A potential shutdown of the Tiwai Pt aluminium smelter would barely dent the value of Meridian Energy, but Labour/Green electricity reforms would take a big bite out of the power giant.
A new research report suggests the value of Meridian shares would fall just 2 cents if the smelter shut down, because the power contract price is at such a low level that Meridian would be "economically indifferent to smelter closure".
In the first significant independent analysis of Meridian Energy, a research report from First NZ Capital says shares in Meridian could trade at $1.40 to $1.60 on listing, if the market values the company like Contact Energy or Mighty River Power.
First NZ Capital analyst Nevill Gluyas described Meridian as a cash-flow powerhouse which could be worth $2 a share on a discounted cash-flow basis, assuming a low risk of Tiwai closure or the Labour/Green power policy being implemented.
"In contrast, using comparable valuation multiples for Contact Energy (CEN) and Mighty River Power (MRP) imply Meridian shares may trade around $1.50," he said.
Meridian shares are being offered by the Government to retail investors at a maximum of $1.60 a share, payable in two instalments.
While suggesting a $2 value on a discounted cash flow basis, the report said that would fall by 69 cents or 33 per cent under the Labour/Green proposal to reform the electricity market.
Because Meridian generates close to half of all hydro power production, it would bear the brunt of the Labour/Green policy aimed at cutting overall power costs by up to $700 milion. That would reduce the estimated value of Meridian shares from $2 to just $1.39.
However, the research report estimates the policy had just a "10 per cent chance of appearing".
The opposition parties would need to win the next election and then bring in the proposal.
In contrast, the potential closure of the Tiwai Pt aluminium smelter in Southland, possible from 2017, would barely nudge the value of Meridian, cutting the discounted cash valuation just 2 cents or 1 per cent.
First NZ Capital assumes average wholesale power prices would fall $30 a megawatt hour in the South Island and $20 Mwh in the North Island from 2017. Retail power prices were assumed to fall about half that amount.
Meridian renegotiated its electricity contract with the smelter company earlier this year. The smelter is Meridian's single biggest customer.
Because Meridian's power contract with the smelter is at about $47 a MWH, it would now be "economically indifferent to closure". "If the smelter threatens to leave in 2017, we would not expect Meridian to offer further discounts to keep the smelter open," the report says.
Gluyas also said changes to transmission pricing could increase Meridian's value by 25 cents a share, while cost cuts and power pricing rises could add 10c and 5c a share respectively, though these outcomes were not included in the valuation.