Contact Energy is to spend $623 million building a new 159 megawatt geothermal power plant, partially replacing its 52 year-old Wairakei power station, and will turn to shareholders for part of the funding.

Contact announced heads of agreement were signed this morning for the Te Mihi station, at the same time as announcing flat earnings for the six months to December 31, slightly ahead of broker expectations.

On an underlying after-tax basis, excluding one-off items, net profit for the period was $78.8 million, compared with $79 million in the same period a year earlier.

A 12 per cent increase in revenue to $1.2 billion, on higher sales volumes and electricity prices, was offset by increased network and gas costs, first-time costs of carbon from the new emissions trading scheme, squeezed retail margins and ongoing customer losses.

Earnings before interest, tax, depreciation, amortisation and financial instruments was barely changed at $225.5 million, up 0.2 per cent from a year earlier.

The result is a little ahead of broker expectations, with First NZ Capital and Goldman Sachs both estimating closer to $70 million.

First NZ Capital was expecting Contact to gain upside from having
138 Gigawatt hours of generation that were exposed to high spot prices on the wholesale electricity market in late 2010.

"While costs continue to increase, competition in the mass market segment continues with up to 30,000 customers switching retailers each month," said departing managing director David Baldwin in a statement to the NZX.

"This, in part, is being stimulated by wet conditions, which have resulted in low wholesale prices, giving the appearance of attractive retail margins."

However, Contact continues to see the long term trend in wholesale electricity prices rising to reflect the cost of building new, more expensive generation in the future and of "maintaining gas-fired generation such as Contact's new Stratford peaking project."

Announcing the greenlighting of Te Mihi, Baldwin said the plant was scheduled to be operational by mid-2013, at which time 45MW of the capacity of the 181MW Wairakei station will be decommissioned.

With expected net output from Te Mihi - which is near Taupo - of 159MW from its two 83MW generating units, the total net increase in electricity production from the two plants will be 114MW.

Funding will be through a combination of debt and equity, with details on a pro rata renounceable rights issue to come, with majority shareholder Origin Energy confirming its commitment to subscribe.

Contact expects its next investment after Te Mihi to be the 250MW Tauhara 2 geothermal power station, on the eastern edge of Taupo, said Baldwin.

While Contact's ability to cope with fluctuating wholesale prices had improved as a result of its new Ahuroa underground gas storage facility and peaker plant at Stratford, the company gave no specific guidance on earnings outlook for the full year, beyond saying the "EBITDAF in the second half is expected to benefit from this increased operational flexibility."

An interim dividend of 11 cents per share was declared, unchanged from the same period last year, representing payout at 86% of underlying earnings, which fell 3.5 per cent to 12.89 cents per share from the prior corresponding period.