Dry year helps knock 28pc off Meridian profit

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.