Meridian dividend beats forecasts

Contact Energy, the operator of the Clyde power project, reported a higher profit while Meridian...
Contact Energy, the operator of the Clyde power project, reported a higher profit while Meridian declared a higher dividend. Photo by Lynda van Kempen.

Electricity prices have been in the news recently and this week, New Zealand's energy companies start reporting. Newly-listed Meridian Energy surprised yesterday with a higher-than-forecast dividend and Contact Energy surprised with a higher profit. Business editor Dene Mackenzie reviews their annual results.


Meridian chief executive Mark Binns says it was gratifying to exceed the prospectus forecasts in key areas as the country's largest energy company released its financial results yesterday.

The company reported an operating profit of $585.3 million for the year ended June 30, up slightly from the previous corresponding period's profit of $584.8 million.

Earnings before interest and tax were also slightly up at $365.3 million but the before-tax profit was down 26% to $316.4 million, through changes to fair value of financial instruments.

Revenue was up 0.8% to $932.4 million.

Forsyth Barr broker Andrew Rooney said Meridian enjoyed a great first year as a listed company and had surprised with its improved dividend.

Most brokers assumed Meridian would pay a dividend of 10.5c per share, in line with the prospectus forecasts.

With stronger earnings, Meridian was paying a 11.0cps final dividend, plus a special dividend of 2cps - imputed to 90% level.

''Meridian's ordinary dividend announcement is clear evidence it intends taking a formulaic approach to calculating the dividend - at least during the prospectus forecast period,'' Mr Rooney said.

Craigs Investment Partners broker Chris Timms said the special dividend of 2cps was put down to the sale of assets - surplus land and United States assets - and the reported profit benefited from a gain on the sale of fixed assets, largely land, of $6 million.

The company did not refine the prospectus forecast, just committed to achieving it, he said.

Mr Binns said the operating results reflected better than anticipated generation volumes and pricing in the corporate and industrial market in New Zealand, coupled with good controls on costs.

The reported profit of 229.8 million was 23% above prospectus forecasts.

''While inflows into our southern catchments were 111% of average, we experienced difficult wholesale trading conditions from February to April when inflows were around 62% of average.

"Despite this, electricity generation was up 8.9% over the previous year.''

The residential segment of the retail market remained competitive, he said.

Recent analysis showed the competitive part of the electricity market had capped energy price rises below the rate of inflation over the last three years Meridian's survey data showed a 0.3% decrease in residential sales-based electricity charges.


Contact Energy surprised with a higher profit but declared a conservative dividend.

Craigs Investment Partners broker Chris Timms said he was disappointed the company did not say more about its dividend policy.

The company reported operating earnings of $587 million for the year ended June, up 9% on $541 million in the previous corresponding period.

Profit before tax rose 25% to $328 million and the reported profit was up 18% to $234 million.

Total revenue fell 3% to $2.45 billion.

The final dividend of 15c per share was payable on September 15.

Mr Timms said the full-year dividend of 26cps represented a payout ratio of 84% of Contact's underlying earnings after tax.

''We expect the company to move to a free cash payout ratio sometime in the future. The 2014 dividend equated to just 65% of normalised free cash flow when the current industry average is 75%."

Operating earnings were higher than expected due to $43 million of compensation as a result of the delayed start of the Te Mihi power station.

Forsyth Barr broker Andrew Rooney said it appeared Contact had taken notice of the political risks associated with the election.

He described the dividend as ''particularly conservative'' compared with 2008, when the operating profit was $557 million and a 28cps dividend was paid.

''While it was not guidance, Contact indicated it expects 2015 earnings to be similar to 2014 with real Te Mihi earnings replacing 2014 liquidated damages.

"Our current 2015 earnings forecast is $596 million,'' he said.

Contact chief executive Dennis Barnes said the company was focused on improving the customer experience, increasing the efficiency of existing operations and managing cash flow.

The $2 billion capital investment programme had positioned the business for current market conditions with no significant capital expenditure required in the immediate future.

''It is important to note we operate in a stable regulatory environment given the long-term nature of our industry.

"Consumers are seeing clear evidence the current market is working with high levels of competition leading to lower energy prices,'' he said.

• Mighty River Power reports tomorrow.

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