UPDATE: Meridian shares rise after capital return flagged

Shares of Meridian Energy gained after the electricity generator-retailer flagged capital returns for shareholders over the next five years, including a special dividend with today's first-half earnings report.

The stock rose 2.6 percent to $1.95 after the Wellington-based company said it plans to return $625 million to shareholders via on-market buybacks and special dividends, and increased the proportion of free cash flow it will pay out in future dividends.

Meridian's board declared an interim dividend of 4.8 cents per share, ahead of First New Zealand Capital's 4.6 cents forecast, and will pay a 1.4 cent special dividend to use up imputation credits that would otherwise be lost in May when the Crown transfers shares to instalment receipt holders.

After reviewing Meridian's capital structure, the board decided to increase the proportion of free cash flow paid out to an average of between 75 percent and 90 percent from the current 70-to-80 percent, and plans to return $625 million to shareholders over the next five years. Meridian increased operating cash flow to $216.8 million in the six months ended Dec. 31 from $191.5 million a year earlier.

"Investors really like the idea there's a possible capital return coming up from Meridian - they're going to have very low capital expenditure and free cash flow is going to be high," said Grant Williamson, a director at Hamilton Hindin Greene in Christchurch. "That's a much different story to what we saw with Contact (Energy), which is looking to do offshore investment rather than reward investors with dividends of capital returns."

Contact this week said it was investigating an international geothermal energy investment strategy in the absence of growth opportunities in New Zealand, surprising investors who had been expecting higher dividends or a capital return after several years of intensive capital expenditure and knocking around 10 percent off the Contact share price, compared with pre-announcement trading.

Meridian said it will provide more details of the capital return programme for the 2016 financial year when it reports its annual result in August.

"The board is flexible as to how this is achieved, but the anticipated form of return will be either an annual on-market share buyback programme, special dividends, or a combination of both," the company said. "The capital return will follow the final instalment receipt process and will be subject to the owners of the Tiwai Point smelter not terminating the electricity agreement, or there not being any adverse event in the interim."

Meridian supplies electricity to the New Zealand Aluminium Smelters, majority-owned by Rio Tinto, which consumes about one-seventh of the nation's electricity. It renegotiated its contract with the major customer in 2013 when Rio Tinto threatened closure ahead of Meridian's initial public offer, leaving the smelter's owner an option to terminate its contract on July 1 this year, ending the arrangement from the end of 2016.

Meridian said its assessment of the plant was that the smelter was in a better financial position than when the new contract was renegotiated in 2013 and was hopeful it will keep operating.

"At this point we have no clarity on where NZAS stands on this decision," Meridian said. "The reality is that uncertainty around the future of the smelter is something the industry just has to live with as NZAS has ongoing termination rights under the contact."

The company today reported earnings before interest, tax, depreciation, amortisation and fair value adjustments, the favoured measure for electricity generator-retailers, of $324.3 million in the six months ended Dec. 31 from $268.2 million a year earlier. Net profit was largely unchanged at $117.1 million from $116.9 million. The result was slightly ahead of First NZ Capital estimates for Ebitdaf of $312 million and net profit of $103 million. Revenue rose 22 percent to $1.33 billion.

Meridian's retail contracted sales rose to 2,993.4 gigawatt hours (GWh) from 2,885.7 GWh a year earlier, with sales to the smelter unchanged at 2,525.4 GWh. Wholesale contracted sales rose to 3,131.5 GWh from 2,959.8 GWh.

The company lifted generation 6 percent to 6,902 GWh due to strong first quarter hydro generation and the contribution from windfarms at Mt Mercer, in Australia, and Mill Creek, in Wellington, while irrigation demand and favourable business sales improved its energy margin by 7.5 percent.

Meridian's average wholesale price was $64.2 per megawatt hour (MWh) from $39.7/MHw a year earlier, reflecting increased demand in New Zealand, full-availability for the HVDC inter-island national grid link and reduced output from thermal generators.

"This increased both Meridian's generation revenue and the cost of supplying its retail customers," Meridian said.