Contact hopes worst is over for customer losses
By Pattrick Smellie
Aug 22 (BusinessDesk) – Contact Energy Ltd. believes it has stemmed the exodus of retail electricity customers to competitors over the past two months, and expects as many as 40% of its 456,000 customers to take up the company’s 22% discount for on-time, online bill payments.
At a presentation on the company’s flat earnings for the year to June 30, chief executive Dennis Barnes said the current 26% annual customer churn level in the New Zealand market was now approaching similar levels to competitive electricity markets in Australian and American states.
“It seems to top out at around these levels,” he said.
Customer losses of around 2500 a month had been the norm prior to the launch of the Electricity Authority’s “What’s My Number?” customer switching campaign in June. That has caused Contact to lose more than 15,000 customers in two months, and it expects to lose another 4000 or so in August, before settling back to more normal levels in September, said Barnes. There had been two days since the launch of the 22% discount when Contact had experienced net customer gains.
There was no “sunset date” on the unprecedented discount, Barnes said, and the company expected an overall impact on revenues - $2.231 billion last year – of around 3%, or around $66.9 million annually, and assumed the 20% of customers already eligible for the discount would rise to 40%.
While retail electricity tariffs remained unsustainably low, Barnes was cagey on the extent to which Contact could hope to push electricity tariffs up in the year ahead, given the historically high level of retail competition and a prolonged period of low wholesale market spot prices caused by wet weather, subdued economic activity, and the impact on consumption of Christchurch’s earthquakes.
While retail electricity sales, including to “time of use” industrial customers, were up 8% over the course of the year and sales prices were up 4%, that was not enough to offset margin erosion caused by increased network costs, mass market customer losses, and downward pressure on contracts for bulk electricity, which reflect low wholesale spot prices.
Total retail margin came in at 2%, compared with 4% the year before, and the sales breakdown shows a dramatic jump in North Island sales, and in TOU sales at 3,920 Gigawatt hours, compared with 2,999GWh in the previous financial year.
While the electricity segment as a whole showed a 6% improvement in EBITDAF at $405 million, retail EBITDAF was down 44% to $28 million.
Barnes also signalled that while the Ahuroa gas storage facility and a reduction in take or pay gas obligations from 52 Petajoules to 40 PJ’s annually, the company could still expect to end up with loss-making distressed gas sales and to pay for some unused gas, particularly if high rainfall continues and continues to favour hydro-electric generation over thermal options.
In the last year, Contact reported an $11.1 million loss on “distressed” gas sales, compared with $5 million the year before, while gas paid and not taken cost $12.5 million, down from $19.7 million a year earlier.
That was despite filling the newly commissioned Ahuroa underground gas storage facility to the brim with 5.8PJ of stored gas that would otherwise have had to be sold at a loss or paid without being consumed at all.
Ahuroa had, however, given Contact the option of reducing its take or pay contract obligations to 40PJ annually.
Barnes made much of the fact that the combination of Ahuroa and 200 Megawatts of fast-start gas-fired “peaking” plant at Stratford would improve Contact’s profitability in both wet and dry years in the future.
Even though the Stratford peakers were only officially commissioned in the last month of the financial year, Contact’s second half had benefited from the new investments, with an 8% increase in electricity segment EBITDAF to $204 million.
There were also $195 million of hedged electricity sales in the second half, compared with $163 million in the prior year, and a much smaller proportion of “exposed” generation - $9 million worth versus $26 million in the previous year’s second half.
The country’s largest listed energy company reported a statutory after tax profit of $150.3 million in the year to June 30, down 2.8% on the previous year’s result, and exactly in line with predictions from brokers Forsyth Barr.
Contact is cutting its final dividend by two cents a share to 12 cents, leaving payout for the year at 23 cents, two cents lower than the previous year, but still representing a 100% payout of underlying earnings, which were roughly the same as net profit, at $150.9 million. The dividend will be paid as a tax-free bonus issue, with capacity for buyback from shareholders by Contact.
The result was achieved on a 3.1% increase in total revenue to $2.23 billion, to produce a 3.4% improvement in earnings before interest, depreciation, tax, depreciation amortisation and changes in the fair value of financial instruments, of $441.42 million.
Barnes gave no guidance for the year ahead beyond the generic expectation that Ahuroa and the peaker plant would lead to structural improvement in long term earnings of around $30 million a year.
“This industry has huge variability because of the weather,” he said. “The floor of earnings is more likely in the $470 million to $480 million range, versus $420 million to $430 million, and even in a wet year, we’ve delivered $441 million, despite $4 million of costs from the Christchurch earthquakes.”