Contact Energy - CEN Chart

[Beagle]

Cool answer mate but I am a genius and I have sniffed the breeze with my long range super sniffer beagle nose and I can predict the weather for the next ten years with 100% accuracy, it will be changeable

Even if future year dividends are 30 cps on a gross basis inclusive of imputation credits that's 5.7%.

I think there's an absolute tsunami of money that's going to be looking for safe yield in the share market as term deposit's mature and people spit the dummy with accepting 1% from their bank for reinvestment.

Any deal on an orderly exit regarding Tiwai would be rocket fuel for this sector which in my opinion has fully priced in a complete closure next year.

I prefer GNE's yield of ~ 8% gross.

[RTM]

I prefer GNE's yield of ~ 8% gross.

Its not one or the other. You can own both and maybe weight according to your preference.
Agree, there is a tsunami of cash looking for a home right now. I have some if it.

[iceman]

Its not one or the other. You can own both and maybe weight according to your preference.
Agree, there is a tsunami of cash looking for a home right now. I have some if it.

Totally agree with that RTM. I think a mixture of GNE, CEN and MCY in whatever proportions one likes, is a good strategy ATM. All 3 in my view will pay very reasonable dividends (5-8%) in the next few years despite Tiwai closure. I would be surprised if we don't see Government (Whether Labour or National) lead incentivised discussions with the likes of Fonterra and others to stop using coal and change their factories to our abundant clean electricity post Tiwai.

[Beagle]

Fair enough guys.

For those interested in the maths here's what it looks like for CEN.
I have used the average forecast figure of 33 cps future dividends off market screener and assumed 65% imputation credits and that an investor looking at this now is treating the almost imminent dividends of 23 cps as a partial return of the purchase price.

Looking at the medium term yield.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield

[macduffy]

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

In theory, yes. But I have a problem with "netting" the purchase price. If one spends the div, as income, it seems strange to also treat it as a deduction from the purchase price. Having one's cake and eating it too?

[Beagle]

In theory, yes. But I have a problem with "netting" the purchase price. If one spends the div, as income, it seems strange to also treat it as a deduction from the purchase price. Having one's cake and eating it too?

Just my own "dogged" way of trying to get the yield to me as a possible new investor as accurate as possible. Doubt you'll find my methodology in any investment textbook

[limmy]

Fair enough guys.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield

I acted on this good tip yesterday Mr Beagle, and doubled up my holding in CEN at $6.36. I'm glad I did cos it's now going at 8 to 10c higher this morning. Thanks Mr. Beagle.

[see weed]

I acted on this good tip yesterday Mr Beagle, and doubled up my holding in CEN at $6.36. I'm glad I did cos it's now going at 8 to 10c higher this morning. Thanks Mr. Beagle.

Yes, thanks Mr Beagle. Good buying in the last month. Look at the one month chart. Up 76c plus, and a 23c div coming very soon.

[Snoopy]

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.

Time to look at a ten year scenario analysis. This analysis takes the current dividend policy and looks back to see what level of dividend might have been expected had that policy been in place for all of the last ten years, This involves using actual 'Cashflow from Operational Activity', 'Stay in Business Capital Expenditure' and 'Net Interest Costs'. In my view using as much real data as possible is preferable when investigating these scenarios.

	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020
Cashflows from Operating Activities	$379m	$440m	$469m	$446m	$490m	$556m	$508m	$457m	$466m	$390m (1)
less Stay in Business CAPEX	($180m)	($98m)	($116m)	($46m)	($63m)	($87m)	($116m)	($78m)	($60m)	($52m)
less Net Interest Costs	($62m)	($72m)	($66m)	($77m)	($98m)	($101m)	($92m)	($84m)	($70m)	($55m)
equals Operating Free Cashflow	$137m	$270m	$287m	$323m	$329m	$368m	$299m	$295m	$336m	$283m
Operating Free Cashflow (OFC) x 100%	$137m	$270m	$287m	$323m	$329m	$368m	$299m	$295m	$336m	$283m
Modelled Dividend per Share (based on 718m shares on issue)	19cps	38cps	40cps	45cps	46cps	51cps	42cps	41cps	47cps	39cps
Actual Dividend per Share (based on 100% of OFC payout policy)									39cps	39cps
EBITDAF-DA-I-T (Normalised NPAT)	$156m	$177m	$202m	$199m	$161m	$159m	$134m	$131m	$175m	$127m
Normalised eps (based on 718m shares on issue)	21.7cps	24.7cps	28.1cps	27.7cps	22.4cps	22.1cps	18.7cps	18.2cps	24.3cps	17.7cps

The policy to declare dividends of 100% of operating free cashflow (OFC) was announced in AR2018 in time for the Financial Years of 2019 and beyond. So why was only 82% of OFC paid out for FY2019? As explained in the FY2019 investor briefing from August 11th p8, the plan is to pay out 100% of OFC in a mean hydrological year, further corrected for abnormal plant maintenance requirements and volatile market conditions. So the '100% payout of Operating Free Cashflow' policy is not quite as simple as it sounds. Water inflows over FY2019 were way above average. Water inflows over FY2020 returned nearer to average although not in the way you might expect. From the integrated report for FY2020 p6:

"We also had an unusual hydrology sequence where the Clutha River experienced periods of extremely low inflows and a one in 20 year flood."

So FY2020 is the first year that has produced the dividend payment that the AR2018 announced headline dividend policy promised. If Contact get a year of bad hydrology, will they borrow to make the dividend up to the level previously promised for an average year? That part of the payout 100% of OFC policy is yet to be tested.

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

Another point of note is that I am assuming exactly 718m 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 each of 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. Yet history cannot model future macroeconomic changes, and Chair Robert McDonald delivered this rather ominous warning to shareholders on p5 of Contacts 'Integrated Report' for FY2020.

"It is particularly pleasing to deliver investors the same 39cps annual dividend this year as last year. However as we look forward to a likely period of disruption in the industry, we will need to reconsider the level of future dividends as the status of Tiwai is cemented and mitigations emerge."

The Tiwai Point aluminum smelter, based in Bluff, uses around 13% of New Zealand's generated power. If it were to close, there is not enough Transpower infrastructure reserved to transfer all the surplus power from Contact's Central Otago located Roxburgh and Clyde dams north. So we could see some surplus power go down the dam spillways after August 2021, if Tiwai does indeed close on that date. And that could lead to a permanent rethink on what constitutes an 'average hydrological year', with a consequential negative effect on future Contact Energy dividends.

(1) If all this wasn't complicated enough, it appears the definition of 'Operating Cashflows' has slightly changed between FY2019 and FY2020. If you look in the respective 'Cashflow Statements' for AR2019 and AR2020, you will see that 'Operating Cashflow' for FY2019 is listed as $466m in the former and $401m in the latter. Why the difference? In FY2020 the FY2019 figure has been reduced by a net interest figure of $69m -$4m = $65m. In AR2019 the 'interest paid' is reported in 'Financing cashflows' and the 'interest earned' is reported under 'Investing cashflows'. For consistency I am using the earlier definition of cashflows in the above table, with no interest charges deducted or added. This explains why 'Operating Cashflows' for FY2020 are listed as $390m in my table, but only $341m in the FY2020 Integrated Report.

SNOOPY

[Snoopy]

The gentailers have a reputation for being 'yield' shares. The sort of thing you want to have in a portfolio if you want a steady income. Over the last couple of years the trend has been towards paying dividends out of cashflow, rather than earnings. This in turn means that most of the dividends from gentailers going out into the future will not carry full imputation credits.

Most of the gentailers are coming out of a period of investment in new power stations that is now finished. Thus they have high depreciation charges (non cash) that will not require a corresponding reinvestment in new power plant in the medium term. These depreciation charges effectively become extra free cashflow. And that extra cashflow is being passed on to customers through 'top up' unimputed dividends.

So an important question arises: How do you value a dividend that is only partially imputed?

Below is a copy of my latest (7th April 2020) Contact Energy dividend statement, normalised down to one share.

Security Description	Participating Holding	Payment Rate	Declared Dividend	Supplementary Dividend	Withholding Tax	Imputation Tax Credit	Gross Taxable Dividend	Net Payment
Fully Paid Ordinary Shares	1	0.16	0.16	0.00	0.0267	0.0388	0.1988	0.1333

If the dividend had been 'fully imputed' (which means 28% of company tax has already been deducted) then the gross income would have been: 16c / (1-0.28) = 22.22c. Thus the imputation credits would have been: 22.22c - 16c = 6.22c. But of course the actual dividend declared only 3.88c of imputation credits, because it was only partially imputed.

If 6.22c represents 100% imputation, then 3.88c represents: 3.88c/6.22c = 0.624 or 62.4% imputation.

My dividend statement says, "Your dividend has been partially imputed to 19.55%". That is well out of line with my calculation. But there is another way of looking at the situation.

If we regard a 28% imputed credit as 'full imputation', then a 19.55% imputation rate would represent: 19.55%/28% = 69.8% of a fully imputed dividend. That is more than the 62,4% I calculated, so someone has still got it wrong. Can anyone out there figure out if it is I or Contact?

SNOOPY