Contact's energies focus on Australia

By RICHARD BRADDELL

WELLINGTON - With eyes set on Australian acquisitions, Contact Energy is upbeat on second-half prospects.

Contact yesterday reported a first half net profit of $38.2 million, ending March, down 30 per cent on the $54.4 million for the same period last year.

But excluding non-recurring gains and losses such as further liquidated damages from delays in the commissioning of Otahuhu B, earnings of $32.2 million were 5 per cent better than last year's normalised $34.2 million.

And the latest result was produced in a period when wholesale electricity prices were down more than a third on the previous period.

Chief executive Paul Anthony said this demonstrated the underlying strength of the business.

He said a recovery in wholesale prices was likely to be sustained for the rest of the year and would feed through to profits.

The second half, which covers the winter months when demand is high, traditionally accounts for 60 per cent of generation earnings.

Mr Anthony believes a 1 per cent price movement would have a 5 per cent impact on generation earnings.

But Contact has set its sights on Australia where 4 to 6 per cent market growth in some regions eclipses the 1 per cent growth in New Zealand.

State asset sales such as those in train in South Australia give rise to potential individual investment opportunities ranging upwards of $A250 million ($300 million) to $A1 billion.

Given that last year's asset revaluations considerably strengthened Contact's balance sheet, it could afford to target up to 900 MW of Australian generating capacity over the next 18 months to two years, financed 70 per cent by borrowings.

Would that mean that Contact would shift its head office to Australia?

Not yet, said Mr Anthony but if it became the "centre of gravity," then a move would be likely.

Further New Zealand acquisitions were likely to be small but four significant opportunities were being looked at in Australia.

In spite of the optimistic outlook, Contact's closing price of $2.34 a share yesterday is well shy of the $5 paid by its cornerstone shareholder, Edison Mission Energy.

Mr Anthony said he had not discussed with Edison whether it would raise or reduce its stake, but he conceded that the uncertainty was one factor in Contact's weak share price.

However, he said that while Edison's holding was worth much less, it was an earnings investor and it had done much better than expected on that count.

Other factors in the weak price were the general withdrawal of international investors from New Zealand and the thin local institutional market and people selling to buy into the Natural Gas Corporation issue.

While declining to put a fair value on Contact's share price, Mr Anthony said Contact's view was that it was at the upper end of analysts' estimates that range between $3 and $3.88.

In the retail business, Contact intends to target its large Auckland and Wellington gas retail bases to build up its much weaker electricity retail businesses.

Contact's electricity retail business is mainly in rural areas.

In an insight into the costs of customer acquisition, Mr Anthony said the administration costs of switching a customer from one retailer to another were $50 a customer.

However, marketing campaign costs probably ranged between $350 and $1000 a customer.

Mr Anthony said the discounted Sky Television/electricity bundle offered by Meridian Energy was all at Meridian's expense.

But while winning customers in a competitive market was expensive, overseas experience showed that once they had moved, they were just as likely to move again.

Contact had lost 10,000 customers but had gained 12,000.