Meridian suggests fresh Government talks on smelter under way as it contemplates $1.3b write-down

Wednesday, 26 August 2020

Meridian’s Manapouri power station, built to supply the Tiwai Point aluminium smelter, could soon be in need of new customers.

Meridian Energy may need to write down the value of its power stations by between $690 million and $1.3 billion if the Tiwai Point aluminium smelter closes in August next year, the company has warned.

Meridian chief financial officer Mike Roan said the potential impact on the business would become clearer over time and the outcome was uncertain.

There has been speculation that Meridian and the smelter’s majority owner, Rio Tinto, might reach a deal that would see Rio Tinto keep the smelter running for a few more years in return for lower power prices from Meridian’s Manapouri hydro plant.

Meridian chief executive Neal Barclay did not report any fresh developments in relation to those conversations when reporting Meridian’s annual results on Wednesday.

Meridian has hinted at new talks between the Government and Rio Tinto to keep the Tiwai Point aluminium smelter open for longer.

* Contact says talks with aluminium smelter 'active' but Meridian is downbeat

* Meridian boss: 'We offered smelter compelling deal'

The smelter’s closure was probably inevitable some time in the next 10 years given its age, Meridian chief executive Neal Barclay says.

But he said on a call to analysts that he believed Rio Tinto was having “further discussions with the Government” in relation to electricity transmission costs, which are charged by Transpower.

Energy Minister Megan Woods and Rio Tinto have been contacted for comment.

“We have engaged with the smelter owners on the possibility of extending the closure period from one year to four years [but] at this stage we are not aware if an extended closure proposition is acceptable to them,” Barclay said.

He said it was “probably inevitable” that the smelter would close some time within the next decade, “given the age of the facility”.

Roan separately revealed that Meridian had set aside $5m to pay for any fallout from an Electricity Authority investigation into whether it manipulated electricity prices last year.

The authority said in a preliminary ruling in June that Meridian withheld hydro generation in December by unnecessarily spilling water from its South Island dams that it could have used to generate power.

It estimated that had an $80m impact on the spot market for electricity and resulted in 7000 tonnes of extra carbon emissions as fossils fuels were instead burnt to generate electricity.

As well as investigating the “undesirable trading situation” (UTS), the authority is also investigating whether Meridian’s and Contact’s practices breached the industry’s “high trading standards” rules.

Barclay again rejected the authority’s interim findings on Wednesday, saying they contradicted decisions it had previously made.

“Clearly, we don’t think this is the authority’s best work but we do acknowledge there is a wide range of views on the matter,” he said.

The authority had “rewritten the rules” of what constituted a UTS and set a new test that “prices would need to be what the authority would expect to see, which is a very low bar”, he said.

But Roan said Meridian had booked the $5m provision “in case the regulator maintains its position”.

Independent electricity retailers which brought the original complaint against Meridian said this month that both it and Contact had been involved in the UTS and put the impact on the spot market at $177m.

Flick Electric chief executive Steve O’Connor said it thought a penalty that sent a strong message was needed “otherwise it will be a slap over the wrist and no incentive to stop this behaviour that is making a joke of the market and harming consumers and competition”.

NZ First has called for “heads to roll” at Meridian if the authority’s findings are upheld.

Despite the controversies, Barclay described last year as a successful one for Meridian.

Meridian Energy reported a 48 per cent fall in its net profit to $176m for the year to the end of June, with its “underlying profit” down 5 per cent at $313m and revenues 2 per cent lower at $3.4b.

Barclay said there were significant challenges on the horizon, including the smelter closure and the “global impact of the Covid-19 pandemic”.

Meridian shares fell 1.6 per cent to $5.04 when trading opened on the NZX in the wake of the result.