Mixed fortunes for energy SOE's at half-year

Sunday 15th March 2009

The energy SOE's produced mixed results for the half-year to December 31, 2008, reflecting a combination of high wholesale electricity prices, expanded generation portfolios, slumping export orders, and the variable impact of new international accounting standards on the bottom line.

The electricity SOEs, Meridian, Genesis, MightyRiverPower, the coal producer Solid Energy, and the national grid company, Transpower, all tabled their half-year results in Parliament Friday.

Meridian Energy was the most affected by the dry 2008 winter, recording reduced profits on all key measures of trading performance, compared with the same period a year earlier, and a bottom-line loss of $20.5 million after unrealised losses on future contracts and financial derivatives.

"Underlying" profit for the half at $85.0 million was down $14.9 million on the $99.9 million recorded in the equivalent prior half. Meridian produces its own underlying profit figure to give guidance through the volatile impact of future aluminium smelter contracts on its earnings path.

In the half year under review, Meridian recorded unrealised losses of $78.9 million on the value of its recently concluded 18 year electricity supply contract to the Rio Tinto aluminium smelter at Bluff. An almost equal impact of $71.0 million came from unrealised losses on financial instruments, caused by the collapse in global interest rates during the half.

Unlike MightyRiverPower, which recorded a $121.4 million hit to the bottom line from unrealised losses on the fair value of its unhedged interest rate derivatives, Meridian was 60% hedged.
Solid Energy, the government-owned coal producer, found itself seriously over-hedged when key export orders were cancelled as the world economy went into meltdown towards the end of the period. Of a total of $37.4 million in impairment adjustments, $19 million related to forex contracts that were closed out unexpectedly.

Solid Energy would gain nothing in this financial year from the fall in the New Zealand dollar, and only partial benefits in 2010, because of the extent of its forward cover, the company's new chairman, John Palmer, said.

The MRP result was a record for the half in EBITDAF terms, with earnings at $234.5 million, compared with $175.1 million in the same period a year earlier. This was mainly because the new 100MW Kawerau geothermal plant started production. MRP displaced Contact Energy as the country's largest geothermal generator during the half, and Kawerau helped boost total generation by 23% over the comparable period.

However, the substantial unrealised losses on derivative contract values reduced this to a net profit of just $30.7 million, compared with $83 million in the same period last year. That was before MRP adopted the new International Financial Reporting Standards, which are playing havoc with traditional assessments of earnings because they mark financial instruments to market at each reporting date, producing substantial unrealised gains and losses in many cases.

In Meridian's case, the impact of the IFRS rules is most marked on the value of its recently signed 18 year, 75,000 Gigawatt hour contract with Rio Tinto, to fuel the Bluff aluminium smelter.

While the contracts do not take effect until 2013, it is accounted for in current accounts, and the contract pricing varies according to at least three key variables: world aluminium prices, future wholesale electricity prices, and inflation.

The collapse in world aluminium prices accordingly drove Meridian's net loss position in the half year under review. As a result, Meridian recorded a return on equity well below target, at 0.33%.

"Due to the size, the long term nature of the CfD (smelter contract) and the exposure to aluminium and electricity spot market prices, Meridian is likely to experience income statement volatility over the life of the CfD," the company said.

Genesis Energy was least affected by changes in fair value of financial derivatives, recording improved EBITDAF of $121.9 million ($104.7 million in the same period a year earlier), and a net profit of $48.9 million ($31.4 million).

Solid Energy reported a "very disappointing" result for the half, despite more than doubling revenue to $516 million and recording a net profit of $78.4 million, compared with a $2.8 million loss in the first half of 2007/08.

Weak world coal prices and ordersd world coal prices were expected through 2009 and into 2010, Solid Energy said.
As well as the $19 million forex cover write-downs, Solid Energy also made impairment charges of more than $18 million relating to its bio-diesel, coal seam gas, and New Vale Open Cast mine operations.

The short term outlook was "highly uncertain and volatile" and the company would seek to maintain a strong balance sheet to "respond to a range of downturn outcomes".

Meridian split out its wholesale and retail segments for the first time in the latest results. They showed strong performance in the wholesale side of the business with EBITDAF of $309.1 million, reflecting rocketing wholesale market prices relating to the dry 2008 winter, and a trading loss of $23.6 million on its retail side.

(Businesswire)

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