Meridian Agrees NZ Smelter Power Deal, Clearing Way for IPO

Meridian Energy Ltd., New Zealand’s largest power company, agreed a new electricity supply deal with the nation’s only aluminum smelter, removing a potential obstacle to its planned initial public offering.

The agreement with New Zealand Aluminium Smelters Ltd., which is owned by Rio Tinto Group and Sumitomo Corp., allows for a price reduction effective from July 1, 2013, and the owners’ commitment to the smelter until January 2017, state-owned Meridian said in a statement in Wellington today. The government contributed NZ$30 million ($24 million) to secure the medium-term future of the plant, it said.

The government plans to sell as much as 49 percent of Meridian in an IPO this year that Prime Minister John Key expects will raise about NZ$3 billion. The yearlong talks about the future electricity supply agreements with the smelter, and the risk that the plant may close, have made investors wary of the performance of Meridian.

“A lot of investors would view the fact that we have 40 percent of our power covered by one customer as being reasonably significant,” Chief Executive Officer Mark Binns told reporters in Wellington. “I think it will be viewed by investors as a positive.”

Asset Sales

The Meridian IPO is part of a bigger asset-sales program the government hopes will reap between NZ$5 billion and NZ$7 billion. It raised NZ$1.7 billion by selling a 48 percent stake in Mighty River Power Ltd. in May.

Mighty River shares fell 3 percent to NZ$2.30 at the 5 p.m. market close in Wellington. Contact Energy Ltd., another New Zealand listed power company, slipped 0.9 percent to NZ$5.35.

Binns said that without the smelter deal, wholesale and retail electricity prices in New Zealand would have fallen because the plant takes around 14 percent of the country’s total power generation. At the same time, it will preserve around 3,000 jobs in the Southland region, he said.

The plant is at Tiwai Point near Invercargill, at the southern tip of the New Zealand’s South Island.

Meridian didn’t disclose the new electricity price it has negotiated with the smelter owners. The agreement is inflation indexed, and allows for price increases should the New Zealand dollar value of aluminum rise above agreed levels, it said.

‘Meaningful’ Reduction

The price reduction is “meaningful” and “will assist the smelter in terms of its international competitiveness,” Binns said.

While the new contract extends to 2030, matching the one it replaced, the smelter company can terminate it after January 2017 provided it gives at least 15 months notice. The company can also reduce the volume of power it takes to 400 megawatts from 572 megawatts from 2015.

The government’s payment was a one-time incentive to help secure agreement on the revised contact “because of the importance of the smelter to the stability of the New Zealand electricity market,” Finance Minister Bill English said in an e-mailed statement. “It provides medium-term certainty for Southland and New Zealand.”

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