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.
“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.