Contact Energy profit up 17.6% on new plant and hydro gains

Monday 18th August 2014

The stars aligned for Contact Energy in the year to June 30, producing a 17.6 percent increase in net profit at $234 million and a second dividend increase for shareholders in two years, as a new geothermal power station came on stream and the upgraded Cook Strait cable allowed plentiful water in South Island hydro-electricity catchments to be used to best effect.

The profit includes a $43 million payment from the contractors who built the company's brand new Te Mihi geothermal power station, officially opened last week but which was late to be commissioned, and reflects greater production of lower cost hydro-electricity during the period.

Stripped of that one-off factor, net profit rose 12.4 percent to $227 million, although the company expects the revenue covered by the compensation payment to show up in operating revenue in the current financial year as Contact increasingly reduces its use of gas-fired power stations in favour of its fleet of renewable hydro and geothermal plants.

Earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments were up 9 percent to $587 million. Directors declared a 1 cent per share increase in the final dividend to 15cps, raising total distributions for the year by 4 percent to 26cps, after being raised 9 percent to 25cps in the previous year.

The result was earned on revenues of $2.446 billion, 3 percent lower than in the previous financial year, reflecting weak demand, partly caused by warm winter weather, and ongoing competition for customers.

Despite weak ongoing electricity demand, the result reflects Contact's completion of a multi-year $2 billion series of new plant builds, including a gas-fired peaker station at Stratford, as well as Te Mihi, and upgrades at other geothermal stations.

"Our diverse and flexible generation portfolio, supported by a reduction in gas take-or-pay commitments and the upgrade of the inter-island transmission link, allowed Contact to benefit from higher than normal inflows to hydro schemes," said chief executive Dennis Barnes in a statement to the NZX. The company also used bought more electricity from other generators to meet demand rather than cranking up its own gas-fired plant.

Generation from its two combined cycle gas turbine units, once the powerhouse of the Contact fleet, fell by 1,027 Gigawatt hours to 2,332GWh, with excess gas injected into the company's Ahuroa gas storage facility, which created a negative impact to working capital, along with a $50 million hit created by delayed billings caused by the company's switch-over to a new billing system.

Hydro generation was 14 percent higher at 497GWh.

Growth in demand for electricity remained weak, affected by the withdrawal of 50 Megawatts of industrial demand after the closure of the Tasman pulp and paper mill at Kawerau, although demand from the Tiwai Point aluminium smelter was up 175GWh and other industrial demand rose by 38GWh during the year.

On its new SAP-based customer relationship management system, Contact says it is moving out of transition phase and into "future mode", with customer segmentation completed using the new system and "SAP-enabled pricing plans being prepared" with a view to delivering "improved margins without compromising competitiveness."

Barnes said Contact's "competitive pricing strategy has seen (customer) loss rates move closer to market", although the company reported heavy customer losses in June, which company spokespeople say was the result of suspending customer acquisition activity to led the new retail system bed down.

"It will take time to fully realise the benefits of the new systems and processes and provide a positive contribution to profits above the increase in interest and depreciation costs" associated with the SAP upgrade, said Barnes.

Slides accompanying the profit announcement confirm "no signficant capital investment in the futre immediate future", with focus moving to "managing for cashflow", although its planned geothermal power station at Tauhara ranks as the "next most competitive generation development in New Zealand.

Barnes insisted the New Zealand retail electricity market was among the most competitive in the world, with official statistics showing "the annual rate of increase in the energy component of tariffs was 0.5 percent over the past three years and was only 0.3 percent in the past year."

The company continues to hold a very short gas book into the future, as it anticipates running gas-fired plant far less than in the past, has access to as much as 17 Petajoules from the Ahuroa storage facility, and has signed for 27PJ's over six years, which represents "a significant step in contracting with a secondary supplier," the company says.

The shares rose 0.7 percent to $5.51.

BusinessDesk.co.nz

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