This month three of New Zealand’s five major electricity companies will release full year results. Two of these, Contact and Meridian, have already reported while Mighty River Power will release its results Wednesday next week. So which of these Companies is performing the best?
The best measure to us when comparing operating earnings is Earnings before Interest, Taxes, Depreciation and Amortization (‘EBITDA’) as it excludes abnormal items and differing debt levels. Contact increased its EBITDA by 6% from $509 million to $541 million while Meridian increased its EBITDA by 23% from $477 million to $585 million. Meridian’s larger increase in earnings is due its different asset mix and the sensitivity of its assets to the amount of rainfall during the year.
Increased rainfall means more water flows into New Zealand’s lakes. Some of these lakes have dams and hydro power stations owned by New Zealand’s electricity companies. Higher levels of rain fall mean more water into the lakes and a greater volume of electricity produced by the hydro power stations. As a result the owners of these hydro stations increase their earnings by selling more electricity. Consumption of electricity is not heavily influenced by the level of rain (we will still watch TV and run the dishwasher whether it rains or not) so the increased generation by hydro stations results in less generation by the costlier gas and coal stations, at the expense of their owners.
Meridian has a far higher amount of hydro generation than Contact (or any of the other three majors) making its earnings more sensitive to the level of rainfall. The central South Island experienced its driest year on record in 2012 which meant Meridian’s large South Island hydro stations produced a low level of electricity compared to normal and Meridians earnings suffered. The year just been was far better with close to normal levels of rainfall and as a result Meridian’s earnings recovered with a 10% increase in electricity generation.
In a typical year, 40% of Contact’s generation is from hydro stations compared to 90% for Meridian. So while Contact increased its hydro generation by 23% in 2013, this had a far smaller incremental benefit to its earnings than the increase in hydro generation did for Meridian.
Both of these Companies are well managed and delivered good results when we exclude the fluctuation created by weather conditions. Contact has done a superb job controlling costs that will generate benefits worth over $100 million to its shareholders in the coming years. Meridian produced a $101 million gain on the sale of an Australian wind farm asset and is left with a very strong balance sheet as it prepares for IPO in November. With little electricity demand growth expected for the next five years, cost control will be a key determinant of the relative performance of these companies.
Mighty River Power will report next week and is likely to beat its prospectus forecasts after announcing better than expected operating metrics in July.
Disclosure of interest: Milford Asset Management holds shares in Mighty River Power and Contact Energy on behalf of clients.