Govt pays NZ$30 mln to smelter owners in a deal that will clear the way for the float of Meridian Energy

Govt pays NZ$30 mln to smelter owners in a deal that will clear the way for the float of Meridian Energy

Meridian Energy has struck an agreement for a new electricity supply contract for the Tiwai Point aluminium smelter - with the help of a NZ$30 million taxpayer-funded payout to the smelter's owners.

Under the new deal the smelter, which has been threatened with closure, will remain in operation till at least 2017.

The deal, which involves something like 13% of all of NZ's electricity, will give the green light for the proposed 49% float of Meridian by the Government, probably in around October. 

While the Government has moved ahead with the float, in reality it was unlikely to achieve a successful public offering of the Meridian shares unless some greater certainty was achieved around the smelter.

A successful float of Meridian might raise something like NZ$3.2 billion for the Government - a big bit of the NZ$5 billion to NZ$7 billion that has been earmarked to be raised from partial sales of assets and to go toward funding of new state assets. The partial float of Mighty River Power earlier this year raised NZ$1.7 billion. 

The new deal sees a cut in price that the smelter owners New Zealand Aluminium Smelters (NZAS) - an offshoot of global resources giant Rio Tinto - will pay. In the renegotiated contract Meridian agreed a new price, which will see a reduction in the current electricity charge from July 1 2013 and allows for price increases should the New Zealand dollar value of aluminium rise above agreed levels. The contract period remains to 2030.

Meridian chief executive Mark Binns said the deal with NZAS had been reach after a year of "robust" negotiations.

"We have reached an agreement that is commercially acceptable to both parties and provides a greater level of certainty for Meridian,” says Meridian Chief Executive Mark Binns.

Finance Minister Bill English said the agreement with smelter owners New Zealand Aluminium Smelters (NZAS) will provide greater certainty for Tiwai Point smelter workers, the wider Southland region and the New Zealand electricity industry.

“While the contract remains until 2030, the revised agreement between Meridian and NZAS’s shareholders demonstrates a commitment by NZAS to continue operating the smelter until at least January 2017,” English said.

English said the NZ$30 million taxpayer-fund "incentive" payment to help secure agreement on the revised was "because of the importance of the smelter to the stability of the New Zealand electricity market". The money is going to come from "operating contingencies" for the 2013/14 year.

"It provides medium term certainty for Southland and New Zealand."

SOE Minister Tony Ryall said the Government was not directly involved in the negotiations between Meridian and NZAS.

“Meridian negotiated a commercial agreement that included returning the price of power paid by NZAS to around pre-2013 levels, in exchange for guarantees on the contract from or on behalf of NZAS’s parent companies.

“NZAS shareholders approached the Government for further assistance to return the smelter to viability in current market conditions,” Ryall said.

“The protracted negotiations caused a great amount of uncertainty in Southland and in the electricity market in general, prompting the Government to explore whether it could step in to support a positive outcome.”

Meridian's Binns said the new agreement was inflation indexed and included guarantees from or on behalf of the NZAS parent companies Rio Tinto and Sumitomo Chemical Company, Ltd.

"These guarantees demonstrate a commitment to the Tiwai Point smelter to January 2017,” Binns said.

He said the deal provided the smelter with more flexibility in its operations, whereby it could reduce its contracted volume from 572 MW to 400 MW from 2015. In addition, NZAS could terminate the deal from January 2017, providing notice was given at least 15 months prior.

“Meridian is delighted that the parties could find a mutually acceptable position – and trusts that the new pricing framework and associated arrangements assist NZAS in establishing a competitive cost position for the future,” Binns said.


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I just wish that the 30 million were paid into the power accounts of plain joe/jane kiwi. sigh :(

$30 million for three years so they can get their meredian share float away. I think the markets will price in 100% that Meredian is going to lose that contract in three more years.
Bad dealing John Key

Ma and Pa investors will need to be doubly sure they are not getting scalped when the prospectus is delivered with the attendant over the top hoopla. Read more
The NZX website on the exchange's regulatory role, first off the rank, says "all investors should be treated fairly and equitably".
The FMA says in its overarching mission blurb that it wants to "promote investment markets that are fair, efficient and transparent".
Fair, that one group gets access to research, one does not? Fair that one group gets to walk away if the price is not to their liking, the other one does not? Transparent, that the rules for setting a clearing price are not set out?
To borrow from Orwell: All investors are equal, but some investors are more equal than others. And there are layers in the inequality.
Professional investors get the right to tender and get research, sometimes rich investors (it was $100,000 minimum with Mighty River) get the right to tender but can't get to see research, and small investors get to hit and hope.
Even the Government took advantage of the stupidity of market practice to get top price for Mighty River by allocating so much stock to private investors that the institutional pool was left unnaturally short given the huge number of overseas investors interested in "green" stocks. Good luck with Meridian, guys, as a two-time vendor.
Investors only take part in these lopsided floats because experience has told them they will make money 70 per cent of the time. Chalkie reckons these odds may be changing and that in any event, it only takes two failures in a row for investors to lose heart for rolling the dice.
Even if the regulators have in the past looked at the IPO practice and thought it sensible - to do so you really have to believe in "efficient market theory" which is sort of like believing in the tooth fairy - they should have noticed that the practice is getting riskier for the private client.

Mr English says. “It provides medium term certainty for Southland and New Zealand.”
There is no such thing - the only certainty is the nation is $30 million poorer and others will have their begging bowl out. Is it not enough that the owners of Tiwai are bound to negatively gear the operation so as not to pay NZ tax?

Yes.  I find it interesting how the news media frames these taxpayer subsidies as "deals" rather than the outright "subsidies" that they are.  Muldooneromics.

Wow they are dropping  contracted volume 172MW out of 572 MW, thats gotta hurt Meredian

What does this mean in actual prices "Meridian negotiated a commercial agreement that included returning the price of power paid by NZAS to around pre-2013 levels"?
What price does NZAS pay for Tiwai electricity compared to other big users and the typical small customer?
Did the management of Meridan serve the best interest of New Zealand or were they so keen on privatisation that they gave a sweetheart deal to Rio Tinto? Did management calculate that a part privatised Meridan will lead to higher pay for management?

"Mr Ryall says the agreement will provide some relief for smelter workers and the Southland economy, and greater stability for the electricity market in New Zealand."
Greater stability? Can't have the power price going down, eh Tony, that'd be bad for the shareholders and ticket clippers. Screw the Kiwi consumers and others industries, we get to subsidise Rio Tinto via our taxes AND inflated power prices. 

Yep, our politicians always land on the cringeworthy solution to commercial dilemmas. Seems as though International success is limited to sports and other matters of limited financial concern.

Spot on Kiwidave.
It appears Ryall was rogered over the negotiating table by Rio Tinto afterall.
What a bunch of spineless $%*&'s we have in government and then have the nerve to add "the government had little to do with the negotiation process" by the way, we'll flick you $30m to keep you afloat for the time being.
I suppose half of Southland will be overjoyed for keeping their jobs for the time being.
By the way, can someone make economic sense of CEO's of SOE's being paid 7 figures sums along with other directors on 6 - figure sums requiring an "incentive" payment to keep their company afloat?
Is it purely to float Meridian shares?
I must be missing something? I'm certainly in the wrong job as well.

This deal is passable ONLY if they start meaningful planning for a post-Tiwai future immediately.
I doubt that'll happen though, in which case the deal will look like Bill English securing votes and Tony Ryall making sure the next float goes ahead.

I speculated that the DOW would hit 14k and it did. Then i speculated that it would hit 15k and it did. Then i speculated (some time back) that if the DOW hit 16k by the end of September then it would crash in October as October is the prefered month for big crashes.
At the moment the FED is talking about reducing QE and the DOW is down. I believe it could fall another 100 or so points as it did a few weeks ago. It will then rebound as it did a few weeks ago.
That is my speculation
Mighty River goes on sale in October - Good luck with that i say.
My pick is that a crash in October will be in the range of 25-30%. However this depends on sales volume and sale spread in the months leading up to a crash. The bigger the sales and spread the smaller the crash and vice versa.
Time will tell if i am right. Lets see

Of course it is a complete coincidence that we have an election next year and this is Bill English's electorate, can't lose 3000 jobs then, would be bad timing indeed.
Kick that (aluminium) can further down the road

This is great, now the Hillside workshops and the latest firm to lose their contract to KiwiRail to overseas underbidders and all the other manufacturing firms can go and get their bit from the govt to keep them going. Awesome, awesome, awesome
What? They can't? Why not? Their closures won't have any downward effect on power prices is why not. Oh, I see.

The govt should look at alternative like turing the smelter into a gaint data center ( ask Google to fund it).  They got the electricty, perfect weather - not so hot, and remoteness = low risk.

.... or to punish the directors of Fonterrible , we could force them to shift their opulent head office into the Bluff smelter ....
That icey cold wind blasting off the great southern ocean should sharpen up their focus , somewhat ....

The rhetoric of the free market, so quickly rolled out when freeing up labour regulations etc, is quickly stifled when it comes up against the reality of political advantage. 

New Zealand can no longer pretend to have a free market philosophy underpinning the efficacy of economic decision making. We have totally succumbed to a phalanx of command economy apparatchiks beholden to, if not directly dependent on, servicing the importunity of a small coterie of crony capitalists.
Stuff's Rosemary McLeod writes a compelling story, calling into question many facets of NZ's business model.

A very good piece.
The problem as I see it is short termism.  The value has not only been sucked out of NZ businesses but they have been loaded with debt and are not worth squat now IMHO.  So now we have commentators complaining about that....probably the same ones 5 years ago who wacthed the sucking out and said nothing....blah.

So the taxpayer gets to fork out $30M to keep power prices high, keep asset sales (theft) going, lose dividends from the assets sold, get even higher power prices in the future.  Sweet for the crony capalists.  BTW:
 Portland, OR:
.o677 for the first 1000 kw/h, then .075 thereafter. Portland General Electric here
Wenatchee, WA:
2.7 cents per kwh [hydro]
“you must have some hydroelectic hookup with rates this cheap.”
[Ed: Yes, USA hydro so much more efficient than NZ hydro]
The average retail price of power is 6.6 cents per kilowatt hour in Washington State and 7.4 cents in Oregon, versus a national average of 9.8 cents for the nation, according to federal data.
NZ = 22 to 30 cents per kWh !!!

Welcome to socialism for the rich and austerity for the rest of us. Once again, we're constantly berated from the 9th Floor that the cupboard's empty... unless of course, you happen to be sitting in a posh boardroom chair or otherwise have the right connections.

The impact on south South Island from losing the smelter would be devastating to that economy.   What would be the payout in WINZ etc? sure it was a gun to our heads and that makes me sick as but we are in a lose or lose.  Unfortunately I think this is just the first, the over-capacity being built will I think make more handouts or closure in-evitable. The Q is will this and the next Govn do anything to mitigate it or not, bet not.

I dont make jokes, I just watch the government and report the facts.
So with all the surplus GREEN energy go talk to any major IT outfit that is looking for where to build their next data centre (Amazon, Google etc.).

While it may be surplus and green, it is more expensive than places they do put their data centres.
Taking New Zealands generation sales for 2011 from p121 of
and doing a quick conversion to USD, we get a price around about USD 78 per MW (keeping in mind this is the entire electricity sector I couldn't find the hydro figures separated out).
Checking page p5 in the International Energy Agencies report into hydro generation,
Large Hydro has total production costs in the 40-110 range, with a mean or median (not listed) of 75. This puts NZ not in the cheaper half of the world for it's power costs.
Of course, then you would factor in the amount price differential that industrial users are getting compared to residental, and the figure looks like 48 (don't ask what the residental alone figure looks like). But that is the cost of supply rather than generation, and presumably countries with a lower cost of supply can offer cheaper raters to industry.