Smelter talks resume between Meridian Energy and Rio Tinto
By Pattrick Smellie
Dec. 7 (BusinessDesk) - New Zealand's largest electricity producer, Meridian Energy, has resumed talks with Rio Tinto
Alcan, the majority owner of the Tiwai Point aluminium smelter, over Rio's request for changes to 18-year contracts for
power supply that kick in on Jan. 1.
Meridian chief executive Mark Binns told the company's annual public meeting in Wellington that Rio had recently come
back to Meridian to resume discussions after Meridian set out what it was and wasn't prepared to renegotiate in the
contracts, which were signed in 2007, and account for about one-seventh of total electricity consumption in New Zealand.
Since then, aluminium prices have fallen steeply on global markets, while on the domestic front, Meridian and other
electricity generators are heading into their sixth year of flat demand as the New Zealand economy undergoes a sluggish
recovery and industrial users contract, invest in efficiencies, and seek alternative fuel sources.
"We have reviewed the contracts some time ago and have advised Rio Tinto of areas in which we are prepared to look at
some amendments, and areas where are we not prepared to look at amendments," said Binns. "I can't elaborate on where we
have drawn the line."
The existing contracts contain fixed and variable portions, with the electricity price influenced by a formula that
takes into account international aluminium prices.
Rio Tinto Alcan, the Canada-based aluminium arm of the Anglo-Australian metals giant, is seeking to sell its interest in
the smelter at Tiwai Point, along with a clutch of other, relatively ageing smelters in Australia and has packaged the
assets as a new subsidiary, Pacific Aluminium. Rio has indicated it does not expect a quick sale.
Binns would not confirm comments by Prime Minister John Key that the first three years of the contract arrangements were
set in stone, except to say that "the Prime Minister's not a silly man" and that there was no question that the new
contracts would come into force from Jan. 1.
On criticisms from competitors of the company's decision earlier this year to build the Mill Creek wind farm behind
Wellington, Binns conceded the project was "on the cusp" of commercial viability "in a negative scenario", but that the
board and senior management were confident it would earn its cost of capital.
"On balance, we thought it would be overall positive," he said.
He took a poke at Dennis Barnes, the chief executive of NZX-listed rival Contact Energy, saying Meridian could have
questioned its decisions to build gas storage facilities in Taranaki and the new Te Mihi geothermal plant at Wairakei.
"We could be critical but I won't be" because Meridian was no closer to the detail of Contact's business than Contact is
to Meridian's.
"I suppose the last guy who built the last power station will always criticise the next guy," he said. Meridian
green-lit the $169 million, 26 turbine project in June.
As the largest and most valuable government-owned electricity company, Binns said Meridian was ready for partial
privatisation in the event the government decided to proceed with a sale, and that it had established a permanent "due
diligence room" allowing all relevant company records to be kept up to date.
In an update on Meridian's outlook, Binns confirmed that Meridian's half year profit to Dec. 30 would be lower than last
year's, as flagged, but not as low as had been originally thought. The company would exceed its earnings before
interest, tax, depreciation, amortisation and movements in the value of financial instruments for the year to June 30.
He expected a few anxious months while Transpower commissioned the new Cook Strait electricity cable early next year,
since any unforeseen outages could hit earnings, and the company "can't wait" for the transmission constraints between
the two islands to disappear once the new connection, called Pole 3, to go live.
Unlike some other industry participants, Meridian supported the Electricity Authority's recent draft decisions on how to
share the cost of transmission among generators, and had been advocating such an approach for some years. It would
submit that some elements of the proposals could be simplified, said Binns.
(BusinessDesk)