Customers for sale as NGC loses $1m a day

By RICHARD BRADDELL utilities writer

New Zealand's fiercely competitive electricity market has humbled Natural Gas Corporation, which is expecting a year-end loss of between $280 million and $310 million.

Most of the losses are non-cash and relate to the writedown in value of its customer base.

But to stem trading losses estimated at more than $1 million a day, NGC yesterday confirmed it was negotiating the sale of its 116,000-strong South Island customer base to Meridian Energy.

It also revealed that its 66 per cent parent, Australian Gas Light, is to guarantee up to $177 million in short-term funding to cover beleaguered retailer On Energy's electricity purchase commitments and provide an additional $65 million to $100 million to meet NGC's own short-term cashflow commitments.

NGC managing director John Barton said both loans were negotiated at arms length and are guaranteed by the NGC.

A Stock Exchange waiver for related party transactions was obtained, but retrospective shareholder approval will be sought at the annual meeting on October 30.

The surgery comes as NGC reels from high wholesale electricity prices brought on by a severe cold snap last month and drought-induced low levels in South Island hydro lakes.

But while the jump in wholesale electricity prices has made life uncomfortable for other retailers with a shortfall in generation, the industry has been generally astonished that On Energy has found itself badly exposed by not taking out forward contracts or hedges that would lock generators into supply contracts at fixed prices before the winter began.

Mr Barton said the unhedged portion of forecast supply commitments would drop to less than 20 per cent once a combination of arrangements now in place and still under discussion with other parties was concluded.

Rival companies said there was an air of long-term inevitability that On Energy's South Island customers would eventually be sold to South Island-based Meridian, which produces 30 per cent of New Zealand's power but has little more than 100,000 retail customers of its own.

"Doubling the number of customers they've got is going to be helpful for most people because they won't be as aggressive in growing the business and discounting," one electricity company executive said.

But Meridian is unlikely to stump up anything like the $700 a customer NGC is thought to have paid out when it took over TransAlta.

The South Island sale also raises questions about Meridian's own ability to supply the new customers. Chief executive Keith Turner said that it was generating electricity to meet its hedge positions alone and was not profiting from the spike in wholesale prices.

But although NGC has suffered substantial losses, it would appear financially strong.

Based on the mid-year accounts, NGC might end the year with about $700 million in shareholders' funds.

And with the sale of Lower North Island gas reticulation assets for $118 million, that might still equal a respectable 50 per cent of the total assets.