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Contact first-half earnings fall 11% as dry spell saps generation

Monday 12th February 2018

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Contact Energy's first-half earnings fell 11 percent as the electricity generator-retailer faced a dry spell which sapped its hydro generation in what it described as a "highly competitive" market. 

Earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments, a measure in the electricity sector to demonstrate performance shorn of one-off factors, dropped to $236 million in the six months ended Dec. 31 from $264 million a year earlier, the Wellington-based company said. Net profit sank 40 percent to $58 million, or 8.1 cents per share, which it said was due to a greater reliance on thermal power supply. Revenue rose 15 percent to $1.19 billion. 

The result was in line with Forsyth Barr analyst Andrew Harvey-Green's forecast for an 11 percent decline in ebitdaf to $236.1 million on a 14 percent increase in revenue to $1.18 billion. 

"Wholesale market conditions in the first half of the financial year were book-ended by record low inflows into our Clutha catchment", chief executive Dennis Barnes said in a statement. "Our flexible thermal fuel supply and diverse assets ensured a reliable supply to customers through these dry periods, but the additional fuel and carbon costs incurred adversely impact financial performance."

Contact lucked out in the period as dry spells in the South Island left its hydro lakes operating below average, while wet weather in the North Island left rivals such as Trustpower and Mercury NZ flush with wholesale electricity prices almost twice what they were a year earlier. 

Separately, Contact released its January operating metrics which show the weather didn't shift into the company's favour last month, with South Island storage at 87 percent of the mean as at Feb. 8. Inflows into the Clutha scheme were 44 percent of the average in January, compared to 50 percent in December, 69 percent in November, and 51 percent in October. 

Contact's hydro generation dropped 46 percent in January to 191 gigawatt hours from the same month a year earlier and geothermal fell 8.9 percent to 257 GWh, while thermal generation soared to 305 GWh from 39 GWh a year earlier. The generation weighted average price climbed to $118 per Megawatt hour from $43/MWh in January 2017. 

The company's earnings from generation dropped 13 percent to $173 million in the half due largely to a 21 percent decline in hydro generation to 1,635 GWh due to record low inflows to the Clutha dam. Earnings from the retail business shrank 4.5 percent to $63 million due to lower electricity sales volumes. Contact's customer numbers across electricity, gas and LPG rose to 568,500 as at Dec. 31 from 567,000 six months earlier as the company trimmed churn to 19.1 percent over the previous 12 month period, 1.8 percentage points below the market average.

The electricity generator-retailer didn't provide annual earnings guidance, saying "the extent of the dry period remains unknown" and that it will focus on growing operating free cash flow by clamping down on controllable costs.

Contact is looking to trim between $42 million and $62 million from its controllable costs to between $295 million and $315 million in the year ending June 30. Of that, $8 million-to-$18 million is expected to come from other operating costs and $22 million-to-$32 million from capital expenditure. 

The company plans to pay 80-to-90 percent of operating cash flow in dividends once it reduces its net debt to ebitdaf ratio of 2.8 times and is targeting annual dividends of 32 cents per share in the 2018 financial year. Operating cash flow rose 5 percent to $141 million.

The board declared a fully imputed interim dividend of 13 cents per share, payable on April 6 with a March 16 record date. That's up from 11 cents a year earlier and represents 66 percent of operating free cash flow. 

The shares closed at $5.34 on Friday and have gained 11 percent over the past 12 months. 


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