Contact Energy has given its clearest signal yet that it will contemplate capital returns to shareholders as the company settles into a no-growth mode in the New Zealand market and reported a 22 percent drop in underlying, tax-paid earnings of $76 million for the six months to Dec. 31.
Over-supply of wholesale electricity pushed generation prices down during the period and Contact lost 6,500 customers while it dealt with teething problems in its new customer service software, which prevented the company from seeking new customers at a time when retail electricity market competition remained intense. Transition costs of $17 million were associated with this changeover during the reporting period, but are not expected to be repeated.
Statutory profit, which includes one-offs and non-cash items, was down 54 percent for the half year at $51 million, compared to the same period a year earlier, largely reflecting the retail system transition costs and an $18 million adverse, non-cash movement in the value of financial instruments, compared with a $16 million favourable movement in previous comparable half year.
Contact shares fell 3.9 percent to $6.65 at the opening of trading on the NZX this morning.
Net interest costs rose 32 percent as the company is no longer capitalising interest now that all major capital expenditure projects, primarily the Te Mihi geothermal plant and the retail transformation project, are complete. Teething problems at Te Mihi caused a prolonged outage during the period, but it is now operating at above specification.
Earnings before interest, tax, depreciation, amortisation and the fair value of financial instruments - the company's preferred indicator for overall operational performance - was down 3 percent to $257 million, compared to the first half of the previous financial year, reflecting "a $20 million reduction in retail margins as a result of the continued intensity of retail competition."
The company says that householders who sign up for discounted campaign electricity prices are receiving services that produce a profit for Contact "comparable to commercial and industrial customers", which typically pay less for electricity than residential consumers because they buy larger volumes of energy.
However, free cashflow was up markedly at $180 million, a 51 percent increase on the previous comparable half, because the company has stopped all but minor capital expenditure and now expects to become "strongly cash generative." The result was achieved on total revenues of $1.24 billion in the period, impacted by the Te Mihi outage, but still an increase on $1.15 billion booked in the same period a year earlier. Operating expenses at $983 million were also up, from $884 million on the same basis.
While the Contact board declared an unchanged interim dividend of 11 cents per share, presentation notes released with the half-year result announcement give the clearest account of the company's thinking about what to do with increased cashflows, with capital returns and potential for investment in offshore renewables projects, using Contact's expertise in geothermal energy projects, apparently favoured over higher dividends or debt reduction.
However, the notes say Contact's current gearing ratio at 28 percent supports a BBB credit rating and "de-leveraging is likely to be inefficient", as was "distribution of forecast cashflow through dividends."
"Imputation credits and available subscribed capital provide tax effective options for dividends or capital returns," the notes say.
The company is "considering the appropriate balance of distributing cash flow versus investing in growth", most probably in international markets since Contact sees "no material long term growth" prospects in New Zealand.
That's because the future of the Tiwai Point aluminium smelter, using one-seventh of total electricity output, remains uncertain and energy efficiency is improving.
However, Contact says there may be opportunities in electric vehicles, which it says are "compelling for New Zealand" with its high base of renewable generation, and that off-grid renewable electricity, such as solar, will continue to grow, although "centralised renewable generation is more economic for customers in the near term."
Looking ahead, chief executive Dennis Barnes said Contact "expected to see improvement" in the second half of the financial year, with one-off impacts in the first half not being repeated, while in the 2016 financial year, "I expect a reduction in the cost to serve our customers that will provide a positive contribution to profits."