Contact Energy looks to new gas peakers as profit falls

Friday 20th August 2010

Contact Energy is looking to build more fast-start, gas-fired power stations to cope with increasing volatility in wholesale power prices, after a year of wet weather depressed earnings by 6%.

The country’s largest NZX-listed energy utility reported underlying earnings of $150 million in the year to June 30, in line with expectations, and reflecting a combination of intense retail competition, lower wholesale power prices than the previous year, and the cost of using gas when it was unprofitable to do so. The shares fell 2.1% to $5.70.

Directors announced a reduced final dividend equivalent to 14 cents a share for full year distributions of 25 cents, down 3 cents on the year before, and constituting a 100% payout of underlying earnings per share, which fell 7% to 25 cents per share.

Looking ahead, managing director David Baldwin said it would be “inappropriate to provide specific quantitative guidance” because of a range of market and operating uncertainties, but predicted a “year of two halves” as strategic initiatives to use gas more flexibly would come into play in the second half.

These initiatives are the Ahuroa gas storage facility, which allows Contact to horde gas that it currently has to use or relinquish irrespective of market conditions, and the 200 Megawatt “peaker” station at Stratford, which is being commissioned now, somewhat behind schedule.

“If the Stratford Peakers and the Ahuroa gas storage facilities were fully operational in FY10, EBITDAF would have been up to $60m higher,” the company says in a detailed presentation accompanying the profit announcement.

Contact’s take-or-pay gas obligations will also fall from 52 PetaJoules in calendar 2010 to 40PJ next year, further decreasing its exposure to inflexible gas costs. The underlying unit cost of natural gas rose to a new high of $8.16PJ during the year. However, Contact sees increasing opportunity for gas-fired generation, as wind generation becomes a greater part of the New Zealand electricity system and increases the volatility of day-to-day wholesale prices.

“Contact is currently seeking to consent an option for a new set of 200 MW peakers, Likely to be at an existing thermal site,” the company says, pointing to its Otahuhu and New Plymouth power station sites as available sites. “If the gas reserve position improves, these sites could also be used for combined cycle gas turbine plants.”

In the meantime, however, Contact is moving its Otahuhu-B and Stratford CCGT’s to run as mid-merit plant, reflecting the rising cost of gas and the desire to run these middle-aged, traditionally baseload plants more flexibly. The 2009/10 result was marked by a contraction in retail electricity margins from 5% to 2%, reflecting intense competition, while unit generation costs rose 5%, owing to increased gas costs.

Contributions from wholesale gas and retail gas and LPG sales were up $7 million as gas margins improved during the year.

Capital expenditure was up 5% to $469 million, net debt rose 20% to $1.3 billion, to produce a net debt/equity ratio of 32% (29% in the previous year).

The company spent an additional $6 million removing asbestos from the decommissioned New Plymouth station and meeting retail outsourcing costs. The company also moved to change the way it presents its earnings, abandoning the long-standing practice of presenting Contact’s business model as a vertically integrated hedge in which wholesale and retail segment performances have, in the past, tended to balance one another. Instead, Contact will now report an “electricity” segment – by far the largest part of the business - and an “other” segment.

Electricity segment EBITDAF was down $26 million, or 6%, at $387 million, due to a combination of higher effective gas costs and lower volumes, offset by a higher transfer price and increased renewable generation; higher volumes of spot market sales offset by lower average prices and higher thermal generation costs; and a 51% reduction in retail EBITDAF, caused by $48 million in cost increases exceeding revenue increases of $18 million.

Businesswire.co.nz

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