Meridian sees strong second half after testing first six months
By Pattrick Smellie
Feb 25 (BusinessDesk) - Meridian Energy says it's ready for partial privatisation and expects a significant uplift in
operating earnings in the second half after transmission outages and heavy rainfall knocked its performance in the six
months to Dec. 31.
The state-owned power company's accounts also show a strong positive bounce in the unrealised value of its contracts to
service the Bluff aluminium smelter, where the majority owner Rio Tinto is pressing to renegotiate a new long term
contract to achieve lower prices.
The $102.1 million improvement in the unrealised value of financial instruments was the primary factor pushing Meridian
to a net profit of $173.3 million in the first half, up by $164.1 million on the same period a year earlier.
However, the more useful measure of its operational performance is earnings before interest, tax, depreciation,
amortisation and movements in the value of financial instruments showed a 6 percent decline to $277.1 million.
Underlying profit, an internally produced measure of earnings that smooths out large abnormal items , was $88.3 million,
an 11 percent fall on the previous six months, but a significant improvement on the last six months of the last
financial year, chief executive Mark Binns said.
That was because low inflows to hydro catchments in the second half of the previous year created difficult operating
conditions.
Revenue for the first half was down 2 percent at $1.19 billion, reflecting falling wholesale prices and weak commercial
and industrial demand for electricity.
There was no shortage of rain to Meridian's South Island catchments in the half-year under review, but heavy inflows
depressed wholesale electricity prices, while a large number of transmission system outages relating to the
commissioning of the new Pole 3 Cook Strait cable also pared first half earnings.
While further outages are a risk to second half earnings, Binns said Meridian had "returned to higher profitability this
half year and is on track to achieve signficiant full-year ebitdaf growth."
"Operationally, we're in good shape and we're building resilience against New Zealand's medium term flat demand
outlook," he said.
The improvement in the value of financial instruments is significant because they are largely tied to the smelter
contracts and reflected "a softening of forward electricity prices and strengthening forward aluminium prices."
Binns offered no update in the company's statements to the NZX about the progress of negotiations with Rio Tinto, which
is seeking to sell the smelter along with a suite of other mid-life plant in Australia, other to say the talks were
progressing.
However, improving metal prices and a soft outlook for electricity prices suggest the conditions for a favourable
outcome to the negotiations are improving.
In the retail electricity market, Meridian says it was facing 18 percent monthly customer churn rates, consistent with
the rest of the industry, and that it has now completed its efforts to gain additional North Island customers following
sector reforms that forced the SOE retailers to diversify their customer bases.
With other retailers announcing in recent days that electricity tariffs are unlikely to move up much in the next few
years, Meridian said it had undertaken "some tariff changes repositioning to mid-market pricing and recover higher lines
costs" and that the company anticipated "further pricing pressure."
Transmission costs rose 33 percent, or $14 million, in the half year under review, largely reflecting the cost of
monopoly national grid operator Transpower's upgrade programme.
"The Electricity Authority's proposed transmission pricing methodology changes, if implemented, are likely to benefit
Meridian over time," the company says, placing it at odds with most of its competitors, who are alarmed by the
proposals, which will shift transmission costs to be less heavily borne by South Island generators.
(BusinessDesk)