Power debacle costs NGC $1.4m a day

By CHRIS DANIELS energy writer

The final nail has been decisively hammered into the coffin of Natural Gas Corp's disastrous foray into electricity retailing, with yesterday's disclosure that it had lost more than $1.4 million a day for two straight months.

The company revealed that during its first full year as an electricity retailer, it lost $301.6 million, a result at the top end of predictions, and a sharp reversal from its previous year's profit of $43.5 million.

It was its first and last full year of results to include electricity retailing as NGC bailed-out of that business last month. The loss means NGC will not pay a dividend this year.

The figures show that high wholesale electricity prices, partly caused by low hydro lake levels and NGC's lack of hedge protection in the wholesale electricity market, meant it lost $48.7 million in June, then $40 million in July, on electricity sales.

The firm's decision to get out of the retailing business cost a further $15 million, including redundancies and the cancelling of leases. It also had to write down $255.1 million in goodwill from the sale of its electricity customer base to state-owned rivals Meridian and Genesis.

Altogether, the abnormal items relating to its rapid exit from electricity retailing added up to $311.5 million.

Explaining the results yesterday, NGC's managing director John Barton criticised the structure of the electricity market, saying there was no way a net retailer could remain competitive because they had to buy power from their competitors.

He said the problem with electricity retailing was identified early, and the company "moved quickly to exit the business".

The requirement to protect shareholders meant the company had to act immediately to mitigate losses.

While accepting the year had been "extremely disappointing" he said things were looking good for NGC's other operations, with net earnings of $55.6 million from "continuing activities" such as electricity and gas generation and gas retailing.

These activities returned an operating profit of $9.9 million.

There had been a 41 per cent increase in natural gas sales, record LPG production and sales and expansion of electricity generation, mainly from an upgrade of the company's Taranaki power station.

Shareholders assets in NGC shrunk by $250 million to $1.953 billion over the June 30 year.

Mr Barton said he expected the company would be in a position to pay dividends within 18 months, but the after-tax July losses of $40 million would have to be taken into account when anticipating next year's result.

From this month NGC has been a net generator of electricity, so the high wholesale prices is now working in its favour.

Last month, responding to criticism that NGC was stupid to have taken a bet against the weather by going into the winter unhedged, Mr Barton said that even if the company had taken all the hedges on offer, it would still have lost money.

"It was not possible to get hedged competitively in this market."

Asked if any lessons could be learned from the due diligence process on TransAlta before it was bought, he said the market had changed substantially since the electricity retailer was acquired.

One such change had been "the amount of effort the generators put into acquiring customer bases".

When the electricity market was devised, it was thought generators would simply sell hedges and let the specialist retailers sell electricity to consumers.

This did not happen, as the four big generators, three of which are state-owned, moved quickly into electricity retailing.

When asked to comment on NGC's result and its criticism of the market structure, Energy Minister Pete Hodgson said he knew there was a view that an electricity retailer needed the safety of its own generation.

"It is a view that is held as the result of people getting their fingers and in NGC's case also their elbows burned."

Feature: Electricity

Energy Efficiency and Conservation Authority