Contact Energy half year results:
Revenue - $1.2bn up 11pc
Profit - $25.1m down 80pc
Dividend - new 'profit distribution scheme':
equivalent of 11 cents per share
KEY POINTS:
Contact Energy has reported a 31 per cent fall in half-year underlying earnings after tax to $79.9 million, as the company was battered by winter drought, a summer deluge, and transmission constraints.
The underlying figure for the six months to the end of December excludes significant one-off items and a non-cash change in fair value of financial instruments net of tax.
Profit for the period was down 79 per cent to $25.1m, while operating revenue rose 10.9 per cent to $1.24 billion.
What could be evidence of a customer backlash against Contact's decision last year to hike directors' fees while also increasing power prices can be seen in the latest results.
Contact says it lost 20,000 electricity customers during the six months between 30 June 2008 and 31 December.
Chief executive David Baldwin said today that at the heart of the financial performance was the fact that the mix of generation which had historically largely insulated Contact's earnings from weather driven volatility was stymied.
That was due to limitations arising from transmission constraints, primarily due to the loss of pole one of the HVDC inter-island link.
For example, in the first quarter of the financial year, the South Island had one of the worst droughts in recorded history, Mr Baldwin said.
During that period Contact's South Island generation was limited to about 80 per cent of the company's South Island demand.
Contact was required to buy the extra electricity from the wholesale market at an average price that was around 250 per cent of the average purchase price during the prior corresponding period - when two poles were in operation - mainly due to transmission constraints.
But the average price Contact received for its North Island generation in the first quarter of the current financial year was just 65 per cent of the cost of South Island electricity purchases, said Baldwin.
Towards the end of 2008, the winter drought conditions had reversed with some of the highest recorded inflows into the South Island's hydro lakes.
In addition to the deluge, the removal of around 180 megawatts of Southland electricity demand following the unexpected closure of an aluminium production line at the Tiwai Point aluminium smelter in November further limited generation from Contact's Clutha power stations.
As a consequence of transmission constraints in the lower South Island, and an excess of energy, Contact and other South Island hydro generators were forced to spill significant volumes of water during summer.
Contact also said it had been developing various alternatives aimed at increasing its available funding, including arranging new bank debt facilities, extending existing facilities and preparing to raise capital in the domestic bond market.
It had registered a prospectus today with the Companies Office relating to a New Zealand retail bond offer, expected to open on March 2.
In addition to increasing available liquidity, the company had also been considering other means of strengthening financial capacity, and intended to introduce a profit distribution plan, effective from and including the half year ended December 31, 2008.
Under the plan, all shareholders would receive distributions in the form of non-taxable bonus share issues, with the option to have those shares, or a portion of them, bought back by Contact for cash.
The plan was expected to retain cash within the company to support the execution of Contact's strategic initiatives, while also allowing shareholders who wished to receive cash the ability to do so.
For the purpose of the interim distribution for the current financial year, shareholders' entitlements would be set on the basis of the equivalent of 11 cents per share.
Baldwin said there was no certainty as to the timing of the return of the Tiwai demand, but Transpower was implementing a plan expected to increase the transmission capacity out of Southland/Otago and therefore largely alleviate the lower South Island transmission constraint.
"What the six-month period reinforces is how dependent New Zealand is on a robust and reliable transmission grid," he said.
New Zealand had a heavy reliance on hydro generation and the potential requirement for increasing quantities of wind generation, while major load centres were geographically isolated from key generation sources.
A modern transmission grid that accommodated changing electricity generation and demand patterns was critical to the efficient operation of the electricity market, Baldwin said.
"We are dealing with the impacts of historic underinvestment in the country's transmission network."
Contact was now building the first phase of the Tauhara geothermal project near Taupo, and a 200 megawatt gas-fired fast-start peaking power station at Stratford, Taranaki.
In December, Contact started injecting natural gas into New Zealand's first underground natural gas storage facility near Stratford.
"These three projects represent expenditure of more than $500m at precisely the time when the country needs infrastructure investment most," said Baldwin.
The company was making good progress on gaining consents for two North Island wind farm sites, but the current economics of wind would require energy prices to rise before execution of those projects would be justified.
Contact shares closed at $6.05 yesterday, the lowest level during the past year after having been as high as $10.15 in April.
- NZPA
