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Integrated Business Delivers Model 6 Month Result

29 April 2005

Integrated Business Model Delivers Strong Six Month Result

Contact Energy Ltd today announced a net surplus of $89.2 million for the six months to 31 March 2005. Strong wholesale electricity prices, increasing gas sales, flexible use of generation plant and a resumption in customer growth were key factors.

“This is a strong result for Contact, further proving the effectiveness of the integrated energy business model, which seeks to optimise a balance between generating capacity and total retail demand,” said Contact’s chief executive, Steve Barrett.

The reduction in effective tax rate to 34 per cent in the current six month period was also a significant influence. An effective tax rate of 40 per cent served to depress earnings for period ended 31 March 2004.

The result was underpinned by increases in gas and electricity tariffs over the previous 12 months to reflect rising wholesale prices as the balance between energy supply and demand has tightened in both the electricity and gas markets.

“We are competing vigorously for new customers and investing to build our brand, our customer service, and our retail offerings to customers,” said Mr Barrett. “It is particularly pleasing to report the resumption of growth in our electricity customer base. An additional 5000 customers came across to Contact Energy over the six month period, restoring total electricity customers to our March 2004 level of 513,000.”

In the first six months of the current financial year, one of the key factors in earnings growth was the increase in average wholesale prices compared with the same period last year, particularly in the second quarter. Average wholesale prices of $55.57 per MWh in the January to March 2005 period were 54 per cent higher than in the same quarter a year earlier, owing to a number of factors.

“Wholesale prices were relatively depressed because of high inflows to hydro catchments in the first six months of last year. In the current period, factors causing upwards pressure on wholesale prices over the summer months included: strong demand in Auckland; a major, planned maintenance outage at Contact’s Taranaki Combined Cycle plant; and restricted operations at Genesis Energy’s Huntly power station because of water temperatures in the Waikato River.

“Contact was able to make greater use of its hydro generation facilities at times when wholesale spot market prices were higher. We were also able to run units at our New Plymouth station to offset the loss of TCC during its planned outage,” said Mr Barrett.

Total generation for the six months of 5054GWh was up slightly on the same period last year (5028GWh). Total electricity revenue for the period of $542.3 million ($491.5 million in the same period a year earlier) reflected higher wholesale prices in the six months under review, and the flow-through of retail tariff increases announced in the last year.

“Reflecting the tightness in the balance between electricity supply and demand, retail tariffs are now closer to levels needed to support the cost of new generation. This has been a key factor in the announcement of various plant upgrades and new generation investments by Contact and other electricity companies in recent months.”

Meanwhile, Contact’s total gas revenues increased by 27 per cent to $77.8 million, reflecting increased sales to wholesale customers, and retail tariff adjustments to reflect rising gas prices.

Future Fuels Developments

As well as advancing previously announced new generation options and incremental plant upgrades, Contact continued during the latest quarter to investigate its future fuel options, with particular emphasis on accessing new sources of natural gas to run the company’s existing and planned gas-fired power stations in Auckland and Taranaki.

“Work with Genesis Energy is continuing on the potential for importing natural gas into New Zealand. While this is a backstop rather than our preferred future fuel option, we remain confident about the commercial viability of imported natural gas for New Zealand. We are still conducting technical studies and are some months from announcing a preferred site for the required facilities.”

On the domestic gas front, the company is advancing plans for seismic work in its offshore Taranaki petroleum exploration licence area, and assessing opportunities to become involved in exploration with other parties.

“Contact believes there are opportunities for farm-in arrangements that would help to ensure that prospective areas offshore Taranaki are explored in a timely and commercially advantageous fashion,” Mr Barrett said. “It is important to gain the greatest possible certainty about future fuel sources as we prepare to invest in major new gas-fired plant. However, any assessment of, or investment in, farm-in opportunities will be undertaken within appropriate risk parameters.”

Mr Barrett said the market-led parts of the sector are working increasingly well, responding to price signals and appear capable of delivering security of supply as long as they are allowed to continue working.

“While Contact is actively pursuing investment opportunities in generation plant and fuel sources, we continue to be concerned about the regulatory environment. Under-investment in the national transmission system is a particular cause of concern.

“Contact would regard any attempt to compensate for this failure by moving towards central planning of generation alternatives to transmission as a serious backward step that could compromise New Zealand’s ability to secure necessary investment,” Mr Barrett said.


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