Contact sees falling headcount as electricity demand stagnates

BUSINESSDESK: Contact Energy expects to reduce its headcount from around 1200 staff and contractors as it stops building new power plants in response to stagnant electricity demand.

Chief executive Dennis Barnes gave no target for reductions but says the focus for the country's largest listed generator-retailer would turn to "sweating" existing generation assets, rather than building new ones, once it finishes work at the Wairakei and Te Mihi geothermal power station sites next year.

"It doesn't necessarily mean we are over-supplied with people, but their focus will change," Mr Barnes told a media briefing after announcing a 17% improvement in underlying after-tax earnings of $176.4 million for the year to June 30.

The underlying earnings measure strips out one-off factors to allow investors a clear view of the company's performance from year to year.

"It's quite clear that will result in efficiency opportunities in the business which may result in a lower headcount over time. To say what the number is, is premature," but the "stagnant demand outlook is changing and shaping the business".

As a result, capital expenditure is forecast to fall from close to $600 million in the year to June 30 to less than $100 million by the 2015 financial year and would be a significant contributor to stronger cashflows and earnings in the next few years.

"Completing the current asset and systems investment programme, leveraging existing investments to reduce cost and continuing to improve our fuel purchase costs will position Contact to grow earnings in coming years," Mr Barnes says.

As a sign of that, the final dividend of 12 cents per share announced yesterday will be the last paid as bonus shares rather than cash for the foreseeable future.

Mr Barnes also revealed that some 40% of the Contact customer base – 160,000 out of 443,000 – have taken up the company's offer of a 22% discount on their power bills if they pay online, and on time, although uptake is slowing.

He attributes the discount offering and active retail customer acquisition as reasons for net growth of 5000 customers in the year to June 3, reversing a trend that saw the company lose around 80,000 customers between 2008 and 2011.

Contact also achieved improved margins from its industrial "time of use" and commercial customers, although the reported margin on retail sales fell from $2 per Megawatt hour in the previous year to $1 in the year just passed.

On Contact's gas generation portfolio, Mr Barnes released graphs showing the company has only three Petajoules of natural gas contracted for purchase in 2015, compared to a gas book today of 44PJs.

While the current entitlements are more than Contact needs annually, its new gas storage facility, Ahuroa, means there are no costs last year for gas bought but not used.

This compares to the $24 million cost of unused gas the year before, with the effective price per Gigajoule falling to $7.62 in the last financial year. It was $8.57 a year earlier.

Contact has also swapped a total of 6PJs of current entitlements into 2014 and 2015.

Contracting for competitively priced gas will determine the fate of Contact's two combined-cycle gas-fired power stations in Auckland and Taranaki, both of which could be converted to open-cycle operation if their future as baseload generators was placed in doubt by high gas prices.

"It's a work in progress," says Mr Barnes, noting that gas prices have been falling. With current levels of exploration and production activity, he is confident Contact would "markedly improve its contracted position".

Carbon costs also helped the bottom line, with Contact paying an average $9 per tonne of carbon in the year to June 30, compared to $20 a tonne in the previous year.

The company also continues to skew its load to the North Island, giving it better ability to juggle generation assets without being caught out by price separation caused by Cook Strait cable constraints, and a big shift from as recently as 2009, when just 54% of its load was in the North Island.

Mr Barnes says while Contact's "enterprise transformation project" to install SAP software across the business was complete for finance, procurement and generation assets, it is taking longer and proving costlier than desired to implement new customer billing and service applications.

Simplified billing and new customer service initiatives will not be seen before next year.

Shares of Contact, which is controlled by Origin Energy of Australia, rose 3 cents on the NZX yesterday morning to $4.88, compared to a high in the last 12 months of $5.79.