State-owned Genesis Energy has confirmed it will drop gas exploration and coal production, but it would not comment on what effect that might have on the company's balance sheet until the company results are announced next week.
The company will exit gas and coal production – apart from Kupe, in a reorganisation of its profile that includes a focus on more economic (renewable) generation and a reshaped retail division.
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.
Genesis general manager of coporate affairs Malcolm Alexander said this was not a result of any government directive. “The government has given Genesis Energy no particular target other than expecting the company to deliver a return on its investment. The company’s statement of corporate intent reflects our view of what’s achievable.”
The government has $1439 million invested in the company as at June 2009, compared to $1744 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.
Genesis also plans to almost double productivity (edbitdaf/MWh generation) from 25 in 2009/2010 to 40 in 2014.
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, to manage costs and balance sheet risk.
Mr Alexander said oil and gas exploration was a high-risk, high-return business and given the other players now in the market, the company did not see an immediate need to be present, apart from the investment in Kupe – shortly to come on stream.
He said Genesis went into upstream production because of fuel risk, which was now well managed.
Genesis Energy chairman Brian Corban also said in the statement of intent new, lower cost generation entering the market over the next few years would 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.
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.
Mr Alexander said Genesis had always been in support of the ETS and any additional cost would be passed on. “That’s the point of the ETS – to change consumer behaviour.”
He said the ETS was a factor in the exit plans, but not the main factor. “The immediate impact is the upcoming entry into the market of lower cost and must-run generation. There’s a lot of these projects coming on, such as geothermal or wind and when that’s built it runs, because that’s the nature of the technology.”
The company's dividend policy outlines a payout ratio of 80% of free cashflows. Last year the company’s policy was to payout 40% of net profit after tax.
“This was a board decision of the level of return to shareholders. The board decided this was a better approach.”