Profits down but Contact shares power ahead

By CHRIS DANIELS energy writer

Contact Energy shares were the top performer on the NZSE40 yesterday after it reported a $107 million annual profit, but our largest listed energy company is cautioning shareholders that days of rapid growth and increasing dividends may soon end.

The profit was down $23 million from the previous year's record $130.7 million result, which was largely due to the unusually cool dry winter, but in line with most expectations.

The shares closed up 14c or 3.75 per cent at $3.87 after the company declared a final dividend of 15.4c a share.

Chief executive Steve Barrett yesterday outlined the company's journey over the past few years from a net electricity generator to its current form - a balanced retailer-generator with a large customer base.

He described a new era of stability, thanks to the balance between the amount of power it is asked to supply to customers with the power it generates, meaning less fluctuation in earnings, and less risk. Short-term dividend growth may be deferred and used to fund new investment.

Contact's generation hedge by electricity volume is 86 per cent, meaning 86 per cent of the power it generates is accounted for by its own customers. Lower wholesale power prices - averaging $41.60 a megawatt hour, a little over half $82.70 average of the year before - meant Contact earned less money from generating electricity.

This means power bought from the wholesale market to supply its customers is cheap, saving it money.

These prices are likely to remain low into next year, according to Contact, with normal inflows into South Island hydro storage lakes and a good-sized snowcap ready to melt during the summer.

Revenue for the 12 months to September 31 was down by $500,000 at $1.05 billion, but this was largely the result of the lucrative year previously, when cold, dry weather conditions allowed Contact to make big profits from its thermal power stations.

To demonstrate the change in Contact's business, Barrett said its retail load had grown by 50 per cent in the past three years with the addition of 60,000 customers or 12 per cent in the past year.

The company preferred to stay a net electricity generator with only incremental increases in generation capacity over the next few years.

Barrett reiterated the company's interest in buying NGC's Stratford gas-fired power station, which would tip the balance toward generation over retailing electricity.

Barrett used the results announcement to again stress his concern over the future of New Zealand's supplies of natural gas, saying that the Kupe and Pohokura fields needed to be brought into production as soon as possible.

A three-yearly revaluation of the company's assets has increased the value of its fixed generation assets by nearly $800 million, meaning it now has total assets of $3,352 million.

Barrett yesterday spoke of how close the company was to the right balance of generation and retail.

"We're getting towards a very good balance there, it's something we monitor very carefully in the company on a regular basis. It has a lot to do with the volatility of earnings in the company."

He said that there was a risk of adding too many customers that were not matched by similar increases in generation capacity.

"There comes a point where if you get too many customers it adds to volatility and risk because you have more exposure to the retail side of the business. There is an optimal level and we are approaching that optimal level. In order to continue to be able to grow our integrated business we need some generation to keep that balance."