Good will thumping for NGC

Friday 24th August 2001

For a man who has just lost his employer $301.6 million John Barton looks remarkably relaxed. Unveiling his company's annus horribilis this week, Natural Gas Corporation's Australian boss had a few tips.

"The biggest lesson you can learn is, don't rely on your competitor to supply you if you don't need to," he confided, a pearl with which few will disagree.

For NGC and its Australian parent AGL the pain isn't over yet.

The June-year result includes $48.7 million of losses from this winter's drought-driven power price spike but the surge continued through July when NGC sold its last power customers.

That month alone will shave $40 million off the 2002 profit. The loss will be offset, wholly or in part, by post-July gains from generation: relieved of the burden of supplying its customers NGC is now creaming it on the wholesale market, although only 20% of its output is sold on-market.

Barton pointed out the company had acted very quickly to offload its exposure once the horrors of having unhedged exposure to a skyrocketing market became clear.

He also rightly pointed out that nobody had predicted, publicly at least, how the market reforms pushed through by former Energy Minister Max Bradford would play out.

The big surprise, he said, was the way the net generators - Meridian, Genesis, Contact, et al - so aggressively chased customers. "I would have thought it was easier just to be a generator and sell hedges. I think the market designers were surprised too."

Barton thinks the market's design is flawed and needs fixing. Being a net retailer, he declared, was simply not feasible when you had to get hedges for the power consumed by your uncovered customers from generator-retailers competing for those same customers.

Perhaps saying the same thing in a different way, rating agency Standard & Poor's said this week the market's failing was the unwillingness or inability of retailers to pass on their higher power bills to consumers.

Neither mentioned a critical outcome of the breakneck pace of the reforms - the hugely uneconomic prices retailers paid for their customer bases.

Nowhere has this been better demonstrated than in NGC's case.

At the December 31 half-year balance date the company had 481,000 power customers. Fierce competition had already eroded this from 541,000 six months before.

To stem the haemorrhaging caused by June's rocketing prices, NGC sold 116,000 customers to Meridian and 290,000 customers to Genesis, exiting the market in late July.

That's a total of 406,000, suggesting it had jettisoned a further 75,000 users in the first six months of this year, net of any gains.

With 135,000 users lost overboard in just 12 months it wasn't going to be long before NGC was out of the retail business, price spike or not.

The savagery of NGC's midwinter haircut had been well-telegraphed to the market but last Monday's numbers provided some interesting detail.

The 406,000 users NGC sold and, presumably, the 135,000 it lost during the year had a book value of $394.6 million, or $730 each. This compared with analysts' estimates of a fair value of around $400. Even optimists such as PricewaterhouseCoopers, in a report on TrustPower, valued retail customers at only $445 to $580.

NGC got just $139.5 million for its remaining base, or $344 a punter, setting a new market benchmark.

That left it to write off $255.1 million, or $386 each - more than half what it paid.

Its massive overvaluation doesn't let Bradford's reforms off the hook. It would have lost just as much money in the energy trading market no matter how much it paid for its customers.

But it was always going to struggle to make a decent return on its huge retail electricity investment. And the write-offs wouldn't have been nearly so big had it paid realistic prices for consumers in the first place.

It can't say it wasn't warned.

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