Solid Result Provides Platform For Investment

17 August 2005

Solid Result Provides Platform For Long Term Investment

Contact Energy Ltd today announced a net surplus of $138.2 million for the nine month period to 30 June 2005, $37.6 million above the same period last financial year. The nine month result reflects the change in the company’s balance date from 30 September to 30 June. Growth for the period shows solid business performance and a reduction in the effective tax rate.

Earnings Before Interest, Depreciation and Amortisation (EBITDA) provide a clearer view of the Company’s underlying performance and were $363.5 million, 14% above the $318.3 million earned over the same nine month period during the previous financial year.

The effective tax rate for Contact for the nine month period was 33% compared to 40% for the same period last financial year reflecting the tax treatment in the current period of major costs associated with plant outages and the reversal of some provisioning for income tax in the previous year.

Contact’s Chief Executive Steve Barrett said the underlying result reflected a consolidation of the company’s retail position within an environment where tariff levels have increased to reflect the tightening supply/demand balance. Higher wholesale electricity prices and proceeds from gas sales also made an important contribution.

“The result reflects the benefits of Contact Energy’s integrated energy business, with a solid performance across the portfolio” said Mr Barrett.

Contact has consolidated its electricity retail position, holding the customer gains it made in the quarter ended 31 March 2005 and had a total of 513,000 electricity customers as at 30 June 2005. Total gas customers were 2,000 lower at 85,000 at 30 June 2005 compared to 87,000 at 31 March 2005.

“Consolidation of our electricity retail position reflects increased investment in branding and marketing activity in response to increasingly competitive retail market conditions,” Mr Barrett said. “We will be investing further to ensure the retail business is well positioned for the future.”

Wholesale electricity market conditions were relatively tight this year as hydrology levels were lower than last year. This was reflected in higher average wholesale prices and an 18 % increase in total gas purchased to 42.5PJ, compared with the same period last year.

“The average wholesale electricity price for the nine month period ended 30 June 2005 was $54.72 per MWh, 38% above the same period the year before when wholesale prices were relatively depressed. Contact’s strategy of ensuring an appropriate balance between our generation and retail businesses continues to insulate our customers from the impact of this short-term price volatility.”

Contact’s forward contract and retail sales volume represented 87% of its actual generation output of 7,970GWh.

“While the pace of electricity tariff adjustment has slowed significantly, electricity prices to retail customers continue to reflect the tightening balance of demand and supply, and the underlying cost increases being faced by electricity generators, including higher transmission and regulatory costs. This is an unavoidable fact in the emerging post-Maui energy environment in which all new generation options – be they wind, hydro, geothermal or gas-fired – come at a higher cost than options available in the past.

“Even with this structural change in the New Zealand energy market, electricity prices in this country remain relatively low compared to most other First World countries,” Mr Barrett said. “Crucially, this new pricing environment is providing the signals to generators to invest in generation that was not economic at former pricing levels. This is an inevitable part of helping to ensure security of electricity supply.”

Contact is also investing in a number of energy efficiency and conservation related initiatives to assist customers in this new environment. These include the Energy Challenger initiative to help Small and Medium Enterprises assess their energy management, and the Healthy Homes campaign to help residential customers make best use of the energy they buy, and promote the links between efficient energy use and family health.

Operating expenses (excluding provisions, depreciation and amortisation) for the nine months ended 30 June 2005 were 8% higher at $634.8 million. The primary driver of this was increased costs associated with gas purchases and transmission.

GOOD PROGRESS ON KEY STRATEGIC ISSUES – FOCUS ON NEW THERMAL GENERATION

Mr Barrett was also pleased with the company’s progress on key strategic issues across the business.

Contact continues to see gas fired thermal capacity as a key contributor to New Zealand’s growing energy needs, particularly to provide balance and back-up as more renewable generation is added to the national electricity system.

“Contact maintains its long-standing position that a mix of the available generation options is the answer to New Zealand’s future energy requirements.

“Renewable generation sources such as wind and water are inherently less flexible than thermal generation sources because of their dependence on weather conditions. Gas-fired thermal generation will continue to be necessary to provide much-needed flexibility and electricity system security.

Key to New Zealand’s gas-fired generation is the development of the Otahuhu-C power station. Otahuhu-C would be a companion plant to the 380MW Otahuhu-B station, and is a site for which Contact already holds resource consents.

“The development of Otahuhu-C is the best major gas fired addition to New Zealand’s generation fleet. Our focus to date has been on growing confidence in our ability to secure new fuel sources.

“Our attention now turns to the role this plant will have in the fast-changing generation market. We are now at the stage of examining how to optimise the plant configuration to best complement the other generation investments that are occurring.” Mr Barrett said.

“The company has also made steady progress on its programme of capacity expansion. Contact has already completed or commissioned 65 megawatts out of the 100 megawatts capacity development outlined at the Annual Meeting in February.

“This is consistent with the wide range of plant upgrades and investment in new plant now occurring across the electricity industry in response to supply constraints and pricing that allows new, costlier forms of generation to be brought to market.” Mr Barrett said the Contact board had declared a fully imputed final dividend of 10 cents per share. This takes distributions for the nine month period to a total of 18 cents per share, fully imputed.

Dividends will be used to purchase shares on market for those shareholders who are currently participants in Contact's share top up plan.

The declaration of this dividend follows a review of dividend policy by the Board. The Company’s policy is to maintain or grow dividends on a year to year basis whilst targeting an average net surplus payout of approximately 80% over time.

Going forward, the Board will consider the split between the interim and final dividend to reflect the higher proportion of earnings in the first part of the financial year.

Contact has elected early adoption of the New Zealand equivalents to International Financial Reporting Standards. Due to the higher level of complexity under the new accounting standards, the Board has determined that the significant additional work and cost associated with quarterly reporting is no longer warranted. As a result, the company has also elected to move to twice yearly financial reporting. The first interim financial report under IFRS will therefore be for the half year ended 30 December 2005. However, the company will continue to supply a suite of operational data on a quarterly basis.

ENDS

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