At an investor programme in Taupo this week Contact Energy Ltd (NZX & ASX: CEN) said gas production has recently not been as reliable as had been expected.
Managing director Dennis Barnes said the company has not been able to ascertain whether these situations are “one-off in nature or the start of a shift in medium term gas availability.”
Barnes told investors Contact’s strategy remains to optimise the customer and wholesale businesses to deliver strong cash flows.
The focus on improving operational performance and simplification of the customer and wholesale businesses is driving a focus on growing cash flow by delivering cost efficiency which “has us targeting operating costs $18 million lower in FY19.”
In the last year, there were two significant transactions - sale of Ahuroa gas storage (AGS), and sale of the Rockgas LPG business.
Last month, Contact completed sale of AGS and received $190 M cash, with a further $10 M contingent on the new owner obtaining a favourable binding ruling in line with our tax treatment.
Standard and Poors (S&P) will initially capitalise the storage service payments leaving the S&P net debt to EBITDAF ratio substantially unchanged. However, Contact and FlexGas, the new operating entity, are increasingly confident in further commercialisation of the facility. This would trigger an S&P re-assessment, lowering Contact’s key debt ratio.
Barnes said with the current review of the electricity sector, Contact agrees with the Panel’s assessment that the electricity system is working well to produce reliable and sustainable electricity supply.
Where it isn’t working so well is for those customers who are struggling to pay all their household bills and we believe the Government, social agencies, Contact and the industry can do more for these customers.
The current market settings have delivered, and changes that would undermine current momentum or have unintended consequences should be avoided.
Barnes said Contact’s EBITDAF for the financial year to date is higher than the prior comparative period, having benefitted from comparatively stronger renewable generation following record low inflows in the first quarter of FY18.
In addition, the company’s flexible generation portfolio and stored gas reserves saw an increase in merchant sales to support the market in the recent high priced periods as the market responded to gas field outages and lower national hydro storage levels.
This has been partly offset by $3 M in higher LPG product costs, as well as payments to secure flexible gas storage which reduce EBITDAF by $14 M a year from October 1.
Contact has not contracted for material volumes of gas for calendar 2019, which is not unusual for this stage of the year, but is engaging with suppliers.
In addition to the gas Contact expects to contract because of access to stored gas in AGS and other contractual options which will give appropriate access to energy for customers.