Contact Energy profit halved

Friday 14th August 2009

Contact Energy's tax-paid profit for the year to June 30 is $117.5 million, exactly half last year's $237.1 million after a shocker year of coinciding negative factors.

The weather, the electricity transmission system, inflexible gas contracts and a customer exodus conspired to drag underlying earnings per share down to 27.35 cents, a drop of 31% from 39.6 cents in the previous year.

The company is holding its interim dividend at 17 cents per share, payable on 22 September, "based on the expectation that the company's financial performance would return to normal trends", but declined to take a view of the future.

"Any recurrence of extreme hydrology, transmission constraints, adverse government policy changes, or a prolonging of the recession could impact Contact's financial performance in the near-to-medium term," said managing director David Baldwin. "To the extent such impacts do occur, the company would be unlikely to maintain distributions at this year's level.

"With the range of market and operating uncertainties, it is not appropriate to provide quantitative guidance for the 2010 full year financial performance at this time."

Baldwin also acknowledged that customers had "perceived a link between price increases and an increase to the fee pool from which directors are paid which was not acceptable to them".

"The result was a loss of customers, a drop in our favourability ratings and a bruise to our brand."

Quarterly operational statistics, released with this morning's result, show that a further 8000 electricity customers left Contact for competitors. At 479,000 customers, Contact has lost just over 50,000 customers - almost 10% of its customer base - from a high point before the tariffs/fees fiasco of 529,000. Gas customer losses were stemmed in the latest quarter, holding steady at 67,000.

Baldwin noted that the current financial year had opened with wholesale prices "currently below both the variable costs of operating thermal plant, and the price required to support investment in new generation".

"Current economic conditions are expected to continue to dampen demand growth and, consequently, tariff movements."

He also held out little prospect of early progress on the proposed Te Mihi and Tauhara geothermal developments because of weaker trading conditions, saying "the sequencing and timing" of both plants was "dependent on a number of factors including electricity demand growth, credit conditions, carbon policies, currency rates and resource consents".

"We currently anticipate both projects will be implemented over time."

The result was achieved on operating revenue of $2.222 billion, down 19.39% on the previous year, yielding earnings before interest, tax, depreciation, financial instruments and other significant items down 21.49% at $445.26 million. Underlying earnings after tax, which exclude the impacts of one-offs and changes in fair value of financial instruments, were down 31% at $160.62 million.

Underlying return on shareholders' equity was also down at 5.5%, compared with 8% in the the 2007/08 financial year.

Last year's performance reflected three key factors, Baldwin said:

A South Island winter drought combined with Cook Strait cable constraints meant Contact had to buy "very high-priced" power to serve its South Island customers for a period;
Then, when the hydro lakes refilled in spring, transmission constraints in the lower South Island prevented Contact despatching as much electricity as it could have, and it had to spill water worth a potential 400 Gigawatt hours of generation;
New gas contracts with stringent take-or-pay conditions came into force, which required gas-fired plant to run when it was uneconomic. This was made worse by the loss of Contact's New Plymouth gas-fired plant, which has closed because asbestos was discovered. Contact's new Ahuroa gas storage facility and Stratford peaking plant would become operational in mid-2010 and alleviate some of this pressure, Baldwin said.

Businesswire.co.nz

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