MRP faces $24mln hit if March price spike upheld

MRP faces $24mln hit if March price spike upheld

Oct. 5 (BusinessDesk) – MightyRiverPower Ltd. has put a $24 million potential price tag on some eight hours of March 26, when electricity prices on the wholesale spot price spiked to more than $20,000 per Megawatt hour – more than 200 times their normal price.

If realised, those costs could see a fall in MRP’s earnings before interest, tax, depreciation, amortisation and changes in financial instrument values in the current financial year from last year’s $443.1 million EBITDAF, with MRP already forecasting flat earnings in the current year.

MRP gave earnings guidance for the current year today, saying EDITDAF was likely to be in the range of $430 million to $450 million, but that figure assumes an Electricity Authority decision to reduce all March 26 prices between approximately 10am and 6pm to $3,200 per MWh is upheld.

The highly unusual situation caught out MRP and state-owned rival Meridian Energy Ltd. during a planned transmission grid outage in the upper North Island on the March Saturday in question.

Both MRP and Meridian are early candidates for partial privatisation, but the process could be complicated if the March 26 arguments drag on and make it difficult to draw up definitive starting accounts for either business.

Genesis Energy Ltd. and NZX-listed Contact Energy Ltd. are challenging the EA’s decision on the March 26 prices, saying it rewards market participants who made poor risk management decisions.

However, MRP chair Joan Withers said “we believe there is clear evidence supporting the (EA) ruling.”

“Market solutions, including the effectiveness of the market for risk management products, can break down in situations where a market squeeze can be applied by one of two generators, such as during a period of restricted transmission capacity.”

Withers also took the opportunity to speculate on the company’s forward path if a re-elected National Party-led government proceeded with proposals to sell a minority stake in the SOE, which is a likely candidate for the first or second partial float because of its tidy balance sheet, established earnings record, and the benefit it would derive from injections of new capital to pursue geothermal opportunities in New Zealand and offshore.

“It is clear that the extent to which can embrace this growth potential with equity investments will be influenced by policy decisions by our shareholder, and also our management continuing to demonstrate success,” said Withers.

Her statements echo passages from the company’s Statement of Corporate Intent, released last week, which said the so-called “Mixed Ownership Model” of partial privatisation, nicknamed MOM, would require effort from all parties to preserve the company’s reputation, and to adequately resource company initiatives, “to avoid unacceptable diversion on the MOM process, should it proceed.”

The SCI outlines a moderate trajectory for improving return on capital employed over the next three years. In the year just ended, MRP outstripped its 10.2% target with an 11.7% result, but the current year’s target return is 11.1%, next year’s is lower at 10.9%, and it rises to 12% in the 2014 financial year.

Domestic and international initiatives would require new capital, and would “in the short term increase gearing and lower credit metrics.”

The annual accounts show the substantial impact of MRP’s agreement to a “virtual asset swap” contract with South Island hydro-electricity producer Meridian Energy Ltd., as part of the government’s electricity market reforms.

The value of energy contracts on MRP’s books at June 30 this year totalled $4.408 billion, almost double the $1.729 billion recorded at the end of the previous financial year.

Based on calculations using a weighted average net cost of capital of between 8.5% and 9%, accounting firm PwC valued MRP at $3.719 billion, giving a theoretical value for a 49% stake of $1.82 billion, although the Crown might expect to realise less in a partial privatisation as it will remain the majority shareholder, meaning there will be no premium for control in the price paid for 49% on offer.

The annual report also shows that total senior management team remuneration fell from over $4 million to $3.2 million during the year, and that 209 people in the organisation have base salaries of between 100,000 and $200,000 a year. Chief executive Doug Heffernan’s remuneration, including a slightly reduced bonus but a recalculation of holiday pay entitlements after a tax law change, rose to $1.126 million from $1.104 million the year before. Some 34 staff earned between $200,000 and $530,000 annually.

(BusinessDesk)

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