'Disappointing' 2015 a watershed year for Contact Energy

See also: Plant closures to test the electricity market

Contact Energy [NZX: CEN] will look back on a "disappointing" financial performance in the year ended June 30 and see it as a transitional period, chief executive Dennis Barnes said as the company posted a 43% decline in net profit to $133 million and a 29% drop in underlying earnings, its preferred measure, to $161 million.

"Following a disappointing year ... improvements across all areas of the business are expected in the 2016 financial year," Mr Barnes said in a statement posted to the NZX. "We believe we will look back at the 2015 financial year as a turning point in Contact's performance as its flexible asset portfolio and world class retail system provide the platform for Contact to improve performance and remain competitive in the New Zealand market."

That will be reflected in increased availability of geothermal and hydro generation plant following outages and upgrades in the past year, and annualised cost savings of about $15 million from the closure of the 400 Megawattt Otahuhu-B gas-fired combined cycle gas turbine (CCGT) from the end of next month. Contact announced the closure today, saying increased geothermal generation in the electricity system, including its newly opened Te Mihi plant, and more availability of fast-start 'peaker' plant ended the case for a spare CCGT unit.

It will also spend $45 million upgrading its other CCGT, the 377MW power station at Stratford, which can be run as a peaker station to meet spikes in electricity demand, and is adjacent to its newer Stratford peaker plant and its underground gas storage facility, Ahuroa. The Otahuhu-B closure decision was assisted by the reduction in take-or-pay contracts for natural gas, which forced Contact to use gas unprofitably, and the fact that Genesis Energy will continue to make 500MW of its Huntly power station available to the market until 2018.

The company also expects to improve its cost to serve retail customers following a four-year project to implement a new SAS software-based customer support system. Cost to serve increased 11% to $13.14 per Megawatt hour of electricity in the last financial year but the new system should deliver savings of about 10%.

Despite weaker profit performance than the previous year in all areas other than its liquefied petroleum gas business, the year was a bumper one for shareholders, who will have received total dividends of 76c a share after the payment of the final 15c dividend announced today. Distributions jumped because of a 50c special dividend in June, before the sale earlier this month of Origin Energy's controlling 53.1% stake in the company.

As well as Origin's desire to strip cash before exiting, that payout reflected a 21% increase in free cashflow to $363 million, as expected after the company largely completed some $2 billion of plant construction and systems upgrades in the past five years, allowing dividend policy to be revised to target 100% payout of free cashflow in future. However, underlying distributions of 26c a share were unchanged in the latest financial year.

The special dividend exhausted available imputation credits, so the final dividend, payable on September 15, is unimputed, and it increased the company's debt gearing by seven percentage points to 35%. Imputation credits are expected to resume in 2016, the company said. It will also start a share buyback scheme in 2016, reflecting higher free cashflow.

Some $225 million of the $300 million of bridging facilities established in the second half of the past financial year have been refinanced, with Contact now considering an offer of unsecured, unsubordinated fixed rate bonds to institutional and New Zealand retail investors for the balance. Aside from some upcoming bank facilities that are likely to be extended, Contact has no further capital maturities until its $100 million wholesale bond matures in April 2017.

Contact gave no specific profit guidance for 2016 but foreshadowed contributions from increased availability of power generating plant and "a positive contribution to profits above the increase in interest and depreciation costs" from the upgraded retail system.

"We will continue to review our pricing and product offerings to ensure customers are provided with profitable services that they value," Mr Barnes said. Some 70% of Contact customers were now on discounted tariffs, with customers on "campaign tariffs" receiving electricity at discounts similar to a commercial or industrial customer, he said.

Still, total customer numbers fell by 9000 during the year under review, with electricity customers numbering 430,000 at year end, down 7500, and retail gas customers down 1500 to 61,500. The drop partly reflected a withdrawal from customer acquisition campaigns while the new retail system bedded in. Contact says it plans to stop door-to-door customer acquisition by the end of next year.

Commercial and industrial sales volumes fell 1% pecent, reflecting competition and the termination of a Fonterra contract.

Earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments were down 11%, at $587 million on revenue that was little changed at $2.44 billion. Total operating expenses were 3% higher at $1.9 billion.

Depreciation charges were $14 million higher at $204 million, reflecting the end of capex projects, and adverse interest rate movements were behind a $37 million negative change in the fair value of financial instruments.

Tax expense at $29 million was 69% lower than the previous year and amounted to an effective tax rate of 18% on the statutory profit because of a one-off change to the way powerhouses are treated for depreciation.

Total generation volumes for the period were 5% higher at 9514 Gigawatt hours, and retail electricity sales were virtually unchanged at 8,392/GWh, with lower average temperatures helping to offset customer losses and improving energy efficiency.

Retail netback, a calculation used to judge the performance of the retail segment of the business, fell 8 percent to $85.49/MWh in a year when the average wholesale market spot price for electricity rose to $71/MWh, up from $67/MWh the previous year.

The company will delay its annual meeting until December, instead of the usual October date, to allow time to find and nominate a new chairperson for the Contact board . Interim chairman Phil Pryke said today he would not stand again for the chairmanship, while wishing to remain on the board. Former Origin appointee Bruce Beeren will retire, which will require Mr Pryke to seek re-election.

(BusinessDesk)