Flexible generation helps deliver secure supply; 14 per cent increase in earnings
The flexibility of Contact Energy’s natural gas-fired power stations helped ensure a secure supply of electricity to New
Zealand during an exceptionally dry year, and delivered a solid annual result for the company.
Contact Chief Executive, David Baldwin, said the company’s gas-fired plant was able to increase generation by 41 per
cent in order to cover a significant shortfall in available hydro generation; driven by the driest year in the South
Island in 29 years, coupled with a cold winter.
Mr Baldwin said the company’s generation assets helped deliver earnings before net interest, tax, depreciation,
amortisation and financial instruments (EBITDAF) of $557.0 million for the 12 months to 30 June 2006, up 14 per cent on
the 12 month period ending June 2005. EBITDAF is the closest indicator of the company’s underlying financial
performance.
Contact recorded a $280.9 million full year profit for the period, which included a one-off gain of $33.4 million from
the sale of the company’s stake in the Valley Power Peaking Plant in Australia, and an $8.7 million pre-tax gain in the
change in fair value of financial instruments.
Adjusted for the Valley Power gain and the change in fair value of financial instruments, the result gives an underlying
return on investors’ equity of 9.5 per cent, or a return on assets of 5.3 per cent from an asset base of $4.580 billion.
Contact declared a fully imputed final dividend of 16 cents per share, payable on 21 September, taking total fully
imputed dividends to 26 cents per share for the full financial year.
Mr Baldwin said the solid annual result highlighted the importance of gas-fired power stations in backing up New
Zealand’s hydro-based generation system, and ensuring a secure supply of electricity to New Zealand consumers,
particularly during dry and cold years.
Contact’s hydro generation for the 12 months ended 30 June 2006 was down 23 per cent on the previous year, while
generation from the company’s thermal plants, fired by flexible Maui 367 gas, increased to fill the gap and meet demand.
As a result, Contact’s total generation was up 10 per cent on the previous 12 months.
Mr Baldwin said low hydro storage levels were reflected in wholesale electricity prices 91 per cent higher than for the
12 months ended 30 June 2005. However, while Contact received higher than average wholesale prices for the electricity
it generated, the company’s retail business was negatively impacted by electricity purchase prices 100 per cent higher
than in the 12 months ended 30 June 2005.
“Contact’s 2006 annual result, and the market conditions over the 12 months ended 30 June 2006, also demonstrate the
importance of the integrated generation and retail business model,” he said.
“While this was a very good result for the company, 2006 was the last year during which the vast majority of our
contracted gas position will be sourced from relatively cheap and flexible Maui gas. The new domestic gas supply
environment is very different.”
Mr Baldwin said Contact, with joint venture partner Genesis Energy, was continuing to develop a backstop option of
importing liquefied natural gas (LNG), in case it might be required to bridge a possible future fuel shortfall. He said
the two companies expected to announce a preferred site for a possible import terminal soon.
“LNG isn’t anybody’s preferred option, but it must be considered alongside all others,” said Mr Baldwin. “If New Zealand
was unable to source sufficient new natural gas, it is likely that future energy shortfalls would be met using coal,
which produces more than twice the level of carbon dioxide emissions.
“It is a commercially prudent risk management strategy.”
Over the 12 months ended 30 June 2006, Contact’s thermal enhancement project increased generation capacity from the
company’s Otahuhu B combined cycle gas turbine plant by 15 megawatts, and from its Te Rapa cogeneration plant by 2.5
megawatts. This follows a 10 megawatt increase in capacity from Contact’s Taranaki Combined Cycle plant in April 2005.
Contact also delivered 20 megawatts of geothermal heat through its completion of a direct heat project at Tenon’s
Taupo-based wood processing plant.
Contact is currently looking at building upon its established renewable generation base, which currently makes up half
of the company’s portfolio. The company is now actively investigating new generation options in geothermal, hydro and
wind, as well as continuing to develop plans for additional combined cycle gas capacity.
Contact has recently signed a memorandum of understanding with the renewable energy group at Investec Bank (Australia)
Ltd, the Australian arm of specialist international investment bank, Investec, in order to develop a number of wind
generation options. Contact is also currently consulting around a planned 16 megawatt hydro scheme at Lake Hawea.
In addition, Contact is continuing to invest in its geothermal drilling programme at Taupo to secure fuel for current
and future geothermal power stations.
Mr Baldwin noted that while the alliance with Investec, and other wind developers, establishes wind energy options for
the company, Contact will continue to closely monitor the relative value of all new generation options.
Mr Baldwin said there was strong competition for customers in the electricity market and he was pleased that Contact had
increased its electricity customer base from 514,000 when it was last reported as at 31 March 2006, to 515,000 at 30
June 2006. On average, retail electricity tariffs increased by about four per cent.
Contact’s gas customers decreased from 80,000 as at 31 March 2006, to 79,000 as at 30 June 2006, as the company
continues to re-balance its portfolio to maximise the value of its remaining gas supplies.
Mr Baldwin said the electricity and gas markets in New Zealand continue to be dynamic. “It is important that the wider
competitive and regulatory environments continue to support new investment,” he said.
“While this is a solid result for last year, Contact now needs to face some challenging issues, particularly in the area
of fuel costs, that are central to the underlying economic value of the business and which will require careful and
strategic management into the medium term.
“Contact has a depth of management which positions the company well to deal with these challenges,” said Mr Baldwin.
ends