Dividend yields up to 13.4% in Meridian sale

By Brian Fallow

Investors get a look at forecast returns as float prospectus is launched

Mark Binns, Meridian's chief executive, said it's premature to assume the smelter will close in 2017. Photo / Mark Mitchell
Mark Binns, Meridian's chief executive, said it's premature to assume the smelter will close in 2017. Photo / Mark Mitchell

Retail investors are being offered Meridian Energy shares at a dividend yield of 6.5 per cent this financial year and 7.2 per cent next year.

But because of the offer's instalment receipts structure, the effective yield for the first 12 months after the company lists at the end of next month should be 10.5 per cent.

Those are the forecast cash yields; if grossed up for imputation credits - the shareholder's share of company tax paid - the yields are as much as 13.4 per cent in the first 12 months.

The prospectus sets an indicative price range of $1.50 to $1.80 a share. Of this, $1 is payable up front and the balance in 18 months.

The final price will be announced on October 23, six days before the listing.

For retail investors, there is a price cap of $1.60 but the investor has to hold the shares until the second instalment is paid in 18 months.

Meridian's dividend policy is to pay 70 to 80 per cent of free cash flow, which is defined in the prospectus.

The company forecasts an underlying net profit of $187.9 million in the year to next June, rising to $211 million the following year.

Underlying net profit after tax is forecast to be $161.5 million in the year to June, close to last year's $162.7 million, before rising to $179.4 million next year.

How much the Government ultimately gets for the 49 per cent of Meridian it is selling will depend on the final price struck in an institutional book-build process and on what percentage of the shares are bought by retail investors and subject to the cap of $1.60 a share.

At the bottom of the indicative range it would get $1.9 billion; at the top somewhere between $2 billion and $2.3 billion.

None of the float's proceeds go to Meridian.

Among the risks investors have to weigh are the potential for dry years (as Meridian's generating capacity is largely hydro-electric), the future of the Tiwai Pt smelter after 2017 and the political risk posed by the plans of Labour and the Greens to scrap the wholesale electricity market.

The prospectus forecasts assume average hydrological conditions.

While the company has a lot of experience of managing hydrological risk, and the benefit of an increasingly liquid hedge market, the prospectus warns that actual hydrological conditions and the company's financial performance are likely to differ from those forecast.

The renegotiation of Meridian's contract with New Zealand Aluminium Smelters, which accounts for 40 per cent of Meridian's output, is widely seen as securing the future of the smelter at least until 2017.

If the smelter were to close, Meridian's revenue would be hit by a general reduction in wholesale and retail electricity prices, the prospectus says.

But Meridian's chief executive, Mark Binns, said it would be premature to assume the smelter will close in 2017.

The renegotiation has significantly reduced its electricity costs, by enough for Meridian to write down its own value by nearly $500 million.

If the smelter did close, the effect on power prices would depend on what the owners of thermal generating plant opted to do.

Of the Labour/Greens proposal for a single buyer, New Zealand Power, to set wholesale electricity prices, the prospectus says the owners of generating assets with low operating costs, such as Meridian's hydro assets, would expect to face significantly greater revenue reductions than owners of plant with higher operating costs, if the proposal were implemented.

Binns said it was difficult to quantify that risk because Labour and the Greens had not given a lot of detail about how it would work.

"It is an exceptionally difficult thing to do, to change the market as they are suggesting."

Finance Minister Bill English said the market understood that risk existed, and this was bound to be reflected in pricing.

- NZ Herald

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