Meridian Energy's White Hill wind farm near Mossburn in
northern Southland, one of seven such farms it operates, or
is building. Photo by Simon Hartley.
Five separate and independent reports have now been
lodged with the New Zealand stock exchange about Meridian
Energy's partial share float.
With a cap of $1.60 per share having just been set for
Meridian Energy's initial public offering, the Government has
ensured there is no lack of public information in the form of
the commissioned reports, unlike the Mighty River Power float
and its lack of publicly available analysis, which attracted
The offer closes on Friday and the listing is scheduled for
The commissioned reports of Woodward Partners, Edison and TDB
Partners were released earlier in the month, followed last
week by Morningstar and First NZ Capital's reports.
None is hugely critical, but the complexity of the
electricity sector, and what investors must wade through and
weigh up before making a final choice, is revealed in the
respective brokerages' research.
The main points include the future impact of Southland's
Tiwai Point aluminium smelter, southern hydro-generation and
the Labour-Greens proposal to reform the electricity market.
The latter potential Labour-Greens reform is rated as an
unlikely outcome from the election, but generally it is
considered the highest-risk component of the analysis,
described by the five brokerages as ''the major risk
element'', the ''biggest risk'', a ''huge impact'', ''fairly
extreme''and a ''key issue''.
The investors' $1.60 for Meridian shares would be paid in two
instalments over 18 months, and they would receive any
dividends in full during that period, offering an attractive
The latest reports from Morningstar and First NZ Capital both
predict strong cash flows for Meridian, with Morningstar
saying it expected the strong free cash flow to be generated
from a ''dramatic decline in capital expenditure.
''This ... will prompt the board to lift the dividend payout
from 80% to 100% of free cash flow. Consequently, we project
dividends to increase by 11% per annum on average during the
next five years.''
Morningstar has largely set aside the polarising issues of
the future of Rio Tinto-owned Tiwai Point aluminium smelter,
where the Government recently came up with $30 million for
Rio when negotiating a new supply contract.
Morningstar said the deal gave Meridian, and the electricity
sector in general, more certainty and allowed companies time
to adjust to changing circumstances.
''Principally, New Zealand Aluminium Smelters [NZAS, Rio
Tinto's operating subsidiary] receives a discounted price
from July 1, 2013, which we believe is in the order of 15% if
it consumes the requisite amount of electricity''.
Given Meridian's large exposure to Tiwai, selling 40% of its
power to the smelter, its existence to Meridian was
''critically important'', but Morningstar said it had not
factored the Tiwai closure into its forecasts. Morningstar
noted the electricity price discount still applied after
January 2017, if NZAS reduced consumption, meaning Meridian
could sell the surplus on the higher-priced spot market.
The Labour-Greens reform proposal was ''fairly extreme'', and
would significantly reduce Morningstar's fair value stock
estimate if implemented.
''We believe regulation would most likely reduce returns for
all power companies and possibly reduce Meridian's operating
income by $170 million.''
First NZ Capital had factored discounts into its valuations
for a Tiwai closure and Labour-Greens reforms, but noted
their ''low likelihood of occurring''.
However, should the Opposition reforms go ahead, Meridian was
expected to ''take the brunt'' of the regulatory change, with
its discounted cash flow (DCF) valuation declining by 69c per
share, while the DCF for Tiwai's closure was just 2c.
''This [2c per share decline] concurs with the management
statements that the new contract was signed at a price where
Meridian is economically indifferent to [Tiwai] shutdown,''
First NZ Capital said.
Edison said the ''very attractive'' intervening dividend
yield, between an investor's first and last payment, of 13.4%
was a major draw, while Meridian's dividend policy would see
about 140% of net earnings paid to shareholders.
The low debt levels, strong cash flows and ''sharply lower''
capital expenditure, from the second half of next year, left
plenty of medium-term scope for the return of further capital
to shareholders, Edison said.
Similarly, Woodward Partners highlighted strong cashflows and
growing dividends, but closely scrutinised its hydro power
capacity, being six power plants on the Waitaki River and
separate Lake Manapouri-driven turbine.
Meridian was more susceptible to droughts than other
producers, and dry years could reduce cash flows, earnings
and dividends, Woodward Partners said.
TDB Partners said much of Meridian's pricing volatility
stemmed from its high reliance on hydro power.
As with Contact Energy, TrustPower and Mighty River Power, it
would be a mistake to regard those companies and Meridian as
utilities with stable earnings.
''These companies, and Meridian in particular, face and must
manage a high degree of uncertainty about water inflows,
other fuel prices, the regulatory regime and competitors'
behaviour,'' TDB Partners said.
In some respects, First NZ Capital may have best summed up
Meridian's future, in lay terms, in its opening disclosure:
''Reliance on hydro generation and its influence on
electricity prices can result in significant earnings
volatility from year to year''.
Last week's decision by Mighty River Power to launch an up-to
$50 million buy-back of its underperforming shares is
designed to boost its share price - a credible tool but which
was criticised as a cynical move to sweeten Meridian's
The issue raises questions over where investor appetite
really lies for these large, and for many unpopular, partial
It appears that, given the level of scrutiny ascribed within
the five reports to the potential for political interference,
and wider generation issues, investors must put some hard
questions to their stockbrokers.
Government's 49% sale of Meridian
Energy, capped price at $1.60.
• Meridian Energy is the country's largest
electricity company; fourth largest retailer. 100% renewable;
90% hydro, 10% wind. Meridian has six Waitaki River power
plants, one on Lake Manapouri and seven wind farms: five New
Zealand, two Australian.
• Total annual 13,000GWh production, of which
5000GWh (40%) is consumed by Tiwai Point aluminium smelter
(Tiwai uses 13% of New Zealand's electricity).
• Meridian has 272,000 customers. Rio Tinto,
Tiwai's majority owner, gets an estimated 15% discount on
electricity, according to broker Morningstar.