Drought burns Contact earnings

The spillway of Contact Energy's Clyde Dam. Photo / supplied

Drought in the south of the South Island has taken its toll on Contact Energy's earnings, prompting the major hydro-electricity generator to report an 18.7 per cent drop in its net profit for the first half to December 31.

Contact, which is 52 per cent owned by Australia's Origin Energy, reported a net profit of $68 million for the six months, down from $83.7 million in the previous corresponding period. Despite the fall in earnings, Contact maintained its interim dividend at 11c.

The dry weather meant Contact's hydro-electricity production was its lowest since 2006.

Contact has two major South Island dams - Clyde and Roxburgh.

The company, which generates a quarter of New Zealand's electricity, also has geothermal assets in the central North Island and big gas-powered stations in Auckland and Taranaki.

Dry years normally translate into high wholesale prices, so in theory Contact should be able to cash in on high wholesale prices by running its thermal stations in the North Island to help offset the lower hydro production.

But strong North Island hydro production meant wholesale prices did not significantly increase in line with the dry South Island conditions, so Contact was not able to run as much thermal as it would have done under a truly dry-year scenario, Forsyth Barr electricity and energy sector research analyst Andrew Harvey-Green said.

"Secondly, a lot more generation has come on board since the last dry year in 2008 in the form of geothermal and wind power, which meant the need for thermal was less than it once was."

Contact also had to wrestle with intense retail competition, which meant its margins continued to be squeezed.

The company's earnings before net interest expense, income tax, depreciation, amortisation, change in fair value of financial instruments and other significant items (ebitdaf) were $231 million, $5 million higher than the prior corresponding period.

Contact chief executive Dennis Barnes said the combination of higher wholesale electricity prices and the delivery of gas take-or-pay savings were offset by hydro generation volumes being down by 16 per cent compared with the prior half year.

The majority of this volume was replaced by more expensive thermal generation, with wholesale prices only just covering costs.

A return for the valuable capacity role the thermal plant played was not evident in market pricing, he said.

The Government-led price awareness campaign What's My Number resulted in an increase in customer "churn" across the sector and saw significant customer losses for Contact in July and August, Barnes said.

But an updated offer for residential customers who receive and pay their bills online successfully reversed this trend, with the company gaining more than 4600 customers between September and December.

Barnes said with current national hydro storage levels at the end of last month at the lowest seen in the past 15 years, there was potential that Contact's diverse generation assets would be required to ensure continued security of supply to customers.

The company expects to see better retail prices in the second half.

Contact shares, which are one of the market's most widely held, closed yesterday up 2c at $4.80.