NGC's bitter pill

By Phil Boeyen, ShareChat Business News Editor

Monday 20th August 2001

Natural Gas Corporation's (NZSE: NCH) disastrous entry and exit from power retailing is finally written in the ledgers with the company reporting a full-year loss of $301.6 million.

The deficit for the year ended June is in the upper range of previous estimates and compares to last year's profit of $43.5 million. It includes abnormal losses of $311.5 million.

"The abnormal losses, which arise from the direct effects of high wholesale electricity prices and NGC's related decisions to write down its electricity retailing assets, were crystallised by NGC's decision to exit the electricity retailing business," says MD John Barton.

He says the cause of the losses was the electricity retailing business and that all other aspects of the company's business had performed satisfactorily.

"When electricity wholesale prices increased to five and six times their usual levels, this created substantial losses and placed strains on financing the business."

The write down of $311.5 million is made up of $255.1 million for goodwill and customer bases, $48.7 million arising from the high wholesale electricity costs in June, and $15 million associated with the company's exit from the retail business, including write down of systems and restructuring costs.

The company posted a trading profit of $9.9 million on sales of $1.242 billion compared with last year's $632.9 million in sales revenue.

Mr Barton says the loss is extremely disappointing and because the withdrawal from electricity retailing wasn't completed until the start of August the next set of financial results will also be affected.

"NGC's net exposure in July would result in losses from the electricity business in the region of $40 million after tax. However, since July NGC had eliminated it retail electricity exposure and the losses for that month were expected to be more than offset by earnings from NGC's electricity generation business."

"Putting aside electricity retailing, we are heartened by the strengths of our continuing business activities in natural gas and LPG sales, electricity generation, and gas transmission and distribution.

"Excluding electricity retailing, these activities produced net earnings for the year of $55.6m. They provide us with a sound financial footing with good prospects for improved cashflows and profitability."

In light of the substantial loss the company is not paying a final dividend.

NGC first warned it was in trouble early in June when the wholesale spot price for electricity began rising, eventually soaring well above what it was charging consumers.

Although the company tried to claw back the situation with a price rise this was before the seriousness of the power crisis had hit home and the move had customers racing for the phones to try to change suppliers.

Deciding enough was enough for its battered bottom-line NGC finally sold its South Island retail customer base to Meridian Energy and its North Island customers to Genesis - both state-owned corporations with more generation clout.

New Zealand remains in a power bind although wholesale prices have dropped considerably in past weeks.

The Government is currently running a nationwide ad campaign urging people to try to save at least 10% in electricity, aimed at averting power cuts until spring rains and snow thaws can refill hydro lakes.

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