Big wet boosts Meridian earnings 25pc

The Benmore Dam in the Waitaki Valley as Meridian Energy spilled water from the hydro lakes. Photo / Simon Baker

Wetter than normal conditions enabled Meridian Energy to lift its operating earnings 25 per cent to $642 million in the year ended June 2010, despite a price freeze and lower volumes in its retail business.

The state-owned power company generates 93 per cent of its power from hydro stations, the rest from wind.

In contrast to the 2008/09 year, which was drier than normal for the first third and wetter than normal for the rest of the year, the latest year started with plenty of water in the lakes and had above-average inflows during winter 2009 and autumn 2010.

That, coupled with a doubling of wind generation as the West Wind project near Wellington came on line, enabled Meridian to lift the volume of electricity it generated by 13 per cent.

The flipside of a wet year was lower wholesale electricity prices. Meridian's retail business paid an average $58 a megawatt hour (MWh), 7 per cent less than in 2008/09.

But it warned that retail prices are not high enough to support long-run energy costs, which are greater than $80 a MWh.

Meridian's retail prices (which exclude the 40 per cent of its output sold to the Rio Tinto aluminium smelter at Tiwai Point) were frozen all through the 2009/10 year. The freeze expires in October, which is also when the GST increase to 15 per cent occurs, but chief executive Tim Lusk said no decision had yet been taken to increase prices.

"We are certainly seeing increased input costs but there are no decisions yet on when we might move on that."

The retail electricity market is unusually competitive as the three state-owned power companies, whose generation portfolios are being reshuffled either physically or virtually, seek new customers closer to their generation assets.

The rate of customer churn (or retailer switching) has climbed to 16 per cent in the year ended June from 9 per cent two years earlier. "They are no longer passive price takers," Lusk said. So far the increase in Meridian's North Island customer base has been largely around Wellington and in the Waikato, but it has Auckland in its sights too, he said.

Meridian's overall revenue was up 9 per cent to just over $2 billion, underpinning the 25 per cent improvement to $642 million in earnings before interest, tax, depreciation, amortisation and fair value movement (ebitdaf).

But a more competitive market, combined with flat demand in the near term, was likely to put pressure on margins and increase the cost of maintaining market share, chief financial officer Paul Chambers said. Meridian's key productivity measure, ebitdaf per MWh generated, improved by 11 per cent in the latest year.

The company has about 1300MW of generation projects - mainly wind farms but also hydro - in various stages of the consenting process. They would cost about $4 billion to build.