International Power Profit Growth Faces Slowdown in Australia

By Paul Dobson

Aug. 6 (Bloomberg) -- International Power Plc, the U.K. utility with power stations in 20 countries, may face slower profit growth from Australia, its third-biggest source of revenue.

Electricity prices in Australia fell in the year ended June 30 because of milder temperatures, JPMorgan Chase & Co. said in an Aug. 4 report, citing data from the National Electricity Market. The start of carbon-dioxide emissions trading may add to costs and cut the value of the company's assets, Lakis Athanasiou, an analyst at Evolution Securities Ltd., said in a research note Aug. 1.

International Power, based in London, owns regulated and market-based projects in Europe, the U.S., Asia and Australia to benefit from areas where profit margins are the widest. Led by Chief Executive Officer Philip Cox, earnings growth slowed to 22 percent last year from 44 percent in 2006. Per-share profit in the first half probably increased 10 percent, according to the median estimate of five analysts surveyed by Bloomberg News.

``Australian power prices have fallen recently, which may dampen profit growth for the full year and beyond,'' Andrew Mead, a U.K.-based analyst at Goldman Sachs Group Inc., said in a note to investors July 30.

Earnings per share excluding one-time items probably rose to 14.8 pence from 13.4 pence a year earlier, according to the analyst estimates. That follows a drop in the first quarter of 2007 as a bush fire in Australia curbed output.

Gas-Fired Plants

International Power plans to build three natural-gas fired plants in New South Wales, and may participate in a sale of power assets by the state. The utility said in April that Australia, which accounted for 16 percent of its revenue last year, and Asia offer ``huge electricity demand growth.''

The Australian government plans to start a carbon emissions trading system July 1, 2010, to reduce greenhouse gas emissions blamed for global warming. The system may not hurt profits, according to Morgan Stanley analyst Bobby Chada.

``The Australian carbon issue is a risk for International Power, but one that can be offset,'' Chada wrote in a note to clients July 30. State aid to counter higher costs looks ``certain,'' while other expenses may be passed on, he said. Higher gas and coal prices in Australia may also boost earnings because the company fixed some fuel-supply costs under contracts.

Chada rates the stock ``overweight,'' saying higher U.K. power prices will lift profit and the company's ability to borrow will allow it to exploit opportunities for projects in all regions.

New Investment

International Power declined 9 percent in London trading this year to 413.75 pence, valuing the company at 6.2 billion pounds ($12.1 billion). The Dow Jones Europe Stoxx Utilities Index fell 20 percent over the same period.

``You want to be able to have good new investment opportunities and they've done that very successfully because they've got established positions in the countries where they operate,'' said Edward Collins, a London-based fund manager at New Star Asset Management Group Plc, who manages about 100 million pounds, including International Power shares.

The company said in 2007 that first-quarter profit fell after a fire stopped some electricity exports and forced purchases at higher prices. Earnings in Australia fell in the second quarter as output halts caused International Power to buy back power at prices boosted by drought.

Disruptions curbed electricity output from South Africa to China, highlighting a shortage of power generation throughout the world, Goldman Sachs analysts wrote in a note in April.

Plant Value

``Generation's becoming more valuable -- either they're running out, or replacement costs are going up,'' said Iain Turner, an analyst at Deutsche Bank AG in London, in a phone interview Aug. 4. ``If you've already got a power station built, its value goes up.''

Cox, 56, plans new facilities in Indonesia, Pakistan, Thailand and Vietnam, according to slides from a presentation in Melbourne on April 11, posted on the company's Web site. International Power is building a gas-fired plant in Portugal and plans another in the Netherlands with Rotterdam-based Eneco Holding NV. It may need to cut the size of a future plant in Botswana after the preferred contractor for the project declined to take on undisclosed risks.

International Power got funding for a power and water- desalination project in the United Arab Emirates in December and agreed to buy wind farms in Germany and Italy from Dublin-based Trinergy Ltd. in August. The company reached a 30-year accord this week on power sales for a coal-fired plant in Indonesia.

``It's operating in a lot of regions, it's well-placed'' said Angelos Anastasiou, an analyst at Pali International Ltd. in London, in a phone interview. ``The capacity is needed. The prospects are there. They can get the financing on a project-by- project basis, which they've shown on the deals to date.''

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net