Mighty River Power’s operational update suggests a strong performance for the first six months of its June 2013 financial year but current hydro conditions may cause headwinds for the second half.
Electricity sales to customers rose 9% for the half year driven by a 22% increase in sales to business customers. This is a well timed move as the Company will need to find a home for the soon to be commissioned (July 2013) Ngatamariki geothermal generation. Total generation was 1% higher helped by strong hydro generation due to good water levels in Lake Taupo. Lake Taupo feeds its network of Waikato River hydro power stations so high rainfall in the central North Island is favorable for Mighty River as it can lift its hydro generation.
The average sales price of electricity increased 1.5% to $115/MWh and Mighty River also benefited from an improvement in the LWAP/GWAP* ratio from 1.04 last year to 0.99 this year. This means that the price differential where Mighty River sold its generation and where it purchased wholesale electricity for its customers was more favorable this year compared to last.
However the dry North Island summer may make a more difficult environment for the second half of the financial year. Lake levels in Taupo have fallen steadily since October meaning without significant rainfall Mighty River’s hydro generation will likely decline. Lower generation is ok if it is matched by an increase in wholesale electricity prices but wholesale electricity prices are currently subdued due to high lake levels in the South Island.
Investors in the upcoming sale of electricity SOE’s will have to get used to earnings volatility bought about by differing weather conditions year to year. While Mighty River is a strong business, earnings will swing as hydro generation fluctuates depending how much rain falls and where.
*LWAP/GWAP stands for Load Weighted Average Price over Generation Weighted Average Price. Load price is the price of wholesale electricity purchases at different locations where Mighty River sells electricity to customers. Generation price is the price received for electricity produced from its power stations and sold onto the wholesale electricity market. Electricity prices differ depending on the location in New Zealand so LWAP and GWAP will differ depending on where electricity is sold and purchased.