Contact - Unaudited Financial Results Discussion
CONTACT ENERGY LIMITED
Management Discussion of Unaudited
for the Six Months Ended March 31, 2005
Summary of Financial Result
The net surplus for the six months ended 31 March 2005 was $89.2 million, a solid increase on the $55.3 million net surplus recorded for the corresponding period last year. Earnings before interest, tax, depreciation and amortisation (EBITDA) for the six month period were $239.9 million, an increase of 26% on the $190.2 million for the six month period ended 31 March 2004. Overall, the result showed both a continuation of the benefits being derived from Contact’s integrated business model and the impact of tariff levels moving to reflect the tightening supply/demand balance and increasing fuel prices. The change in effective tax rate from 40% in the six month period ended 31 March 2004 to 34% in the current six month period has also had a significant impact.
In contrast with the pattern in recent quarters, earnings growth was supported by an increase in average electricity wholesale prices, compared with the same period last year, causing retail electricity sales (net of energy purchases) to remain almost static and revenue from sales to the wholesale market to increase. Operational flexibility allowed Contact to maximise use of its generation portfolio during periods when wholesale spot prices were high and to manage risks associated with plant outages. A growth in volumes and margins from the gas wholesale and retailing activities further contributed to the result.
Six months ended 31
March 2005 Six months ended 31 March 2004 Quarter ended 31
March 2005 Quarter ended 31 March 2004
Net surplus $89.2m $55.3m $47.9m $27.8m
Revenue1 $631.3m $567.0m $307.1m $270.3m
Operating expenses 2 $391.4m $376.8m $185.9m $179.0m
EBITDA $239.9m $190.2m $121.2m $91.3m
Shareholders’ equity $3,032.0m3 $2,449.8m $3,032.0m3 $2,449.8m
Gearing 25%3 32% 25%3 32%
1. Excludes equity accounted earnings of associates.
2. Excludes provisions, depreciation and amortisation.
3. Shareholders equity includes a $550.3 million net increase in the Asset Revaluation Reserve as at 30 September 2004.
Revenue for the six months to 31 March 2005 was $631.3 million, an increase of 11% on the corresponding period last year. Much of this increase was concentrated in the second quarter, where relatively high average prices on the electricity spot market boosted wholesale electricity revenues to $145.0 million. This represented a 60% gain on the $90.8 million wholesale electricity revenues in the same quarter a year earlier, when wholesale prices were relatively depressed, and was achieved despite a major planned maintenance outage at the TCC station. Increased generation, particularly from New Plymouth, enabled trading risks to be managed and revenues to increase.
Retail electricity sales (net of energy costs) were 3% higher in the first six months of the current financial year, at $289.6 million. This was achieved in spite of a fall of 14% in the second quarter compared with the previous corresponding quarter, caused by higher spot prices. The impact of tariff adjustments announced over the last year supported gross electricity retail sales that grew by 5% compared with the previous corresponding period. Contributing to the second quarter result was ongoing success in electricity retail customer acquisition strategies, with total electricity customer numbers returning to 513,000, an increase of 4,000 on the previous quarter, and returning total customers to the same level as a year previously.
Total gas revenues also increased to $77.8 million from $61.5 million reflecting higher wholesale customer sales and mass market tariff adjustments to reflect rising gas prices.
Operating expenses (excluding provisions, depreciation and amortisation) for the six months were up 4%, at $391.4 million, compared with $376.8 million for the corresponding period in the previous financial year.
Wholesale and Retail Electricity
months ended 31 March 2005 Six months ended 31 March
2004 Quarter ended 31 March 2005 Quarter ended 31 March
Wholesale electricity revenue 1 $252.7m $209.2m $145.0m $90.7m
Retail electricity sales (gross) 2 $463.8m $440.8m $223.0m $207.3m
Retail electricity sales (net of energy cost) 3 $289.6m $282.3m $120.8m $141.0m
Total electricity revenue $542.3m $491.5m $265.8m $231.7m
Transmission and distribution costs $180.9m $177.4m $86.3m $81.9m
Average Wholesale Electricity Price ($/MWh) $46.20 $40.40 $55.57 $36.07
Gas used in internal generation 17.7PJ 16.2PJ 9.0PJ 8.0PJ
Thermal generation (GWh) 2,065 1,906 1,013 925
Geothermal generation (GWh) 867 857 426 414
Hydro generation (GWh) 2,122 2,265 1,067 1,120
Total generation (GWh) 5,054 5,028 2,506 2,459
Retail sales (GWh) 3,389 3,610 1,627 1,671
1. Includes contracts for differences, ancillary services constrained on payments and share of revenue from the ValCon joint venture.
2. Before cost of electricity purchases, transmission, distribution and retail operations.
3. Before cost of transmission, distribution and retail operations.
The six months to 31 March 2005 was characterised by higher average wholesale electricity prices than in the same period a year earlier, when high mean levels of hydro storage depressed prices. The lift in wholesale prices was most marked in the second quarter of the current financial year where average generation revenue was $55.57 per MWh, a 54% increase on the second quarter of the previous year.
While total hydro generation in both quarters of the current financial year was lower than in the comparable periods a year earlier, overall generation levels were flat. Increased running of the thermal portfolio and optimisation of hydro generation allowed relatively high spot electricity wholesale prices to be captured. As a consequence, total wholesale revenues were 21% higher than in the same period last year, at $252.7 million. The flexibility of the generation portfolio allowed the five week TCC planned major maintenance outage to be effectively managed through greater utilisation at other stations, particularly New Plymouth.
Total retail electricity sales for the six months ended 31 March 2005 were 3,389 GWh, a 6% reduction compared with 3,610 GWh in the previous corresponding period. The reduction in volume reflected a combination of lower average customer numbers during the period and a reduction in consumption per customer. These factors were reflected in the average hedge levels (by volume) over the six months under review of 89%, compared with 93% in the first six months of the last financial year, and consistent with expectations outlined at the first quarter announcement. Hedge levels over the remainder of the financial year ending 30 June 2005 are anticipated to be around 80% reflecting relatively high generation expectations. However, actual hedge levels will depend on hydrology and actual plant operations in response to market conditions.
Gross retail electricity sales for the six months to 31 March 2005 increased by 5% to $463.8 million, compared with $440.8 million for the previous corresponding period. The increase in retail electricity sales reflects the impact of tariff adjustments as a result of tightening supply and increasing cost of fuel. As noted above, retail electricity sales (net of energy costs) grew by only 3% over the six months to $289.6 million, reflecting high average wholesale prices.
As at 31 March 2005, Contact had approximately 513,000 electricity customers, compared with approximately 509,000 at 31 December 2004. Contact has now increased customer numbers in both quarters of the current financial year, which are the first gains in electricity customer numbers since the September 2003 quarter. This returns Contact to electricity customer numbers seen in March 2004, and reflects customer acquisition and win back campaigns, and the rollout of retail offerings to all areas of New Zealand, with the remaining exception of the King Country network area.
Wholesale and Retail Gas
months ended March 31 2005 Six months ended March 31
2004 Quarter ended March 31 2005 Quarter ended March 31
Wholesale gas revenue $17.9m $11.1m $8.9m $6.7m
Retail gas revenue $59.9m $50.4m $27.2m $22.9m
Total gas revenue $77.8m $61.5m $36.1m $29.6m
Costs of sale (purchase and transmission) 1 $113.1m $106.7m $52.2m $51.5m
Wholesale sales 3.8PJ 2.3PJ 1.9PJ 1.4PJ
Internal gas use
Total gas sales and use 25.3PJ 22.7PJ 12.5PJ 11.3PJ
1. this represents the total cost of gas including gas used for internal generation
Contact’s gas use within its thermal generation portfolio rose in both the quarters under review, as higher wholesale prices and lower hydro generation levels provided opportunities for increased thermal generation.
Wholesale gas sales to external customers rose by 61% to 3.8PJ over the six months to March 31 2005, resulting in revenue rising to $17.9 million, a 61% increase over the same six month period last year. This increase was due to sales to Genesis and small opportunistic sales to other wholesale customers.
Retail gas revenue for the six months ending 31 March 2005 was $59.9 million, compared with $50.4 million for the same period the previous year, while total retail gas volumes fell by 10% to 3.8PJ. Gas customer numbers have stabilised at 87,000 over the quarter, however remain some 8,000 below the customer numbers at the same time last year.
The total amount of gas both sold to external parties and used within Contact’s thermal power stations increased to 25.3 PJ in the six months to 31 March 2005, compared with 22.7 PJ for the same period a year earlier. This increase resulted in additional gas purchase and transmission costs, which totalled $113.1 million in the six months under review. The reduction in unit costs of gas sales in the quarter ending 31 March 2005 reflected the change in mix of gas sales from retail to wholesale and generation, and the resulting reduction in transmission charges.
Contact’s operating expenses (excluding provisions, depreciation and amortisation) for the six months ended 31 March 2005 were $391.4 million compared with $376.8 million in the corresponding period last year. Excluding fuel, transmission and distribution costs, other expenses were $97.5 million for the six months ending 31 March 2005 compared with $92.7 million in the previous corresponding period. The majority of this change related to the retail business and branding activities.
Depreciation and amortisation for the six months ended 31 March 2005 rose 11% to $69.5 million, compared with was $62.8 million for the same period in the previous financial year. The increase in depreciation and amortisation primarily reflects an increase in depreciation due to the revaluation of fixed assets as at 30 September 2004. This was discussed in more detail in the 2004 annual report.
Net interest expense for the period of $39.3 million was down from $43.5 million in the same period a year earlier, reflecting a decline in borrowing between the periods. Borrowings and payables decreased from $1,129.6 million as at 31 March 2004 to $1,060.8 million as at 31 March 2005.
The current period includes a reduction in provisions of $3.2 million compared to a reduction in the comparable period last year of $7.6 million. These relate to a range of commercial matters.
Tax provided for the six months to 31 March 2005 was $46.0 million, compared with $36.5 million for the corresponding period the year before. This represents an effective tax rate on reported pre-tax surplus for the period of 34% compared to 40% in the previous corresponding period. The effective tax rate reflects the impact in the quarter ended 31 March 2005 of the tax treatment of the major costs associated with the TCC plant outage, together with adjustments for income tax over-provided in the prior year. It is anticipated that the effective tax rate for the 9 months ending 30 June 2005 will be comparable to the current period.
Capital Expenditure and Commitments
Capital expenditure for the six months to 31 March 2005 was $41.8 million, compared with $30.3 million for the corresponding period a year earlier. Capital commitments as at 31 March 2005 were $189.0 million, an increase of 118% on the $86.5 million as at 31 March 2004.
Short term deposits, net of overdraft and restricted cash, as at 31 March 2005 were $50.6 million, compared to $8.5 million as at 31 March 2004. It is anticipated that cash available will be utilised in retiring borrowings falling due within the next quarter and in meeting tax and dividend requirements.
The Board has resolved to pay an 8 cent per share fully imputed interim dividend for the 6 month period ended 31 March 2005. This dividend will be paid on 27 May 2005.
announced, the 2004/05 financial year will be for the period
of nine months through to 30 June 2005.
Future dividend payment dates will change to reflect the June year end and it is therefore anticipated that there will be a September dividend payment to reflect the 9 months ending June 2005. Subsequent to this, payment dates will move to the new annual cycle being: Interim dividend (for the six month financial period ending December) expected to be paid in March; and Final dividend (for the financial year ending June) in September.
As was indicated at the AGM in February, the level of dividends and the Dividend Policy is currently under review.
Approved for release by the Board of Contact Energy Limited