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Smelter's future back in focus for Meridian

Meridian's Mark Binns says it will watch first for closure by fossil fuel-fired power stations before making any decision on how it responds if the Rio Tinto exercises its option to terminate its contract on July 1 next year.

Pattrick Smellie
Wed, 29 Oct 2014

Meridian Energy [NZX:MELCA] will watch first for closure by fossil fuel-fired power stations before making any decision on how it responds if the Rio Tinto, majority owner of the Tiwai Point aluminium smelter, exercises its option to terminate its contract on July 1 next year, Meridian's chief executive, Mark Binns, told shareholders at the company's first annual meeting since listing on the NZX exactly a year ago at $1 a share, with 50 cents still be paid next May.

Trading at a high of $1.68 today, Meridian's tradable instalment receipts have effectively more than paid the additional instalment, with the company raising further the prospect of capital returns at the half year dividend next year, now that the National Party win had seen off the proposed single buyer policy of the Labour and Green parties at the Sept. 20 general election.

"The election result was one of the potential events that could have negatively affected our views" on the approach to capital returns, "given Labour’s and the Greens’ New Zealand Power proposal," chairman Chris Moller told shareholders in Wellington.  "However this has now been resolved, at least for the term of the current Government."

Binns dwelt on two threats to the company from Australia; the potential closure of the Tiwai Point smelter and the review of the Australian federal government's Renewable Energy Targets scheme, which underpins revenue generated by Meridian's substantial stable of Australian windfarms.

In the event of a negative decision, the company may need to reassess the carrying value of those assets on the Meridian balance sheet, which have reduced since Meridian sold its half-share of the giant Macarthur wind farm to its partner in the project, AGL.

Binns told the meeting that if Meridian received notice of termination from New Zealand Aluminium Smelters after July 1 next year, the company "will monitor the supply response from its

thermal competitors very closely" as the consumer of around one-seventh of all electricity generated in New Zealand wound down production.

"There will potentially be significant over supply in 2017 and thermal generation, at high marginal costs, will theoretically be required less and the economics of operation will become questionable."

Prime candidates for closure would be the remaining units at the 1,000 Megawatt Huntly coal and gas-fired plant and combined-cycle gas turbine units owned by Contact Energy at Otahuhu and Stratford, which are ageing and are now commonly used as peaking rather than baseload power stations, especially since the addition of substantial addition geothermal generation to the national fleet.

However, Binns expressed optimism about the smelter's future, saying a lower New Zealand dollar and improving aluminium prices suggested "the trading position of Tiwai Point appears to have improved and although forecasts are just that – forecasts – the metal forecasters we follow are predicting further increases in aluminium prices in 2015 based on supply and demand dynamics."

Since the electricity contracts were varied in August last year, the price of aluminium on the London Metal Exchange had appreciated by 10.3 percent and regional delivery premiums have increased considerably.

"The NZD/USD cross rate has stopped appreciating over this period and has actually declined by 1.1 percent with commentators picking further strengthening of the US dollar against most currencies over the next year or two."

He raised also the prospect of the smelter seeking supply from another New Zealand electricity supplier.

"We do not know what that decision may be, but we do understand the matter is getting careful consideration," said Binns.

"We would like to see the operation continue but our drawn-out negotiations last year saw us provide pricing and contract conditions which represented the best offer that Meridian could table. Sixteen months on, our view remains unaltered," Binns said.

Moller reminded shareholders they will need to stump up the remaining 50 cents per share, which will be due for payment no later than May 4, 2015, with a record date for shareholders' eligibility to pay set at May 4.

He confirmed Meridian will not give forward profit projections from now on, despite having done so in the prospectus for last year's partial privatisation, because the company's fortunes could be seriously affected by rainfall levels in its catchments.

With proviso, Miller said the board was "currently comfortable" with a consensus analyst view that the current financial year will produce earnings before interest, tax, depreciation, amortisation and the changes in the fair value of financial instruments of $607 million, some $17 million ahead of the prospectus forecast of "slightly over $590 million."

Binns warned also that Meridian is about to get more commercially hard-nosed about its solar power generation offering, saying the company has 70 percent of the New Zealand residential solar market.

"As we move forward we have to balance our commitment to support solar customers in a way that is also commercially sustainable for Meridian. We will be reviewing our tariffs in this segment over the coming year to reflect this aim."

Solar was not economically viable in New Zealand, being three to four times more expensive than electricity generated at a windfarm, and only ever capable of producing a small proportion of total electricity demand, even if we had "one million kiwi homes" generating their own electricity.

"Using the International Energy Agency numbers and assuming equipment and installation costs fall year-on-year by 5 percent annually, it will be no earlier than 2035 and probably 2045 before solar at utility scale becomes competitive with other renewable options in New Zealand – at current prices!" said Binns.

"We believe solar remains an important part of the renewable energy solution for New Zealand, but is not a likely game changer for generators and retailers but it will raise some interesting questions around how lines companies recover their costs."


Pattrick Smellie
Wed, 29 Oct 2014
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Smelter's future back in focus for Meridian