Thermal generation helps boost Contact's profit

Diversification of generation assets helped Contact Energy lift its operating profit 15.2% in the year ended June to more than $508 million.

Unlike Meridian, which was hurt by its reliance on hydro generation in a year of low inflows, Contact could increase generation from its thermal power stations to lift its profit.

"This is a very good result for Contact, particularly in the context of recent years," Forsyth Barr broker Peter Young said.

"It has exceeded market and our expectations and managed to break $500 million at the operating earnings line for the first time since 2008. This result should see us upgrading our full-year 2013 numbers."

Contact's revenue for the period was up 21% to $2.7 billion but costs were also up 22% to nearly $2.2 billion. The reported profit of $190 million was $40 million, or 27%, higher than in the previous corresponding period.

The final dividend of 12c per share took the total dividend for the June year to 23c.

Contact chairman Grant King said the company would utilise the profit distribution plan for the last time.

"As Contact nears the end of its current investment programme, it is pleasing to see an improvement in earnings that should see Contact revert to a cash distribution in 2013."

The benefits of Contact's diverse generation portfolio were realised in the financial year as record-low hydro generation was replaced by increased output from the company's thermal assets, he said.

Mr King had earlier reported that the Ahuroa gas storage facility and the Stratford peaker plant had been brought into service and were showing positive early signs of contributing to the company's flexibility.

Contact expected gains to be made from that investment.

"We also stated when the interim result was released that we expected an improved second-half result. I am pleased to announce we have delivered on both."

The contribution diverse assets made was evident in the June-year financial results and Contact would achieve further gains from that mix in the future, Mr King said.

Wholesale prices were higher overall than in the previous year but the impact of hydro generation falling by 25% meant the increased prices were largely offset by the higher costs associated with thermal generation.

Looking ahead, chief executive Dennis Barnes said Contact's focus would continue to be on delivery. The company's priorities were on completing the Te Mihi power station and making progress on the enterprise transformation programme.

An important decision in the next 18 months related to the amount of gas the company would contract and the resulting operating regime of the combined-cycle gas-fired power stations.

"Completing the current asset and systems investment programme, leveraging existing investments to reduce costs and continuing to improve our fuel purchase costs will position Contact to grow earnings in coming years," Mr Barnes said.

However, Mr Young said Contact still had reasons to be cautious about its future.

The very dry conditions had eased and along with them, wholesale prices. Contact was no longer running both its combined-cycle plants.

The gas position, while greatly improved, still appeared slightly long for "normal" conditions, particularly for the six months after Te Mihi had been completed.

Forsyth Barr had a hold on Contact shares and a valuation of $6 a share. The electricity market was facing a challenging oversupply situation that was several years away from being resolved, Mr Young said.



At a glance

• Contact profit up 15.2%

• Final dividend of 12cps

• Carbon charges lower than anticipated

• LPG and retail gas margins better than expected


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