Origin costs hit Contact's performance leading to warning

A worse than expected November operational performance has led Contact Energy [NZX: CEN] to warn its full year operating earnings are not expected to be much different from last year's.

However, the electricity generator and retailer still expects an increase in operating cashflow for the 2016 financial year, says Contact in its monthly update, released two days ahead of Wednesday's annual meeting.

Commercial and industrial sales volumes for November were lower than the prior year, at 315 gigawatt hours (GWh) compared to 380 GWh in November 2014. Wholesale contract sales volume was not enough to fully offset the shortfall, the company says.

Tariffs were lower than expected for mass market customers as competition remains strong, though sales volumes were in line with 2014, falling 4% to 283 GWh.

"The lower tariffs were expected to be offset by cost reductions," Contact says. "While progress has been made, costs primarily related to bad debt and those associated with the separation from Origin Energy are higher than expected."

Contact showed a loss of 1000 electricity customers between October and November, at 422,000 – 11,500 fewer than a year ago, although gas customers were unchanged from both the same month a year ago and last month, at 61,000.

The company does not expect its 2016 earnings before interest, tax, depreciation, amortisation and changes to the value of financial instruments to be materially different to 2015's $525 million, and the same for its underlying earnings after tax, which were $161 million in 2015, a 29% drop on 2014.

Contact says it "continues to expect a marked increase in operating cashflow," which totalled $490 million in 2015, a 10% increase on 2014.

The November performance was affected by low hydro inflows and an extended outage at Te Mihi geothermal power station in Taupo.

Te Mihi is Contact's newest geothermal power station, which was integrated into Contact's operations in May 2014 and generated 1159 GWh of electricity for the 2015 financial year, nearly 30% of Contact's total hours generated that year.

Former cornerstone shareholder Origin sold its 53% stake in August as the ASX-listed company came under pressure to strengthen its balance sheet due to cost over-runs and slumping gas prices, affecting its A$25 billion liquefied natural gas project in Queensland.

Later that month, Contact reported a 29% drop in underlying earnings in what chief executive Dennis Barnes described as a "disappointing" financial performance. 

The company has since been refreshing the board, appointing Victoria Crone, managing director of accounting software firm Xero, and current chief financial officer at Air New Zealand, Rob McDonald, as directors in October. The company's longest-standing director, and acting chairman, Phil Pryke will be stepping down at the annual meeting.

In September, the company announced Ralph Norris, an outgoing Origin director who has previously been chief executive of Commonwealth Bank of Australia and Air New Zealand, will replace Mr Pryke.

Contact's shares dropped 2.4% to $4.88, and have dropped 13.2% this year.

(BusinessDesk)