Contact looks to tighten market after 'crappy quarter'

Contact Energy looks to tighten electricity market after 'crappy quarter'

by Pattrick Smellie

Aug. 14 (BusinessDesk) - Contact Energy is looking to tighten electricity supply, saying it will seek better prices for roughly half a terawatt hour of its total annual generation either from commercial and industrial customers, wholesale spot market sales, or simply not selling it.

At a briefing on the company's profit result for the year to June 30, chief executive Dennis Barnes said the company would be running a less aggressive hedging policy in future, reducing the amount of electricity it needs to buy each year either from its own high cost gas-fired power stations or from other generators on the wholesale market.

While fully renewable peers such as Meridian Energy were only willing to contract 70-to-85 percent of their total mean renewable generation, Contact had been contracting at around 125 percent.

"We've back-calculated this," said Barnes. "As far as we can go back, this results in a better earnings and cashflow outcome on average over time" but meant "every now and again, you're going to have a crappy quarter. We've had it this year."

The Wellington-based electricity generator-retailer reported a 10 percent fall in underlying earnings to $141 million for the year to June 30, largely reflecting a complete turnaround in the amount of water available to put through its hydro dams on the South Island's Clutha River in the last quarter of the financial year.

That required Contact to run usually idle gas-fired plant to meet peak winter load because of an unusually dry winter in the South Island.

Resulting spikes in wholesale market spot prices for electricity knocked $32 million off earnings before interest, tax depreciation, amortisation and changes in the value of financial instruments, which fell 5.5 percent at $523 million.

While longer term futures market prices were not yet indicating an end to this decade's protracted period of generation over, Contact was rethinking its previous hedging strategy, said Barnes.

"We are seeing a tightening of supply and demand conditions. We think the reduction in thermal capacity has been masked somewhat by high hydrology over the last few years and it may now be appropriate to take a less hedged position and we've got probably six or seven months to think about that for our next commercial and industrial customer contracting round," he said.

Contact had some 660 terawatt hours of annual production available to re-contract, which Barnes described as "the discretionary part of the discretionary part of our portfolio".

"We think with tight supply and demand that might be better placed in wholesale markets, which should allow us to be more re-selective on C&I (commercial and industrial) re-contracting, which in (and) of itself should result in better prices for us," said Barnes, although "this last half a TWh of thermally backed sales is pretty marginal".

Contact also signalled an increase in dividend payouts in future years, the prospect of share buybacks from time to time and a cost-out focus that yielded $11 million in annual corporate cost savings but pushed $5 million of redundancy and restructuring costs into the last financial year. Another half a million dollar annual saving looms as Contact's slimmed-down head office will relinquish one floor of its recently renovated head office in central Wellington.

The share price rose 1.5 percent to trade at $5.46 by mid-afternoon, an increase of 14 percent this year.

The unchanged final dividend of 15 cents per share, fully imputed in the hands of New Zealand shareholders, takes total distributions for the year to 132 percent of underlying profit. The company said a new dividend policy would be based on payouts of 80-to-90 percent of free cash flow, once net debt falls to below 2.8 times ebitdaf. It currently stands at 3.1 times.

“In FY18, Contact will target an ordinary dividend of 32 cents per share, an increase of 23 percent on FY17,” said Barnes. At the new payout rate, that target would have been between 34 and 38 cents per share. The interim dividend payment date will shift from March into April to assist with imputing dividends to the greatest extent, although full imputation would not be possible for dividends paid against a free cashflow metric rather than tax-paid earnings, said Barnes.

Asked whether the company had considered share buybacks, Barnes said the weight of shareholder opinion appeared slightly to favour unimputed dividends, but there was scope for share buybacks in tranches of up to $100 million at a time, and the board kept the subject live.

The final dividend will be paid on Sept. 19, with a record date of Aug. 31. On a statutory net profit basis, Contact showed a $216 million turnaround for the year, mainly because the costs of closing its Otahuhu-B gas-fired power station washed out of the figures. Net profit after tax was $150 million, compared with a $66 million statutory loss declared in the previous period.

Barnes said Contact was "playing catch-up" with its current round of tariff increases to all its electricity customers, who fell by 2,000 over the year to 423,000, although Barnes said there was little sign of customer switching as a result of raising the energy component of the average power bill by up to 1.5 percent.

Customer switching rates were lower among the 50,000 customers who had taken up the company's shift from the Fly Buys to the AA Smartfuel rewards programme, which occurred in April, said Barnes. Contact previously had around 250,000 customers on Fly Buys, which Genesis Energy is now offering exclusively to electricity customers.

The company also showed marked improvements in staff engagement - a rough guide to internal morale - and a large jump from a negative to a positive 'net promoter score' - a measure of the likelihood that customers will recommend a brand.

(BusinessDesk)

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