The worst inflows into its hydro lakes for 79 years took a toll on Meridian Energy's earnings in the year to June 2012.
The state-owned generator and electricity retailer yesterday reported a net profit after tax of $74.6 million, down from $303.1 million the year before.
But the prior year's earnings had been boosted by the sale of its Tekapo generating assets to fellow-SOE Genesis, and by the settlement of some long-running litigation with its largest customer, New Zealand Aluminium Smelters, operator of the Tiwai Point aluminium smelter.
After backing those one-offs out, the latest year's bottom line was still 28 per cent down on the year before.
Chief executive Mark Binns argues, however, that a fairer comparison is with 2008, the last previous dry year.
Compared with that year, earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) at $476.6 million was $106 million higher, even though inflows were even lower and the company no longer had the Tekapo assets.
Chief financial officer Paul Chambers said lake levels had started to drop last December.
"We picked it early and started to bolster our hedge positions and conservatively managed lake levels."
The company had benefited from increased liquidity in the derivatives market and a more sophisticated and mature approach by other industry players, he said. "We were able to offer the thermal generators certainty of price and bring their power on to the system, avoiding the sort of mad price spikes we saw in 2008."
Meridian, normally a net seller into the wholesale market, was a net buyer over the past year - on the wrong side of wholesale prices which were 138 per cent higher than the year before.
Its hydro generation fell 22 per cent, or 16 per cent excluding Tekapo, a tenth of which was offset by increased wind generation.
Since Binns took over as chief executive in January, Meridian has scrapped plans for the Project Hayes wind farm in Central Otago and the Mohikinui hydro project.
It has sold its WhisperTech business. It also plans to exit its stake in a solar power operation in the United States.
"Not because we don't believe solar has a part in our portfolio, but when we do develop solar it will be in Australasia, and we have learned all we are going to from the US venture," Binns said.
Meridian believes solar power might be competitive with wind by 2020 in Australia and more broadly sees the cross-party political commitment to renewable generation across the Tasman as an opportunity for it, when in New Zealand demand growth is weak and there is overcapacity in generation.
When asked about the possibility of a sudden huge increase in over-capacity if the Tiwai Point smelter were to shut down, Binns said there had been no overt threats of closure.
The company disclosed last week that Rio Tinto, majority owner of NZAS, had approached it to discuss possible changes to the smelter's contract.
Meridian needed to do some quite complex modelling of the potential outcomes and, when it had, the board would make a decision based on what was good for Meridian.
"In some of the press there seems to be this indication that Meridian is going to 'take one for the team', if you like. I saw that phrase used. I would just reiterate the board and management are very clear what their obligations are."
The Government had been informed when the smelter raised its concerns early last month.
Binns noted, however, that SOE Minister Tony Ryall had said it was a commercial issue for Meridian and NZAS to resolve.
- Brian Fallow
Profit slump a warning to investors, says analyst
An analyst says Meridian Energy's profit slump is a warning to potential investors in state-owned power generators that they must be aware of volatility within individual companies.
Head of private wealth research at Craigs Investment Partners Mark Lister said that while the industry as a whole was stable and predictable, companies were still at the mercy of the weather.
Meridian generates most of its power from its South Island hydro stations and if it did not rain in hydro catchments the company suffered, Lister said.
"While it's a very good industry in terms of what they produce being a necessity and predictable low risk and low volatility ... because of our reliance on hydro power you're going to get these swings and roundabouts between the different players.
"Meridian's result could just have easily have been an outstanding one if they had got some great rainfall in the right place."
The other SOE power companies being primed for partial sale will release their results this month. Genesis Energy reports on August 27 and the first company due to be sold down, Mighty River Power, delivers its result the day after.
- Grant Bradley