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Contact posts flat underlying earnings; tariffs

Tuesday 23rd February 2010

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Contact Energy posted little-changed underlying earnings for the first-half, missing some analyst estimates.

Earnings were $80.1 million in the six months ended December 31, from $79.9 million a year earlier, the company said in a statement today. Net income soared 252% to $88.1 million, reflecting extreme weather conditions and constraints on the Cook Strait cable in the year-earlier period.

While Contact had suffered none of the extreme weather which knocked $40 million off the bottom line in the first half of the previous year, higher gas and transmission costs, low wholesale electricity prices and substantial customer retention and bad debt write-off costs hampered performance, managing director David Baldwin said today.

With a "major step up" in one of its gas contracts in the six months ahead, Baldwin said full-year earnings would be dictated by various factors, including whether retail prices rose to reflect the costs of electricity production.

Underlying earnings per share of 13.54 cents were down 2.2%, while the net result before adjustments for one-off items and adjustments for changes in the fair value of financial instruments was well shy of broker Forsyth Barr's pick of a 27% rise in net earnings in the first half to more than $100 million.

The company will pay an unchanged interim of 11 cents per share, partially imputed under the company's share buyback scheme, payable on March 30.

"The costs of generating electricity increased 9% in the six months to Dec. 31, primarily due to increases in the thermal costs," said Baldwin. "Transmission and distribution costs were also 5% higher than last year, and customer retention costs and debt write-offs were up 76%."

As a result, "neither wholesale nor retail prices had reflected the true costs of energy," said Baldwin. "While we have seen some encouraging trends in wholesale priceds since December 2009, we are still yet to see the true costs of electricity reflected in retail tariffs, which is a concern."

Wholesale electricity prices averaged $42 per MWh in the half under review, compared with $72 per MWh in the previous corresponding period.

Contact's retail margins were "unsustainably low" and electricity prices in the first half had not covered the costs of having gas-fired capacity available to run.  Unless prices rose, Contact would struggle to justify investment in the company's next planned power station, the 220 Megawatt Te Mihi geothermal plant to replace the ageing, 168MW Wairakei station.

"The company is looking to commit to a final investment decision (on Te Mihi) once it has confidence in improving market conditions," he said.

Baldwin also took a veiled swipe at retail electricity prices offered by its state-owned competitors, saying "we must have confidence that there is commercial competition across the sector and that prices support commercial investment decisions," said Baldwin.

He was reluctant to give earnings guidance, saying hydrology, wholesale prices and the extent to which higher operating costs can be reflected in retail prices will determine the outcome.

The result was achieved on a 13.6% drop in operating revenue to $1.072 billion, largely reflecting low wholesale electricity prices during the period, and flat earnings of $225 million before interest, tax, depreciation, amortisation, financial instruments and other financial instruments.

Operating expenses were down 17% to $846.9 million, largely reflecting a 46% drop in electricity purchase costs, although labour costs and other operating expenses were 6% lower at $176.8 million for the period.

Meanwhile, Contact is adding Whaimutu Dewes, a former Fletcher Challenge executive and current director of Central North Island Iwi Holdings as a further independent director to the board, to accompany Sue Sheldon, John Milne, and deputy chairman Phil Pryke. 

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