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Contact tightens focus on commercial, industrial market

Monday 13th August 2018

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Contact Energy has restructured its retail operations to tie commercial and industrial sales closer to its generation activities.

The Wellington-based firm, which also today presented new corporate branding, says the change reflects its desire to drive decarbonisation in the energy sector and will help time future generation development.

“To achieve this we will need to work with partners and suppliers to assist the conversion of business customers with a high carbon footprint to renewable energy. Contact has the largest commercial and industrial customer base and is best placed to lead this transition,” chief executive Dennis Barnes said in a statement.

“This will enable demand-backed development of our consented geothermal resources, in preparation we are working hard to reduce the cost of our consented renewable development options. While the market fundamentals don’t currently support new renewable investment, it is something we will be ready for, especially as New Zealand looks to achieve its carbon reduction ambitions,” Barnes said.

Earlier, Contact, the country’s second-largest gas and power retailer, reported a 13 percent decline in full-year profit after low hydro storage increased its energy costs and tough competition kept pressure on retail margins.

Contact is the biggest supplier to the commercial and industrial sector where it is facing increased competition.

The tighter focus on that business is part of a broader strategy aimed at simplifying its operations and freeing up capital to accelerate the use of automated processes to help lower cost-to-serve.

Last month the firm agreed to sell its LPG distribution assets to First Gas for $260 million to shed exposure to international LPG prices and domestic supply issues. In December it agreed to sell its Ahuroa gas storage facility to First Gas for $200 million. That transaction secured Contact’s use of the facility for at least 15 years and was structured to encourage the expansion of the facility and greater use by third-parties.

Barnes said that while the asset sales appear simple, they will provide “significant flexibility” to the firm and reduce debt while still providing access to both gas storage and LPG volumes for customers.

Net profit fell to $132 million in the year ended June 30, from $151 million a year earlier. Earnings before interest, tax, depreciation and changes in financial instruments fell to $481 million, down 4 percent from a revised $501 million a year earlier.

Underlying profit, which excludes changes in financial instruments, fell to $130 million, down 9 percent from $142 million a year earlier. Prior year earnings were restated to reflect a change in accounting standards.

Contact noted that a $9 million reduction in operating earnings from its retail business was driven by lower volumes and margins on its sales to commercial and industrial users. Higher LPG prices, reflecting higher oil prices, were not all passed on, resulting in reduced earnings there.

Operating earnings on mass-market power and gas sales rose by $3 million, reflecting an $11 million reduction in the firm’s cost to serve its customers.

Despite low South Island lake levels last winter and again during summer, Contact increased its generation marginally to 8,704 GWh (gigawatt hours), with geothermal and gas-fired plants more than offsetting reduced hydro output.

A maintenance shutdown at the firm’s Taranaki Combined Cycle plant in November and December meant the firm could not take advantage of higher wholesale prices at the time. Higher gas and carbon costs also more than offset a $6 million reduction in other generation costs.

Contact has been working hard to contain controllable costs and reduced capital expenditure the past year by 32 percent to $69 million. Another $20 million was saved from among other operating costs and trimmed total controllable spending 18 percent to $292 million.

The company said its sustainable annual capex after the Ahuroa and LPG sales are completed should fall to between $60 million and $65 million. It is aiming to have controllable costs down to about $250 million from the 2020 financial year.

The company will pay a fully-imputed second half dividend of 19 cents on Sept. 18. That will take the full-year payout to 32 cents, up from 26 cents last year.

The shares slipped 0.2 percent to $5.75 at the opening of NZX trading, having increased 3.6 percent so far this year. 


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