MIGHTY RIVER POWER INTERIM REPORT 31 DECEMBER 2003
Contents
03 07 08 09 10 12 13 17
From the Chairman and Chief Executive Interim Financial Statements Consolidated Statement of Financial Performance Consolidated Statement of Movements in Equity Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directory
Highlights
Operating Surplus before Interest, Non-recurring Items and Taxation of $95.3 million, up 20% on 2002. Net Surplus after Taxation of $51.4 million, up 16% on the normalised 2002 result. Further successful debt restructuring through a $113.8 million Fixed Rate Bond Issue. Mercury Energy approaching 300,000 retail customers.
Long-term contract volumes rise. Waikato River resource consents granted for 35-year term, subject to appeal. Expansion of geothermal generation continues. Extensive generation research and development underway. Mercury Energy won the Business Ethics award at the Deloitte’s Management Top 200 awards.
Operating Surplus before Interest, Non-recurring Items and Taxation ($m)
for 6 months to 31 December
2003 2002 2001 2000 1999
0
20
40
60
80
Net Debt/Net Debt plus Equity (%)
100
at 31 December
2003 2002 2001 2000 1999
0
20
40
60
80
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
100
01
Total Operating Revenue ($m)
for 6 months to 31 December
2003 2002 2001 2000 1999
0
50
100
150
200
Operating Cashflow ($m)
250
300
Normalised
350
400
for 6 months to 31 December
Actual
2003
2002
2001 2000 1999
0
20
40
Net Surplus after Taxation ($m)
60
80
Normalised
100
for 6 months to 31 December
Actual
2003
2002
2001 2000 1999
0
20
40
Total Generation Volumes (GWh)
60
Hydro
Cogeneration
80
Geothermal
Methane
100
for 6 months to 31 December
2003 2002 2001 2000 1999
0
02
200
400
600
800
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
From the Chairman and Chief Executive On behalf of the Board and Management, we are pleased to present Mighty River Power’s performance for the six months to 31 December, 2003.
Highlights It is satisfying to look back on a period that has continued to see the Company perform well. This consistency is a function of the sound business platform created since the Company’s formation in 1999 and reflects the hard work and focus of the entire organisation. In earlier years our focus was on strengthening our balance sheet, stabilising our retail operation, and creating a good balance between generation capacity and retail sales. The substantial benefits of that focus are reflected in Mighty River Power’s best ever performance in a July to December period. Operating Surplus before Interest, Non-recurring Items and Taxation was $95.3 million, a result enhanced by our decision in December 2002 to exit the onerous Southdown Power Sale Agreement and to acquire the remaining 50% share of the Southdown Co-generation plant. The full effect of that acquisition was felt in this period through the benefits of completely integrating the Co-generation plant into our generation portfolio to better complement weather-related fluctuations in our hydro production and market conditions. Getting our balance sheet in order after inheriting heavy debt levels at formation was also rewarded with an upgrade in our Standard & Poor’s credit rating outlook from stable to positive, while confidence in our business was reflected in a second successful bond issue.
reduce their exposure to the price risks associated with the wholesale market. Concerns over security of supply during early winter 2003 highlighted future fuel issues and an uncertain climate for investment in new generation, while prompting the Government to act in securing backup generation for dry-year reserve capacity. Mighty River Power has confirmed that it is technically possible to start up its mothballed, oil-fired plant at Marsden Point and, although transmission constraints may present challenges, we are continuing discussions with the recently formed Electricity Commission about the station’s possible future. Other options for generation at the Marsden B site are also under investigation as part of our plan for developing new generation capacity. Our successful application for more flexibility in our 35-year consents for the Lake Taupo/Waikato River hydro system is expected to assist in maximising the efficiency of our existing hydro generation capacity in meeting consumer demand. A small number of parties have appealed some of the consent conditions. We are actively working with the appellants and are reasonably confident the issues that have been raised will be resolved. No interim dividend will be paid as agreed with our shareholders, with the retained earnings used to reduce debt to assist future investment in new generation capacity.
Financial Operating Surplus before Interest, Non-recurring Items and Taxation was $95.3 million compared to the $79.4 million surplus in the same period last year.
The strength of our current balance sheet gives us the option of investing in new generation – an area we are pursuing with vigour to meet growing demand. Other issues impact on our ability to develop new generation opportunities, as discussed later in this report.
Net Surplus after Taxation performance was $51.4 million, compared with $99.8 million in 2002. The 2002 figure was boosted considerably by the one-off, non-recurring gain associated with exiting the Southdown Power Sale Agreement. The $51.4 million in the 2003 period represents an improvement of 16% over the normalised Net Surplus after Taxation in the 2002 period.
Our retail operation continued to perform extremely well, while new products, an emphasis on service and a thriving housing market facilitated new connections and customer acquisition.
Total Operating Revenue of $305.8 million represented a more than $70 million increase period on period reflecting the impact of full ownership of Southdown, stronger retail and commercial sales and increased retail prices.
Large commercial customers were also attracted to our financial risk management products as they sought to
Our ongoing focus on an appropriate balance between our retail sales and generation capacity was assisted by an
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
03
increase in large commercial customers seeking to reduce their risk exposure to wholesale price fluctuations by electing to take up our financial contracts. Restructuring our debt portfolio continued with a second Fixed Rate Bond Issue that raised $113.8 million. The Company’s average debt maturity profile has improved from an average 2-3 years to 7-8 years. Net debt was further reduced from $487.8 million to $394.1 million. Just after the end of the last financial year the outlook for our Standard & Poor’s credit rating improved from BBB (stable outlook) to BBB (positive outlook). The reduction in debt and the improvement in our debt profile have given the Company room to prudently invest in generation development. Currently, we are committing significant amounts of capital to researching and developing generation opportunities.
Generation Total production for the six month period was 2,689 gigawatt hours, a 6% increase on the corresponding 2002 period. Mighty River Power has been looking at how we will contribute to the increased energy needs of the country with a focus on expanding its generation capabilities. Since May 2003 the Company has been a 25% equity partner in the Tuaropaki Power Company which is undertaking the 39MW Mokai II expansion at the Mokai geothermal field, due for commissioning in mid-2005. Exploratory drilling is also underway near Kawerau following our agreement with the Putauaki Trust. Further drilling has been undertaken to restore full generation from the Rotokawa Power station, while discussions are continuing on the possibility of recommissioning the Marsden B oil-fired plant as dry-year reserve. Investigations are also being carried out for alternate thermal fuel options for the Marsden B facility while a number of other generation options are being investigated elsewhere. The granting of consents for the Waikato River hydro system for 35 years, and the additional flexibility obtained in those consents, although subject to appeal, are ultimately expected to allow Mighty River Power to increase the efficiency and flexibility of generation from this limited but renewable fuel resource.
04
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Customers In the commercial market, Mighty River Power has been working closely with end users to provide well-priced, electricity price risk management products. We have seen more customers keen to eliminate price risk for longer durations or to cover specific short-term events. The reciprocal benefit of the increasing number of longer-term contracts for the Company is an increase in certainty. Mighty River Power also worked closely with other major generators to introduce a web-based forward price curve www.energyhedge.co.nz. The aim of the site is to provide a more liquid and transparent mechanism for forward price discovery of up to two years. Commercial customers also benefited from another new service, consisting of email and text message notification of significant shifts in the wholesale market spot price. This service enables customers to manage their demand around pricing peaks. In mass markets, an ongoing focus on service and product development has contributed to significant growth for Mercury Energy’s retail customer base, which is now approaching 300,000. Services such as monthly meter reading, gas and electricity on the same bill (Mercury Duo) and discounts for prompt and direct debit payments have been complemented by the addition of Online Billing and the creation of the OneBillTM service for customers with more than one property who want to receive just a single bill. These products are creating greater stability in our customer base. These enhanced services mean competing retailers targeting Mercury’s customer base are having little success while the services are attracting new customers. The very strong housing market has also boosted new connections, particularly across the Auckland region. A programme targeted on gaining access to difficult-toread meters, including offering evening and weekend meter reads, proved very successful. Mercury Energy’s high profile community initiatives continued with new, highly specialised, X-ray equipment provided to Starship Hospital and our ongoing support for the Christmas in the Park and Starlight Symphony events. Our association with Christmas family events was successfully expanded to include Hamilton, where we continue to grow our retail presence.
One of the highlights for our retail operation was Mercury Energy winning the Business Ethics award at the Deloitte’s Management Magazine Top 200 awards. The award recognised the environmental work practices that lay behind achieving the Platinum Enviromark standard, together with Mercury’s unique “Beat your Bill” energy-saving campaign which rewarded individual customers for saving power during the national Target 10% energy-saving campaign.
Looking Forward The country’s most pressing issue is the need to develop an energy policy encompassing a strategy for securing fuel supplies in the medium to long term. Such a policy is fundamental to ensuring the security of New Zealand’s future electricity supply, so as to sustain the economic wealth of all New Zealanders.
The Company is investigating a variety of opportunities to participate in the gas exploration sector. Finally, the Resource Management Act presents its own challenges for those pursuing investment in generation. The Act encourages a local focus on individual projects rather than taking a view of their national significance. This can result in local interests overriding projects of national importance. We see this directly in our geothermal developments. Also at the national level, we have a new body to work with – the Electricity Commission. The Company has made submissions on how this body might operate. We look forward to working with the Commission in developing coherent strategies to ensure security of electricity supply to meet New Zealand’s growing energy demands so as to meet the economic needs of all New Zealanders.
We need clear signals as a company and an industry about the terms on which various fuel options will be available to us to reduce the risks associated with investment in new generation.
Our People
Currently, we face major uncertainties created by New Zealand’s commitments to the Kyoto Protocol and the proposed carbon tax regime, future gas supplies and exploration, and the Resource Management Act for new projects, especially renewables.
With a new focus on developing generation, we have strengthened our environmental and development teams.
Doubts around Russia’s participation in Kyoto cast uncertainty around New Zealand’s commitment to the protocol as, without such a major player and the absence of Australia and the United States, there appears to be increasing uncertainty about the viability of the initiative.
We again acknowledge the contribution of our staff and the support of their families in achieving success for Mighty River Power.
We continue to build further on the very good work undertaken since our formation and have created a strong and consistently performing business, one that has the capital and technical capabilities to meet the market needs for energy.
Clear intentions regarding Kyoto and a carbon tax regime for New Zealand are necessary as carbon taxes impact significantly on fuel choices for generation and, consequently, viable development options. Given the limited hydro and geothermal development opportunities and the long lead times associated with gaining consents, coal and gas appear to be the best medium-term generation fuel alternatives. However, coal may be ruled out by a carbon tax regime and gas may also be adversely affected by carbon tax requirements. A more pressing concern about gas is its availability in New Zealand, especially with the limited reserves now identified in the Maui field.
Rob Challinor Chairman
Doug Heffernan Chief Executive
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
05
06
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Interim Financial Statements For the six months ended 31 December 2003
08 09 10 12 13
Consolidated Statement of Financial Performance Consolidated Statement of Movements in Equity Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
07
Consolidated Statement of Financial Performance For the six months ended 31 December 2003
Year Ended 30 June 2003 Audited $000
798,286 (162,270)
Note
Sales
391,870
316,019
(90,777)
(86,343)
Interest income
7,446
Other revenue
646,246
Total Operating Revenue
119,474
Operating surplus before interest and non-recurring items
(29,867) 34,217
Interest income Interest expense Non-recurring items
126,608
Surplus Before Taxation
(13,077)
Taxation expense
113,531
Surplus After Taxation
0 113,531
Six months ended 31 December 2002 Unaudited $000
Less transmission, line and metering charges
2,784
2,784
Six months ended 31 December 2003 Unaudited $000
Share of retained deficit of associate company after taxation Net Surplus After Taxation
2
3
990
1,512
3,738
3,863
305,821
235,051
95,326
79,417
990
1,512
(16,222)
(14,062)
0
35,362
80,094
102,229
(28,571)
(2,476)
51,523
99,753
(80)
0
51,443
99,753
The notes set out on pages 13 to 16 form part of, and should be read in conjunction with, these Interim Financial Statements.
08
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Consolidated Statement of Movements in Equity For the six months ended 31 December 2003
Year Ended 30 June 2003 Audited $000
Six months ended 31 December 2003 Unaudited $000
Six months ended 31 December 2002 Unaudited $000
759,965
Equity at Beginning of the Period
861,696
759,965
113,531
Net surplus after taxation
51,443
99,753
113,531
Total Recognised Revenues and Expenses for the Period
51,443
99,753
(11,800)
Final dividend paid for 2002
0
(11,800)
861,696
Equity at End of the Period
913,139
847,918
The notes set out on pages 13 to 16 form part of, and should be read in conjunction with, these Interim Financial Statements.
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
09
Consolidated Statement of Financial Position As at 31 December 2003
30 June 2003 Audited $000
31 December 2003 Unaudited $000
31 December 2002 Unaudited $000
Equity 377,561
Share capital
377,561
377,561
484,135
Reserves
535,578
470,357
913,139
847,918
51,387
59,896
384,459
394,046
435,846
453,942
1,665
0
63,833
74,032
3,332
2,907
861,696 Non-Current Liabilities 56,002 434,771
Energy contracts Loans
490,773 Current Liabilities 0 79,197 3,322 0
Bank overdraft Payables and accruals Provisions Provision for taxation
12,994
0
22,793
Deferred taxation
23,921
21,012
10,064
Energy contracts – current portion
9,647
11,407
36,000
Loans – current portion
8,000
104,345
123,392
213,703
1,472,377
1,515,563
151,376 1,503,845
Total Equity and Liabilities
The notes set out on pages 13 to 16 form part of, and should be read in conjunction with, these Interim Financial Statements.
10
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Consolidated Statement of Financial Position (continued) As at 31 December 2003
30 June 2003 Audited $000
31 December 2003 Unaudited $000
31 December 2002 Unaudited $000
1,357,846
1,392,038
Non-Current Assets 1,375,053 6,916 14,438
Property, plant and equipment Investments Other non-current assets
1,396,407
4,255
7,119
15,626
8,976
1,377,727
1,408,133
0
10,619
91,507
84,204
Current Assets 4,882 95,091
Cash Receivables and prepayments
3,016
Inventories
4,449
Taxation receivable
107,438 1,503,845
Total Assets
3,143
2,939
0
9,668
94,650
107,430
1,472,377
1,515,563
The Board of Directors authorised the issue of the interim financial statements on 25 February 2004.
The notes set out on pages 13 to 16 form part of, and should be read in conjunction with, these Interim Financial Statements.
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
11
Consolidated Statement of Cash Flows For the six months ended 31 December 2003
Year Ended 30 June 2003 Audited $000
Note
Six months ended 31 December 2003 Unaudited $000
Six months ended 31 December 2002 Unaudited $000
309,546
254,123
1,025
1,190
Cash Flows from Operating Activities Cash was provided from (applied to): 654,391 2,416 (531,193)
Receipts from customers Interest received
(202,791)
(182,767)
(29,983)
Interest paid
(16,156)
(14,888)
(13,904)
Taxation paid
(10,000)
(10,303)
81,624
47,355
81,727
Payments to suppliers and employees
Net Cash Inflow from Operating Activities
4
Cash Flows from Investing Activities Cash was provided from (applied to): 850
Sale of property, plant and equipment
453
Proceeds from investments
(25,822)
Purchase of property, plant and equipment
(13,056)
Purchase of other non-current assets
92
833
2,581
0
(10,172)
(19,369)
(2,360)
(6,800)
(250)
Purchase of associate
0
0
9,293
Purchase of subsidiary and joint venture
0
9,293
(9,859)
(16,043)
0
0
(28,532)
Net Cash Outflow from Investing Activities Cash Flows from Financing Activities Cash was provided from (applied to):
8,712 0
Loans advanced
(78,312)
(12,168)
(48,500)
Loans repaid Loans of purchased subsidiary
0
0
(11,800)
Dividends paid
0
(11,800)
(51,588)
Net Cash Outflow from Financing Activities
(78,312)
(23,968)
(6,547)
7,344
4,882
3,275
(1,665)
10,619
1,607
Net Increase (Decrease) in Cash Held
3,275
Cash Balance at Beginning of the Period
4,882
Cash Balance at End of the Period
The notes set out on pages 13 to 16 form part of, and should be read in conjunction with, these Interim Financial Statements.
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MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Notes to the Consolidated Financial Statements For the six months ended 31 December 2003
1. Statement of Accounting Policies The interim financial statements presented here are the unaudited consolidated financial statements of Mighty River Power Limited for the six months ended 31 December 2003. These interim financial statements have been prepared in accordance with FRS-24 Interim Financial Statements, and should be read in conjunction with the Annual Report for the period ended 30 June 2003. The accounting policies used in the preparation of these interim financial statements are consistent with those used in the annual financial statements and the previously published interim financial statements. Certain prior year comparatives have been restated to conform with current period presentation.
2. Non-Recurring Items Year Ended 30 June 2003 Audited $000
Six months ended 31 December 2003 Unaudited $000
Six months ended 31 December 2002 Unaudited $000
0
43,153
43,153
Exit from Southdown Power Sale Agreement
(8,243)
Write-off of Southdown goodwill
0
(8,243)
Other
0
452
0
35,362
(693) 34,217
Exit from Southdown Power Sale Agreement On 28 November 2002 the Group exited from the Southdown Power Sale Agreement. The amount of $43,153,000 relates to the net gain from exiting this arrangement, including a termination payment and reversal of an onerous energy contract provision.
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
13
Notes to the Consolidated Financial Statements (continued) For the six months ended 31 December 2003
3. Taxation Expense
Year Ended 30 June 2003 Audited $000
126,608 41,781
Six months ended 31 December 2003 Unaudited $000
Six months ended 31 December 2002 Unaudited $000
Surplus before taxation
80,094
102,229
Taxation at 33 cents
26,431
33,736
Release from Southdown energy contract
0
(24,470)
Amortisation of energy contracts
0
(1,590)
2,140
(5,200)
0
0
28,571
2,476
Taxation effect of permanent differences: (24,470) (1,486) (2,324) (424) 13,077
Other permanent differences Prior year adjustments Taxation expense Analysis of taxation expense:
9,623
Current taxation
27,443
804
3,454
Deferred taxation
1,128
1,672
28,571
2,476
13,077
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MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Notes to the Consolidated Financial Statements (continued) For the six months ended 31 December 2003
4. Reconciliation of Net Surplus After Taxation with Net Cash Flows from Operating Activities
Year Ended 30 June 2003 Audited $000
113,531
Net Surplus After Taxation
Six months ended 31 December 2003 Unaudited $000
Six months ended 31 December 2002 Unaudited $000
51,443
99,753
27,389
25,967
Add (less) non-cash items: 53,696 0 (15,610) 469 1,347 0 (74,153) 8,243 326
Depreciation Share of retained deficit of associate company Amortisation of energy contracts Amortisation of goodwill
80
0
(5,032)
(10,373)
0
469
Amortisation of other non-current assets
907
542
Movement in obligations assumed on acquisition of businesses
(76)
(842)
0
(74,153)
Release from Southdown energy contract Write-off of Southdown goodwill Other non-cash items
(25,682)
0
8,243
174
4,400
23,442
(45,747)
Add (less) movements in working capital 4,319
Decrease in receivables and prepayments
3,584
15,206
(201)
Increase in inventories
(127)
(124)
(15,278)
(11,427)
17,443
(8,898)
1,128
7,426
6,750
2,183
0
(9,603)
(11)
769
(11)
(8,834)
81,624
47,355
(6,688)
Decrease in payables and accruals
(3,679)
(Decrease) increase in provision for taxation
9,207
Increase in deferred taxation
2,958 Add (less) items classified as investing activities (9,603) 523
Working capital acquired on purchase of subsidiary and joint venture Movement in other non-current assets
(9,080) 81,727
Net Cash Inflow from Operating Activities
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
15
Notes to the Consolidated Financial Statements (continued) For the six months ended 31 December 2003
5. Commitments
30 June 2003 Audited $000
31 December 2003 Unaudited $000
31 December 2002 Unaudited $000
39,438
8,633
8,194
9,148
47,632
17,781
Capital Commitments 31,964
Commitments for future capital expenditure Operating Commitments
7,844
Commitments for future operating expenditure
39,808
6. Contingencies Mighty River Power Limited has guaranteed payment obligations of $20.0 million pursuant to a letter of credit provided by a bank in favour of the market clearing company (M-Co Clearing House Limited). Mighty River Power Limited has a number of potential obligations under on-going support projects with community-based groups. Mighty River Power Limited has a contingent liability in respect of the Accident Compensation Corporation’s residual claims levy. The levy is payable annually from May 1999 for up to fifteen years. The Group’s future liability is a function of the Accident Compensation Corporation’s unfunded liability for past claims and future payments to employees. Mighty River Power Limited has guaranteed payment obligations of $29.8 million pursuant to a letter of credit provided by a bank in favour of TPC Holdings Limited. Mighty River Power Limited holds land and interests that may be affected by certain claims that have been brought or are pending against the Crown under the Treaty of Waitangi Act 1975. In the event that a recommendation is made by the Waitangi Tribunal for the return of some or all of the affected land, and that recommendation is confirmed by the Crown, resumption would be effected by the Crown under the Public Works Act 1981 and compensation would be payable to Mighty River Power Limited.
7. Subsequent Events There have been no events subsequent to balance date that would affect the fair presentation of these interim financial statements.
16
MIGHTY RIVER POWER LIMITED INTERIM REPORT 2003
Directory
Directors Rob Challinor Chairman Carole Durbin Deputy Chair Caroline Ball Ian Fraser Sandy Maier David McConnell Tania Simpson Wayne Walden
Executive Management Doug Heffernan Chief Executive Tim Densem General Manager Hydro/Thermal John Foote Group Operations Manager Tony Gray Group Finance Manager Olwen Hyslop Group HR Manager Stuart Lush General Manager Generation Development William Meek Enterprise Risk Strategist James Moulder General Manager Trading Greg Raasch General Manager Geothermal David Reeve General Manager Metrix Neil Williams General Manager External Affairs
Company Secretary Richard Taylor
Registered Office Level 19 1 Queen Street Auckland
PO Box 90-399, Auckland Telephone: 09 308 8200 Facsimile: 09 308 8209 Email: enquiries@mightyriver.co.nz Website: www.mightyriverpower.co.nz
Mighty River Power generates the bulk of its power from eight dams on the Waikato River and geothermal resources near Taupo. That generation is complemented by the Southdown Co-generation plant in Auckland and methane gas recovery sites in Auckland and Wellington. Current generation assets are: Hydro Aratiatia Ohakuri Atiamuri Whakamaru Maraetai Waipapa Arapuni Karapiro Geothermal Rotokawa Mokai* Co-generation Southdown Methane Gas Recovery Rosedale (Auckland)** Greenmount (Auckland)** Silverstream (Wellington)**
78 MW 106 MW 74 MW 98 MW 352 MW 54 MW 182 MW 96 MW 32 MW 55 MW 118 MW 5 MW 5 MW 3 MW
(*25% owned by Mighty River Power) (** majority owned by Mighty River Power)
M I G H T Y R I V E R P OW E R I N T E R I M R E P O R T 3 1 D E C E M B E R 2 0 0 3