Genesis sticks with plan to buy hydro system in need of repair

Repairs to the Tekapo canal, which has seepage problems, have been estimated at several million dollars. Photo / Jed Bradley

Genesis Energy says it remains on course to offer bonds to raise up to $500 million to buy a hydro power system in need of multimillion-dollar repairs.

The state-owned company will use the funds to buy the South Island Tekapo hydro system off another taxpayer-owned firm, Meridian Energy, as part of a string of deals scheduled for the first half of this year.

Canals critical to the dam system require repairs, and while that work has not been started Genesis said yesterday the condition of the waterways was not to blame for a delay in offering bonds and would not delay the deal.

"We have done our due diligence and that's been factored into the deal."

Genesis is likely to seek between $300 million and $500 million.

The price it is paying for Meridian's assets has not been disclosed but one insider said it could range up to $800 million.

The asset transfer is part of electricity reforms which require SOEs to trade assets among themselves aimed at encouraging greater competition.

A report last year identified some seepage from the canal, which had slumped at one point. Although repairs were estimated at several million dollars, plus more for improved annual monitoring, Meridian yesterday said a permanent fix had not been started.

"Ongoing monitoring to satisfy safety and operational requirements continues," a spokeswoman said.

Meridian had commissioned a detailed report on the state of the canal with consultants Damwatch and international experts.

"This report has been provided to Genesis Energy and is being considered by them as part of the sale process," she said.

The 26.5km-long canal, with an average depth of 5.3m, links the Tekapo A and B power houses, ending up in Lake Pukaki. The Tekapo deal is critical for Genesis' need to diversify its generation base after what one analyst has identified as a failure to develop renewable energy projects.

The lack of new generation development is also believed to be troubling chief executive Albert Brantley. Although Genesis has small-scale hydro and wind generation, it relies on its coal and gas fired plant at Huntly.

Earlier this month Standard & Poor's affirmed its BBB-plus long-term rating of Genesis given its strong market position but revised the outlook on the rating from stable to negative, partly because of an "uncertain funding strategy" for buying the Tekapo power stations.

The credit rating agency said Genesis' liquidity position was "adequate" but that did not factor in the Tekapo purchase.

Standard & Poor's said Genesis' upstream oil and gas exploration and production operations were inherently riskier than its core generation and energy retailing business.

Genesis holds a stake in the offshore Kupe field which is projected to make up a third of earnings but exposes the company to volatile oil prices and movements in the New Zealand and US dollars.

As the sole off-taker of Kupe gas, S&P says Genesis faces another business challenge that the agency said would weigh negatively on the company's financial performance for the next one to three years.