Meridian earnings up, capital return possible

Meridian owns the Benmore Dam. Photo / Simon Baker

Meridian Energy, which generates about 30 per cent of the country's electricity, lifted first-half earnings 21 per cent as it widened margins and clamped down on costs, and has flagged capital returns for shareholders over the next five years, including a special dividend with today's report.

Earnings before interest, tax, depreciation, amortisation and fair value adjustments, the favoured measure for electricity generator-retailers, rose to $324.3 million in the six months ended December 31 from $268.2 million a year earlier, the Wellington-based company said in a statement.

Net profit was largely unchanged at $117.1 million from $116.9 million. The result was slightly ahead of First NZ Capital estimates for Ebitdaf of $312 million and net profit of $103 million. Revenue rose 22 per cent to $1.33 billion.

The board declared an interim dividend of 4.8 cents per share, ahead of First NZ's 4.6 cents forecast, and will pay a 1.4 cent special dividend to use up imputation credits that would otherwise be lost in May when the Crown transfers shares to instalment receipt holders.

After reviewing Meridian's capital structure, the board decided to increase the proportion of free cash flow paid out to an average of between 75 per cent and 90 per cent from the current 70-to-80 per cent, and plans to return $625 million to shareholders over the next five years. Meridian increased operating cash flow to $216.8 million from $191.5 million a year earlier.

"The board is flexible as to how this is achieved, but the anticipated form of return will be either an annual on-market share buyback programme, special dividends, or a combination of both," the company said. "The capital return will follow the final instalment receipt process and will be subject to the owners of the Tiwai Point smelter not terminating the electricity agreement, or there not being any adverse event in the interim."

The instalment receipts, which were sold at $1 apiece in 2013, last traded at $1.90, and have gained 8 per cent this year. The stock is rated an average 'hold' based on seven analyst recommendations compiled by Reuters with a median price target of $2.23 and last traded at $1.90.

Meridian supplies electricity to the New Zealand Aluminium Smelters, majority-owned by Rio Tinto, which consumes about one-seventh of the nation's electricity. It renegotiated its contract with the major customer in 2013 when Rio Tinto threatened closure ahead of Meridian's initial public offer, leaving the smelter's owner an option to terminate its contract on July 1 this year, ending the arrangement from the end of 2016.

Meridian said its assessment of the plant was that the smelter was in a better financial position than when the new contract was renegotiated in 2013 and was hopeful it will keep operating.

"At this point we have no clarity on where NZAS stands on this decision," Meridian said. "The reality is that uncertainty around the future of the smelter is something the industry just has to live with as NZAS has ongoing termination rights under the contact."

Meridian's retail contracted sales rose to 2,993.4 gigawatt hours (GWh) from 2,885.7 GWh a year earlier, with sales to the smelter unchanged at 2,525.4 GWh. Wholesale contracted sales rose to 3,131.5 GWh from 2,959.8 GWh.

The company lifted generation 6 per cent to 6,902 GWh due to strong first quarter hydro generation and the contribution from its Mt Mercer and Mill Creek windfarms, while irrigation demand and favourable business sales improved its energy margin by 7.5 per cent.

Meridian's average wholesale price was $64.2 per megawatt hour (MWh) from $39.7/MHw a year earlier, reflecting increased demand in New Zealand, full-availability for the HVDC inter-island national grid link and reduced output from thermal generators.

"This increased both Meridian's generation revenue and the cost of supplying its retail customers," Meridian said.

See the latest Meridian results here: