Retail Growth Underpins Solid Year For Contact

Retail Growth Underpins Solid Year For Contact Energy

Contact Energy Ltd recorded a solid $107.0 million tax-paid profit for the 12 months to September 30, 2002, in a year when lower wholesale electricity prices were offset by continued strong growth in Contact’s retail customer load.

“Since entering the retail market four years ago, Contact has pursued the creation of a balanced portfolio of electricity generation and retail assets to provide a strong and relatively stable earnings base,” Contact’s managing director and chief executive, Steve Barrett, said today. “Contact has made excellent progress towards this goal, and we are now entering a new phase in which we will consolidate our position and seek new opportunities for growth.”

This balanced strategy was the key to Contact’s strong performance for the year to September 30, 2002, when wholesale electricity prices averaged $41.60 per MWh, just over half the $82.70 per MWh average for the previous year, when a cold, dry winter threatened power shortages.

The $107.0 million result compares with $130.7 million the previous year, while the core net surplus after one-off items was $116.8 million in the year under review, compared with $126.0 million the year before.

The overall result was achieved on total revenue of $1,052.6 million ($1,098.5 million). Total operating costs of $838.2 million were static, reflecting lower gas purchase and transmission costs, offset by higher electricity transmission and distribution costs associated with the growth in retail customer load.

Contact’s retail load has grown by 50 per cent over the last three years, with growth of 12 per cent, or 60,000 new customers, in the year under review. Growth in electricity customers showed a 16 per cent rise in the year, making Contact Energy the country’s largest energy retailer with a total of 554,000 electricity and gas customers (449,000 electricity and 105,000 gas customers respectively).

This has significantly increased Contact’s level of retail hedge to approximately 71 per cent, compared with 56 per cent by volume in 2000/01. Contact’s overall level of hedge in the year ended 30 September 2002 was approximately 86% by volume.

This balanced portfolio of generating and retail assets means that Contact’s earnings are now less exposed to short term volatility in electricity spot prices.

“Our focus over the coming period will be to maintain stable earnings in a climate of increased uncertainty,” said Mr Barrett. “A more balanced portfolio of retail and generation assets helps to deliver that, and reduces the company’s exposure both to periods of high and low wholesale market spot prices.

“After a strong growth phase in which Contact has gone from only owning generating plant to becoming an integrated generator-retailer, Contact now faces a period when the rate of retail customer load growth must slow, in part because of constraints on our capacity to add substantial new generating capacity.

“Contact’s preferred position remains to be a net generator,” said Mr Barrett. “We have plans for incremental increases in generating capacity over the year next one or two years, but there is still insufficient certainty about the source and price of new energy supplies – whether gas or an alternative - to allow us to commit to the construction of substantial new generating plant at this time.

“This remains a key issue for the country, as we approach the rundown of the Maui field, which has provided a whole generation of New Zealanders with relatively cheap and easily accessed energy.”

Mr Barrett said it was imperative that the Kupe and Pohokura fields be developed quickly to help ease this period of relative uncertainty.

“Kupe and Pohokura are the only two known undeveloped gas resources of commercial size. Their timely development will help to close the gap created by the rundown of Maui, but further discoveries will be necessary to meet expected demands as we reach the end of this decade.

“It is time to get on with it,” Mr Barrett said.

Meanwhile, Contact is continuing to explore opportunities for new growth, with New Zealand as the primary focus, followed by close attention to opportunities as they emerge in Australia.

Earlier this year, Contact’s Board signaled that dividend growth may have to be deferred in the short term to fund new investment, and so ensure that longer term earnings growth can be maintained. The fundamental forces shaping this outlook have not changed, and the Board remains committed to this position.

However, the Board is also mindful that Contact did not enter into any major new capital commitment during 2002, and so the Board is declaring a final dividend for 2002 of 15.4 cents per share, which equates to a 10% growth in total dividend as compared to the previous year.

In line with established policy, Contact’s three yearly asset revaluation has increased the value of its fixed generation assets to $2,935 million, (previously $2,092 million), lifting total assets to $3,352 million.

“This reflects the expected future price path for gas and electricity in the post-Maui period,” said Mr Barrett. “This outlook is affected both by the likelihood that new sources of supply can be expected to be more costly than in the past, and the already visible impact of a looming period of capacity constraint on wholesale electricity and gas prices.”

“However, New Zealand’s energy prices remain relatively low by world standards and are expected to continue to be so, notwithstanding the rundown of Maui.”

The revaluation has also strengthened Contact’s balance sheet, which now shows a net debt/net debt plus equity ratio of 22 per cent, compared with 28 per cent in the previous period.

Contact’s full Annual Report will be mailed to shareholders from mid-December, and the company will hold its Annual Meeting in Christchurch on 11 February 2003.

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