Genesis forecasts profit jump
Genesis Energy is expecting dramatically improved earnings over the next three years, driven partly by higher prices for oil and gas from the Kupe field and refusing to run its ageing Huntly power station at a loss.
However, tougher competition in the last 18 months sees Genesis write down the value of its retail customer base by $85 million in its 2010-2013 Statement of Corporate Intent, tabled in Parliament this week.
Despite vowing not to raise its prices from July 1 to compensate for introduction the emissions trading scheme, Genesis identifies the recovery of carbon costs, along with oil prices and the balance between new generation and electricity demand growth, as a key uncertainty over the period the SCI covers, and foreshadows its own intention to raise tariffs.
"Commercially, the ability to recoup thecost of carbon from the retail market is an uncertainty," the SCI says. "Any failure to recoup the cost of carbon would result in adverse commercial outcomes should carbon-intensive plant run.
"Recent announcements by competitors suggest modest prices increases will occur across the market to reflect underlying cost pressures (including carbon) and the price of new generation."
The SCI takes no account of the asset swap required under electricity reforms announced last December, for which legislation has yet to be passed, and Genesis anticipates amending its SCI once that occurs. The swap requires Meridian Energy to make over the South Island Waitaki A and B hydro stations to Genesis, while Genesis must write contracts for Meridian to supply 450 Gigawatt hours annually of so-called "North Island power."
The move is intended to force more retail competition across the country, and has already seen Genesis launch customer acquisition drives in Christchurch, Dunedin and Queenstown. The SCI says Genesis will seek to "rebalance" its retail load, where possible, to accommodate the South Island expansion. The company is already taking a more cautious approach to contracting to industrial customers.
The SCI also reveals more optimism about the lifespan of the four units at the 1000 Megawatt, four unit, coal and gas-fired Huntly plant. The retirement dates for the first two units at Huntly are pushed out a year to 2012 and 2015 respectively, and a feasibility project is under way into options for mothballing retired units, so they could return to service if market conditions allow.
Most notable in the SCI is Genesis's improved earnings outlook.
In the current financial year, it is forecasting a return on equity of 2.8%, compared with 0.5% forecast in last year's SCI, rising to 4.9% in 2011/12 (1.7% forecast in last year's SCI), and 6.1% in 2012/13 (3.8%).
Earnings before interest and tax are forecast to hit 4% this year (previous forecast at 2.2%), 5.6% next year (3.1%), amnd 6.5% two yearsa out (4.6%).
The SCI values Genesis's business at $1.624 billion, up from $1.439 billion in last year's SCI, based on a weighted average return on capital between 8.6% and 9.5%. The company continues to forecast dividends paid at a rate of 80% of free cashflows.
SCI's from MightyRiverPower and Meridian have yet to be released.
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