Contact Energy - CEN Chart

[NZSilver]

low 5's... I'm going to start buying back in at these levels...

[Jantar]

Don't forget that CEN went Ex $0.15 today. Based on Friday's close it was expected to be around $5.03 today. So effectively it is trading at a small increase on last week.

[Hoop]

Don't forget that CEN went Ex $0.15 today. Based on Friday's close it was expected to be around $5.03 today. So effectively it is trading at a small increase on last week.

Looking at the opening prices today it seems some forgot...a double dividend equivalent to the lucky seller(s)....nice

[Bobdn]

Gee, didn't take long for the share price to recover after going xd. Hope Air is the same.

[Snoopy]

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.

	FY2016 Result (forecast)
EBITDA (normalised FY2015)	$549m
less DA (FY2015)	-$204m
less I	-($98m+$24m)
Total EBT	$233m
less Tax at 28%	-$62m
NPAT forecast FY2016	$161m

We can now divide that forecast profit figure by the reduced number of shares 'post buyback' to get a forecast eps figure.

$161m / (733m -20m) = 22.6c

It is always a good idea to check your past predictions against what actually happened.

	FY2016 Hormalised Result
EBITDA	$523m
less DA	-$201m
less I	-$101m
Total EBT	$221m
less Tax at 28%	-$62m
NPAT forecast FY2016	$159m

So not a bad guess, although my guess was worse than it appears.

At my forecast time I had assumed the $24 'Retail Transformation' cost (a one off thing) had already been removed from the headline EBITDA figure. In fact it had not. So my forecast EBITDA should have read $525m, not $549m. This in turn would have reduced my forecast FY2016 NPAT to be $143m. So, everything considered, I think we shareholders can be pleased with the FY2016, being above my modest expectations.

The actual normalised eps figure turned out to be:

$159m / 715.5m = 22.2c

For yield investors, throwing a spanner in the works was the clean out of imputaion credits from the special dividend. This means that although the annual dividend was kept at 15cps+11cps=26cps, it was no longer fully imputed. In 'dollars received' terms for shareholders it reduced to 20cps. This is all history now. But what does it mean for shareholders going forwards? What will the real 'dividend yield' for FY2017 be, assuming Contact hold their dividend payment rate of 15c + 11c constant?

SNOOPY

[Snoopy]

For yield investors, throwing a spanner in the works was the clean out of imputaion credits from the special dividend. This means that although the annual dividend was kept at 15cps+11cps=26cps, it was no longer fully imputed. In 'dollars received' terms for shareholders it reduced to 20cps. This is all history now. But what does it mean for shareholders going forwards? What will the real 'dividend yield' for FY2017 be, assuming Contact hold their dividend payment rate of 15c + 11c constant?

FWIW I think the answer going forwards is to look at the 'earnings yield', not the 'dividend yield' when considering the 'income generating capacity' of your Contact investment going forwards.. If a company pays out more than their earnings in dividends then, long term, that is equivalent to paying out all of their earnings in dividends plus giving you some capital back. The unfortunate thing about this is that the 'returned capital' part of the dividend also comes with an income tax bill!

Last year (FY2016) the picture was distorted. The 50c Contact special dividend soaked up all of the available tax credits prior to Origin Energy selling out as controlling shareholder. That affected the imputation credits available to attach to the FY2016 dividend. So this year's FY2017 dividend should look better than the FY2016 dividend, from an imputation credit perspective. Nevertheless I calculated FY2016's 'normalised earnings at 22.2cps. If earnings do not improve in FY2017, and I am predicting no significant improvement, and dividends remain steady (15cps+11cps) as I predict, then we shareholders will get:

26cps - 22.2cps = 3.8cps

of shareholder capital returned to us. From that 3.8c of 'spare capital', the tax man will claim his slice! So is this 3.8c really capital? Remember we are dealing here with a power company. And power companies have very long lived assets.

Prior to Origin buying their controlling stake in Contact Energy in 2004, but subsequent to the original float, there were three years of large uplifts in asset values for Contact's generation assets totalling $2.066 billion. The capital increases were justified from a discounted cashflow analysis. This analysis was done on the increased earnings potential of the hydro dams. This 'asset rerating' was done in a different electricity market climate to that we find ourselves in today. Power was in short supply, and new energy generation projects were being set up to meet the increasing demand. As a result suddenly the hydro assets, in particular, were worth more. And more money could be borrowed against them. Will this situation again be repeated in the short term? It was Edison Mission Energy policy to revalue the power generating assets every three years, until they sold their stake to Origin. Origin initially continued with this three year asset revaluation policy. But later they changed their mind, reversing the 2007 assets revaluations and resetting FY2004, the year Origin bought their stake, as the 'base year' for valuation purposes. Now we at Contact are independently owned, who is to say that the asset revalutaion policy, which creates equity out of thin air, will not be revived?

SNOOPY

[horus1]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.

[peat]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.

not according to Infratil. They released a document a while ago that demonstrated solar was still a lot more expensive than hydro.
https://infratil.com/assets/Uploads/...pdate-2015.pdf

[Snoopy]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.

Yes, the generation asset revaluations creating 'capital out of thin air' are dependent on the marginal cost of generation increasing.

As you say Horus, if a very lowest capital cost way of putting new electricity inot the grid came to fruition, then existing high capital cost assets could be become stranded. That means the owner of those assets may indeed have to write them down in value, not up. Photovoltaics make sense for baseload consumption at home (for now), because there are no network transmission or ongoing billing costs to the home owner to pay for the power so generated. However, unless you can arrange to go completely off grid, your external electricity supply company still has network and billing costs of their own, regardless of any solar panel installations on any particular house on the network. So the big retailers are now looking to make you pay for those transmission charges anyway, with higher fixed daily charges.

Contact used to be the most 'retailer friendly' operator for people who generate their own power. Not sure if they still are. Current information on the subject may be found from the URL below.

https://www.contact.co.nz/personal/p...utedgeneration

I see that Contact have now changed to a 'two tier' payment system. If your in house generation system creates less than 10kW of power, they will pay you 8c/kWh for any excess energy you want to export to the grid. If your system has a generating capacity of greater than 10kW, they say 'contact us'. This is code for saying:

"We will put up with dribs and drabs being fed into the power grid. It looks good for PR purposes. But if you want to get serious about rooftop power production, we don't want to know you."

If you are currently a 'rooftop generator' for Contact, there is more to worry about from Contact's submission to the Commerce Commission's pricing review. From p79 of the FY2016 Annual Report:

"Contact's view is that regulatory settings for investment in new technology should promote the best long term outcome for consumers and ensure that there is a level playing field and open access for the provision of new technologies like battery services. In other words networks retrailers and third parties should be able to provide battery services on the same basis and be able to access market prices for all related services they provide."

The 'level playing field' bit that I have emphasised means you as a 'home generator' are not going to get away with dodging your share of nationwide grid and distribution costs in the future. There is a further implication by omission that feeding power straight into the grid at any time will not be tolerated. In the future 'home generators' will need a battery installation at home, so that power will be fed into the grid only when Contact wants you to do so. This is all part of the 'level playing field' to put 'home generators' on the same footing as Contact's own hydro dams. I'd say Contact are out to get the likes of you Horus!

SNOOPY

[Snoopy]

Contact Energy commissioned its 200MW gas-fired peaking power station in early 2011. The facility plays an important role in providing New Zealand with a secure supply of electricity, while enabling the country to increase the level of electricity generated from renewable sources. The two fast-start gas turbine peaking units supply enough electricity for 200,000 average homes and can go from a cold start to full load in just 10 minutes. The gas turbine peaking units have been installed on the site of Contact's former Stratford power station, adjacent to the company's existing Taranaki Combined

I thought the Contact's position on the current emissions trading scheme was worthy of further comment. From p42 of AR2016.

"While over the past few years, the electricity sector has made substantial progress in reducing its emissions, our view is that without increasing the cost of generation or creating security supply challenges, the electricity sector's ability to make further changes is limited. This is because of the important role gas-fired generation currently plays in meeting electricity peak loads and at times of low hydro inflows and when the wind isn't blowing."

<snip>

"Under existing NZETS rules, companies like Contact currently submit one emissions unit per two tonnes of carbon emitted. As announced in May this year, companies with surrender obligations will transition to surrendering one emissions unit per two tonnes of carbon emitted to one emissions unit per one tonne of carbon emitted (1 for 1) by 2019. Transitioning to from a 50% unit cost to full market price for emissions from 1 January 2019 represents an increase in cost for Contact and other emitters.."

Carbon emisssion costs for FY2016 were $8m (AR2016 p63). Even if that were to double to $16m in FY2020, that is still manageable. But I am wondering if we are indeed nearing the end of the 'renewable substitution' road, how this change will be reflected in power prices for consumers going forwards. If the cost of running a peaking station goes up, that means the offer price of adding such a station into the power generation matrix goes up. This means the wholesale market will be paying more for peak power. In turn the retailers will be paying more for peak power. However, most consumers are on a fixed unit price scheme. So the only way for retailers to recover their higher peaking costs will be to put up fixed power unit charges for consumers all the year round. Is my logic correct?

SNOOPY