On Energy losses spread to Australia

By RICHARD BRADDELL utilities writer

The Australian Stock Exchange yesterday halted trading in Australian Gas Light pending a statement as likely losses burgeon in its 66 per cent owned New Zealand subsidiary Natural Gas Corporation.

Before the trading halt, AGL shares had fallen 39Ac to $A8.60 ($10.80).

While NGC yesterday sold its Hutt Valley and Porirua gas reticulation assets to Powerco for $118 million, speculation mounts about potential losses from its On Energy retail electricity business and writedowns that could exceed $300 million.

On Energy is estimated to be losing between $1 million and $3 million a day because of a large unhedged exposure to high wholesale electricity prices following a cold snap at the end of May.

NGC shares have plunged 30 per cent since the beginning of the month when the company warned adverse conditions meant it was unlikely to make a second-half profit.

But the biggest losses may arise from customers defecting to other suppliers and writedowns in the value of those remaining.

NGC paid $824 million for 75 per cent of On Energy in March last year when former controlling shareholder TransAlta of Canada bailed out as it failed to acquire sufficient generation to cover its retail risk.

Normally, the goodwill on that acquisition could be expected to be written off over 20 years. But NGC, which now owns 100 per cent, may be under pressure from its auditors to accelerate the writedown due to the customer losses, which may have reached 100,000.

One analyst said that figures of asset writedowns of $350 million or more were credible given that TransAlta had paid between $600 and $700 a customer. They now might be worth less than $300 if it sold them.

On Energy now faces a customer exodus after it endeavoured to stem losses by boosting electricity prices 16 per cent in the last fortnight.

NGC's woes have sparked an inquiry by the electricity market's surveillance committee and accusations that New Zealand's largest electricity generator, Meridian, has manipulated the market.

But Meridian chief executive Keith Turner rejected the suggestion the SOE was taking advantage of low hydro levels to boost prices and make super profits for itself.

He was supported by electricity analyst James Miller of ABN Amro Craig, who said Meridian had a large risk position of its own in the South Island which it had to manage.

"They have to take a very prudent position, because they have to provide to their customer base and that customer base includes Comalco and the losses that would occur to Meridian if they fail to do that would be very large," Mr Miller said.

Dr Turner said Meridian had a responsibility to maintain its South Island hydro lakes at levels that would see it with supply that would last till the end of the winter.

At present, there remained several possible weather scenarios that could still see them emptied if not managed cautiously, he said.

"We don't have the water to produce at these high prices. We are earning virtually no extra income from these high prices," he said.

But although Dr Turner said that Meridian was producing largely to match pre-sold positions and for its own customers, an analyst said the company and other large generators would be enjoying very good returns for this month at least.

Meanwhile, NGC's "bet against the weather" in not hedging the cost of sufficient future electricity supplies has stunned the industry and analysts.

Rival TrustPower has also been hit, although its 10 per cent unhedged exposure is regarded as acceptable.