Genesis confirms reorganisation, drops gas and coal

State-owned Genesis Energy has confirmed it will drop gas exploration and coal production - apart from Kupe, in a larger reorganisation of its profile.

The company's statement of corporate intent signals an ambitious return on equity for the next five years, from 1.9% in 2009/2010 to 5.3% in 2013/2014.

It also plans to almost double productivity (edbitdaf/MWh generation) from 25 in 2009/2010 to 40 in 2014.

Genesis will make a further announcement next week, when its annual report is released.

New Zealand's largest electricity retailer with over 700,000 customers, Genesis' main assets are the Huntly power station and the Tongariro and Waikaremoana power schemes.

The statement described the move to exit gas exploration and coal production, as being to manage costs and balance sheet risk.

It said it impaired tens of millions of dollars when it abandoned the Momoho and Cardiff gas exploration joint ventures.

Genesis also plans to abandon its Mangatoa exploration permit, for which it has already gathered seismic data.

Genesis Energy chairman Brian Corban also said in the statement new, lower cost generation entering the market over the next few years will result in the Huntly one to four units to be placed into retirement, as output decreases and the costs of operating and maintaining the plant increase.

A risk-sharing agreement was struck with the government for Huntly unit five, with the crown assuming certain risks related to the long-term supply of gas.

The company's 2007 annual report stated forward gas contracts from Kupe and Pohokura fields would only allow it to keep e3p at Huntly running for ten years. There is little likelihood it will be able to secure enough gas to run a second baseload station at the Rodney site, it said.

The company intends to focus on more economic generation and reshape its retail division.

Key challenges identified in the statement include the timing and price of carbon under the emissions trading scheme (ETS) and the oil price and commissioning of the Kupe project.

The company's dividend policy outlines a payout ratio of 80% of free cash flows.

The government has $1,439 million invested in the company as at June 2009, compared to $1,744 million in June 2008.

The drop in commercial value was blamed on decreasing projected generation volumes from the older Huntly units (one to four), as the older thermal plant was displaced by new lower cost generation.

There was also a $41 million drop in the value of the retail business, caused by lower volumes and prices.

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