Higher dividends in prospect as Contact Energy debt ratios fall

Contact Energy shareholders can expect an increase in their annual dividend later in the year as the electricity company’s debt levels fall to within its target ratio.

Contact will pay an interim dividend of 11c a share for the six months to December, the same as it has paid every year since 2008, although final dividends, special dividends and share buybacks have put total annual distributions on a steadily increasing trend.

Interim and final dividends have totalled 26c a share for the last three financial years, but a 50c special dividend in the year to June 2015 reflected the departure of Origin Energy as the company's cornerstone shareholder.

That distribution also exhausted imputation credits, which are only slowly rebuilding, so that the interim dividend is only imputed for 8c of the 11c a share.

The $261 million earnings before interest, tax, depreciation, amortisation and the value of financial instruments to December represents a ratio of net debt to ebitdaf of 3.1 times, just outside the target ratio band of 2.6 and 3.0 times ebitdaf.

Chief operating officer Graham Cockroft says the company expects to fall within the ratio band by the end of the calendar year.

Discussions on a change to dividend policy will start in the next six months or so, chief executive Dennis Barnes says.

Trading during the first half of the financial year reflected ongoing intense competition for customers in the retail electricity market, low wholesale electricity prices that are keeping prices to consumers relatively stable, which is encouraging new competitors and falling national demand for electricity.

The 2% nationwide reduction in demand in the half-year appeared to reflect warmer temperatures and high rainfall, reducing demand for home heating and agricultural irrigation, on top of long term falling demand caused by energy efficiency investment and industrial sector changes.

While the main source of price increases to consumers in the June and September quarters of last year was increasing charges from monopoly electricity network owners totalling about 8%, Contact achieved about 1% increases in both quarters in the "energy and other component" element of the bill, reflecting what Mr Barnes says was "slight margin recovery.”

"By many sector comparisons, that margin (on electricity retailing) is very low," he says.

The financial results were presented in a new format from the past, with separate profit and loss accounts for the generation and customer sides of the business.

On that basis, customer ebitdaf was $57 million, up $6 million on the same half a year earlier, on total revenues of $818 million, while the generation business turned over much less, at $559 million, but posted ebitdaf of $204 million, up $1 million on the previous year.

Where Contact previously emphasised the “integrated” nature of its business, which demonstrated its capacity to earn steady returns irrespective of fluctuations in wholesale electricity prices, the new reporting structure is intended to focus the two different sides of the business on their own profitability, using a transfer price derived from the electricity futures market to calculate the cost to the customer business of buying electricity from the generation side.

During the year, Contact entered into no new contracts for the supply of natural gas, with Mr Barnes noting the dropping reliance on gas in the largely renewable New Zealand electricity system will make the sector's transition easier if the Tiwai Point aluminium smelter were ever to close.

The smelter uses about 12% of all electricity generated in New Zealand and its ongoing viability is under constant review, although Mr Barnes says the Rio Tinto-controlled plant near Bluff "looks cashflow-positive to us."

Contact shares were trading at $4.91, up 2.5%.

(BusinessDesk)