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Weather and Business Structure Influence Contact

9.00 am, 26 October 2001

MEDIA RELEASE

Weather and Business Structure Influence Contact Energy Result

Contact Energy Ltd’s improved profit in the year to 30 September 2001 reflected a cold, dry winter this year, compared with a warm, wet winter in 2000.

The company produced a net surplus of $130.7 million for the year, compared with $97 million for the 1999/2000 financial year.

“The result carries a simple message that Contact Energy has consistently stated,” said Contact Energy Chairman Phil Pryke. “With its portfolio of hydro, thermal, and geo-thermal assets, Contact can expect to do well in cold, dry years.

“Contact’s mix of generating assets and a retail customer base left the company well-placed to protect its customers from fluctuating wholesale prices.”

Contact Energy released its unaudited financial statements today ahead of the scheduled November 22 reporting date, in the interests of assisting shareholders’ evaluation of Edison Mission Energy’s (EME) full takeover offer for the company.

Mr Pryke said that the directors had not yet made a decision as to whether to declare and pay a final dividend although he noted that the takeover offer from EME provided for an adjustment to the offer price for any final dividend paid.

The company’s adjusted net surplus is $126 million. Abnormal items included the sale of surplus units and transmission equipment at Whirinaki, as well as a payment of $12 million to Natural Gas Corporation to amend the terms of a gas supply agreement. Last year’s adjusted net surplus was $61.1 million.

Commenting on Contact’s operational performance, Chief Executive Stephen Barrett said the very dry winter and a significant growth in demand highlighted risks that are inherent in New Zealand’s electricity system.

“In the previous two years, we had wet, warm winters and the financial results reflected this.

“In contrast, this year was colder than usual and accompanied by the lowest inflows to hydro-lakes for a January to August period in 71 years of record-keeping.

“At the same time, there was significant demand growth through late 2000 and early 2001, signalling an emerging gap between New Zealand’s generation capacity, and the nation’s future electricity needs,” said Mr Barrett.

“The relatively low inflows into the lakes prompted conservation of existing storage. Wholesale prices then rose to reflect the scarcity value of the water as well as the cost of thermal generation brought in to replace the hydro capacity. This stands in stark contrast to last year’s situation, when a wet warm winter depressed demand and resulted in an abundant supply of electricity at relatively low wholesale prices.”

Mr Barrett said Contact’s decision to be a net generator capable of covering retail customers’ demand and contracts to third parties underpinned the company’s financial performance during 2001.
“During a year when average spot prices rose, around 40% of our generation capacity benefited from the relatively higher prices. This had a significant influence on total operating revenue, which rose to $1,097 million for the period ended 30 September 2001, compared with $868 million for the same period last year.

“But our position as an integrated electricity company that has a good balance between its generation and retail activities meant Contact’s customers were protected from volatile prices in the wholesale market,” said Mr Barrett.

Contact’s response to the tight supply situation during winter 2001 took place on two fronts.

“First, Contact brought on additional generation capacity, particularly at our New Plymouth facility,” says Mr Barrett. “At the same time, we reorganised our gas portfolio, by exercising contractual rights, to ensure that sufficient gas was available to meet generation requirements. We also had our Otahuhu A station on standby if the situation warranted its use. At all our other North Island facilities, Contact’s teams lifted production by shortening or deferring maintenance periods.

“Secondly, Contact encouraged consumers to conserve electricity through a broad-based newspaper campaign about simple power-saving practices. This was augmented in August with our four-week community savings campaign, which achieved savings of 14.2% across all regions where Contact is a major retailer. As a result, community causes throughout New Zealand have benefited from $3 million provided by Contact.”

Total operating expenses increased by 21% to $838.7 million compared with $695.7 million in the previous financial year, due mainly to higher gas purchase and transmission costs, and higher electricity network costs with the inclusion of a full year of Empower customers.

The company’s electricity customer base increased by approximately 13,000 in the six months since March 2001 to 387,000, giving Contact a total customer base, including gas users, of almost 495,000. Growth was stimulated by Empower’s activities, and the company’s DualEnergy programme, which enables customers to receive a single invoice for electricity and gas.

The company announced in early October that it had made an investment with Edison Mission Energy in Valley Power, a 300MW peaking plant in Victoria.

Mr Barrett said that winter 2001 had highlighted the fact that future generation constraints are emerging more quickly than earlier anticipated: “New power stations will be required within the next three to four years, with investment decisions on new capacity necessary within the next year or so.

“New investment will require higher prices than prevail at present to justify investment. It is worth noting, however, that New Zealanders now pay, and for the foreseeable future will continue to pay, among the lowest electricity prices in the developed world.

“Contact is ensuring that – when the time is right and an adequate return on investment can be achieved – it has a range of new generation options for development,” said Mr Barrett.


For further information:
Pattrick Smellie (04) 495 9753,

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