$57m cloud over Meridian results

Meridan Energy's full financial reports are likely to carry a $57 million contingent liability into the 2011 financial year when they are released next month.

The contingency, which could affect the company's future profits, will be required due to a dispute between Meridian and its largest customer, New Zealand Aluminium Smelters, which operates the Tiwai Pt aluminium smelter near Bluff. The dispute is expected to go to arbitration, but that hasn't started yet, a Meridian spokesperson said.

According to the accounts of Rio Tinto (Alcan) NZ, the Australian company that owns NZ Aluminium Smelters, a failure at the smelter's power supply switchyards in November 2008 led to a partial shutdown of the plant and a reduction in power consumption to below the "take or pay" threshold in smelters' contract with Meridian.

"The value of the difference between the full take-or-pay contracted amount and actual usage as of December 31, 2009, is approximately $57m."

NZ Aluminium Smelters returned to full volumes on September 21, 2009, but is claiming "force majeur" relief from its supply contract through its subsidiary RTA Power (NZ).

Force majeur clauses are often written into contracts to allow both parties to duck liability when a force beyond their control, sometimes referred to as an "act of God", makes it impossible to meet the terms of the contract.

RTA Power supplies 543.75MW of power a year under the contract through until 2012. That will increase to 572MW in 2013.

Tiwai Pt is big enough to affect New Zealand's overall power supply-and-demand equation. According to statistics presented by the Ministry of Economic Development, due to lower demand from the Tiwai Pt aluminium smelter, "total demand in 2009 dropped to around that of 2005.

Demand at Tiwai Pt is back to normal levels in 2010 so total demand is also likely to return to normal levels".

Last week, Meridian reported a net profit of $184.0m for the year ended June 2010. Underlying profit for the year was $251.9m compared to 2009's $195.0m. Meridian will pay its government owners a final dividend of $68.5m, following an interim dividend of $89.6m paid in April.

Chief executive Tim Lusk said the result was achieved despite flat electricity demand with good lake storage and inflows and the doubling of wind generation capacity.

"We also experienced an improvement in retail performance achieved, despite a price freeze, by enhanced co-ordination of our wholesale and retail businesses and refining our customer mix, including increasing our North Island customer base by 17%," he said.

During the year, online retail subsidiary Powershop performed strongly. The 62-turbine West Wind wind farm, near Wellington, was commissioned, doubling Meridian's wind generation to 7% of its total production.

A further 28-turbine wind farm near Raglan is due to start generating in December. Resource consents were also granted for a wind farm in Waiouru and a hydro project at Mokihinui on the West Coast also gained consent but is under appeal.

Also during the year, Meridian raised $200m through NZ's first issue of online retail bonds.

Overseas, Meridian has also developed its first solar power plant in the United States and purchased the Mt Millar wind farm in South Australia. Planning is under way for a joint venture with Australian energy company AGL for another windfarm.

- © Fairfax NZ News