Meridian's profit rises despite challenges

Makara Wind farm, owned and operated by Meridian Energy. Photo / Supplied

Meridian Energy managed to lift operating profit in the year to June despite a "perfect storm" of low wholesale power prices, flat demand, fierce retail competition and earthquakes.

It was a robust performance in such a challenging year, chief executive Tim Lusk said.

Earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) rose 2.8 per cent to $659.9 million.

That was boosted by a one-off $28.1 million from settling - amicably, Lusk said - a dispute with Meridian's largest customer, Rio Tinto Alcan, over an outage at its Tiwai Pt aluminium smelter in 2008.

On the other hand, the Christchurch earthquakes cost the company between $20 million and $25 million in lost sales, as well as the costs of the disruption to its own operations, chief financial officer Paul Chambers said.

The combination of flat demand for electricity and a wet year in the catchment of the hydro lakes saw wholesale prices drop 14 per cent.

This hit Meridian especially hard because it generates a lot more electricity than it needs to satisfy its own customers and is therefore a net seller into the wholesale market.

But it was on the wrong side of an extreme spike in wholesale prices in the upper North Island on March 26 which regulator the Electricity Authority has over-ridden but which is subject to a court appeal. Should the court reinstate the market prices on the day, Meridian stands to lose $14 million.

During the year Meridian sold the Tekapo A and B power stations on the upper Waitaki to Genesis Energy in a reshuffling of the state-owned enterprise's generation portfolios intended to boost retail competition.

Of the $830 million sale price, the Government receives a special dividend of $531 million, boosting the total dividend to the Crown for the year to $685 million.

In an environment of heightened retail competition and customer churn, Meridian lifted customer numbers 7 per cent to a market share of 14 per cent. Retail revenue grew 4.5 per cent on volume growth of 1.7 per cent.

Asked if retail prices were unsustainably low, Chambers said: "It would be interesting to see what happens if there's a dry spell. But competition is a good thing."

Meridian's 64MW wind farm at Te Uku came on line in March and construction has begun on a 420MW wind farm in Victoria, a 50:50 joint venture with AGL Energy.

Lusk said the company had four more wind or hydro projects consented and ready to go when the commercial time was ripe, and five further back in the pipeline.

It expects growth in demand to return to long-run average rates, lifting wholesale prices to levels that would justify further generation investment.

Meridian's net profit after tax was $303 million, up from $184 million the year before. That includes a gain of $157 million, relative to book value, on the sale of the Tekapo power stations, but also a loss of $103 million when long-term derivatives the company has in place to manage risks in its contract with the smelter are marked to market.