New chief executive seeks key to unlock Natural Gas Corporation's hidden value

Friday 15th March 2002

Remember New Zealand Gas & Light - the company that never was cropped up in 1998 as part of an agreement between Fletcher Challenge and Australia's AGL to carve up Natural Gas Corporation?

It never happened as Fletcher instead sold its one-third interest to AGL, setting the Australians on the path to last year's $340 million electricity market mauling.

Now, according to market tongue-wags, Bust-Up Plan No 2 is on the drawing board as AGL licks its wounds.

The problem with NGC is that it doesn't have a good reason to exist in its present form; the sum of the parts is worth more than the whole.

It's not that the company's travelling badly now. The share price has recovered from last year's lows, its banking covenants are sound, and its operations are back in profit.

But a $16.1 million half-year gain isn't much of a return on total assets of $1.7 billion.

So the pressure is on AGL's board to sort out its "Kiwi problem."

That pressure comes from two directions.

First, AGL's Australian institutional shareholders got a big fright from last year's electricity market losses and want the company to get its money out of New Zealand.

More importantly, AGL's shareholding cap is at last being dismantled and the company is a juicy takeover target for just about anybody with a portfolio of energy assets - US giant Alliant Energy, Edison Mission Energy, or National Power, for example.

Rumour has it the lights burn late every night at AGL's Sydney head office as hordes of strategy types try to devise a survival plan.

So NGC's new chief executive Phil James has been despatched across the Tasman with the job of working out how to release some of the undoubted value locked up in AGL's second-largest asset.

He had hoped to announce his strategic plan with the half-year result but is probably finding, as many a Kiwi analyst has, that the company is a hideously complicated beast.

One option is for AGL simply to sell out. But no buyer is likely to want 66% so AGL would have to take out the minority shareholders.

These irksome types could increase in number very shortly when Hutt Mana Energy Trust decides what to do with its 77 million-odd shares.

Parcelling out the shares to its 84,000 beneficiaries is a choice that will recommend itself to risk-averse trustees.

But if AGL mounted a successful mop-up bid it would still have the problem of getting a price for NGC which reflects the full value of the company's assets.

So option two is to break up the company and sell it off piecemeal.

The 1998 blueprint called for a split into three entities; New Zealand Gas and Light, which would hold the gas reticulation marketing operations; gas processor and co-generator Taranaki Production Services; and transmission grid owner and operator TransGas.

But that's no longer a good indicator of how the assets might be unbundled.

They were packaged that way to suit Fletcher Energy and AGL pre-electricity involvement, and the plan left a lot of question marks over the disposition of tricky bits, like NGC's LPG station, that didn't seem to fit anywhere.

The cleanest and most obvious sale would be NGC's gas entitlements, valued at $198 million in the last annual report.

Contact Energy, for example, would be a keen buyer.

At this week's annual meeting chief executive Steve Barrett said his company was on the look-out for more gas.

That would be a worry for generation rival Genesis Power. Genesis gets some of its gas from NGC and, as one analyst put it, "Contact would just love to know when Genesis is sucking on the pipe."

A gas sale would also free NGC of the muddle the upcoming Maui redetermination will cause.

Anyone who doubts the litigation will go on forever need only remind themselves of the Kapuni case.

Gas marketing and reticulation would also be attractive to Contact, particularly if it got the entitlements as part of the deal.

But it's doubtful that one would get past the Commerce Commission so NGC would have to look elsewhere for a buyer.

The low-risk transmission network would also make a good clean sale but it's not immediately obvious who would want it.

Meanwhile in Sydney AGL boss Greg Martin has signalled the company is interested in any Australian network assets that are up for sale.

If it bought, for instance, American Electric Power's Melbourne business, it would need to go to its shareholders for more cash.

Those shareholders aren't in a good mood so an equity raising would likely come with strings attached.

So expect NGC's James to make up his mind sooner rather than later.

Given Air New Zealand's acknowledged need for cash and its avowed intent to sell off "non-core" assets the market's eye has been drawn inexorably to its engineering arm.

In response to Shoeshine's enquiries a spokesman said the company wasn't talking to anybody and no proposal had been put to the board.

Nonetheless Merrill Lynch did a scoping study some 18 months ago and the division is estimated to be worth $300 million to $400 million.

The most obvious buyer would be US giant Pratt & Whitney, with whom the airline last year announced with great fanfare a joint venture at its Christchurch centre.

Air New Zealand said at the time that overhauling the new V2500 engines brought to the deal by P&W would result in revenue growth from $US80 million to $US170 million over five years.

A sale of that size would just about knock the carrier's balance sheet back into shape, provided the Australian Securities and Investments Commission doesn't blow another giant hole in it.

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