Contact Energy - CEN Chart

[Snoopy]

The profit relates to operating activities so rightly under IFRS, interest in relation to the uncommissioned asset is capitalized. That extra interest should be offset by the revenue of the new plant once commissioned (if not, it was a bad investment).

The problem with power company investments is that power is a commodity. So if we have two cases:

1/ Company A builds a power station from pure equity and
2/ Company C (Contact) builds a power station using borrowings which push capitalized interest costs into the construction.

Under this scenario, it is likely that company A will have the lower cost power station. So what happens with a Labour/Green controlled government? It is clear that Contact spent more money on their power station (because they capitalised the interest during construction). So therefore Contact will be allowed to charge the single electricity buyer more for the same rate of power generation, because their construction costs were genuinely higher?

SNOOPY

[CJ]

Snoopy - If what you are saying is the Labour/Greens plan doesn't make sense, I agree. I was explaining how things work in the real world.

[Snoopy]

That AGM must have infuriated the shareholders - enough to break support and breakout downwards. CEN at 6.20 next week my guess...

Not much of a mention of AGMs on this thread (comment above was from 2008) but for what it is worth here is a run down on what happened at the Addington race Course in Christchurch today.

Contact Energy’s AGM opened with - a song! Whai Dewes led all of the senior staff present in what was described as a “Manawa ranga” (I hope I got that right). A ‘manawa’, using my wikipedia maori, is a kind of ‘song challenge’ and ‘ranga’ has a connotation of weaving. The theme of the song was “working with the communities for the resources used”, which - I think - is where the weaving ties things together.

Next down to the spoken business: A short address each from Chairman Grant ‘Ozzie’ King and CEO Dennis ‘Pommie’ Barnes.

Grant King clarified that he doesn’t believe the Tiwai Point Aluminium Smelter will close completely come the next Meridian / NZ Aluminium Smelters power agreement review in 2017. He feels it is more likely NZAS will continue to smelt but on a smaller scale. That means some of that Meridian Manapouri power will become available to the rest of NZ from 2017. And the upgraded south to north island link will allow the electrons to flow, all the way to Auckland if required. Manapouri partly coming on stream will in turn will push future power station builds for all market players out beyond 2020(ish).

Contact’s $450m of bank facilities remain undrawn since balance date. Cashflows are going up, with the wind down of the Te Mihi (latest geothermal) power station build program. Te Mihi construction is finished and the shake down process should result in power delivered to the grid within months if not weeks. Answering a post address question, King noted the life of the geothermal energy plant is determined by the life of the resource consent of the geothermal energy field being tapped. This is no shorter than 25 years, but the equipment could be expected to run for 50 years. Some of Contact’s equipment still working at Wairakei is now 54 years old. The Ohaaki geothermal field re-consents is a work in progress.

No more price rises for power are seen in the medium term, with the caveat that those local infrastructure companies will probably sting Contact for more money to pass Contact’s electrons along the power poles. IOW when Contact do put the prices up, blame the other guys down the line. Improved dividends for shareholders going forwards therefore depends on rising cashflows (already happening) and cost cutting. The Contact head office is now consolidated in the one site in Wellington from FY2013.

With the rise of geothermal energy, burning gas will change from being a base load operation to more of a support role for renewables. Nevertheless a (reduced) take or pay gas contract remains part of Contact’s energy generation plans going forwards. The Ahuroa gas storage facility will now be able to be even better utilized, meaning almost all of the ‘take or pay’ gas can be taken if not immediately used. King also mentioned that with the sale of the old New Plymouth power station site to Port Taranaki, Contact retains an option to build a gas infrastructure plant there. So shipping in LNG from Australia in the future remains an option. King expects the Combined Cycle gas turbine power station in Stratford will be used less under normal hydrology conditions once Te Mihi is in full production. When ultimately required the next power station to be developed will be on the Tauhara geothermal field. Contact already has resource consent for Tauhara (gained in 2011) which is reputedly the largest untapped geothermal energy resource in New Zealand.

On competition, Dennis Barnes elaborated. NZ is divided into 35 distribution regions. Contact claim they are the most cost competitive in 29 of those 35 regions. To boost customer service Contact are installing more smart meters which tie in with their H.E.A.T. strategy. ‘H.E.A.T.’ stands for Heat Energy Assessment Tool, a net based tool that ties in with the 130k so far and rising smart meters in service. HEAT allows better tracking of power use by customers on line

Both King and Barnes took a swipe at the “Labour/Green” single power buyer policy. After being relatively quiet on the topic in the media up to now, Contact has released a commissioned external report to the media today. Main problems identified are potential over investment, pricing volatility and problems with security of supply, not to mention the costs of the extra layer of bureaucracy created.

The just paid final dividend of 14cps, brought the total dividend to 25cps which represents 91% of profits.

The meeting ended with a generous morning tea of aristocratically cut club sandwiches and petit pastries. Whipped cream on freshly baked scones was to finish. Chocolate cake and blueberry mini muffins were available for the cream averse.

SNOOPY

[JAYAY]

Whai Dewes. Yes I remember him at last years AGM giving us an address in Maori. I thought what a great communicator. What was he saying? Who did he think he was talking to? How much does this guy cost us?
A political necessity I suppose.

[Snoopy]

Whai Dewes. Yes I remember him at last years AGM giving us an address in Maori. I thought what a great communicator. What was he saying? Who did he think he was talking to? How much does this guy cost us?
A political necessity I suppose.

Much of the geothermal power station development is on Maori land. So what we have here is a real partnership. I think it is a very good idea to have someone from the local iwi inside the tent. IMO having Whai Dewes on the board is a shrewd move. Some may see him as a 'token maori', but I feel he has a lot more to offer than that. He comes from a very well connected family in maoridom, and is certainly not devoid of business nous.

SNOOPY

[Snoopy]

No more price rises for power are seen in the medium term, with the caveat that those local infrastructure companies will probably sting Contact for more money to pass Contact’s electrons along the power poles. IOW when Contact do put the prices up, blame the other guys down the line. Improved dividends for shareholders going forwards therefore depends on rising cashflows (already happening) and cost cutting.

I have been a Contact Energy shareholder from way back, right from the public float. Starting with a modest holding I have built it up over the years, always buying never selling. I decided to top up my holding this morning, in lieu of putting that money in the Meridian float. Was weighing up between MRP and CEN, but came down on the side of CEN. The numbers tell me that at market opening today MRP was offering a slightly better yield, yet it was probably the fact that in dollar terms I own less CEN than MRP that swayed me.

Actually it wasn't only that. I reread the AGM addresses about all of that strong cashflow. Reading between the lines I think we shareholders could be looking at a modest lift in fully imputed dividends in the coming year, or possibly even a share buyback. At $5.20 we are on an historic gross dividend yield of some 6.7% (less than MRP), but I think the potential for dividend growth is greater than MRP. Hence I am happy to pay the slight premium.

Despite owning some CEN since the start, my median holding time is only 2.5 years. With today's buy, my average holding price is now $4.73. Roll in the two latest cash dividends and my compounding gross rate of return over those 2.5 years has been 7.9%. That could even be a little below market, but given the kind of investment CEN is, I am satisfied.

I did my cause no good by purchasing some shares on market during the 2011 rights issue. The rule of thumb of buying during a capital raising is that you are more likely to get a good deal because of the greater number of shares up for sale. I bought a reasonable tranche of shares at $5.92. That looked good at the time, because this was the first time in ages the CEN share price had slipped below $6. That same purchase doesn't look so clever today! The market has rerated much of the growth out of Contact since.

Nevertheless Contact remains a solid pillar in my overall portfolio, and a near 7% yield (hopefully rising through cost control) is a lot better than I would get at the bank. And on the potential downside from the single buyer electricity model, I still feel Contact has less to lose than the other listed power companies. Now that cash dividends have resumed, I look forward to my CEN dividends covering my power bills into the future.

SNOOPY

PS, Yes, I am fairly economical with my power use!

[troyvdh]

dear snoop...your post very much appreciated....I have a similar story...about your div calculations...am a little confused there...

..Origin...I always thinks whats going to happen to CEN over the long term...what 2-3 attempts historically to take out.... my equal pillar equivalent investment is RYM .

cheers troy

my direct broking site tells me CEN has returned 35%....

[Snoopy]

dear snoop...your post very much appreciated....I have a similar story...about your div calculations...am a little confused there...

cheers troy

my direct broking site tells me CEN has returned 35%....

I badly screwed up my 2.5 year investment return troy. I just pulled the share prices straight from my records, conveniently forgetting about all the extra capital that I put in on the way!

My basic return formula is like this:

(Opening Balance) x (1+i)^n = (Closing Balance + Dividends Received over holding period)

I need to solve the formula for 'i' (the compounding rate of return, expressed as a fraction), while putting in a value for 'n' which is the number of years of my investment. 'n' doesn't have to be a whole number. In my case my median holding period for CEN shares is 2.5 years. So 'n' is 2.5. You need a scientific calculator with a y to the power of x function to solve an equation like this.

That is the correct formula if you don't buy or sell shares through the investment period. However, in my case I added a significant amount of new capital in just after my 'opening balance date'. After adding that in I find my value of 'i' comes out as -0.00244 as a fraction. Multiply by 100 to get a percentage and my two and one half year compounding rate of return is -0.244% per year.

That means I lost money (darn it), although in practice such a miniscule loss is pretty close to breaking even. I guess that is exactly the result I should have expected, buying a tranche of shares at $5.92, 2.5 years ago.

SNOOPY

PS doing a calculation based on a median holding period is a quick and dirty way of doing things. If the returns prior to the median period and after that period are quite different (the case with CEN), then it won't be a good estimate of your average return. The one calculation that is correct is my average holding price of $4.73

[CJ]

I badly screwed up my 2.5 year investment return troy. I just pulled the share prices straight from my records, conveniently forgetting about all the extra capital that I put in on the way!

My basic return formula is like this:

(Opening Balance) x (1+i)^n = (Closing Balance + Dividends Received over holding period)

I need to solve the formula for 'i' (the compounding rate of return, expressed as a fraction), while putting in a value for 'n' which is the number of years of my investment. 'n' doesn't have to be a whole number. In my case my median holding period for CEN shares is 2.5 years. So 'n' is 2.5. You need a scientific calculator with a y to the power of x function to solve an equation like this.

That is the correct formula if you don't buy or sell shares through the investment period. However, in my case I added a significant amount of new capital in just after my 'opening balance date'. After adding that in I find my value of 'i' comes out as -0.00244 as a fraction. Multiply by 100 to get a percentage and my two and one half year compounding rate of return is -0.244% per year.

That means I lost money (darn it), although in practice such a miniscule loss is pretty close to breaking even. I guess that is exactly the result I should have expected, buying a tranche of shares at $5.92, 2.5 years ago.

SNOOPY

PS doing a calculation based on a median holding period is a quick and dirty way of doing things. If the returns prior to the median period and after that period are quite different (the case with CEN), then it won't be a good estimate of your average return. The one calculation that is correct is my average holding price of $4.73

Or you could use Sharesight which does it all for you for any period that you want (since beginning, financial year, calendar year, week, month)

[troyvdh]

dear snoop...no offence intended...but how many folk on this planet can comprehend ...what you posted...you sir are taking the absolute...piss...Whats more I love it...honestly...I hate to admit this but I achieved a maths exam result (mid 70's) of about 18 %...(History about 80 %)...my arithmetic however was I believe second to none.
...Somehow I suspect you knew this already...........................................

cheers troy

PS...My future son in law....is currently working towards honours in maths/calculates (?) so indeed Sir your days may be truly numbered.