Govt in line for $300m Meridian dividend

Meridian this year had the largest inflows of water to its southern hydro lakes in decades. Photo / Simon Baker

The Government is to receive nearly $300 million in dividends from Meridian Energy despite a 30 per cent fall to $89 million in the state-owned power company's net earnings in the year to June.

That figure includes $114 million unrealised mark-to-market losses on electricity derivatives Meridian has in place to manage risks surrounding its renegotiated contract with the Rio Tinto aluminium smelter at Tiwai Pt, which does not come into effect until 2013. The underlying profit, excluding such paper losses, was $195 million after tax, Meridian said, up from $104 million in the previous year.

Chief executive Tim Lusk said the result was satisfactory considering the challenges the year had presented.

Hydrological conditions had swung wildly from the dry conditions of winter 2008 to a deluge, the largest inflows of water into the southern hydro lakes for decades.

Unfortunately for Meridian that had coincided with a transformer failure at the smelter which shut down a third of its load until very recently, while constraints on the Cook Strait cables limited its capacity to move power in the North Island. The result was a drop in wholesale prices when the company was a net seller.

Meridian is to pay the Government a normal dividend of $144 million for the full year, representing just under 75 per cent of its underlying profit, and it will also pay a special dividend of $150 million.

Chief financial officer Neal Barclay said interest cover, the key measure of concern to ratings agencies, was above target and trending upwards, allowing the company to review its capital management strategy and pay a special dividend.

"In essence we had the cash there and were able to return it to the shareholder," Barclay said. "We had an independent adviser come in and look at the capital management policies of the business. As part of that we did a lot of forecasting of various scenarios for the future - hydrology, capital expenditure, that sort of thing. And we established the business would continue to perform at a level that exceeded our minimum ratios to retain a BBB+ credit rating."

Meridian plans to make a retail bond issue in the first quarter of next year whose size has yet to be determined. Its fellow state-owned enterprise, Mighty River Power, is also paying the Government a $150 million special dividend.

The Government has been critical of the SOE generators' financial performance compared with their private sector counterparts.

The State-owned Enterprises Act requires them to perform commercially at a level comparable to equivalent listed companies.

"We have recognised we are somewhat behind that," Lusk said. "But now we have a plan in place to achieve that."

He said it involved a leaner corporate centre, better customer service, improvements in information technology and procurement, and disciplines around how scarce capital is allocated.

The company has frozen residential prices until the end of June next year. It has almost completed a large wind farm near Wellington and has plans for $2.6 billion of capital expenditure over the next five years, three-quarters of it in New Zealand wind projects. Only a small fraction is committed, however.

On the ministerial review into the electricity sector now under way, Lusk said Meridian supported many of the Layton committee's recommended changes. But it is not keen on the proposed asset swap between itself and Genesis Energy, under which each SOE would get the jewel in the other's crown, the Manapouri hydro scheme and the new gas-fired plant at Huntly respectively. It has suggested moves to foster a more liquid hedge market instead.