State owned enterprise Mighty River Power has put a NZ$24 million potential price tag on some eight hours of March 26, when electricity prices on the wholesale spot price spiked to more than NZ$20,000 per Megawatt hour – more than 200 times their normal price - with fellow SOE Genesis Energy the main beneficiary.
If realised, those costs could see a fall in MRP’s earnings before interest, tax, depreciation, amortisation and changes in financial instrument values (EBITDAF) in the current financial year from last year’s NZ$443.1 million EBITDAF, with MRP already forecasting flat earnings in the current year. MRP gave earnings guidance for the current year today, saying EBITDAF was likely to be in the range of NZ$430 million to NZ$450 million, but that figure assumes an Electricity Authority decision to reduce all March 26 prices between approximately 10am and 6pm to NZ$3,200 per MWh is upheld.
The highly unusual situation caught out MRP and state-owned rival Meridian Energy 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 if the National Party is re-elected on November 26.
Genesis and NZX-listed Contact Energy 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.”
See more here on the March 26 'Big Saturday' dispute.
Withers also took the opportunity to speculate on the company’s forward path if National proceeds with proposals to sell a minority stake in the SOE, which is a likely candidate for the first or second of four partial floats 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 we 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 Meridian as part of the government’s electricity market reforms. The value of energy contracts on MRP’s books at June 30 this year totalled NZ$4.408 billion, almost double the NZ$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 NZ$3.719 billion, giving a theoretical value for a 49% stake of NZ$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 NZ$4 million to NZ$3.2 million during the year, and that 209 people in the organisation have base salaries of between NZ$100,000 and NZ$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 NZ$1.126 million from NZ$1.104 million the year before. Some 34 staff earned between NZ$200,000 and NZ$530,000 annually.
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