Contact maintains dividend despite first-half loss; retail struggles

Monday 15th February 2016

Contact Energy will pay an unchanged 11 cents per share interim dividend thanks to a 24 percent improvement in free cash flow, even though the electricity generator and retailer turned to a first-half loss of $116 million, mainly due to impairments to the value of its shuttered Otahuhu-B power station.

Wellington-based Contact booked write downs of $233 million on the Otahuhu plant closure and $35 million from a decision that its Taheke geothermal prospect is "unlikely to be developed in the foreseeable future."

The share price rose in early trading, up 1.6 percent to $4.45.

The net statutory loss compared with a profit of $51 million a year earlier and came in a first half when it says retail electricity prices fell by 2.8 percent and the number of customers on non-standard, discounted tariffs rose to 76 percent of its customer base. Even so, Contact had 10,000 fewer customers at Dec. 31 than it had at the end of the previous year, with some 27 electricity retailers in operation and customer churn levels raising to 21 percent in the period, "with discounting remaining the universal currency."

However, as expected, the company's capital expenditure is down dramatically following several years of major new plant investments, which meant free cash flow rose to $203 million in the first half of the current year, up $39 million on the prior period.

The interim dividend will be paid on March 23, with imputation credits attaching to 7cps of the total, "reflecting the continued low imputation credit balance following the payment of a fully imputed special dividend in June 2015."

A further $38 million of share buybacks, for a total of $100 million, is expected to be completed during the second half of the financial year. Full year earnings guidance is unchanged, with no material difference expected from last year's full year earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments (ebitdaf) of $525 million, which were down 11 percent on the 2014 full financial year.

Cash flow improvements were partially offset by "higher stay in business capital expenditure relating to the planned refurbishment of the Taranaki combined-cycle power station in 2017," the company said. There was also an unplanned outage at the near-new Te Mihi geothermal power station for turbine shaft realignment, although total geothermal generation was higher than in the previous half year while gas-fired generation was lower in line with the strategic shift to more baseload generation from geothermal rather than gas-fired power plant.

"The positive cash flow from the increased use of stored gas rather than contract gas in the first half of 2016 was offset by unfavourable retail debtor movements due to one-off collection of late bills in the first half of 2015."

The result is the first half-year period since Contact emerged from the effective control of Origin Energy, which quit its 53.1 percent shareholding last August.

Underlying earnings, stripping out one-time factors, were down 3.9 percent at $73 million and earnings before interest, tax, depreciation, amortisation and changes in the value of financial instruments was flat, down 1.2 percent at $257 million.

Notes accompanying the first-half result paint a picture of a company still struggling to improve its performance as a retailer, despite a multi-year customer transformation programme that has included implementation of new enterprise-wide software systems that Contact expects will eventually allow it to improve its customer offers and retention.

"Contact’s financial performance over the past two years has been impacted by the customer business coming under increasing pressure from the growth of smaller competitors and increased innovation and targeted offers from existing retailers," says chief executive Dennis Barnes in the half year report. "Much of this overlapped with the implementation and stabilisation of our customer billing and service system which has limited our ability to respond.

"While we have seen a continuation of this theme in our financial performance over this period, I remain confident that our focus on becoming a truly customer inspired business will deliver improvements in the next six months and the years ahead."

"Netback" on its sales to retail customers worsened by $15 million on retail sales, driving by "increased discounting and operating costs", with customer cost to serve rising to $128 per customer from $113 in the same period last year. A measure of brand loyalty - a "net promoter score" - fell 4 percent in the period under review, although the company had considerable success saving or winning back departing customers, with a total of 3,362 customers retained, compared with 2,273 in the same period last year.

Cost reductions were not being achieved as quickly as originally expected.

Contact announced this morning it had sold the Otahuhu power station site to an Auckland property developer, Stonehill Property Trust, for $30 million, with both parties to share in the proceeds of the sale of assets on the site over the next 12 months.

BusinessDesk.co.nz

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