Low hydro, geothermal outage, Origin costs hit Contact's November performance

Monday 7th December 2015

Contact Energy's operational performance for November was worse than expected, leading the company 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 cash flow for financial year 2016, said Contact in its monthly update, released two days ahead of Wednesday's annual meeting in Wellington, where its longest-standing director, acting chair Phil Pryke, will be stepping down and whose former cornerstone investor Origin Energy sold out in August.

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 said.

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

"The lower tariffs were expected to be offset by cost reductions," Contact said. "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 1,000 electricity customers between October and November, at 422,000, 11,500 lower 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 was $161 million in 2015, a 29 percent drop on 2014.

Contact said it "continues to expect a marked increase in operating cash flow," which totalled $490 million in 2015, a 10 percent increase on 2014.

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

Te Mihi is Contact's newest geothermal power station, which was integrated into Contact's operations in May 2014 and generated 1,159 GWh of electricity for the 2015 financial year, nearly 30 percent of Contact's total hours generated that year.

Former cornerstone shareholder Origin sold its 53 percent 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 percent drop in underlying earnings in what chief executive Dennis Barnes described as a "disappointing" financial performance. The company has since been driving at a board refreshment, appointing Victoria Crone, managing director of accounting software firm Xero, and current chief financial officer of Air New Zealand, Rob McDonald, as directors in October.

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, would replace Pryke.

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

BusinessDesk.co.nz

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