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Contact, Genesis at greatest risk from Tiwai closure - S&P

Wed, 11 Jul 2018

Contact Energy and state-owned Genesis Energy are the two power companies most at risk if the Tiwai Point aluminium smelter closes, says a senior Standard & Poors analyst, Richard Creed.

In an interview televised on the Reuters Insider programme, Creed, who is S&P's director of corporate and infrastructure ratings in Australia, picked all the listed power companies in the New Zealand market as sources of stable dividend yields over coming years.

That's because no new power stations will need to be built in the foreseeable future because of "flat to slightly declining demand" for electricity.

Contact, Genesis, MightyRiverPower, and Meridian Energy are all rated BBB on stand-alone basis, but the early closure of the Rio Tinto-owned Tiwai Point smelter, which uses around one-seventh of the country's total electricity output, would create "a large supply side shock" which would likely see lower prices to electricity users in the short term.

"Contact and Genesis may well be impacted most," said Creed, because they are the country's major owners of gas and coal-fired power stations, some of which may close and all of which would be likely to run less often if the smelter's consumption were removed.

Meridian has only renewable wind and hydro assets, while MRP has wind, hydro, geothermal, and one small thermal plant, used as a peaker.

"A side effect (of smelter closure) may be that the power sector may become more volatile with more reliance on hydro power," said Creed. The country has suffered several scares in the last 25 years where low rainfall into hydro catchments has threatened supply during winter months, when demand is heaviest.

The government is examining the sale of a 49 percent share in Meridian by share market float in this quarter, although there have been no recent announcements on that timetable. The same proportion of MRP was floated in May and the share price has traded for most of the intervening period below the $2.50 issue price, although it recovered in trading to close at $2.42, up 3.4 percent since last Friday's announcement the stock would join the NZX50 index, meaning the stock will be automatically supported by institutional investors holding portfolios guided by that benchmark.

Contact closed today at $5.48, down 1.3 percent. A flurry of rumours about resolution to the Tiwai Point issue appeared to be the reason for a share price surge the week before last, but no announcements from either Meridian or Rio Tinto subsidiary Pacific Aluminium, which owns the smelter, have been forthcoming.

Creed said the most interesting aspect of MRP's and Meridian's partial privatisation would be "what the financial policies of these companies evolve into because we will be far more focused on this and how they may change in response to new shareholders."


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Contact, Genesis at greatest risk from Tiwai closure - S&P