Continuous Disclosure: Tiwai's future overhangs NZ power generator results

The future of Tiwai Point aluminium smelter looks set to overhang the big power generators as they report their first-half results this month.

It is understood that discussions between Tiwai Point's majority owner, Rio Tinto, and the major power companies regarding pricing have already progressed to an advanced stage.

Whichever way it goes, the outcome will be far-reaching, given Tiwai takes about 13 per cent of the country's power output.

Contact has already reported its first-half result and outgoing chief executive Dennis Barnes told the Herald this week that he was optimistic Tiwai would stay.

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A decision on the smelter's fate is expected by the end of March.

The options are: business as usual, reduced operations, a stepped exit, or an exit with a one year run-down.

Craigs Investment Partners' head of institutional research, Grant Swanepoel, said a business-as-usual scenario would benefit Contact the most as it would allow the company to go ahead with the construction of its Tauhara 2 geothermal plant and gradually exit gas.

"Any other outcome would be negative for all five companies," Swanepoel said in a research note.

"We interpret some of the decisions and management comments (from Contact) as highlighting a level of confidence that Tiwai will remain," he said.

Swanepoel noted that Contact planned to depreciate its Taranaki Combined Cycle plant aggressively to close it by 2023.

Management had secured gas contracts through to 2025 which they could have delayed a couple of months if they were concerned about Tiwai, he said.

"Further, management indicated that the industry had done its bit toward incentivising Tiwai to remain and the company continues to firm up the Tauhara geothermal resource with potential to progress to a final investment decision stage by April 2020," he said.

Contact was the first cab off the rank with its result, which showed a 21 per cent drop in earnings amid tight gas supplies and reduced sales volumes to the firm's commercial and industrial customers. The company expects the second half to be better.

In the beginning
Genesis Energy's result, due next Friday, is in a similar position to Contact, with an earnings decline likely.

The company has signalled that earnings would be down 15 per cent in the first half due to the Kupe outage, gas issues and lower than normal hydro generation.

"They have done really well with their retail book - showing some margin strength in terms of costs out and in terms of pricing," Swanepoel said.

Genesis' full year year ebitdaf guidance of $360 million to $380m has remained unchanged. The company's ebitdaf came to $363m last year.

Mercury rising
Mercury, which reports on February 25, is expected to report a first-half profit dip compared with the previous coresponding period, which was abnormally strong.

The company is expected to make up for lost ground in the second half.

"They should easily hit their guided number of $510m for the full year," Swanepoel said.

Last' year's ebitdaf came to $505m.

Meridian combo
The jewell in the crown for this reporting season is likely to be the biggest power generator - Meridian - thanks to a happy combination of high water levels and strong wholesale prices.

Last year's first-half result was a record and Swanepoel expects Meridian to beat that by 20 per cent this half when it reports on February 26.

"Earnings are running well for Meridian at the moment," he said.

As to what is likely to happen, should Tiwai close, Swanepoel said: "There are too many moving parts for all for all of them to say who is the most and who is the least affected."

Musical chairs
In the meantime, it's a been a game of corporate musical chairs for the energy sector.

Fraser Whineray has left Mercury to become chief operating officer at Fonterra. He is being replaced by Trustpower's CEO Vince Hawksworth.

David Prentice, a TrustPower director, has taken Hawksworth's place in the interim.

Former Refining NZ chief executive Mike Fuge will take over from Dennis Barnes at Contact on February 28.

After nine years at Contact, Barnes aims to take a break before seeking work in the Australian energy sector.