Meridian Energy has raised its dividend and says it intends to return $625 million of capital to shareholders over the next five years provided July 1 passes, as it hopes, without Rio Tinto giving notice it intends to close the Tiwai Point aluminium smelter.
"If you were an investor you would be damned happy," said Craigs Investment Partners head of research Grant Swanepoel.
The generator/retailer yesterday reported operating earnings (ebitdaf) of $324 million for the six months to December 31, up 21 per cent on the same period a year earlier.
Its net profit after tax was unchanged at $117 million, although it was up 38 per cent to $115 million when one-off gains and losses on the sale of assets and the marking to market of financial instruments are excluded.
Meridian has declared an interim dividend of 4.6c a share, up from 4.2c a year ago, plus a special dividend of 1.4c, both fully imputed.
It has sweetened its ongoing dividend policy to pay out 75 to 90 per cent of free cash flow, up from 70 to 80 per cent previously.
And it cast more light on a return of capital foreshadowed last year, pencilling in $625 million over the next five years, with details to be announced next August. That would be about 24c a share or the equivalent of a seventh of its current equity.
It is hostage to events, however. In particular the owners of the smelter, which takes about 40 per cent of Meridian's electricity, could give notice on July 1 that they would close it at the end of next year. If that deadline passes uneventfully it will be two and a half years before the earliest closure.
Aluminium prices, though volatile, rose nearly 16 per cent over 2014 in New Zealand dollar terms, according to ANZ's commodity price index.
"Our modelling suggests the smelter is running a reasonable cash surplus," said Meridian chief executive Mark Binns.
There are unlikely to be any new projects for some time in either New Zealand or Australia, unless we are blindsided by demand
Rio Tinto reported last week that net earnings from its Australasian aluminium smelters rose by 131 per cent to US$291 million ($220 million)." Meridian's potential return of capital reflects its expectation that investment calls on its capital - beyond normal stay-in-business capital expenditure - will be limited in the near future.
Retail demand for electricity has picked up, by 1.3 per cent on an annual basis, in a period of above-trend economic growth and record net immigration which boosts household formation rates.
The company does not expect to see a return to historic rates of demand growth, however.
It has not raised its retail prices since 2012 - for energy, that is; it has passed on higher lines charges. It says its residential pricing is close to the lowest in most major network areas.
Binns has promised no increases before June this year but said yesterday he was reluctant to make a similar pledge for the year to June next year.
Binns expressed a degree of frustration about continued political uncertainty in Australia which has paralysed investment in renewable generation.
"There are unlikely to be any new projects for some time in either New Zealand or Australia, unless we are blindsided by demand," he said.
And beyond Australia and New Zealand he could see no competitive advantage that would warrant doing anything at scale by way of generation investment.
Swanepoel said that an outlook of minimal investment opportunity over the next five years did not mean minimal opportunity to grow earnings.
"They are not saying they are going to sit on their hands. In this result we saw they cut their domestic costs by 7 per cent, on a year-on-year normalised basis. And they are seeing some green shoots on the demand front," he said.
"But for now with the expectation that there is no need for growth capex in their numbers they are happy to say, 'We'll give it back to you rather than build an empire'."
Grant Bradley: Firms' plans for cash piles driving shares
Results from both big energy companies that have reported this week have been fairly much in line with market forecasts.
But it's what Contact Energy and Meridian Energy said about what they'll do with the cash they're amassing that had a sharply contrasting impact on market sentiment.
Contact Energy's half-year profit dropped by 54 per cent compared with the same period last year hit by squeezed margins and the loss of customers. This had been telegraphed in monthly data but what wasn't was Contact's investigation into spending up to $1 billion overseas, rather than returning surplus cash to shareholders.
It's been characterised as a bombshell, in light of other New Zealand companies having come unstuck in geothermal projects overseas.
Down went the share price by 9 per cent in the hours after the announcement, $450 million was wiped off the value of the company, although there's been some recovery since. Analysts said they were shocked by Contact's previously well hidden global ambitions.
By contrast Meridian shares rose 4.26 per cent following the release of its half-year results. Earnings are up and more talk of capital returns for shareholders buoyed the market. It said it plans to return $625 million to shareholders through on-market buybacks and special dividends - dependent on keeping the Tiwai Point aluminium smelter contract.
Contact is 51 per cent owned by Australia's Origin Energy, a relationship that has led to friction in the past. Kiwi retail investors are among the 70,000 with a stake in Contact. One view is that Origin is behind Contact's latest move. Investment overseas would be a long-term play, cash would remain in Contact for longer, easing pressure on Origin's balance sheet under strain from heavy investment in an oil-price affected Australian LNG project