Has the Government sacrificed $30 million of tax payer money to push through the Meridian asset sale? Why did Mighty River Power and Contact Energy share prices fall yesterday with what should have been a resolution to the smelter closure risk?
Yesterday Meridian announced the conclusion of 13 months of negotiations with the owners of NZAS. The new contract includes a price cut on the previous contract but extends the commitment to the Tiwai Smelter from January 2016 to January 2017. The Government has contributed $30 million to subsidise the Aluminum Smelter over this period.
The uncertainty around the contract negotiations would have had an impact on the Meridian sale price but was unlikely to stop the sale completely. With a potential $2.5 billion sell down, the Government only requires a 1.2% improvement in the sale price to regain its $30 million expense. It is possible that the increased certainty around yesterdays deal improves the sale price by up to $100 million, meaning the Government stands to benefit up to $70m. From that point of view, the $30 million has been well spent.
The disappointment of this deal to other electricity generators was that this deal only delays the potential closure of the Smelter by one year. If the Smelter is to close, listed companies Contact Energy, Mighty River Power and TrustPower stand to lose revenues as electricity prices fall when Meridian sells its Tiwai Smelter electricity into the general market. Hence uncertainty remains and those hoping for a 10 or 20 year contract were disappointed yesterday.
With the negotiations completed, it is likely that Meridian will list in the fourth quarter, potentially late October.
William Curtayne
Senior Analyst
Disclosure of interest: Milford Asset Management holds shares in Mighty River Power, TrustPower & Contact Energy on behalf of clients.