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Contact: Short Term Supply Outlook Improves

Short Term Supply Outlook Improves – Long Term Challenges Remain

Contact Energy is proposing to increase output from existing power stations by more than 100 Megawatts, in response to market signals that investment in new, more costly sources of electricity is becoming commercially viable, Contact’s chairman, Mr Grant King, said today.

Mr King announced a profit of $41.3 million for the first three months of the current financial year and noted that, given that this was a first quarter result, care should be taken in using it as a basis for projecting the full year performance.

Addressing shareholders at the company’s Annual Meeting in Wellington this morning Mr King said energy market dynamics had changed significantly in the last year, Mr King said.

“New generation proposals are leading to a far more secure outlook for electricity supplies for the next three to four years, when annual demand growth of more than two per cent is forecast.

“This is a direct result of electricity prices rising in response to tightening supply and these prices stimulating investment in new generation from both renewable and thermal sources.

“However, while smaller, near term generation projects are proceeding on normal commercial terms, the most important questions for longer term secure electricity supplies remain unanswered.” These are:

What source of natural gas will replace the Maui field?

A substantial expansion of local exploration is required over the next three to four years in order to provide certainty about domestic gas supplies into the future. That is why Contact is exploring the backstop option of importing Liquefied Natural Gas, and has taken a limited exploration position in its own right. Contact will also consider direct investment in domestic gas production should this be necessary to secure its future.

Will the national grid be upgraded quickly enough to ensure electricity system security?

Concerns are growing that lack of investment is making the national electricity transmission system an increasing risk to security of supply. It is important that the Government take steps quickly to encourage an effective solution to this issue.

Will there be a stable regulatory regime?

An environment in which all players are treated equally and fairly is essential before any commercial investor will commit the very significant investments required for long-lived plant and fuel contracts for a major new power station. Continuing the efforts to develop resource consent processes capable of appropriately balancing competing interests remains particularly important.

In the meantime, Contact has identified a range of projects, some already in train, which will increase output across Contact’s generation fleet by more than 100MW, mainly from renewable energy sources, requiring capital expenditure of more than $130 million.

They include:

increasing geothermal production to full capacity at the Wairakei plant and plans to boost production from the Poihipi station under existing resource consents, adding approximately 35MW; plans for new drilling to increase production from the Ohaaki geothermal station by 15 to 20MW. Like Poihipi, Ohaaki has never run at full capacity owing to steamfield deliverability constraints; a 15MW binary plant upgrade to the Wairakei station, already under construction and due for commissioning in June this year; plans for 8 to 16MW of new generation by installing turbines at the existing flow-control structure known as Hawea Gates, at the top of Contact’s Clutha hydro system; and upgrades to the Otahuhu-B and Taranaki Combined Cycle gas-fired plant to yield approximately 24MW of new capacity at peak load, and improve fuel-burning efficiency.

However, Contact’s most significant future generation options are the new, large scale combined cycle gas turbine (CCGT) plants that could be built on sites at Otahuhu and Stratford, and for which the company already holds resource consents.

Each of these plants is equivalent to between two and three years’ electricity demand growth. If gas sources were identified and regulatory and transmission concerns allayed, Contact could realistically complete one of these options by the end of the decade.

“The company is well-placed to pursue investment opportunities as they arise,” said Mr King. “This is particularly important at a time when New Zealand is facing substantial challenges in meeting its fuel and generation needs over the next decade.

“With the forthcoming change to a June financial year, the Board will shortly consider new dividend payment date options bearing in mind the aim to maintain fully imputed dividends.

“The board has no current intention for a capital return to shareholders,” said Mr King.

Solid Result for First Three Months

Commenting on the result for the three months to December 31, 2004, Contact chief executive Steve Barrett said post-tax earnings of $41.3 million represented a solid increase on the $27.5 million reported for the same period last year and further demonstrated the fundamental strength of Contact’s integrated energy business model.

Earnings before tax, interest, depreciation and amortisation rose 20 per cent to $118.7 million, compared with $98.9 million in the three months to December 31, 2003.

“Contact continues to deliver strong earnings to shareholders and prices to customers that reflect longer term price trends rather than short term wholesale market price fluctuations,” said Mr Barrett. Increased wholesale gas sales also assisted the result.

“I would note that this quarter’s result was boosted by prior period adjustments to electricity purchase and the release of a provision, following settlement of a dispute.

“We continued to experience significant competition for retail customers in some areas, and have mounted new programmes focused on retaining existing and winning new customers, particularly in new areas of service.”

As of today, Contact is able to offer service to 99.5 per cent of all homes and businesses in New Zealand – with the remaining exception of the King Country.

Contact gained a net 1000 new customers in the three months to December 2004 – the first such gain since the December 2003 quarter – with total electricity customers numbering 509,000 at December 31, 2004. This trend has continued into the current quarter.

“Retail competition is alive and well, and we look forward to more of it. “

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