FY18 Shareholder letter

This year has been a noteworthy one for Contact, not least
because it marks the last time we will be known by our familiar
red brand. In its stead is our new brand, which firmly signals
the beginning of our transformation to become a truly digital
retailer with the in-house agility to adapt to the evolving needs
of our customers. This includes streamlining the channels
through which they interact with us, and surprising and
delighting them with new products and services that
customers’ value.
It is also a year where the electricity and gas operating
environment has tested us. In the Generation business we
experienced a second successive year of hydro inflows that
were 10% lower than average. Our Customer business
continued to compete hard against an ever-growing number
of start-up retailers and reinvigorated incumbents. In the face
of the challenges, we showed strong financial discipline and
reduced the operating and capital spend by $58 million, an
incredible effort from our dedicated people. Our lean and
low-cost operation sets up Contact for any future and has
given the Board the confidence to increase dividends to
shareholders after a period of serious investment in assets
and systems.
In the last year we also announced two transactions. They
stand out to me as key enablers to accelerate the delivery of
our strategy: the sale of the Ahuroa Gas Storage (AGS) facility,
and the sale of the Rockgas LPG business. Although on face
value they seem like simple disposals at a fair price, they build
significant flexibility into our business. With AGS we retain
access to long-term gas storage services to meet our flexible
thermal generation requirements without the need to own and
operate a gas storage asset. Similarly, the Rockgas sale frees
us up from the fulfilment aspects of the LPG business while
still being able to sell the product to our mass market
customers, which we know is something they value. The sales
proceeds will also strengthen our balance sheet and add
resilience to the company.
Focussing on our core areas of advantage will be key to
succeeding in today’s markets and allowing us to participate
in those that are only just starting to emerge. For example, we
know the demand for low carbon, reliable, renewable
electricity will rise as the economy reduces reliance on fossil
fuels and decarbonises. This will need to be balanced against
access to affordable energy and we will work with the
Government to help shape future policy that will impact our
regulatory environment. New technologies will continue to
disrupt traditional ways of doing business and provide
challenges and opportunities that we need to be prepared for.
I can say with confidence we will be ready for them.
CONNECTING WITH CUSTOMERS
The New Zealand energy market remains highly competitive
and, with more retailers competing for attention, it is more
important than ever that we can distinguish our products and
services in the eyes of customers. Our new brand marks the
culmination of a number of years of work to reinvent Contact
as a truly customer-centric digital energy company from the
inside out.
The operational performance of the Customer business over
the last year has given us the confidence in our belief that we
are on the right path, and provides solid momentum to deliver
on our brand promise. Our focus on being New Zealand’s
lowest cost energy retailer with the best customer experience
is delivering results, with customers advocating for us in
greater numbers than ever before (as measured by our Net
Promoter Score) and customers staying longer, with churn
below the market average.
Much of this is attributable to our transformation programme
which continues to deliver operational efficiencies by
empowering the Customer team to remove bottlenecks,
reduce operating costs and react to valuable market
opportunities. This focus resulted in a $13 million reduction in
electricity and gas cost to serve, and a decline in the number
of interactions with customers as the functionality of our
online channels improved. Our proactive approach to the debt
collection cycle has also lead to less debt being written off
and fewer customers in the credit cycle.
Tena koe
Greetings,

Despite these operational improvements, the Customer
business results in the year were impacted by market
headwinds. In particular, increased competition in the
commercial and industrial electricity segments reduced
margins and Contact was unable to pass through the higher
cost of LPG to customers as it rose with global oil prices. As a
result, the Customer business EBITDAF was $109 million in
the period, $9 million lower than FY17.
GENERATING FOR THE FUTURE
Dry conditions impacted the earnings in our Generation
business as the low South Island inflows at the end of FY17
extended into the start of FY18 culminating in a dry, hot
summer. As a result, hydro generation volumes were below
average for the second consecutive financial year and,
although hydrology recovered in the last quarter of FY18, it
was not enough to offset the dry start.
Hydrological variability is expected and our flexible fleet of
generation assets means we are able to increase generation
from our thermal plants and supply energy to our customers
at a fixed price when they need it, not just when it’s raining.
However, the additional cost of gas and carbon to run harder
has weighed on our financial performance in the period.
Unfortunately the timing of the scheduled five-yearly major
refurbishment of our largest thermal plant, the Taranaki
Combined Cycle, occurred during November and December,
a period of unusually higher wholesale prices due to the
dry summer.
As a result, operating earnings (EBITDAF) from the
Generation business were $372 million in the period, $11
million lower than FY17. The portfolio performed as expected
and the 3% reduction was primarily due to lower returns as a
market-making participant on the ASX futures market and the
liquidated damages received in FY17 were not repeated. The
full effect of the dry conditions on our financial performance
was mitigated by our continuous improvement programme,
which is delivering sustainable reductions in ongoing
operating costs and improving the resource utilisation of our
renewable assets.
A key focus for the business is to position itself to support
further decarbonisation of New Zealand’s energy sector. We
see the development of the consented geothermal resources
under our control playing a key role in the transition and
reducing the cost of these renewable generation
developments will provide us with options to close thermal
plant, if gas and carbon costs continue to rise, and help to
keep our cost of energy low. It should be no surprise that as an
operator of geothermal plant for 60 years, it is an area where
we are a clear leader. We are not resting on our heritage. Since
2015, Contact has improved the efficiency of our geothermal
operations by 7%. While the market fundamentals don’t
currently support new renewable investment, it is something
we plan for and refine, especially as New Zealand looks to
achieve its carbon reduction ambitions.
OPERATING SUSTAINABLY
Contact can only operate commercially if we ensure the
sustainability of the resources that we rely on, and the
well-being of our stakeholders who rely on us. This principle is
universal and traverses environmental, social and economic
partners. We do not shy away from initiating and developing
these connections, even when at first there seem to be
divergent opinions – this will deliver the best outcomes in both
the short and long term.
This year we committed to the Science Based Targets
initiatives (SBTi) to set emissions reduction targets in line with
limiting global warming to two degrees. We also joined the
Climate Leaders Coalition to help New Zealand transition to a
low emissions economy. We created a climate change
position statement which describes our commitment to
reducing our own emissions while supporting our customers
and other sectors to reduce theirs.
As an owner and operator of iconic national generation
assets, provincial New Zealand is our home. We are an
inseparable part of those communities and have a shared
interest in creating a vibrant future. This year, we were ranked
among the top five companies in New Zealand for community
investment activities on the BACS Social Index, which signals
that our energy is focussed in the right place. We also work
with tangata whenua who have a special relationship with the
resources that we use.
Employees who are respected, included and trusted are a
sustainable advantage and Contact works hard to create a
receptive culture where diversity flourishes. We take the pulse
of our progress with an annual engagement survey, which
pleasingly recorded a five percentage point increase in
engagement to 77% between October 2017 and May 2018. As
a dynamic, progressive organisation we will continue to adapt
and improve to raise engagement.
At Contact we take pride in our excellent safety systems and
generative safety culture, which empowers frontline workers
to take ownership of health and safety outcomes with the
backing of our world-class process safety systems. It follows
that when 14 people were hurt in the year it is incredibly
disappointing. While most of the injuries were strains or
sprains, this does not diminish our resolve for improvement.
As mentioned, a key sustainable priority is working to position
ourselves to take the lead in the decarbonisation of
New Zealand’s energy sector. To be credible in the
conversations with customers, Contact needs to deliver on
our carbon strategy. This means measuring, controlling and
ultimately reducing our emissions.
Under our new brand, we will put our human energy where it
matters: delighting customers, leading the decarbonisation
charge, contributing positively to the communities in which we
operate, and delivering value for shareholders.
I very much look forward to it.
Dennis Barnes
Chief Executive Officer