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"No showstoppers" on Meridian Energy part-privatisation

Monday 2nd April 2012

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Meridian Energy’s chief executive, Mark Binns, has told investment market analysts that a review of plans for partial privatisation has found “no showstoppers” and the company expects a Cabinet decision on its part-sale by the end of the year.

In his first formal briefing to investment market analysts, Binns also gave the most explicit view yet published of Meridian’s approach to valuing prospective wind projects, with good projects commercially attractive at under $85 per Megawatt hour.

“Meridian’s existing pipeline showing four projects at less than $85/MWh, four projects between $85 and $95/MWh,” say Binns’s presentation notes, well below the widely quoted belief in the electricity industry that wind requires prices of around $100MW/h to be viable.

The figures are also at the low to middle of the range for the most attractive geothermal generation options, which are currently being pursued by various generators ahead of emerging opportunities known to exist for new wind farms.

Binns signalled after select committee hearings last week that Meridian is close to a final decision on whether to build the 26 turbine wind farm at Mill’s Creek above the Ohariu Valley, to the north of its much larger West Wind development on the Makara coast, near Wellington.

The presentation notes say a board decision on Mill’s Creek is expected within the next six months, and that its economics are “extremely competitive.”

Binns was reported by Fairfax Media as saying a combination of the project’s relatively small size, competitive conditions for the civil works, and a strong New Zealand dollar bringing down the price of imported turbines all worked in the project’s favour.

While all electricity generators agree electricity demand is too weak to justify building major new power stations, Binns said Mill’s Creek would be absorbed into the electricity system without difficulty, and could lend itself to local connection, saving costs of a hook-up to the national grid.

Binns also explained how Meridian reaches project value using a discounted cashflow rather than using the forecast long-run marginal cost of electricity as its benchmark for investment decisions.

The DCF must exceed a hurdle rate, defined as a return greater than the weighted average cost of capital after sunk cost.

“Terminal value (second life or sustainable cashflows) are excluded from this calculation.”

Additional sources of value also considered include second life value, risk benefits, portfolio/retail benefits and other revenue sources.

“Forward expectations of high quality wind unit costs are better than other generation options: true greenfield geothermal, and thermal (gas / coal).”

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