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Home / Business / Companies / Energy

Director-fee fallout hurts Contact

By Grant Bradley
NZ Herald·
14 Aug, 2009 04:00 PM5 mins to read

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Angry shareholders heckled Contact Energy chairman Grant King after the board moved to increase directors' fees. Photo / Brett Phibbs

Angry shareholders heckled Contact Energy chairman Grant King after the board moved to increase directors' fees. Photo / Brett Phibbs

Contact Energy says the fallout following last year directors' fee shambles was the worst blow to its reputation in the company's history.

The company announced a 50.4 per cent plunge in profit for the past year to $117.5 million, hit by running gas generating plants at a loss, transmission constraints
and being forced to pay sky-high prices for wholesale electricity during last winter's drought.

Managing director David Baldwin said Contact lost 41,000 electricity customers in the wake of last October's board move to increase directors' fees at a time when it was putting up some householders' power bills by more than 10 per cent.

Angry shareholders last year heckled chairman Grant King and although the company, 51 per cent owned by Australia's Origin Energy, backed down after the meeting, it came too late to avoid a public backlash.

Baldwin said Contact would do things differently now and the handling of the issue was "pondered quite regularly" by executives and the board, which had already been reconfigured.

"The lesson has been clearly understood. We could have taken a different course of action and probably should have."

He said the loss of customers from 520,000 in June last year to 479,000 12 months later cost the company around $2 million, a fraction of its $1.288 billion retail electricity revenue.

"It's not a material amount of money, the brand implications are more significant. For us it's all about the reputation of the company."

Since its creation 13 years ago (and 10 years as a listed company) the company has copped heavy flak for huge salaries paid to former executives, the quality of its directors and periodic attempts by the board to persuade minority shareholders to sell out.

Baldwin said the fallout from the meeting was the worst period in Contact's brand life but it had been able to raise $550 million in retail bonds. The company was now winning back customers by the hundreds every week and aimed to lure thousands a week within the year. But competition for customers was intense, with Contact struggling to match deals offered by SOEs worth hundreds of dollars.

Contact said that during the winter drought in the South Island, transmission constraints north of Wellington and across the high-voltage direct current (HVDC) link prevented Contact from transmitting thermal generation from the North to the South Island.

That required the company to purchase very high-priced power from the market to meet demand from its South Island customers.

In spring when the southern hydro lakes rapidly filled, Contact was hit by transmission constraints in the lower South Island, combined with the loss of demand from the Tiwai Point aluminium smelter which suffered equipment failure and is only now resuming full production.

The other major impact on Contact's result was loss of operation flexibility brought about by the shift to stringent take or pay gas contracts and the removal of the New Plymouth power station.

Gas for generation prices had risen by 25 per cent during the year.

The combination of those factors resulted in underlying earnings after tax for the year of $160.6 million, down 31 per cent from $232.8 million the previous year. Earnings before net interest expense, income tax, depreciation, amortisation, financial instruments and other significant items fell 21.5 per cent to $445.3 million.

Operating revenue was down 19.4 per cent to $2.22 billion.

Key structural issues that affected profitability during the past year were being resolved.

Regional transmission constraints in the lower South Island would be alleviated later this year, but the replacement of pole one of the HVDC by April 2012 with pole three remained a critical energy infrastructure project for the country.

Baldwin said Contact's Ahuroa gas storage project and the Stratford gas-fired peaking project would restore some of the flexibility. Both would be in operation in mid-2010.

Contact was no longer interested in building a liquefied natural gas terminal at New Plymouth, even though without major new discoveries imported gas could be necessary by the middle of next decade. LNG tankers could pump gas into Ahuroa instead.

An unchanged final dividend of 17c per share is to be paid. Baldwin said the decision to maintain the distribution level was based on the expectation that the company's financial performance would return to normal trends.

Contact shares closed up 6c at $6.35c after being down 19c shortly after its results were released.

TOO UNCERTAIN FOR GUIDANCE

Uncertainty over market conditions and operating uncertainties mean Contact Energy is not able to provide guidance for the current year.

Managing director David Baldwin said the extreme weather which affected the business in July and August last year were not expected to recur in the 2010 financial year, given present hydrological conditions.

"However, wholesale prices are currently below both the variable costs of operating thermal plant, and the price required to support investment in new generation," he said. "In addition, current economic conditions are expected to continue to dampen demand growth and, consequently, tariff movements."

With the range of market and operating uncertainties, it was not appropriate to provide quantitative guidance for the 2010 full year now.

Forsyth Barr analyst Andrew Harvey-Green said given the number of moving parts and uncertainty within the wholesale market it was not a surprise there was no steer from the company.

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