Dry southern winter drives Contact Energy profit down 10 per cent.

Powerco looking to tighten supply with bid for higher prices

Contact Energy reported a 10 per cent fall in underlying earnings to $141 million for the year to June 30, although statutory net profit showed a $216m turnaround mainly because the costs of closing its Otahuhu-B gas-fired power station washed out of the figures.

Net profit after tax was $150m, compared with a $66m statutory loss declared in the previous period.

Earnings before tax, depreciation, amortisation and changes in the value of financial instruments (ebitdaf) — an earnings measure favoured in the electricity sector to demonstrate performance shorn of one-off factors — was down 5.5 per cent at $523m.

The result showed the impact of “above average hydro generation storage at the beginning of the year giving way to 80-year-low inflows into the key South Island lakes, culminating in a ‘dry winter’ and limiting our ability to run hydro generation”, said chief executive Dennis Barnes.

“During the final quarter of the financial year, our gas-powered stations ran hard during the peak of winter demand.”

Contact said it was looking to tighten supply, saying it would seek better prices for roughly half a terawatt hour of its total annual generation either from commercial and industrial customers, wholesale spot market sales, or by not selling it.

At a briefing on the result, Barnes said the company would be running a less aggressive hedging policy in future, reducing the amount of electricity it needed to buy each year either from its own high-cost gas-fired power stations or from other generators on the wholesale market.

While fully renewable peers such as Meridian Energy were willing to contract only 70 to 85 per cent of their total mean renewable generation, Contact had been contracting at around 125 per cent.

“We’ve back-calculated this,” said Barnes. “As far as we can go back, this results in a better earnings and cashflow outcome on average over time [but meant] every now and again, you’re going to have a crappy quarter. We’ve had it this year.”

The change in hydrology in the last quarter of 2016 required Contact to run usually idle gas-fired plant to meet demand because of an unusually dry winter in the South Island.

Resulting spikes in wholesale market spot prices knocked $32m off ebitdaf, which fell 5.5 per cent at $523m.

“We are seeing a tightening of supply and demand conditions. We think the reduction in thermal capacity has been masked somewhat by high hydrology over the last few years and it may now be appropriate to take a less hedged position and we’ve got probably six or seven months to think about that for our next commercial and industrial customer contracting round,” he said.

Contact had some 660 terawatt hours of annual production available to recontract, which Barnes described as “the discretionary part of the discretionary part of our portfolio”.

“We think with tight supply and demand that might be better placed in wholesale markets, which should allow us to be more re-selective on C&I [commercial and industrial] recontracting, which . . . should result in better prices for us,” he said, though “this last half a TWh of thermally backed sales is pretty marginal”.

Contact signalled an increase in future dividend payouts, the prospect of share buybacks and a cost-out focus that yielded $11m in annual corporate savings but pushed $5m of redundancy and restructuring costs into the last financial year.

Contact’s share price closed 16c or 3 per cent higher at $5.54.

The unchanged final dividend of 15c a share takes total distributions for the year to 132 per cent of underying profit.

We are seeing a tightening of supply and demand conditions. Contact chief executive Dennis Barnes