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Contact balances differing assets

By David McEwen

Friday 31st January 2003

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Until the winter of 2001, nobody thought demand for electricity could outstrip supply in New Zealand.

The energy industry assumed it had an overcapacity of generation and so demand for electricity could be met under any conditions. But in just a few dry months during 2001, the lakes emptied and the wholesale price of electricity rocketed, resulting in huge losses for some energy retailers.

This focused a lot of attention on Contact Energy, which, perversely, made buckets of money when the hydro lakes dried up and power demand exceeded supply. That is because of its mix of hydro, geothermal and thermal generating plant, which enabled Contact to pump out power and sell it at the high prevailing prices.

Conversely, Contact's generation assets can be expected to perform badly in warm, wet years when wholesale electricity prices and demand are low. In the past year, however, Contact has begun addressing that problem by building up its base of retail clients, which now exceed 60,000, making it New Zealand's largest energy retailer. The retail business adds stable earnings to its fluctuating generation profits.

The impact of this strategy, Contact management says in the latest annual report, is evident in its net surplus of $107 million last year, a mere 18% below the $131 million of the previous year. This came "despite wholesale electricity prices that were on average 50% lower than the previous year."

The result was achieved on total revenue of $1.06 billion ($1.1 billion). Operating costs of $838.2 million were static, reflecting lower gas purchase and transmission costs, offset by higher electricity transmission and distribution costs associated with the growth in retail customer load.

"The balance that now exists between our retail and generation assets is a turning point in Contact's growth story," chief executive Stephen Barrett says.

But there is a troubling chapter to this story, which sees Contact, and the country, running short of gas to fuel its generators once the Maui fields run dry.

News of Maui's shortened life has resulted in a change of tack at Contact, which announced in May last year it would delay building a new 400MW gas-fired power station at Otahuhu because of uncertainty about new gas supplies.

"The company has instead focused on the incremental and fuel-assured additions to its generation portfolio," Mr Barrett says.

This has taken the company as far afield as Australia, where it is pursuing investments in power companies deserted by foreign investors.

"The Australian industry," he notes, "is in an unprecedented state of flux, with significant opportunities created in recent months by the financial difficulties of some foreign investors."

However, finding cheap assets is proving harder than Contact expected and a bid for the Australian assets of Minneapolis-based NRG Energy was recently rebuffed at the price Contact offered.

Contact is not a company with great growth characteristics but it has an earnings and dividend track record that attracts conservative investors.

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