Contact Energy mulling capital return to shareholders

Contact Energy [NZX: CEN] directors are actively considering a capital return to shareholders as the company emerges from a five year, $2 billion programme of investment in new power stations and IT systems and enters a period of increasingly strong positive cash flow.

The company's chief financial officer, Graham Cockcroft, confirmed at a media briefing on today's announcement of a 17.6 percent increase in profit to $234 million for the year ended June 30 that "the board is considering it (a capital return) at the moment."

"We see that cash flow will continue to grow at a rate faster than profit will grow and therefore there will be questions about what to do with the cash."

However, there is no timetable for a decision, said Cockcroft.

Contact's balance sheet shows gearing of about 28 percent, in line with credit rating agency requirements for retaining its current BBB rating with Standard & Poor's.

"So there's not a lot of capacity sitting there to suddenly distribute a lot of cash but if you look forward, yes, we do expect to generate more cash," Cockcroft said, with the primary reason for growing free cash flow being the dramatic reduction in capital expenditure forecast in coming years.

Between the 2010 and 2012 financial years, Contact averaged annual capex of around $500 million, falling to around $270 million in 2013 and $230 million in the current financial year, according to charts supplied for today's briefing. In the next financial year, that falls to just $100 million and is projected to be below that for the following three financial years, when Contact does not expect to be building any new power stations.

The company has increased its final dividend by one cent per share to 15 cps, making total payout for the last financial year of 26 cps. That was the second dividend lift in two years, for a total payout value for 2013/14 of $191 million, roughly equivalent to free cash flow of $200 million.

"The dynamic in the business is that 'stay in business' capital is lower than the depreciation charge so naturally that will improve cash flows over time," said chief executive Dennis Barnes.

Grant King, Contact's chairman and managing director of its 52.3 percent Australian shareholder, Origin Energy, first hinted at the potential for capital returns at the annual meeting in October 2012 but gave no update last year.

Origin became the controlling shareholder in Contact in 2003, failed to effect a merger between the two companies in 2006, and wants higher returns from Contact than it has managed to achieve so far.

Barnes also gave detail on $50 million of delayed billing to both residential and industrial customers, relating to glitches in the implementation of its new customer management and billing system in April. While the company expects to recoup most of the delayed billing in the current financial year, an additional $1 million to $2 million has been added to bad debt provisioning in the expectation that some customers will not pay amounts billed in arrears.

Contact shares moved down one cent in trading on the NZX this morning to sit at $5.46 at 1pm local time.

(BusinessDesk)