Meridian Energy says it is ready for partial privatisation and expects a significant uplift in operating earnings in the second half after transmission outages and heavy rainfall knocked its performance in the six months to December 31.
The state-owned power company's accounts also show a strong positive bounce in the unrealised value of its contracts to service the Bluff aluminium smelter, where the majority owner Rio Tinto is pressing to renegotiate a new long-term contract to achieve lower prices.
The $102.1 million improvement in the unrealised value of financial instruments was the primary factor pushing Meridian to a net profit of $173.3 million in the first half, up by $164.1 million on the same period a year earlier.
However, the more useful measure of its operational performance is earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments showed a 6 percent decline to $277.1 million.
Underlying profit, an internally produced measure of earnings that smooths out large abnormal items, was $88.3 million, an 11 percent fall on the previous six months, but a significant improvement on the last six months of the last financial year, chief executive Mark Binns says.
That was because low inflows to hydro catchments in the second half of the previous year created difficult operating conditions.
Revenue for the first half was down 2 percent at $1.19 billion, reflecting falling wholesale prices and weak commercial and industrial demand for electricity.
There was no shortage of rain to Meridian's South Island catchments in the half-year under review, but heavy inflows depressed wholesale electricity prices, while a large number of transmission system outages relating to the commissioning of the new Pole 3 Cook Strait cable also pared first half earnings.
While further outages are a risk to second half earnings, Mr Binns says Meridian had "returned to higher profitability this half year and is on track to achieve significant full-year ebitdaf growth".
"Operationally, we're in good shape and we're building resilience against New Zealand's medium term flat demand outlook," he says.
The improvement in the value of financial instruments is significant because they are largely tied to the smelter contracts and reflected "a softening of forward electricity prices and strengthening forward aluminium prices".
Quiet on Rio Tinto
Mr Binns offered no update in the company's statements to the NZX about the progress of negotiations with Rio Tinto, which is seeking to sell the smelter along with a suite of other mid-life plant in Australia, other to say the talks were progressing.
However, improving metal prices and a soft outlook for electricity prices suggest the conditions for a favourable outcome to the negotiations are improving.
In the retail electricity market, Meridian says it was facing 18 percent monthly customer churn rates, consistent with the rest of the industry, and that it has now completed its efforts to gain additional North Island customers following sector reforms that forced the SOE retailers to diversify their customer bases.
With other retailers announcing in recent days that electricity tariffs are unlikely to move up much in the next few years, Meridian says it has undertaken "some tariff changes repositioning to mid-market pricing and recover higher lines costs" and that the company anticipated "further pricing pressure".
Transmission costs rose 33 percent, or $14 million, in the half year under review, largely reflecting the cost of monopoly national grid operator Transpower's upgrade programme.
"The Electricity Authority's proposed transmission pricing methodology changes, if implemented, are likely to benefit Meridian over time," the company says, placing it at odds with most of its competitors, which are alarmed by the proposals, which will shift transmission costs to be less heavily borne by South Island generators.