'Disappointing' year a watershed for Contact Energy

The power plant at Contact Energy's Otahuhu Power Station in Auckland has been sold to a property developer. Photo / Greg Bowker

Contact Energy will look back on a "disappointing" financial performance in the year ended June 30 and see it as a transitional period, chief executive Dennis Barnes said as the company posted a 43 percent decline in net profit to $133 million and a 29 percent drop in underlying earnings, its preferred measure, to $161 million.

"Following a disappointing year ... improvements across all areas of the business are expected in the 2016 financial year," Barnes said in a statement posted to the NZX. "We believe we will look back at the 2015 financial year as a turning point in Contact's performance as its flexible asset portfolio and world class retail system provide the platform for Contact to improve performance and remain competitive in the New Zealand market."

That will be reflected in increased availability of geothermal and hydro generation plant following outages and upgrades in the past year, and annualised cost savings of about $15 million from the closure of the 400 Megawattt Otahuhu-B gas-fired combined cycle gas turbine (CCGT) from the end of next month. Contact announced the closure today, saying increased geothermal generation in the electricity system, including its newly opened Te Mihi plant, and more availability of fast-start 'peaker' plant ended the case for a "spare" CCGT unit.

It will also spend $45 million upgrading its other CCGT, the 377MW power station at Stratford, which can be run as a peaker station to meet spikes in electricity demand, and is adjacent to its newer Stratford peaker plant and its underground gas storage facility, Ahuroa. The Otahuhu-B closure decision was assisted by the ongoing reduction in take-or-pay contracts for natural gas, which forced Contact to use gas unprofitably, and the fact that Genesis Energy will continue to make 500MW of its Huntly power station available to the market until 2018.

The company also expects to improve its cost to serve retail customers following a four year project to implement a new SAS software-based customer support system. Cost to serve increased 11 percent to $13.14 per Megawatt hour of electricity in the last financial year, but the new system should deliver savings of about 10 percent.

Despite weaker profit performance than the previous year in all areas other than its liquefied petroleum gas business, the year was a bumper one for shareholders, who will have received total dividends of 76 cents per share after the payment of the final 15 cent dividend announced today. Distributions jumped because of a 50 cent special dividend in June, prior to the sale earlier this month of Origin Energy's controlling 53.1 percent stake in the company.

Following a disappointing year ... improvements across all areas of the business are expected in the 2016 financial year.

Contact chief executive Dennis Barnes

As well as Origin's desire to strip cash before exiting, that payout reflected a 21 percent increase in free cash flow to $363 million, as expected after the company largely completed some $2 billion of plant construction and systems upgrades in the past five years, allowing dividend policy to be revised to target 100 percent payout of free cash flow in future. However, underlying distributions of 26 cents a share were unchanged in the latest financial year.

The special dividend exhausted available imputation credits, so the final dividend, payable on Sept. 15, is unimputed, and it increased the company's debt gearing by 7 percentage points to 35 percent. Imputation credits are expected to resume in 2016, the company said. It will also start a share buyback scheme in 2016, reflecting higher free cash flow.

Some $225 million of the $300 million of bridging facilities established in the second half of the past financial year have been refinanced, with Contact now considering an offer of unsecured, unsubordinated fixed rate bonds to institutional and New Zealand retail investors for the balance. Aside from some upcoming bank facilities that are likely to be extended, Contact has no further capital maturities until its $100 million wholesale bond matures in April 2017.

Contact gave no specific profit guidance for 2016, but foreshadowed contributions from increased availability of power generating plant and "a positive contribution to profits above the increase in interest and depreciation costs" from the upgraded retail system.

"We will continue to review our pricing and product offerings to ensure that customers are provided with profitable services that they value," said Barnes. Some 70 percent of Contact customers were now on discounted tariffs, with customers on "campaign tariffs" receiving electricity at discounts similar to a commercial or industrial customer, he said.

Long time Contact Energy director Phil Pryke, seen here in a 2007 file photo.

Still, total customer numbers fell by 9,000 during the year under review, with electricity customers numbering 430,000 at year end, down 7,500, and retail gas customers down 1,500 to 61,500. The drop partly reflected a withdrawal from customer acquisition campaigns while the new retail system bedded in. Contact says it plans to stop door-to-door customer acquisition by the end of next year.

Commercial and industrial sales volumes fell 1 percent, reflecting competition and the termination of a Fonterra contract.

Earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments were down 11 percent, at $587 million on revenue that was little changed at $2.44 billion. Total operating expenses were 3 percent higher at $1.9 billion.
Depreciation charges were $14 million higher at $204 million, reflecting the end of capex projects, and adverse interest rate movements were behind a $37 million negative change in the fair value of financial instruments.

Tax expense at $29 million was 69 percent lower than the previous year and amounted to an effective tax rate of 18 percent on the statutory profit because of a one-off change to the way powerhouses are treated for depreciation.

Total generation volumes for the period were 5 percent higher at 9,514 Gigawatt hours, and retail electricity sales were virtually unchanged at 8,392/GWh, with lower average temperatures helping to offset customer losses and improving energy efficiency.

Retail netback, a calculation used to judge the performance of the retail segment of the business, fell 8 percent to $85.49/MWh in a year when the average wholesale market spot price for electricity rose to $71/MWh, up from $67/MWh the previous year.

The company will delay its annual meeting until December, instead of the usual October date, to allow time to find and nominate a new chair for the Contact board of directors. Interim chair Phil Pryke said today he would not stand again for the chairmanship, while wishing to remain on the board. Former Origin appointee Bruce Beeren will retire, which will require Pryke to seek re-election.

See today's financial results here: