Contact Energy 1H profit up but power prices should fall
Higher gas and carbon prices are likely to underpin wholesale power prices but nevertheless longer-term electricity futures prices should fall, Contact Energy says.
The company, the country’s second-largest electricity retailer, today reported a 28 percent jump in first-half operating earnings, partly due to a surge in wholesale prices late last year when tight gas supplies coincided with declining hydro storage. Contact Energy's bottom line also benefitted from the sale of its Ahuroa gas storage and LPG business last year.
While current spot power prices are roughly a third of those in late October, they remain relatively high. Electricity futures prices, which have also risen since September, have also remained high. The March quarter 2020 contract for Otahuhu was at $97/MWh last week, from $83 at the start of October.
Contact Energy chief executive Dennis Barnes said gas availability and reliability should improve once OMV, the new operator of the Maui and Pohokura gas fields, completes maintenance work at the latter field in April.
Contact is seeking additional gas for this winter, and there is probably a small increase to pay to get operators to firm up probable reserves for delivery, he said. Carbon costs are also expected to be higher, given the planned changes to the country’s emissions trading scheme.
But he said the cost of solar, wind and geothermal continue to fall. While it’s hard to predict futures prices, that should be putting downward pressure on prices long-term.
“If I go back to the fundamentals and take the noise of the short-term out, you would expect to see a reasonable reduction, but there might be a bit of underlying support from gas and carbon,” he told analysts and journalists today.
“Gas prices have probably taken a little bit of a structural lift,” he said. “I don’t think it’s very much.”
Contact shares rose 1.5 percent to $6.31, taking their gain the past year to 18 percent. The company, which today reported a doubling of its underlying first-half profit, also boosted its dividend policy to pay-out 100 percent of operating free cash flow.
Net profit rose to $276 million for the six months ended Dec. 31, from $58 million a year earlier, boosted by a $172 million gain from the sale of its Ahuroa gas storage facility and its Rockgas LPG business.
Earnings before interest, tax, depreciation, amortisation and changes in financial instruments (ebitdaf) from Contact’s remaining businesses rose to $278 million, from $217 million a year earlier.
The company, which has simplified its business to improve its retail and generation margins, generated 4,532 GWh of electricity in the six months, almost 5 percent more than a year earlier.
A 25 percent jump in hydro output from its Clyde and Roxburgh dams enabled the firm to benefit from record wholesale prices in October and November when gas supplies were tight and storage was low in the Waitaki hydro catchment of rival Meridian Energy. The firm also drew on gas stored at Ahuroa to offer additional thermal generation to meet wholesale spot demand.
That saw Contact’s generation ebitdaf increase by $58 million to $243 million.
Barnes noted that, even if wholesale prices do move higher to reflect higher gas and carbon prices, that doesn’t necessarily mean households will face increases.
Despite some of the most volatile wholesale conditions the market had seen, new entrant rivals continued to gain customers late last year, he said, with Electric Kiwi adding about 1,000 accounts a month.
Contact’s customer group ebitdaf increased by $3 million to $48 million, but “in essence” that had only been gained through cost efficiencies, he said.
Wellington-based Contact is working hard to maximise the value of its activities as new retailers chip away at the customer bases of the major players. It sold its Ahuroa gas storage facility and its Rockgas LPG distribution business to free up capital, simplify its operations and reduce its retail exposure to international LPG prices.
It aims to become a provider of smart services to homes and businesses and wants to utilise the untapped potential within its geothermal fields to be a low-cost partner of industry as firms look to greater electrification of their transport fleets and processing to decarbonise their activities.
Barnes said the firm’s Tauhara geothermal field is looking “very competitive” but isn’t ready for development right now.
Demand has been flat for 10 years, but the country still has a great opportunity to make more use of the flexibility of the grid and increased gas storage to take more gas and coal out of the generation system, he said.
The expansion and commercialisation of storage at Ahuroa – a condition of the sale to First Gas – is an important part of that and Contact will be working to ensure that work is completed next year, he said.
“It’s really important for security of supply and I think really important in a decarbonising world to have a secure, flexible, gas supply,” Barnes said.
“September, October, November gave us a taste of that.”