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Contact sees 2014 cash-flow boost as projects put on ice

Tuesday 1st May 2012

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Contact Energy shareholders can expect a substantial boost to cash flow from 2014 onwards as the company completes geothermal projects, winds back major capital spending and seeks to sell some of its $100 million of development land holdings.

The company's decision to all but abandon long-held hydro-electricity developments on the Clutha River was part of a wider drive to strip capital project costs out of the business for the time being, chief executive Dennis Barnes told BusinessDesk.

Contact cited weak national electricity demand, the challenge of gaining resource consents and better options elsewhere for putting on ice hydro-electricity projects that could potentially double its output from the Clutha River, and beginning a process of selling land holdings in the area.

The Clutha options were not commercially viable "in the foreseeable future."

Contact already has 752 MW of installed capacity at the Clyde and Roxburgh hydro stations on the Clutha, and inherited options for developments at Tuapeka Mouth, Beaumont, Queensberry, and Luggate totalling 763MW when it was corporatised in the mid-1990's.

Since then, the company has periodically examined its Clutha options, while fending off criticism from local communities that a lack of clarity about its plans was impeding economic development.

A review of calculations last made in 2008 had shown roading infrastructure costs would be far higher than originally estimated, while the size of each project was too large to consider building for the foreseeable future.

Asked whether the decision signalled the end of "big hydro" in New Zealand, Barnes said: "I don't believe so, but I can't answer the question for 15 to 20 years."

It would be 2025 "at the earliest" before any of the Clutha options made sense to re-examine.

"We will stop spending money on it," he said. "Project development pipelines need to show a return and we needed to take the community to an honest point. We decided we wouldn't do any work for seven, eight or 10 years, and it was fair to tell them that."

Contact also had more attractive geothermal and wind development options than any of its large hydro prospects, although it has extended for one year its resource consents on a small hydro scheme attached to the control gates on Lake Hawea, the only controlled storage lake on the Clutha system.

Barnes said one of his chief tasks in the last year had been to strip out capital development costs from the business, and to start implementing a more active land management policy to rationalise the company's approximately $100 million portfolio of development and other land holdings around the country.

The Clutha decision is still a step away from complete abandonment, with Contact proposing in some cases to sell land with encumbrances either to allow a future hydro development or preventing sale to a competing hydro developer.

"A dammed river is a very significant energy resource and will have a value over a timeframe," he said.

The company is taking a similar approach to land purchased for its mega-wind farm development in the North Island, on the coast north of Raglan, selling property with a future development right attached.

Contact owned only about 20 percent of the land it required to build any of the proposed Clutha dams. No decision had yet been made on exactly how much of its land holdings would be marked for disposal, Barnes said.

He conceded also that resource consents in the lower South Island were likely to take longer and be more costly to obtain than in some other parts of the country.

"Our view is that if you take your time and are transparent, they are consent-able," he said. "But in that part of the country, the community conversations take longer and cost more. It's different from Wairakei, where the community embraces geothermal development."

Barnes said that once the 166MW Te Mihi geothermal plant was completed in 2013 that would bring to an end four years in which Contact had committed an average of $500 million of capital annually.

"It will drop to $100 million or less. The balance goes to cash flow. You will see that very strongly in 2014."

Contact shares traded unchanged at $4.85 on the NZX and have declined about 8 percent this year.

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