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Contact outlines $2 billion renewable generation

23 February 2007

Contact outlines $2 billion in a new renewable generation programme

Contact Energy today announced a new renewable generation programme totalling around $2 billion in wind and geothermal.

Contact Energy Chief Executive David Baldwin said, given appropriate policy settings, the company’s investment plans in renewable generation could play a significant role in helping to advance a more sustainable and climate-friendly energy generation sector.

Geothermal generation

Mr Baldwin said the next stage of the company’s generation growth would come primarily through investment in up to 260 MW of new geothermal generation, with two new power stations planned for the Taupo region.

“Contact is New Zealand’s leading provider of geothermal electricity, and we have a world-class geothermal resource in the Taupo region that can provide New Zealand with much greater amounts of the only form of baseload, and easily accessible renewable electricity generation,” he said.

Mr Baldwin said recent results from test production wells in the Tauhara steamfield strengthened the company’s view that the geothermal resource was potentially very strong and able to support a new geothermal power station.

“Contact will now work to further quantify the geothermal resource and, upon confirmation of satisfactory results, enter the site design phase before moving to resource consenting for a new power station with a potential capacity of up to 200 MW, powered by steam from the Tauhara steamfield. This new plant could be producing energy by 2012.

“In addition, Contact has been considering upgrading or replacing the Wairakei geothermal power station, and will be developing and advancing these plans with a view to having a new plant commissioned by 2011,” he said.

“Replacing the Wairakei Power Station with a modern and efficient plant would enable additional new generation in the vicinity of up to 60 MW, and total capacity of around 220 MW.”

Mr Baldwin said Contact would need a streamlined consenting process for its geothermal investment programme if it were to be implemented within the timeframes anticipated by Contact to help meet the country’s growing demand for electricity.

“Contact’s 2001 Wairakei resource consent applications currently still remain unresolved, preventing us from generating substantial additional renewable energy. For Contact’s new geothermal investment programme we are exploring various consenting options, for example recommending the Government call in applications for renewable projects directly to a board of inquiry or the Environment Court for swift consideration.

“We have been encouraged by the draft New Zealand Energy Strategy and have held positive preliminary discussions with the Energy Minister over possible call-in options.”
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Wind generation

Wind generation developments are also on Contact’s agenda, with the company pursuing four wind farm sites. The company is currently actively engaged on the development of two wind farm sites that indicate significant wind resources. These two sites may be able to contribute up to 400 MW of clean, renewable electricity for the country.

Mr Baldwin also said the company had agreed commercial terms for the purchase of two further wind farm sites, with promising signs for capacity to generate up to 300 MW, although further feasibility work is required.

He said the development of any two of these wind farm sites would cost up to $1 billion.

Otahuhu C and the future of thermal generation

Mr Baldwin said that new generation would be needed by around 2012, and new renewables needed to be developed by then. He said that with Government support for the consenting of geothermal and wind development, he believed the Government’s goal of meeting New Zealand’s energy growth from renewable forms of energy could be realised.

“Strong geothermal development is critical if we are to meet demand growth through renewables, particularly during peak periods. If the Government is committed to this path, then we believe it is possible to defer decisions on new thermal generation for up to 18 months,” he said.

“During this time, we would be looking to the Government to finalise a market-based pricing system for carbon emissions.

“Contact’s proposed Otahuhu C combined-cycle gas turbine power station is clearly New Zealand’s best thermal option. While we hold the consents to build it, we are able to defer construction of this plant for up to 18 months if the consenting climate, and grid transmission capacity, support timely investment in new renewable generation.

“This would enable a decision on Otahuhu C to be made in a stable policy environment.”

However, Mr Baldwin said that, while growth in electricity demand could be met through renewable generation in the short to medium term, New Zealand must also ensure that its current thermal generation fleet is modern and efficient, and can handle peak requirements.

“It will be important for the New Zealand Energy Strategy to permit old and inefficient thermal plant to be replaced with cleaner, more efficient combined-cycle stations. In this context, Otahuhu C will play an important role in reducing the sector’s greenhouse gas emissions.”

New Zealand Energy Strategy

Mr Baldwin said a focus for Contact was on providing a robust submission on the Government’s draft New Zealand Energy Strategy.

“We support the Government’s commitment to addressing climate change, but feel strongly that, if New Zealand is serious about taking meaningful steps to reduce our greenhouse gas emissions, then we need price signals across the entire economy.

“With the energy generation sector producing around 10 per cent of the country’s greenhouse gas emissions, Contact will support the implementation of a mechanism to price carbon, but believes it must be applied across the economy,” he said.

Mr Baldwin said he welcomed the draft strategy’s endorsement of the electricity market, noting that the preservation of a competitive market was vital.

“As a company prepared to invest billions of dollars in new renewable generation projects, we need investment certainty. Contact’s submission on the draft energy strategy will support a level playing field between all market participants, and the market reflecting the true costs
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of energy generation, rather than any system of subsidies and interference in the market,” he said.

Six-month results

Mr Baldwin said the result for the six months ended 31 December 2006 was in line with expectations and showed that Contact was a well-balanced and versatile company.

Earnings Before Interest, Taxation, Depreciation, Amortisation and Financial Instruments (EBITDAF) was $275.4 million, down slightly from $280.4 million for the same period in 2005.

Profit for the six months ended 31 December 2006 was $122.9 million, down from $146.6 million for the same period in 2005. However, included in the 2005 half year was the gain of $33.4 million from the sale of Contact’s stake in the Australian Valley Power plant in October 2005. Adjusting for this one-off item, and excluding the change in fair value of financial instruments, sees profit increasing for the six months ended 31 December 2006 by $7.2 million, or seven per cent.

“This result shows that Contact is a robust company with the diversity of generation assets and options required to contribute to a secure electricity supply,” he said.

“This result shows that Contact has developed a strong and secure base from which to embark on the company’s next stage of growth as a leader in new renewable generation development.”

Mr Baldwin said the result was particularly pleasing despite some challenging trading conditions, but noted that a delay in full production from the Pohokura gas field had seen the company use lower-cost sourced gas, which had favourably impacted on the result.

This is unlikely to be repeated to the same extent over the coming period.

“Contact will continue to face significant challenges over the coming year, as the business adjusts to higher priced gas and reduced fuel flexibility,” he said.

Mr Baldwin said Contact’s views on the expected performance for the remainder of this financial year remain consistent with the guidance provided in the Chairman’s address to Contact’s 2006 Annual Meeting, namely that net profit after tax is likely to be materially lower than for the previous financial year.

Capital return

Mr Baldwin said that Contact’s investment proposals clearly have implications for capital management.

“With up to $2 billion of potential investment opportunities over the next five years, any significant release of cash to shareholders at this time could put the company in a position where it may not be able to execute its plans without adversely impacting the Contact or Origin Group credit ratings. Accordingly, the Board has decided against making a capital return at this time,” he said.

“We will keep this issue under review and revisit our decision if Contact’s future financial flexibility requirements differ from current expectations.”

Dividend

The Board has declared a fully imputed interim dividend of 10 cents per share. Payment will be dispatched on 23 March 2007.


ENDS

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