Contact Energy Limited

Thursday 12th February 2015

Contact Energy Limited (CEN.NZ) is a diversified and integrated energy company, focusing on the generation and retailing of electricity. The Company's Electricity business is a generator and retailer of electricity throughout New Zealand. Electricity is generated by means of hydro, geothermal and thermal sources/power stations.

Contact Energy was formed in February 1996 when it acquired electricity generation and gas assets from state-owned electricity generator ECNZ. Subsequent expansion put the company in the forefront of electricity generators in NZ. It is strongly positioned in wholesale gas distribution, gas retailing and electricity retailing. In early 1999 the Crown sold 241.6m shares in the company (for $1.2b) to cornerstone shareholder Edison Mission Energy (EME) from USA. The rest of the holding was listed on the NZ stock exchange (May 1999) following the sale of 362.4m shares to the public at $3.10 each.

In July 2004, EME sold its 51.2% holding in CEN to Australia's Origin Energy for $5.67 per share, or $1.67b. In February 2006 it announced plans to merge with Origin, but retain a listing on the NZ exchange, but this was dropped in the face of shareholder resistance. As of Aug 18, 2014, Origin Energy Pacific Holdings Limited held 52.30% interest in Contact Energy Limited.

In October 2012, it sold its gas metering business to Vector. In June 2013, Contact Energy Ltd confirmed the conclusion of the sale process for the site of the former New Plymouth power station. In July 2013, Contact Energy Ltd announced that it has completed the sale of its gas metering business to Vector group company, Advanced Metering Assets (AMA).

Contact reported profit after tax for the year ended 30 June 2014 of $234 million, up $35 million (18 per cent) compared with the prior corresponding period (FY13). Earnings before net interest expense, tax, depreciation, amortisation, change in fair value of financial instruments and other significant items (EBITDAF) were $587 million, $46 million (9 per cent) higher than FY13. Underlying earnings after tax (profit for the period adjusted for significant items that do not reflect the ongoing performance of the Group) were $227 million, $25 million (12 per cent) above FY13.

The increase in EBITDAF is primarily due to a reduction in the cost of energy arising from increased hydro generation and the receipt of $43 million of compensation as a result of the delayed start-up of the Te Mihi power station. This higher level of EBITDAF is expected to be sustained in FY15 with a full year of Te Mihi operation. The increases in underlying earnings after tax and profit for the period were driven by the increase in EBITDAF, partially offset by the inclusion of depreciation and interest costs for Te Mihi and Retail Transformation from the beginning of May 2014.

The Contact Board of Directors resolved that the final distribution to shareholders would increase by 1 cent per share to the equivalent of 15 cents per share, resulting in a full year dividend of 26 cents per share. The distribution represents a payout ratio of 84 per cent of Contact’s underlying earnings after tax.

Over the past 14 months Contact raised $773 million in new funding to refinance its $705 million of 2014 maturities and to redeem the $200 million Capital Bond in November 2013.

Contact Energy’s CEO Dennis Barnes stated that in an environment of low demand growth and intense price-led competition, CEN are working to target further efficiencies to drive earnings growth. The business is continuing to adapt to the reality of no demand growth and increasing competition and innovation in the retail market. With the completion of the current capital programme the business is focused on managing for cash flow as the company believes that significantly reduced capital expenditure will generate greater free cash flows. This would be the focus going forward for the Company.

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