Full lakes equal bigger Contact profit

Higher South Island rainfall boosted hydro generation for Contact Energy. Pictured is Contact's...
Higher South Island rainfall boosted hydro generation for Contact Energy. Pictured is Contact's Clyde dam spilling in early January. Photo by Lynda van Kempen.
Contact Energy's almost 30% profit boost to $88 million for its second half-year was in part due to overflowing southern hydro lakes and Contact's expanding portfolio of energy sources.

Despite falling wholesale prices, only a ''modest'' retail customer increase, a decline in retail sales volumes and tightened margins, Contact's use of different energy generation sources offset those negatives.

Contact's after-tax profit for the half-year to December of $88 million was $20 million, or 29% up on a year ago, while earnings before net interest expense, tax, depreciation, amortisation and change in fair value of financial instruments (Ebitdaf) was $253 million, up 10% from $231 million in the first half of the 2012 financial year.

Shares in Contact, which will repeat its 11c dividend, climbed 2.5%, or 13c, to 5.21% after the announcement.

Contact chief executive, Dennis Barnes, said the generator had delivered a ''solid half-year performance'' despite weakness in the wholesale electricity market and sustained competition in the retail market.

''Higher rainfall in the South Island resulted in increased hydro generation, displacing more expensive thermal generation,'' he said in a statement yesterday. Contact was able to respond by reducing thermal generation and purchase a larger proportion of its generation from the spot market, while prices were lower, he said.

''I'm pleased ... we have been able to flex the portfolio over the past six months to deliver good results in both wet and dry conditions,'' Mr Barnes said. Craigs Investment Partners broker, Chris Timms, described the result as ''very good'', being almost 30% ahead of last year and ahead of the overall consensus of various analysts' expectations.

''We remain confident in their [financial] guidance of Ebitda of $520 million, which is above Craig's expectations,'' he said.

Forsyth Barr broker, Suzanne Kinnaird, said it was a ''good result'' for Contact, being more than 9.5% ahead of the first-half result, the profit of $88 million and underlying earnings of $92 million, both slightly ahead of the brokerage's expectations.

She said the proceeds from asset sales during full year 2013 were expected to be more than $100 million, the bulk coming from the sale of the gas-metering business, and proceeds from the sale of land at Clutha and New Plymouth.

Mr Timms cautioned that competition in the commercial arena; a historically strong sector for Contact, was increasing, in line with the already ''highly competitive'' retail market.

While coming to the end of more than $2 billion in capital expenditure, and with expectations of earnings growth, much of that growth would come from future cost reductions, he said.

Last week, as part of a plan to cut costs by up to $40 million, Contact announced plans to lay off up to 100 of 1100 staff, those jobs saving up to $9.4 million.

Mr Barnes yesterday said ''controlling costs was a priority''.

Contact had achieved an ''acceptable result'' in its retail business, despite high levels of customers switching, averaging about 30,000 a month. Sales dropped 1% and electricity sales margins fell by $1 per megawatt hour, reflecting ''competition for customers in an oversupplied market''.

He highlighted the Te Mihi power station was progressing to final the stages of development, with the first stages of power station commissioning started.

''The completion of Te Mihi will bring to an end a greater than $2 billion investment programme, adding lower-cost geothermal, and flexible thermal generation capacity and New Zealand's first gas storage facility,'' Mr Barnes said.

- simon.hartley@odt.co.nz

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