Smelter talks resume between Meridian Energy and Rio Tinto

Meridian chief executive Mark Binns
The Tiwai Pt smelter

New Zealand's largest electricity producer, Meridian Energy, has resumed talks with Rio Tinto Alcan, the majority owner of the Tiwai Point aluminium smelter, over Rio's request for changes to 18-year contracts for power supply that kick in on January 1.

Meridian chief executive Mark Binns told the company's annual public meeting in Wellington that Rio had recently come back to resume discussions after Meridian set out what it was and was not prepared to renegotiate in the contracts, which were signed in 2007 and account for about one-seventh of total electricity consumption in New Zealand.

Since then, aluminium prices have fallen steeply on global markets, while on the domestic front  Meridian and other electricity generators are heading into their sixth year of flat demand as the economy undergoes a sluggish recovery and industrial users contract, invest in efficiencies and seek alternative fuel sources.

"We have reviewed the contracts some time ago and have advised Rio Tinto of areas in which we are prepared to look at some amendments, and areas where are we not prepared to look at amendments," Mr Binns says. "I can't elaborate on where we have drawn the line."

The existing contracts contain fixed and variable portions, with the electricity price influenced by a formula that takes into account international aluminium prices.

Rio Tinto Alcan, the Canada-based aluminium arm of the Anglo-Australian metals giant, is seeking to sell its interest in the smelter at Tiwai Pt, along with a clutch of other, relatively ageing smelters in Australia and has packaged the assets as a new subsidiary, Pacific Aluminium.

Rio has indicated it does not expect a quick sale.

Mr Binns would not confirm comments by Prime Minister John Key that the first three years of the contract arrangements were set in stone, except to say that "the prime minister's not a silly man" and that there was no question that the new contracts would come into force from January 1.

On criticism by competitors of the company's decision earlier this year to build the Mill Creek wind farm behind Wellington, Mr Binns conceded the project was "on the cusp" of commercial viability "in a negative scenario", but that the board and senior management were confident it would earn its cost of capital.

"On balance, we thought it would be overall positive." 

He took a poke at Dennis Barnes, the chief executive of NZX-listed rival Contact Energy, saying Meridian could have questioned its decisions to build gas storage facilities in Taranaki and the new Te Mihi geothermal plant at Wairakei.

"We could be critical but I won't be" because Meridian was no closer to the detail of Contact's business than Contact is to Meridian's.

"I suppose the last guy who built the last power station will always criticise the next guy," he says. Meridian green-lit the $169 million, 26-turbine project in June.

As the largest and most valuable government-owned electricity company, Mr Binns says Meridian is ready for partial privatisation in the event the government decides to proceed with a sale, and that it has established a permanent "due diligence room" allowing all relevant company records to be kept up to date.

In an update on Meridian's outlook, he confirmed that Meridian's half year profit to December 30 would be lower than last year's, as flagged, but not as low as had been originally thought. The company would exceed its earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments for the year to June 30.

He expected a few anxious months while Transpower commissioned the new Cook Strait electricity cable early next year, since any unforeseen outages could hit earnings, and the company "can't wait" for the transmission constraints between the two islands to disappear once the new connection, called Pole 3, to go live.

Unlike some other industry participants, Meridian supportes the Electricity Authority's recent draft decisions on how to share the cost of transmission among generators, and has been advocating such an approach for some years.

It would submit that some elements of the proposals could be simplified, Mr Binns says.

(BusinessDesk)

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3 Comments & Questions

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As I'm retiring soon, how about I get an electricity supply contract at waaaaaay below market rates and taking into account my future diminished earnings?

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Just close it down. The business model of importing materials from Aus and making a commodity using 'cheap power' and exporting it to China does not stack up any more. Think of the impact on the NZ economy of the "extra" power generation that would become available for domestic and other industrial users. (it might also change the position of Meridian as a possible sales asset for the better).

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This a silly comment. The significant 24/7 offtake terms for the aluminium smelter cannot be compared to the on again, off again offtake terms you will want as a retail domestic consumer.

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