Meridian bounces back from drought and deluge, tips $264m in govt coffers

Tuesday 29th September 2009

Meridian Energy took a wild ride with the weather and a broken national grid to produce an $89.3 million net profit in 2008/09, down 30% on the previous year's result.

Meridian CEO Tim Lusk described the result as "satisfactory", because once non-cash adjustments to comply with International Financial Reporting Standards are excluded, underlying profit was up 87% on the previous year at $195 million, while year on year EBITDAF growth was 37% "as a result of improved operating conditions".

The company will pay both an ordinary dividend of $113.9 million and a one-off special dividend of $150 million to the Government, made possible because a key credit rating agency metric, EBITDAF interest cover, had been well exceeded at 5.9 times, against a target 5.1.

MightyRiverPower also paid a $150 million special dividend after reporting its recent record profit, making $300 million of unforecast revenue flowing to government coffers from SOEs at the depth of the recession.

Partly thanks to timing issues, Meridian's full year result was in better shape than Contact Energy's, despite weathering the same volatile South Island electricity market conditions that halved Contact's 2008/09 annual profit.

Meridian experienced the same extreme conditions over calendar 2008 as Contact, when a winter drought initially threatened national electricity supply. This was followed by a deluge that filled hydro lakes at the same time as faults on the Cook Strait cable and a blown transformer at the Tiwai Point aluminium smelter made it impossible to sell all the hydropower available.

The drought had the greatest impact on Meridian in the fourth quarter of the 2007/08 year, when an underlying loss of $39 million was recorded. Contact, however, didn't really suffer until the first quarter of 2008/09, in part because it ran out of stored water in Lake Hawea, and recorded a shortfall in net wholesale revenue of $11 million in Q1 of the financial year just passed. Underlying earnings for Meridian in that period were $36 million.

Meridian's large Christchurch customer base, paying fixed tariffs and not exposed to plunging wholesale prices, was an important factor in ensuring the relative strength of Meridian's performance.

The results carry no contingency for the ongoing dispute with the owner of Tiwai Point, Rio Tinto, following a transformer failure which closed one of its smelting potlines for several months. Rio buys energy from Meridian under a take or pay contract, and has been attempting to invoke force majeure provisions. Meridian would not comment on the sum in dispute.

Lusk said all retail tariffs were frozen until next June, but that there would inevitably be upwards pressure on tariffs once current generation capacity began to be fully used.

Meridian is signalling difficulty justifying any further investment in wind projects, given the comparatively attractive economics of options such as geothermal and fast-start gas-fired peaker plant.

While there is potentially $465 million of capital expenditure on the books for next year, only around $80 million is currently committed, compared with total capex of $499 million in the last financial year, as Meridian completed its Wellington windfarm, West Wind.

The company is undergoing a major restructuring, especially at head office, with 10-15% of Meridian's approximately 700 employees likely to leave the company because of the Fit for Purpose exercise, which has been assisted by PricewaterhouseCoopers.

The programme was also implementing "highly disciplined capital allocation processes", although Lusk said pursuing speculative, "disruptive" technologies would remain part of the culture at Meridian.

For that reason, initiatives such as Arc Innovations smart meters, the RightHouse energy efficiency franchise, the online-only retailer PowerShop, and the recent investment in a Californian solar energy business, CleanTech, were outside the restructuring and represented "a powerful little portfolio".

While underlying return on average equity at 4.6% was above the target 4% and last year's 3%, Meridian's rate of return remains low among SOEs and other electricity generator-retailers.

New capital return targets are expected in the company's next Statement of Corporate Intent, due for tabling with the 2008/09 annual report in Parliament in mid to late October.

Businesswire.co.nz

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