Contact Energy - CEN Chart

[macduffy]

Suuuussssssh. Haven't finished accumulating

Beware of accumulators! They're often about to turn into distributors.

[dreamcatcher]

Looks like CEN in catch up mode to other Gentailers after recent huge orders ........

[bull....]

Looks like CEN in catch up mode to other Gentailers after recent huge orders ........

cen on fire , as are all gentailers. people locking in there divs because low rates and even lower rates for yrs to come

[dreamcatcher]

Over 1m already gone today great dividend payer in these low interest future and looks to be heading with a 7 in front

[bull....]

just about to crack $7

[dreamcatcher]

just about to crack $7

ONLY $7 some ways to go then ........... Oct 2007 was over $9

[Snoopy]

ONLY $7 some ways to go then ........... Oct 2007 was over $9

The above is true, but there is more to the story.

At the end of the financial year in which the $9 peak was reached (FY2018, ending 30th June 2018), there were 576.633m shares on issue. Over the next few years the number of shares on issue ballooned considerably. This was a result of a substantial cash issue, associated with the building of the Te Mihi geothermal power station and the operation of a dividend reinvestment plan. This saw the number of shares on issue balloon out to a peak of 733,359m at EOFY2015, before coming back a bit in recent years, Te Mihi ended up being a replacement for the Otahuhu gas powered station. So at the end of this process we had a company that was substantially unchanged in size, with profits to be shared across a lot more shares that are now on issue.

At EOFY2018 there were 716.287m shares on issue. This is an increase since $9 share price days of:

716.287 / 576.633 = 1.24, or a 24% rise

This means the equivalent share price to $9 from all those years ago is now:

$9 / 1,24 = $7.26

Take off the 50c capital return from 2015 and the all time high equivalent price drops to:

$7.26 - $0,50 = $6.76

So you may not have too long to wait before Contact touches its all time high. I would say we are there right now.

SNOOPY

[dreamcatcher]

Not a client of Craigs but understand they recently upgraded TP to $7.87 .... comments offers the most value in NZ electricity sector at present.

[Snoopy]

What does Contact's new dividend policy really mean in dollar terms? To answer that question I have overlaid the new dividend policy on the actual results over the last nine years.

	FY2009	FY2010	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017
Cashflows from Operating Activities	$425m	$368m	$379m	$440m	$469m	$446m	$490m	$556m	$502m
less Stay in Business CAPEX	($103m)	($76m)	($180m)	($98m)	($116m)	($46m)	($63m)	($87m)	($75m)
less Net Interest Costs	($63m)	($56m)	($62m)	($72m)	($66m)	($77m)	($98m)	($101m)	($92m)
equals Operating Free Cashflow	$259m	$236m	$137m	$270m	$287m	$323m	$329m	$368m	$335m
Operating Free Cashflow x 0.8	$207m	$189m	$110m	$216m	$230m	$258m	$263m	$250m	$228m
Dividend per Share (based on 715m shares on issue)	29cps	26cps	15cps	30cps	32cps	36cps	37cps	35cps	32cps

Those calculated dividends are rather higher than what was actually paid out in the past, with one exception: FY2011. Why was the operating cashflow over FY2011 anomalously low? In that year Contact built both the Stratford Peaker station, and commissioned the Ahuroa gas storage site. Both of these additions were not to add to the normal portfolio of generation assets. They were to enable the existing generation assets to be utilized more effectively. It looks like Contact may have classified any associated expenditure as 'stay in business' Capex, because of this.

I intend to use the above table as 'input information' into my 'capitalised dividend' valuation model, which is one window as to what Contact Energy shares might be worth today.

Another point of note is that I am assuming exactly 715m shares were on issue at the end of each year over the last nine years. In fact the number of shares issued varied with share issues and share buybacks. However the purpose of the table is not an historical retrospective. The purpose of the table is to answer the question:

"What would happen if we imposed the the weather events and demand from the last nine years over the current capital structure. Effectively we are modelling an array of nine possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect.

One more point to notice is the very last figure in the bottom RH corner of the table. That figure - 32cps - happens to be exactly the targeted dividend figure that Contact is looking to achieve for FY2018 assuming debt has been brought down to an acceptable level. By implication, debt was not at an acceptable level at the end of FY2017. But if the debt had been brought down, that means we might have expected that level of dividend from the year just gone, had today's dividend policy applied. The fact that the retrospectively calculated dividend for FY2017 aligns with the forecast dividend of FY2108 gives me confidence in the dividend numbers rolling out from this modelling.

Time to update Contact's restated FY2018 dividend policy, to pay out 100% of free cashflow, from an FY2018 ten year perspective.

	FY2009	FY2010	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018
Cashflows from Operating Activities	$425m	$368m	$379m	$440m	$469m	$446m	$490m	$556m	$508m	$457m
less Stay in Business CAPEX	($103m)	($76m)	($180m)	($98m)	($116m)	($46m)	($63m)	($87m)	($116m)	($78m)
less Net Interest Costs	($63m)	($56m)	($62m)	($72m)	($66m)	($77m)	($98m)	($101m)	($92m)	($84m)
equals Operating Free Cashflow	$259m	$236m	$137m	$270m	$287m	$323m	$329m	$368m	$299m	$295m
Operating Free Cashflow x 1.0	$259m	$236m	$137m	$270m	$287m	$323m	$329m	$368m	$299m	$295m
Dividend per Share (based on 716m shares on issue)	36cps	33cps	19cps	38cps	40cps	45cps	46cps	51cps	42cps	41cps

Those calculated dividends are rather higher than what was actually paid out in the past, with one exception: FY2011. Why was the operating cashflow over FY2011 anomalously low? In that year Contact built both the Stratford Peaker station, and commissioned the Ahuroa gas storage site. Both of these additions were not to add to the normal portfolio of generation assets. They were to enable the existing generation assets to be utilized more effectively. It looks like Contact may have classified any associated expenditure as 'stay in business' Capex, because of this.

Annoyingly between FY2017 and FY2018, the definition of 'Stay In Business' (SIB) Capital Expenditure seems to have changed slightly.

Over FY2017 there were three classes of CAPEX;
'Generation TTC', 'Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement

Here TCC stands for the 'Taranaki Combined Cycle' Plant at Stratford. Contact had a plan for a now $50m do-over, with a revised start date in November 2017. Despite the later than anticipated on the ground start, the expenditure for this was budgeted for over FY2016, FY2017 and FY2018. The Stratford generator has undergone its fifth big refurbishment and that will see it through to 2022. Every 25,000 operating hours the turbine needs new blades. The TCC Station tyoically generates power for three to five months a year during the months of peak demand.

Over FY2018 there were only two classes of CAPEX;
''Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement.

The forecast total CAPEX for FY2018 from the Annual Result Presentation in FY2017 does not appear to have varied from the actual CAPEX for FY2018 This suggests that the 'TCC refurbishments' have now been combined with the formerly separate 'Stay in Business' (SIB) category of capital expenditure. Oddly in another exposition of detail, CEN now make a distinction between 'accounting capex' and 'Cash Spend SIB capex.' I cannot explain this. But the result is the 'cash SIB capex' for FY2018 is now greater than the 'Total Capex'' for FY2018! (Refer to AGM Presentation 2018 p28 and AGM Presentation 2017 p26).

I intend to use the above table as 'input information' into my 'capitalised dividend' valuation model, which is one window as to what Contact Energy shares might be worth today.

Another point of note is that I am assuming exactly 716m shares were on issue at the end of each year over the last ten years. In fact the number of shares issued varied with share issues and share buybacks. However the purpose of the table is not an historical retrospective. The purpose of the table is to answer the question:

"What would happen if we imposed the weather events and demand from the last ten years over the current dividend policy. Effectively we are modelling an array of ten possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect.


SNOOPY

[Snoopy]

Annoyingly between FY2017 and FY2018, the definition of 'Stay In Business' (SIB) Capital Expenditure seems to have changed slightly.

Over FY2017 there were three classes of CAPEX;
'Generation TTC', 'Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement

Over FY2018 there were only two classes of CAPEX;
''Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement.

The forecast total CAPEX for FY2018 from the Annual Result Presentation in FY2017 does not appear to have varied from the actual CAPEX for FY2018 This suggests that the 'TCC refurbishments' have now been combined with the formerly separate 'Stay in Business' (SIB) category of capital expenditure. Oddly in another exposition of detail, CEN now make a distinction between 'accounting capex' and 'Cash Spend SIB capex.' I cannot explain this. But the result is the 'cash SIB capex' for FY2018 is now greater than the 'Total Capex'' for FY2018! (Refer to AGM Presentation 2018 p28 and AGM Presentation 2017 p26).

The above is an issue I have documented on the changing treatment of the Taranaki Combined Cycle power station at Stratford in year to year accounts.

There will be other issues regarding actual changes in the asset portfolio going forwards. Negotiations were well advanced (subsequently concluded) on the sale by Contact of the 'Rockgas' retail LPG supply business and the 'Ahuroa' gas storage facility. This raises the question: Should I try to 'back out' the associated free cashflows of both of these business units in my 10 year operating cashflow picture above? The rationale for doing this is that if I am using my 'free cashflow' table that I have generated above as a forecasting tool for future dividends, would it not be sensible to take out the cashflow from business units that I know will not be there in the future?

The problem I have with making such adjustments is not just technical. I have to consider that throughout history, businesses are managed as a current going concern. For example in the case of 'Rockgas'. 'Rockgas' has been post FY2018 balance date bought by 'Gas Services NZ' for $260m. Total 'Revenue and Other Income' for 'Rockgas' over FY2018 was $123m and EBITDAF was $32m. I could therefore 'fix' my cashflow analysis by backing out $32m of EBITDAF from the top line. Yet the sale of 'Rockgas' has allow debt to be repaid. So I presumably should also back out any associated interest cost savings from the cost line. Yet such a debt adjustment retrospectively assumes that Contact ring fenced a proportion of their debt to directly fund 'Rockgas'. That may or may not be true and this is where making such 'clever' adjustments becomes murky in practice. Making this adjustment, I would be guessing how management might have behaved in the past had their portfolio of assets been a little different.

My current thinking, which may be wrong, is that I should not make any such adjustments in this instance. That doesn't mean I don't have concerns. It just means that I am not sure the 'cure' of making such adjustments will be better than the 'disease' of not doing so.

The situation becomes even more complicated with the sale of the 'Ahuroa Gas Facility' to 'GSNZ SP1 Limited'. We know that this facility was 'on the books' valued at $185m and we know that Contact received $200m for it. What we do not know is what profits have been lost, or will be lost, by Contact in selling this facility. Contact will still have the use of 'Ahuroa' going forwards and will have to pay for the privilege. But how much will they be paying? As shareholders we have no idea. If we use the same earnings multiple as the Rockgas sale (a highly dubious assumption IMO ) then we get an averaged annual EBITDAF figure of $25m. But the use of the facility will be dictated by when Contacts's 'take or pay' gas purchase obligations are mismatched to their annual use requirements. Or more simply, how often the TCC Power Station is required run. Long term, I can't see how that can be forecast. And it looks to be extremely difficult to 'retrospectively adjust' in my modelling. We also need to bear in mind that 'other customers' (in real terms I think that means Genesis Energy, maybe Todd Energy?) may also use 'Ahuroa' going forwards. So the $200m price paid for Ahuroa does not only reflect profits that may be gained from Contact in the future.

I wonder if anyone else on this forum has concocted such a long winded way of saying they are doing nothing?

SNOOPY