Solid first half for Contact, despite retail margins squeeze

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Contact Energy's first-half profit rose 29 percent to $88 million as the impact of low wholesale electricity prices offset flat demand and shrinking margins on retail electricity sales.

Chief executive Dennis Barnes describes the overall result as "solid", but labelled the retail segment performance only as "acceptable" and reiterated the company is restructuring to reduce costs as it completes $2 billion of investments in new power stations and implements a company-wide information technology upgrade.

The result for the six months to December 31 was achieved on revenue of $1.213 billion, down 5 percent on the same period a year earlier, with some offset from a 9 percent fall in operating expenses to $960 million.

That yielded earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments of $253 million, up 10 percent from the first six months of the previous financial year.

Underlying profit, a measure that extracts one-off items and is used by the company to indicate ongoing performance, was up 21 percent at $92 million, representing earnings per share of 12.7 cents, up 17 percent from 10.9 cps in the previous comparable period.

Investments in gas storage and fast-start gas-fired peaker plants were proving themselves for their ability to allow the company to take advantage of low wholesale prices, Mr Barnes says.

"In August, Contact was able to advantage of lower wholesale prices and generate less than it sold to customers. The average wholesale spot price for 1H13 was $56 per Megawatt hour, compared with $79 per MWH for 1H12."

However, volumes of electricity sold were 1 percent lower than in the prior period.

"Margins decreased for electricity sales by $1 per MWh, reflecting the competition for customers in an oversupplied market."

Some 40 percent of the Contact customer base was now taking advantage of the company's sector-leading 22 percent discount for bills paid on time and online – an offer created after Contact dropped its price-leading strategy in the face of major customer losses between 2008 and 2010.

Contact told its approximately 1100 staff last week that it would be restructuring to cut around 10 percent of the workforce.

"In an environment of flat electricity demand it is important that we continue to manage our cost base," Mr Barnes says in today's statement. "We recognise that workforce changes are unsettling, particularly for any of our people who are affected, and we will support them through this transition."

Other cost savings included reduced maintenance on the company's combined cycle gas turbine plants, reflecting their reduced levels of use and the expiry of Contact's "swaption" for electricity from Genesis Energy's Huntly power station.

The company's health and safety record showed no improvement, with further efforts to "bring us closer to our goal of zero harm", Mr Barnes says.

A long-delayed IT upgrade was scheduled to go live later this year, with capacity to offer new products and ways for customers to interact with Contact, while commissioning on the new Te Mihi geothermal power station was on track for mid-year.


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