need to be drilled. Even with the additional contingency, the real long-run marginal cost remains below $80/MWh.

Mighty River Power has currently committed US$250 million to its international geothermal developments via the GGE Fund, with US$225 million of Mighty River Power’s capital already deployed. GGE is currently seeking further capital to advance the development of its projects. Mighty River Power is working with GGE and will consider contributing further capital alongside new investors.

In May 2012, the 49.9MW Energy Source’s John L Featherstone plant (previously known as Hudson Ranch Power I) on the Salton Sea reservoir in California was formally opened and became the first of the GGE Fund’s international geothermal investments to move into commercial operation. The plant achieved a 99% capacity factor in its first full quarter of operation and post-construction project refinancing is underway.

Funding & Debt Maturities

Mrs Withers said Standard & Poor’s had re-affirmed the Company’s long-term credit rating at BBB+/Stable in April 2012 and at 30 June 2012, total debt facilities were $1,560 million, compared with $1,310 million at 30 June 2011.

Mighty River Power extended its liquidity headroom to $510 million during the year by increasing an existing facility by $50 million in September 2011 and establishing a $200 million Commercial Paper Programme in February 2012, of which $100 million of short-term notes were issued at 30 June 2012. In addition, the Company raised $200 million of bank facilities in March 2012, which is sufficient to repay its retail bond which matures in May 2013. The average maturity of the debt facilities as at 30 June 2012 was 5 years.

Performance to Date FY2013

Since 30 June 2012, inflows into competitors’ South Island hydro reservoirs have improved from the lows experienced earlier in 2012. However, South Island hydro storage remains 28% below the historical average. Contrasting this, Mighty River Power has seen solid inflows into the Waikato catchment 10% above the prior comparable period. Given the improvement in national hydro storage, national wholesale prices in the financial year to date have fallen. Storage at Lake Taupo at the end of August, at 348GWh, is in line with averages for the time of year.

As at 31 July 2012, customer numbers were 388,000, up 2,000 from 386,000 at the end of June 2012 and up 5,000 from the half year (383,000).

Following long-term flow testing, GGE recently announced the completion of the most productive geothermal well in South America at the Tolhuaca field in Southern Chile, producing high-temperature steam sufficient to generate 12MW of electrical energy. GGE manages the fund through which Mighty River Power currently invests in offshore geothermal projects.

Mighty River Power was awarded Overall Energy Company of the Year at the Deloitte Energy Excellence Awards, held in August 2012. The Company also won the awards for Innovation in Electricity (GLO-BUG) and Energy Executive of the Year (Doug Heffernan), and was named a finalist in an additional two categories at the event; Retailer of the Year (Tiny Mighty Power) and Environmental Excellence.



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