Meridian Energy is talking tough about its negotiations with the owners of the aluminium smelter at Bluff, dismissing suggestions it will ''take one for the team''.

Last week Meridian, New Zealand's largest electricity generator, revealed that it had been approached by Rio Tinto, owners of a majority stake in New Zealand Aluminium Smelters, about renegotiating a purchase agreement due to come into effect next year.

Amid a global downturn in aluminium prices and demand, Rio Tinto is believed to be seeking a lower purchase price than it has signed up for, and has said publicly it will close unprofitable smelters.

The news caused shares in Contact Energy, New Zealand's largest private sector electricity generator, to drop 20 cents, with fears of a major oversupply to the national grid if the smelter, which uses 14 per cent the country's generation, were to close.

Analysts have privately speculated that Meridian will come under pressure from the government to renegotiate the deal with the smelter on more favourable terms to keep it operating.

Meridian chief executive Mark Binns said the company would take time to evaluate the situation but would ultimately come to a decision that was in the best interests of Meridian Energy Limited.

''The obligations of the directors are very clearly set out in companies law and the Companies Act, that is to act in the best interests of the company,'' Binns said, adding that State Owned Enterprise minister Tony Ryall had said the issue was a commercial one between the two parties.

''Reading some of the press there seems to be this indication that Meridian's going to 'take one for the team' if you like... I would just reiterate that the board and management are very clear about what their obligations are,'' Binns told a media conference, at which Treasury officials were present.

Asked why the company had even entertained talks with Rio Tinto given that a contract was in place, Binns said the media were not privy to the discussions.

The company would evaluate the possible outcomes of the situation and ''see if something that is mutually beneficial can be agreed to, but clearly we would like them to stay, but we would like them to stick to the contract''.

Binns said the deal, negotiated in 2007 and to run from 2013, was freely agreed.

''They weren't wrestled to the ground and we didn't put a Chinese burn on them.''
Binns ruled out taking an equity stake in the smelter before qualifying later that it would not be a preferred option.

There had been ''no overt threat'' that the smelter would close if a deal was not renegotiated but ''you only have to Google aluminium industry to see that the industry internationally is having a difficult time.''

He hinted that the smelter's closure might not be as bad for Meridian as the industry might be speculating, especially once a project to increase the link which exports power between the North and South islands is complete, which will upgrade capacity.

Closure of the smelter would mean ''5000 gigawatt hours from New Zealand's most efficient power plant, with the HVDC link unleashed. There are some constraints in Southland... but these can be resolved.''

The smelter, at Tiwai, uses electricity from the Manapouri Power Station, an underground hydroelectric power station on the western arm of Lake Manapouri in Fiordland National Park. Completed in 1971, Manapouri was built with the main intent of servicing the smelter, 160 kilometres to the South East.

Earlier Meridian, New Zealand's largest electricity generator, blamed an ''unprecedented'' lack of rainfall in the early parts of this year for a 75 per cent drop in profits.

Wellington-based Meridian, which generates most of its electricity from South Island hydro schemes, said net profit after tax in the year to June 40 was $74.6 million, a fall of $228.5m
Earnings before interest, tax, depreciation, amortisation and fair value movements of $476.6m was a fall of $183.3m on the previous year.

In the early parts of this year, rainfall into Meridian's catchment was some of the lowest on record, prompting it to cut back on generation and sending wholesale prices climbing.

"It's been an unprecedented year in terms of hydrology conditions - the lowest inflows in 79 years. The integrated nature of our wholesale and retail business has been key to improving performance compared to 2008. We've managed the situation well through conservative generation and by actively hedging our position against contract load," Binns said.

Meridian said excluding one-off items such as impairments on niche subsidiaries, net profits dropped 52 per cent.

During the year, Meridian paid $140.7m of dividends to its shareholder, the New Zealand government.

It pulled the plug on Project Hayes, a giant windfarm proposed for Central Otago, and Mokihinui, a proposed hydro scheme on the West Coast.

Meanwhile it announced it would go ahead with Mill Creek, a wind farm near its existing West Wind, with a ceremony to mark the start of construction on Wednesday.

- © Fairfax NZ News