Power company turns loss into profit

Meridian Energy posted a first-half net profit of $142 million yesterday, a turnaround from a $20 million loss in the previous comparable period.

Those bottom-line figures are blown around by unrealised mark-to-market gains or losses on interest rate hedges and a long-term hedge to manage financial risks associated with Meridian's contract with the Tiwai Point aluminium smelter.

A better measure of the state-owned company's underlying performance is its ebitdaf or earnings before interest tax, depreciation, amortisation and financial instruments. It rose 24 per cent in the latest half-year to $297 million.

It was an encouraging result, chief executive Tim Lusk said, in light of the wet conditions prevailing in the southern hydro lakes and intense retail competition among the power companies.

Coupled with the output from a new wind farm near Wellington and the return to normal production at the smelter, the wetter than usual hydrology meant Meridian generated 22 per cent more than in the same period a year earlier, but it also meant lower wholesale prices, so that its generation revenue was 17 per cent lower at $925 million.

As a vertically integrated generator/retailer lower wholesale prices meant it also benefited from a 28 per cent fall in its operating costs, resulting in a $57 million improvement to $297 at the ebitdaf level.

The lakes are nearly full and, subject as always to the vagaries of the climate, Meridian says it is on target at this stage to reach its full-year ebitdaf target of just over $600 million.

The company does not intend to raise its residential retail prices before October.

But like the other state-owned power companies it is in the throes of adjusting to Government plans to boost retail competition by a combination of physical and virtual asset swaps intended to give Meridian a less dominant position in the south while providing it with some 1500GWh of electricity to sell in the North Island.

This has resulted in the highest rates of customer "churn" for 10 years and higher costs associated with acquiring and retaining customers - some $2 million more in the latest period. So far Meridian has held its own with a net loss of less than 1 per cent in retail customer numbers.

Contact Energy chief executive David Baldwin argued on Tuesday that wholesale prices need to average around $80 a megawatt/hour (equivalent to 8c a unit on the consumer's bill) to justify investing in the cheapest new generation source, geothermal energy. But at current retail prices that squeezed retail margins to an unsustainable 2 or 3 per cent, he said. Prices would have to rise.

Lusk does not fundamentally disagree. "But the better question is what can you do to put downward pressure on [prices]."

He pointed to the opportunities presented by smart metering technology to spread load and so reduce the need for new generation capacity while offering consumers more options.

MERIDIAN ENERGY

Six months to December 31

Earnings
2009: $297m
2008: $240m

Net profit
2009: $142m
2008: ($20m)