Contact goes cool on gas, seeks higher returns on capital

Chief executive Dennis Barnes

Contact Energy needs to raise its return on capital closer to international norms, but sees little capacity to do so by raising electricity prices in the next two or three years, chief executive Dennis Barnes says.

In a briefing following the announcement of an $88 million tax-paid profit for the six months to December 31, up 29 percent on the same period last year, Mr Barnes says the company was earning a five to six percent return on capital, but needed to achieve eight or nine percent to reach acceptable levels of performance.

In a wide-ranging briefing, Mr Barnes also revealed the company was turning down offers of natural gas at above $6 a Gigajoule as uncompetitive with renewable geothermal and hydro electricity, and raised the prospect of major changes to the use of its two combined-cycle gas turbine units at Otahuhu and Stratford.

"Buying gas and making electricity [with it] has been basically loss-making for Contact. Deciding to buy gas for many years wasn't, in hindsight, the right decision."

Even with gas prices a third lower than recent levels of around $9 a GJ, "I'm not sure I can see the gas price moving sufficiently low to support baseload generation".

The Otahuhu and Stratford units were designed to be used as high efficiency baseload plant when commissioned in the late 1990s and early 2000s, but Contact is now considering all options from turning one or both into open cycle stations through to closing one or both.

However, some gas generation would continue to be part of the mix for the New Zealand electricity system because of the variability of wind and hydro power. Contact recently commissioned a new fast-start peaker plant at Stratford and owns the Whirinaki fast-start plant.

Mr Barnes also appeared to suggest the company may not offer its competition-busting 22 percent discount for paperless bills that are paid on time. Some 40 percent of Contact's customers have taken up the option, which was introduced in 2010 to stem heavy customer losses. Those numbers have since stabilised.

"We never say never," he says. "Our commitment is to have competitive products for our customers."

The 22 percent discount product was currently the best way to achieve that, and he could see little ability for electricity retailers to raise their prices over the next few years while the New Zealand market remained over-supplied.

"Over-supply in a market means the market will win," he says, although returns from the generation sector were still inadequate for investors.

"If I compare it to other companies around the world, we are five to six percent [return on capital] and one would expect eight or nine percent." 

He gave no new guidance on year-end profitability, beyond saying he was "comfortable" with analyst estimates for the full year of between $515 million and $525 million ebitdaf, ahead of last year's $509 million.

Chief financial officer Graham Cockcroft would not be drawn on Contact's plans for refinancing some $700 million of debt falling due over the next 18 months, but indicated a preference for locally sourced funding to avoid exchange risk, while citing local institutional and retail bond markets, as well as international bond markets as possibilities.

The company announced an 11 cents per share fully imputed dividend, the first since cancelling its dividend reinvestment scheme as the company has no current requirement for capital, as it comes to the end of a five-year $2 billion investment spree on new, mainly geothermal, power station developments.

(BusinessDesk)

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