ECNZ profit kept in-house before split

By Mark Reynolds

The state-owned Electricity Corporation made an overall profit of $256 million in the six months to the end of December, but none of it will be paid to the Government in dividends.

Instead, the profits are being applied to repay debt or buy new businesses in the fiercely competitive retail energy sector.

The reinvestment is necessary for ECNZ to bolster its balance sheet and diversify operations before it is split into three competing energy organisations from April 1.

Usually, about 60 per cent of the corporation's earnings would be paid out to its shareholder.

The half-year profit compared favourably with earnings of $152 million in the same period last year, but it included a $70 million one-time profit on the sale of the Coleridge power station in the South Island.

The previous year's result had included a $30 million gain on another one-off sale - of the Mangahao power plant.

The underlying picture in ECNZ's earnings was that competitive pressures and an oversupply of electricity production had pushed power prices lower.

That meant the corporation had to slash costs to keep margins acceptable.

In ECNZ's case, revenue slipped 9 per cent to $452 million for the half year and that was offset by a 27 per cent reduction in operating expenses to $168 million.

The company said a wide range of technical, operational and management initiatives had reduced costs, with the average cost of generating a unit of electricity dropping to 1.4c.

That was the lowest unit power cost ever recorded by ECNZ - it was 2.08c for the year to the end of last June.

But a big portion of the drop could be attributed to high winter rainfall that allowed the group to use its cheap hydro-generation plants to meet demand, rather than more expensive gas-powered facilities.

Total hydro-generation in the six months rose 10 per cent to 10,189 gigawatt hours, compared with a year earlier, while thermal generation fell 84 per cent to just 2568GW hours.

ECNZ noted in a report accompanying its financial result that in recent months its competitors - including state-owned Contact Energy - have produced a glut of power from their gas-fired plants.

But ECNZ said it had actually spilled water from its efficient and environmentally friendly hydro facilities.

"We remain concerned that the split of ECNZ will result in higher thermal generation and therefore greater [carbon dioxide] emissions and increased water spill.

"This will be a major challenge for the industry, particularly if New Zealand is to meet its international obligations for reductions in total emissions," the company said.

Competitors are producing more thermal power because they want to shore up market share ahead of ECNZ's split.

On the other side of the equation, ECNZ has been buying up retail electricity business, like Mercury Energy's customer base in Auckland, to make sure its three separated units have an assured market for the power they generate from April.

The latest accounts did not disclose exactly how much ECNZ paid for the 480,000 customers it, and its subsidiary company First Electric, has acquired.

But its capital commitments had swollen to $399 million at the end of December, from $160 million at June 30.

Over the same six months the corporation repaid $104 million of term debt.

The Government had previously said it would forgo dividends from ECNZ to allow the group to strengthen its balance sheet ahead of the split.

In announcing the half-year result, the chief executive of ECNZ, Dave Frow, said the three new baby ECNZ state-owned enterprises would be in an excellent position to compete effectively when April 1 arrives.

Pictured: With the approach of ECNZ's D-Day, when it will be split into three competing energy organisations, the company has been taking steps to make its position as strong as possible - selling assets, cutting costs, and gaining new customers. HERALD PICTURE / KENNY RODGER