Parched Waikato could hit Mighty River Power

Near drought conditions in Waikato this summer could put the brakes on Mighty River Power's full-year profit after wet winter conditions boosted its interim result.

The state-owned electricity company yesterday posted net profit of $76 million for the six months to December, up from $18m a year earlier.

However, last year's bottom line was affected by a large accounting adjustment for interest rate derivatives, so the company paid close attention to underlying earnings which stripped out those distortions, said chairman Joan Withers.

"We've seen a steady growth in underlying earnings this period, and we've seen steady growth over the last three years," she said.

Underlying earnings for the six months were $133m, up from $102m for the same period a year ago and $89m the year before that.

Revenue for the half year fell 3 per cent to $706.3m.

The company said its operating performance benefited from higher hydro generation because of above average inflows to its Waikato catchment in the three months to September.

Mighty River generates most of its electricity from eight hydro stations on the Waikato River.

In the latest half year it produced 2468GWh from hydro, up 210GWh on the same time last year.

But at a results briefing yesterday, CEO Doug Heffernan said summer conditions were a big turnaround on the first quarter.

"Following the lower than average inflows into the Waikato catchment during the last quarter [to December 31], Mighty River ended the half year at just 69 per cent of historical average [hydro storage]," he said.

The region was now nearing a drought situation, he said. "Since December 31 inflows into the catchment have been significantly lower than average and storage is currently at 217GWh compared to 359GWh this time last year."

The current figure represents 58 per cent of average historical storage levels.

Equity analyst Phillip Anderson of Devon Funds said hydro levels could affect the outlook for the full year.

Rain in Waikato was like "free electricity" for the company, he said. "The same period last year they got really strong inflows, and this is the exact opposite . . .

"In the second half of this reporting year they're going to have to buy a lot more electricity to feed their customers, either on the spot market at a lot higher cost or use their [Southdown] gas plant.

"We expect the second half of this year is going to be a lot tougher for them, they should get their margins squeezed if that all plays out."

Mighty River is due to offer shares to the public in the next few months in the first of the government's big SOE sales, so "it'll be interesting to see how they frame it when it comes to the prospectus", said Anderson.

Yesterday's announcement included results from Mighty River's US$250m investment in overseas geothermal projects through the GGE fund, which the company described as "mixed".

On the positive side, net profit was boosted by $57m reflecting a cash distribution from GGE in October. On the negative side, the value of the investments were written down by $89m principally related to investments in Chile and Germany.

Mighty River announced an interim dividend to the government of $67m. The payout was down from the $75m paid out last year, but the difference was due to a change in dividend policy, said Withers.