Next partial privatisation in October, says Key

Next partial privatisation in October, says Key

By Pattrick Smellie

May 13 (BusinessDesk) - Prime Minister John Key has all but confirmed that Meridian Energy will be the next state-owned enterprise to be partially privatised, with a float of up to 49 percent of the government's single most valuable electricity asset set for October, market conditions permitting.

Key told his post-Cabinet press conference the next part-sale would be "an energy company".

Given Meridian was last valued at $6.5 billion in 2011, against Genesis Energy's $1.9 billion valuation, Meridian is the more attractive candidate for part-sale simply because it would pull in more cash before election year, when the government may be less inclined to pursue another sale in the so far unpopular policy.

In addition, Meridian chief executive Mark Binns has made it clear he expects Meridian would benefit in the long run if the Tiwai Point aluminium smelter were to close, since Meridian could sell its low-cost hydro-electricity to other consumers at a higher margin than it gets from the smelter.

Contracts for the smelter, owned by Rio Tinto subsidiary Pacific Aluminium, account for 572 Megawatts of production, around one-seventh of total New Zealand's annual electricity output.

Meridian expects if the smelter closed, it would do so in an orderly fashion over three to five years because of the way its electricity contracts are structured, and that competitor generators would close higher cost gas and coal-fired plant because of the electricity surplus the smelter's closure would cause.

That would be likely to have its most significant impact on Genesis, which owns both old and new gas and coal-fired plant. Electricity market observers expect most of the impact of a smelter closure to be felt in the market for natural gas, which is in over-supply in the short term.

Pacific Aluminium announced last year it wanted to renegotiate 18 year contracts concluded in 2007 but which only became operational this year, because of falling global aluminium prices and the strong New Zealand dollar. The company said today it was "losing millions of dollars a month" at present.

Pacific Aluminium owns seven Australasian smelters and associated infrastructure, which it has been trying to sell as Rio Tinto seeks to reduce its over-exposure to the tepid world aluminium market.

Key said the proposed float would be "around October, subject to market conditions", and follows last Friday's listing of MightyRiverPower, in an initial public offering that attracted 113,000 New Zealand retail investors, some 77,000 of whom may never have previously owned shares.

Institutional investor appetite for MRP shares saw the allocation for both local and foreign investors heavily over-subscribed, apparently making the government confident it can offer another large tranche of blue-chip power company shares later this year. Some market observers have speculated 49 percent of Meridian could be floated in two tranches, given the size of the offer.

MRP shares continued to trade above their $2.50 listing price, closing on the NZX today at $2.61, down 1 cent on Friday's closing price.

Meridian operates a suite of hydro stations and wind farms and has spent years branding itself as a renewables-only company. Like other New Zealand electricity companies, it has little new investment on the books following five years of slow demand growth, with only the 60MW Mill Creek wind farm under construction in the hills behind Wellington.

The company has also signalled it will seek to crystallise the value of its 50 percent stake in the South Australian Macarthur wind farm, taking the opportunity to sell a "bond-like" revenue stream and retire debt.

It is expected this would be completed prior to partial privatisation to ensure maximum value to the taxpayer.

(BusinessDesk)

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