TransAlta locked into deal with NGC

By BRIAN FALLOW

WELLINGTON - Natural Gas Corporation is on course to almost double in size after yesterday signing an agreement to buy 75.8 per cent of TransAlta New Zealand for $834 million.

NGC's offer was announced on Monday and the mandatory three-day notice and pause period expired without its being trumped by a higher bid.

Contact Energy and Meridian Energy had been interested in the past.

The vendors, TransAlta Energy Corporation of Canada, are now locked into the deal.

The sale is conditional on due diligence and on approvals by the Commerce Commission, the Overseas Investment Commission and NGC's own shareholders.

The last is a formality, given the deal is supported by NGC's own 71 per cent shareholder, Australia Gas Light.

AGL yesterday also indicated its support for the rights issue which will fund between 40 and 50 per cent of the purchase. NGC's current balance sheet is about equally split between equity and debt.

NGC chief executive Richard Bentley said the company was looking to have the rights issue under way in March.

NGC is paying 285c a share; TransAlta shares had traded between 217c and 250c over the past three months.

The purchase price also includes $83 million for TransAlta capital notes ($1.02 a note) and $217 million worth of project debt the Canadians have in the Taranaki combined-cycle power station near Stratford.

That plant and a 47 per cent stake in the Southdown power station, also gas-fired, are TransAlta's only major generating assets. As a result it has to buy, under hedge contracts and through the spot market, more than half of the electricity it sells to its 500,000-plus retail customers.

Frustration at the fact that none of the state-owned generators will be sold, at least for the next three years, is thought to have been one of the reasons the Canadians thought it time to take their profits and quit New Zealand.

They had targeted 70 per cent self-sufficiency in generation.

But with overcapacity in generation weighing on wholesale electricity prices, TransAlta is a net buyer in a buyer's market.

"The way the industry is structured, retailers are necessarily required to buy from the state generators and the name of the game is to work up good long-term relationships with them," Mr Bentley said.

"I think the whole industry will progressively look towards longer, stable contractual relationships, although there will always be a spot market."

Even so, he said, NGC in its own right or through its shareholding in TransAlta would clearly be interested to participate in any new generation, particularly gas-fired generation, that came up.

Meanwhile, the acquisition would give NGC an opportunity to get smarter at electricity and gas retailing, businesses it is already in, in a small way.

"It's not clear to me exactly how. But the energy sector will go through the same sort of transformation as the telecommunications sector has, in terms of product development. But you need a bit of scale to be part of that game. This gives us that."

NGC has no thought of making an offer to TransAlta's minority shareholders, said Mr Bentley.

The only other substantial shareholder is the Hutt Mana Energy Trust, with 14.8 per cent. NGC would seek an understanding with the trust over the next few months on where the company was going.