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Meridian CEO says IPO investors will view Tiwai Pt deal positively given extra certainty and no need to dump power on market; hints at asset revaluation upwards

Posted in News

By Bernard Hickey

Meridian Chief Executive Mark Binns has said a deal done to keep the Tiwai Pt smelter open until 2017 gave the company more certainty about future power prices and would be welcomed by potential investors.

Binns said he could not comment on the exact timing of the govenrment's planned partial float or how it would affect the company's financial forecasts, but that investors would be pleased. The deal means 40% of Meridian's power output, which is equivalent to 14% of New Zealand's power supply, will not have to be dumped onto the market until at least 2017. Binns said if Tiwai Pt had closed Meridian had expected this extra supply being put into the open market would have driven down both wholesale and retail power prices.

"The overall impact, given the laws of supply and demand, is that prices would have gone down," Binns told a news conference in Wellington when asked what Meridian's modeling showed would have happened to wholesale and retail power prices.

He pointed to the stock market reaction towards other generators as a sign of how positively this would be viewed by investors. Contact's shares were up 1.5% by late morning and Truspower's shares were up 1%, outperforming a slightly weaker broader stock market. Mighty River Power shares were flat.

"The certainty that this provides will be viewed by investors as a positive," Binns said.

Earlier Meridian announced it had signed a deal with New Zealand Aluminium Smelters that guaranteed the Tiwai Point Smelter would stay open until at least January 2017 and that Meridian's power charges for the smelter could rise if the New Zealand dollar value of aluminium rose over that period. See David Hargreaves' original article here and his opinion piece here.

The deal was agreed only after the government agreed to pay a NZ$30 million sweetener to the Rio Tinto-controlled NZAS. The deal effectively buys some time for Tiwai Pt workers to plan and retrain ahead of a 2017, or to buy time for any rebound in the New Zealand dollar value of aluminium prices. The new power price supply deal agreed by Meridian sees a signficantly reduced power price for Tiwai Pt from July 1 this year. NZAS had threatened to close the smelter if it could not negotiate a better power price, given a slump in aluminium prices in recent years and the strength of the New Zealand dollar.

"It's a meaningful reduction which addresses the smelter in terms of international competitiveness," Binns said of the price agreed in the new contract. He declined to disclose the details, saying Meridian had agreed not to in its deal with NZAS.

Binns said his role in the negotiations was to act in the interests of shareholders, not for that of the country overall.

"I'm here to make a commercial decision. I'm not here to make social decisions," he said, adding the government had put no political pressure whatsover on Meridian to change its terms.

Binns said Meridian's final position was presented to NZAS three weeks ago and was little different in pricing terms from the one presented in March. He said NZAS had then gone to the government to negotiate its own side deal with Finance Minister Bill English.

The deal specified that NZAS would have to give 15 months notice of closure before January 2017, and thereafter 12 months notice.

Binns said the deal was good for Meridian, good for NZAS, good for Tiwai Pt workers and by extension, good for New Zealand.

"There are winners all around," he said.

Meridian is due to issue its financial results on Monday and Binns said it was likely to include a revaluation of the deal, agreeing it was likely to be upwards.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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19 Comments

Binns said the deal was good

Binns said the deal was good for Meridian, good for NZAS, good for Tiwai Pt workers and by extension, good for New Zealand.
"There are winners all around," he said.
 
Say that again, I must be living elsewhere or this bloke is positively misinformed as to what's in my best interest - he needs to get out more. 

The jobs are extremely

The jobs are extremely important to south NZ...paying out WINZ would cost way more I'd imagine.
In terms of best interests, Im sorry was was it you did again? financial dealing? 
regards
 
 

The jobs are extremely

The jobs are extremely important to south NZ...
 
Well no one seems to care to pay them the increasing sums consistent with buying the necessities.
 
Wage inflation as measured by the labour cost index (LCI) eased to 1.7 percent in the year to the June 2013 quarter, down from 2.0 percent this time last year. Wage rates for just over half of the positions surveyed in the LCI increased during the year. Of those that rose, the average increase is the lowest since the December 2000 quarter, at 3.4 percent. Annual consumer inflation is currently at its lowest since 1999.
 
Growth in wages, as measured by the QES, has continued to ease. Average ordinary time hourly earnings rose by 2.1 percent over the year, the lowest wage growth since the December 2010 quarter. Read more
 
Nationwide housing values as measured by government valuer Quotable Value (QV) increased by 3.1% in the past three months and by 8.1% in the past year.
Values are now up 7.5% over the previous market peak of late 2007.
National average residential property values rose in the year to June to NZ$441,254, with Auckland values up 12.8% to NZ$644,973, QV said .Read more
 
You ask what I do - I subsidise my son's accommodation amongst other matters, one of which you noted correctly.
 

When you are in the equiv of 

When you are in the equiv of  "tulip mania", no one should be helping IMHO.
regards
 

One argument of economic

One argument of economic comparison I've seen was that if the government was to sell Manapouri power at market rates, rather than at a special rate for Tiwai, and let Tiwai close, it could pay the (former) workers vast amounts and still be better off.
Now, this is a moot arguement as the government would never do this, but it does hightlight the degree to which the subsidy of the company is subsidising jobs, and would it be better to cut out the middle man.

Put this in your 2017

Put this in your 2017 diary
As noted some months ago .. Manapouri is a stranded orphan with only one buyer .. the Govt has bought itself some time .. that time needs to be used wisely .. the proceeds of the IPO go into the government coffers .. not Meridians unfortunately .. the "bail-in" of $30 million should enhance the value of the IPO by at least that much if not more .. if the govt uses the time window wisely it will spend some of the wind-fall accruing from the IPO to extend the mains grid to connect to Transgrid so it has a bit more ammo up its sleeve come the next round of greenmail

Fat chance...this will turn

Fat chance...this will turn into ground hog day.  Though I suspect those lines will be done, but under desperation. It will be triage, we need the power we dont need a blood sucker down south any more....bye bye blood sucker.
regards

Goodness, golly, gosh,

Goodness, golly, gosh, Steven, I imagine a railroad is pretty important to Gisborne's economy as well, I will await the annoucement that the govt will chip in and help out there. I am sure there are plenty of other industries waiting with baited breath for similar

But its hardly used and there

But its hardly used and there is an alternative, road and sea. Its not the main sustainer of Gisbourne's economy (It has one?) How often is the line used? a few times a week? so I cant immediately see its that important to the economy, but Im all ears.
If its going to be worth anything longer term it would need to be electrified as well. 
regards
 
 

dp

dp

http://www.epia.org/fileadmin

http://www.epia.org/fileadmin/user_upload/Publications/Global-Market-Outlook-2016.pdf
 
That's Meridian's biggest problem.
 
Guy Waipara, GM External Relations, Meridian Energy said recently (I was there, heard him) that "local PV is the way things are going". He's quite right. Globally, PV is on a trajectory it's hard to ignore, and (given that one way or another we were headed for 100% renewables in the addressable future) it's not before time.
 
The question of him, Bernard/David/David, would be "what business model does Meridian see for itself in the new paradigm?"
 
Clearly, local PV competes for actual kwh, and the demand trend is permanently down (they keep hoping for a 'return' to 'growth) anyway. Either they charge more per kwh delivered, or they up a supply charge, or they get onboard the change. It would be the $64,000 question, pre-float.
They can't do it through tariff ratios; PV can be used locally as a non-connected substitute.

If Germany is a valid model

If Germany is a valid model the power companies make their $s off the peak load, which PV's in Germany at least are reducing significantly. 
So there are 2 alternatives left for this Govn,
a) Intent on selling the SOE's to make money to waste elsewhere, form an effective monopoly around the SOE's by making PV feed in's un-economic and keeping it that way to make the SOE's a sure thing.
b) Move the SOE's into a resiliance / standby model ie accept the Govn purse subsidises them. 
Given tha Govn's [in-]action around Chorus ad ADSL its the former they are inclined towards it seems.  As the saying goes do what I say and not do what I do.
regards

There is a devils advocate

There is a devils advocate argument: that Govt see this as a 'Post Office' scenario - long term no physical mail, therefore no bizzo. Best sold while still worth something.
 
I've long thought that local generation would trump - but never replace -  the grid. What to do with Manapouri? Maybe electric farming of the Southland Plains. Laugh now, but the demand isn't far away.

Yet they havnt sold off Air

Yet they havnt sold off Air New Zealnd, a dodo if ever there was one.
Kind of wonder with Germany as a clear example of PV eating a generators lunch why investors would buy, oh wait the Govn was aiming to fleece mom and pops, not professionals.
regards

It is not a devils advocate

It is not a devils advocate argument, just common sense. From an investment perspective it is a hell of a risk for the tax payer to own 80% of New Zealand's electricity generation. There is an assumption made that these companies are a risk free cash cow and a licence to print money with no end. In fact there are all sorts of risks around water rights, treaty claims, falling demand, competing and cheaper capacity like photovoltaics without considering physical risks like a decent jolt on  the alpine fault.
If the tax payer can reduce the risk by selling down some of the asset and reinvesting in something else that makes a degree of sense.

If you think of the supply of

If you think of the supply of energy as a business, then yes OK its a "risk" If you think of the electricity sector as an essential element of the economy underpinning private businesses, giving them the confidence of supply at a reasonable non-gouging cost so they can get on with their business, then no its not a risk its a necessity. 
 
regards

Where's the NZ Labour Party

Where's the NZ Labour Party in all this ? ..... they want cheaper houses for us , but not cheaper power !
 
.... stand up you plonkers , and oppose this bail-out !!!
 
Tell RIO-Tinto to take a flying leap at themselves .... what're they gonna do , up stakes , and walk away from a multi-billion $ facility .... call their bluff ( excuse the pun ! ) ....
 
Silence from David Shearer .... roll over .... play dead , let it go ..... useless twonks ...

Looks like a case of spilt

Looks like a case of spilt beans..
Binns said his role in the negotiations was to act in the interests of shareholders, not for that of the country overall.
and
Binns said the deal was good for Meridian, good for NZAS, good for Tiwai Pt workers and by extension, good for New Zealand.
"There are winners all around," he said.
 
future looks bright once joining his cohort at nzx,com......
 

It's a tough one, every

It's a tough one, every business in New Zealand becoming more competitive with electricity savings passed on to either their shareholders or customers or this one Australian company Rio Tinto balancing their books.
The article doesn't mention that Aluminium production in NZ has perhaps a 20 year production capasity so selling the product today at cheep rates isn't in our countries long term interest.
Ofcorse, if I was John Key looking to sell an electricity generation businesses then I'd be over the  barrel with Mr Binns driving his interest as-well.