Contact Reports Full-Year Result

Contact Reports Full-Year Result In Line With Forecast

Contact Energy Ltd today announced a net surplus after tax of $144 million for the year to 30 September 2004.

“This is a satisfying result, achieved in very different market conditions from 2002/03, and in line with the forecast published at the time of the Origin Energy takeover offer in September,” said Contact’s chief executive, Mr Steve Barrett.

The Grant Samuel Independent Advisers Report on the Origin takeover offer included a forecast net surplus after tax of $143 million.

“While the solid financial result is pleasing, the most significant achievement in the last year was Contact’s success in refuelling almost every major component of its generation fleet,” said Mr Barrett.

“We have been granted resource consents to continue operating the Clutha hydro and Wairakei geothermal facilities which, while still subject to the appeals process, appear to provide a workable operating framework.

“Meanwhile, over the last 15 months, Contact has entered into contracts involving total new expenditures of almost $1 billion before the end of the decade. Much of this is for the acquisition of additional gas supply, but the total also includes long term commitments for heavy maintenance of Contact’s large gas-fired stations, and the construction of the binary plant at Wairakei.

“These developments are the result of many years of hard work by key teams within Contact, and give the company security for the near term and breathing space to plan for the post-Maui future.”

Mr Barrett said wholesale market conditions in the last financial year reflected the volatility inherent in New Zealand’s hydro-dominated electricity system.

“Unlike 2002/03, the recent financial year was characterised by high hydro inflows and subdued wholesale electricity prices, which averaged $37/MWh over the year. In contrast, the 2002/03 year saw an average of $82/MWh, when dry conditions in hydro catchments prompted a national energy savings campaign.”

“This continues a recent trend whereby large swings in average wholesale prices occur from year to year. Contact is able to insulate customers from this weather-induced volatility in wholesale costs by offering retail tariffs that reflect average hydrology conditions. These tariffs smooth out the effect of dry and wet years.”

“However, Contact is not able to insulate customers from the underlying increases in fuel and technology costs, as New Zealand moves to an environment in which energy is more constrained and costly owing to the rundown of the Maui gas field.

In the last financial year, Contact’s forward contract and retail sales volume was equivalent to 93% of its actual generation output. This was higher than forecast as Contact chose to reduce generation and source electricity supply from the wholesale market at times when it was more cost-effective than running its gas-fired power stations.

This reduced gas use was also a substantial contributor to the fall in total gas consumption – both for internal use and to retail and industrial customers – falling to 50.6 PJ, from 71.6 PJ in the previous year.

Mr Barrett noted, however, that the dynamics of Contact’s gas business continued to experience fundamental change.

“We are moving from the Maui era characterised by a relatively secure and fuel-rich environment to one in which scarcity and uncertainty will tend to prevail. This is especially so during the next few years as we move from dependence on Maui to reliance on a range of smaller existing and new fields.

This trend influenced both operational performance of the gas business and Contact’s programme of actions taken to prepare for the future.”

These included reaching agreements to clarify Contact’s Maui gas entitlements, and concluding contracts to secure additional supply from the new Pohokura gas field. Together, these initiatives secured sufficient gas to meet Contact’s core operational requirements until late in the decade.

“Combined with the initial confirmation of resource consents for our renewable generation assets on the Clutha River and at Wairakei, these near term fuel commitments represent one of Contact’s most important achievements in recent years.”

With an eye to the longer term, a joint study with Genesis Energy was undertaken to assess the viability of liquefied natural gas as a backstop option if domestic gas finds fall short of future growth in demand. This work was recently completed, and indicates that LNG is likely to be an attractive backstop option.

Rising focus on fuel constraints also prompted a significant change in focus by Contact from swift expansion to consolidation of its retail customer base.

After four years of strong growth, total electricity customer numbers fell slightly from their peak of 522,000 at the end of the previous financial year to 508,000 as at 30 September 2004. This reflected retail competition and the change in focus to retention and increased volume sales to existing customers.

Total retail sales rose from 7,042 GWh in the previous year to 7,415 GWh in the year under review.

In part to counter customer losses, Contact began rolling out service to the areas of New Zealand that it did not already cover and undertook targeted customer win back and acquisition programmes.

“We also continued to review retail electricity tariffs to achieve pricing levels that reflect rising medium term electricity costs, and will allow Contact and other energy sector players to invest in new sources of fuel and technologies to meet future electricity demand.

“While some further tariff increases will be necessary, they are now within striking distance of the level needed to underpin the development of new generation plant and fuel sources.”

“Indeed, some of that development has already begun in expectation that prices will continue to adjust to economic levels.

“In line with Contact’s established accounting policy, the company has reviewed the value of its generation assets. Following independent advice, the Board of Contact has resolved to increase the value of these assets to $3,767 million as at 30 September 2004, an increase in the revaluation reserve of $550 million.”

Mr Barrett said the Contact board had declared a fully imputed final dividend of 8 cents per share. This takes distributions for the year to a total of 25 cents per share, fully imputed, compared with 23 cents per share for the previous year.

Shareholders who are currently participants in Contact's share top up plan will receive additional shares in lieu of the dividend.

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