Contact Energy to merge with Origin

Contact Energy, the country's largest listed electricity company, today revealed plans to merge with its majority owner, Australia's Origin Energy.

The announcement came as Contact reported a net after tax profit of $146.6m for the six months to December 31, a rise of 57 per cent on the first half of last year.

The merger, subject to regulatory and shareholder approval, would create Australasia's biggest integrated energy group with a market capitalisation of about $8 billion.

The news came thick and fast for Contact today, with the company's new chief executive, David Hunt, tendering his resignation for "personal reasons".

Mr Hunt, a 10-year Contact veteran who took the reins in October, said his resignation was not related to the merger news and he would stay in the job until a replacement was found.

Contact said the proposed merger would take place by way of a dual-listed company structure, with the new company, to be known as ContactOrigin, run by a common board and unified senior management team.

Contact Energy and Origin Energy would retain their separate legal identities and maintain their individual stock exchange listings.

Contact's minority shareholders, who currently hold 48.6 per cent of Contact, would own 24.3 per cent of the merged business.

Origin Energy shareholders, who effectively own 51.4 per cent of Contact, would hold the remaining 75.7 per cent.

The merger has the support of Contact's independent directors.

The independent committee, made up John Milne, Tim Saunders and Phil Pryke, said the merger would iron out inefficiencies under the current ownership structure, insulate the pair from competition, and help manage "significant strategic challenges" faced by Contact.

Contact, whose 10 power stations generate about 30 per cent of New Zealand's electricity, faces a major challenge over the next few years as contracts for the giant Maui gasfield are used up and a bigger share of Contact's fuel must be purchased from more expensive sources, such as the new Pohokura field in Taranaki.

Today's profit result was boosted by a one-off $33.4m gain from the sale of Contact's 40 per cent stake in the Valley Power peaking plant in Australia.

It was also improved by a gain on the fair value of financial derivatives following a switch to new international financial reporting standards.

Contact announced an interim dividend of 10 cents per share.

The company last year changed its balance date to conform with Origin. In the first half ended March 31, 2005, Contact reported a net after tax profit of $84.7m.

Contact chief executive, Mr Hunt, said the energy company's strong financial performance reflected a combination of higher wholesale electricity prices, strong thermal generation output, and a good balance between Contact's generation and retail businesses.

Contact, whose competitors include state-owned Meridian Energy, Genesis Power and Trustpower, has around 600,000 electricity and gas customers.

Low hydro lake levels, combined with outages of key thermal generation in the market resulted in higher electricity prices, Mr Hunt said.

The average electricity price received for generation for the six month period was $81.70 per megawatt hour (MWh), up 148 per cent from the average of $32.95 per MWh in the same period in 2004.

On the flipside, higher wholesale prices had an adverse effect on Contact's retail business, with electricity purchase costs up 162 per cent to $355.4m.

Gas revenue from wholesale customers rose 51 per cent to $41.5m, while revenue from retail customers fell to $64.7m from $70.3m.

Mr Hunt said the result underlined the diversity of Contact's generation portfolio and the "natural hedge" of owning both retail and generation businesses.

Trading in Contact shares was halted pending today's announcements. The shares last traded on Friday at $6.52, against a year high of $8.06.

If the proposed merger goes ahead, the new board would be chaired by Kevin McCann, chairman of Origin Energy. Contact's Phil Pryke would be deputy chair.

Current Contact chairman, Grant King, would be managing director of ContactOrigin.

The chief executive of Contact Energy would be part of the executive management team, reporting to ContactOrigin's managing director.

First NZ Capital has been appointed to advise Contact shareholders on the merger.

If approved, the merger is expected to be completed early in the next financial year, which begins on July 1.

Origin Energy today posted a 14 per cent rise in its first half profit to A$194m ($216.68m).

- NZPA