Powerco reports on half year result

16th October 2003

Powerco reports on half year result and confirms 2003/04 forecast

Leading New Zealand energy distribution company Powerco has recorded a half-year unaudited post tax profit of $30.7 million or 9.7 cents per share ($18.7 million or 8.4 cents per share for the previous corresponding half year) for the six months to 30 September 2003.

Powerco Chairman Barry Upson said the company has announced a dividend of 7.2 cents per share as per forecast, subject to withholding tax, which will be paid on Friday 19 December 2003 to all shareholders on the Register on Friday 5 December 2003.

Mr Upson said that the Board also reconfirmed Powerco’s forecast of $53.6 million for 2004 financial year and total forecast dividend for the year of 16 cents per share.

Positive factors contributing to the solid performance included: the synergies resulting from the purchase of the UnitedNetworks assets in October 2002; growth of Powerco’s Energy Services activity and income predominantly through an increase in customer initiated works; and increased activity from the Australian operations. These strong performances are reflecting our diversified business revenue growth and are a result of an expanding consumer base.

However Powerco also worked through a number of difficult issues during this period said Mr Upson. We suffered a slight decline in electricity revenue from the low lake level crisis earlier this year. Recent data confirms a return to more normal consumption patterns by consumers. We have also faced a significant level of regulatory costs with a myriad of regulatory interventions in both electricity and gas. Compounding this position was the increased costs imposed on our business through increased local body rates levied on the value of our roadside assets. Until recently these local body rates only applied to land and assets on that land owned by the Company.

We have an absurd position at the moment with regard to Government regulation and council rates said Mr Upson. Local councils apply rates at their discretion and the Commerce Commission has agreed that rates, as an uncontrollable cost may be passed-through to consumers. However, the formula that the Commission has applied for the initial period is retrospective, meaning we have not been able to recover these council tax charges. Some council's have decided not to rate line networks, as they understand that the consequences of increased electricity and gas charges will hurt the lower income earners.

Powerco is also able to confirm that the company is NOT in breach of the initial price threshold periods set by the Commerce Commission. Powerco’s auditors have confirmed this position as required by the regulatory regime. This means that Powerco’s posted prices across the range of its consumers are no higher than what they were when the threshold scheme was first proposed on 8 August 2001. Indeed, Powerco has not increased its average electricity connection charges since 1997.

Total assets of Powerco are now more than $1.72 billion.

Powerco’s credit rating from Standard & Poor’s was reaffirmed at BBB+ earlier this year said Mr Upson. This continues to represent a strong investment grade credit rating, and demonstrates the confidence the market has in Powerco’s past performance and its future prospects. The strong balance sheet and credit rating were factors in the successful US$175 million senior debt raising in the United States in September to part refinance debt from the UnitedNetworks purchase with longer term maturities.

Mr Upson said the result was pleasing for Powerco and its shareholders, and demonstrated that the Company was taking full advantage of its increased scale, diversified revenue streams and overseas investments.

Powerco Chief Executive Steven Boulton said that Powerco has produced another solid result over the past six months but, once again, we find ourselves having to deal with external costs being imposed on our business by both central and local government.”

“Powerco is in the unenviable position of having to involve itself in expensive and seemingly endless submission processes with no less than five regulatory organisations looking to impose an ever-increasing raft of regulations on our electricity lines and gas pipes operations. We are now engaged in regulatory processes involving the Commerce Commission, the Electricity Commission and the Ministry of Economic Development, the Parliamentary Commissioner for the Environment and the Commerce Select Committee amongst others.

Powerco's primary concern is that poorly designed regulation, similar to that seen overseas, will seriously impact on the country’s ability to continue sustainable investment and maintenance of our core infrastructure assets. At the same time this myriad of regulatory processes is placing an increased cost on the Company which will eventually be borne by consumers for no perceivable benefit. Maintaining an incentivised investment environment is crucial to New Zealand’s ongoing economic growth.

No amount of regulation by these parties will be able to provide the necessary funding to both sustain existing assets and provide new investments. The Government must make up its mind on these matters – we can have continuing regulatory creep or we can have a productive investment environment to attract capital, but we can’t have both.

In the interests of our shareholders and stakeholders, Powerco will continue to be a vocal proponent for a fair and sustainable regulatory regime that is even-handed in its design and application.
Given Powerco’s diversified portfolio Mr Boulton said the outlook for next six months was positive with significant developments in both Australia and New Zealand.

“Contracts for the Tasmania Gas Project stage one and the first phase of stage two have been signed with the State of Tasmania, securing the Company’s rights to distribute gas to Tasmania’s large industrial and commercial businesses as well as up to 38,500 smaller commercial and residential consumers. Construction of the backbone network is due to get underway in November 2003 and we expect to connect our first customers early in 2004.”

Powerco Energy Services had achieved improving revenue streams in the first half of the year and we are forecasting continuing growth in contract work over the next six months Mr Boulton said.

“With the opening of our new office in Tauranga, Powerco Energy Services now has a presence in one of New Zealand’s fastest growing cities and continues to build its profile throughout the North Island as New Zealand’s premier provider of design, construction and maintenance services for the energy industry.

Our focus for the next six months will be to continue to increase consumer connections in New Zealand and build our presence in Tasmania, to take full advantage of the opportunities for growth of our contracting arms on both sides of the Tasman, and to continue to make a positive contribution to the regulatory debate as it evolves in New Zealand.

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