Contact Energy posted a 19 percent drop in first-half profit, missing estimates, on low inflows into hydro storage lakes, lower margins on mass market tariffs and “an unfavourable generation fuel mix”.
The largest listed electricity company on the NZX reported statutory, tax-paid earnings for the first half of $68 million, down from $83.7 million a year earlier. The 19 percent profit decline was greater than the 16.4 percent slump predicted by brokerage Forsyth Barr. Sales rose 7 percent to $1.29 billion.
On an earnings before interest, tax, depreciation, amortisation and financial instrument value changes basis, Contact reported a $230.9 surplus, up 2.4 percent on the same period a year earlier, but again slightly lower than the 3.4 percent increase Forsyth Barr was predicting.
Underlying earnings after tax, which excludes the impact of non-cash changes in the value of financial instruments, were down 3.1 percent to $76.3 million.
Despite the fact wholesale electricity spot market prices failed to produce a margin for Contact when it ran gas-fired plants to shore up hydro storage levels, the result nonetheless reflected an improved performance from the company’s electricity business. Hydro generation was at its second lowest for a first half in the last 14 years.
The company’s new gas storage facility at Ahuroa also meant Contact stopped reporting losses on the sale at distressed prices or abandonment of rights to natural gas under take-or-pay contracts, which cost it $23.6 million in the first half of the previous financial year. The sale of its stake in the Oakey power station, in Queensland, during the period also allowed a $28 million one-off gain to be booked.
Contact also arrested plummeting customer numbers with a new 22 percent prompt payment discount for customers receiving billing online and paying on time, and regained 4,600 customers of more than 16,000 lost during an Electricity Authority-sponsored customer switching campaign at the start of the period.
However, the new discount – which 146,000 of its 443,000 customers have taken up - was a main reason retail margins fell from 2 percent to 1 percent. Contact showed how it has been aggressively shifting load closer to its North Island generation as part of a strategy to manage dry year risk by reducing South Island exposure.
North Island load was 71 percent of the total in the first half under review, compared with 64 percent in the first half of the previous financial year.
“The combination of higher wholesale electricity prices and the delivery of gas take-or-pay savings were offset by the hydro generation volumes being down 307 gigawatt hours (16 percent) compared to the prior half year,” said chief executive Dennis Barnes.
“The majority of this volume was replaced by more expensive thermal generation, with wholesale prices only just covering costs. A return for the valuable capacity role the thermal plant plays was not evident in market pricing.”
However, history suggests that if hydro conditions remain dry, wholesale prices are likely to rise more dramatically in the second half of the financial year, which coincides with autumn, when hydro storage levels ahead of winter become a critical factor for electricity generators.
“EBITDAF in the second half of the 2012 financial year is expected to benefit from retail price rises, including seasonally higher prices for Time of Use customers and an increase in contract for difference volumes.
“In addition, if current wholesale market conditions continue as indicated by the recent improvement in forward wholesale electricity prices, then Contact is well placed with its flexible exposed generation capacity to deliver stronger second half earnings,” said Barnes.
However, weak electricity demand growth continued to place downward pressure on margins, especially since 1,297 Megawatts of new capacity had been built since 2007, covering the period of prolonged recession and weak economic growth, while only 310MW had been decommissioned in that time.
This was “moderating spot prices and increasing retail competition.”
The company gained some benefit from weak global carbon prices, with the value of a tonne of carbon falling to $17, compared with $22 in the prior period.
The company will pay an interim dividend in the form of non-taxable bonus shares at a rate equivalent to 11 cents per share, equating to a payout ratio of 102 percent of underlying post-tax earnings.