Winter a blessing and a curse for Contact Energy

Updated

Contact Energy's Roxburgh Dam on the Clutha River in the South Island. Dry winter weather lowered lake levels across the South Island, helping to drive up wholesale prices. Photo supplied by Contact Energy.

It seems this dry winter has been both a blessing and a curse for Contact Energy. It lost revenues because its dams couldn't generate power, but it won customers from those retailers who passed on this winter's more than doubling of wholesale prices.

While the company’s underlying profit fell 10 percent for the year to June 30, the provider reported it had won customers from retailers who depend on passing on wholesale power prices directly and who had to pass on a mid-winter spike because of low lake levels in South Island's hydro power schemes. Wholesale prices have more than doubled to $120 per megawatt hour through the winter.

In a press conference discussing the company’s annual profit result, chief executive Dennis Barnes said Contact Energy had signed up customers because of the rise in wholesale prices, which competitors such as Flick Electric base their retail prices on.

“In the last couple of months we have seen quite a number of Flick [Electric] customers switch," Barnes said.

“What the more recent stress conditions did do was identify to some customers what product they’d bought. Based on what you read on social media, not all customers understood that," he said.

“So they switched away because their bill had started to escalate during winter. Not everybody can manage that change in cash flow in their personal circumstances,” he said.

The majority of those who changed from wholesale retailers to Contact Energy switched to a two-year fixed price deal, he said.

“It’s a bit like running to the insurance company saying ‘your kitchen is on fire, can I have insurance please?’ So we switched most of those customers into Contact on longer, dated, fixed term prices.”

Contact Energy’s customer turnover or churn had fallen to 19.6 percent for the year to June 30, below the market average of 21.4 percent.

It increased overall customer numbers to 567,000 across electricity, natural gas and LPG for the year from 562,500 a year ago.

The increase comes after Contact switched from Flybuys to the AA Smartfuel rewards system earlier this year.

Flick responds

Flick Electric CEO Steve O'Connor said via email some customers had left Flick, but he expected many to return soon.

"We also noticed some of our customers that only been with us a short time and not yet banked big savings have also switched out for now," he said.

"The number of customers leaving is not significant from a long term perspective," he said.

O'Connor cited Electricity Authority figures showing Flick lost a net 286 customers in June, which he said was the first net negative number since Flick launched three years ago.

"Its odd that Contact would note this as the numbers are modest in comparison. They themselves had net switches of –484 (lost customers) in June and have had –8,537 net switches (lost customers) in the last 12 months," he said.

O'Connor said dry winters happened once every five years and rapidly rising lake inflows in recent weeks meant wholesale prices were falling and "so we’re expecting its business as usual from here."

Meridian also sees moves

Meridian Energy spokesperson Polly Atkins said Meridian had also seen an increase in the number of customers coming back to them from wholesale retailers.

“Meridian has seen a significant increase in customers who are looking for stable pricing either joining or switching back to Meridian," Atkins said.

“This is relatively common, especially in the winter months as customers find it difficult to limit their electricity use when spot prices are high. Customers who switch to Meridian during this time are looking for the certainty that we can offer them through our fixed pricing plans,” she said.

Contact Energy reported a 10 percent loss in underlying profit to $141 million for the year ending June 30.

The loss was due to abnormally dry weather in the last financial quarter, which resulted in low water levels in the South Island’s Clutha River, which powers Contact’s two hydroelectric dams.

This, in turn, required Contact to operate gas plants to meet their winter load.

Contact’s net profit for the year to June 30 was $150m, up $216m on the previous year’s $66m loss, which was driven by one-off losses from the closure of their Otahuhu power station.

New dividend payout policy coming

The company’s final dividend was unchanged at 15 cents per share, representing a pay-out ratio of 132% of Contact’s underlying profit.

Barnes said the company would be moving to a new dividend payout policy with dividends based on 80 to 90 percent of free cash flow once net debt falls below 2.8 times EBITDAF. The previous policy was to pay out 100 percent of underlying earnings after tax.

In the next financial year, Contact would target an ordinary dividend of 32 cents per share, an increase of 23 percent on the current dividend. Contact said in a presentation that it would have paid out between 34 and 38 cents a share if it had applied the new more generous dividend policy over the last year.