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Contact Energy's King hints at greater returns as cash mounts

Wednesday 17th October 2012

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Contact Energy chairman Grant King has hinted at the possibility of a capital return or higher dividends to shareholders as the company ends a five-year period of capital investment and looks to a future with large, uncommitted cash flows.

King, who is also managing director of Contact's 51 percent shareholder Origin Energy, indicated his dissatisfaction with Contact's performance over recent years, as economic contraction slowed demand for electricity, wet weather felled wholesale power prices, and the company was caught with insufficiently flexible generation assets.

"With the current capital investment programme coming to end, the Contact board will be considering how best to utilise the significant cash-flow of the business and how this could best be applied to the benefit of shareholders," King told shareholders at the company's annual meeting in Auckland.

To questions from the floor, King said the board had yet to discuss the issue and that decisions were perhaps a year away. Origin is currently investing heavily in the Australia LNG project, with capital commitments of A$3.6 billion between now and 2016, when liquefied natural gas production is scheduled to start.

King said Contact had recognised in 2007 that it needed a more flexible mix of fuels and generation assets "to respond effectively to changes in the New Zealand energy market."

"At that time we didn't foresee the impact the Global Financial Crisis would have on global and regional economies, including here in New Zealand. This has led to a material reduction in the demand outlook for energy in New Zealand. Nor could we anticipate a number of years of higher than normal rainfall which has created a surplus of energy in the New Zealand market."

These circumstances have resulted in a number of challenging years for Contact particularly in terms of financial performance," said King. He made no mention of Contact's own-goal in September 2008, when it raised directors' fees and electricity tariffs just before a general election as the GFC was at its height.

That action prompted a mass exodus of customers that was only stemmed last year when the company abandoned a long-standing price-leader strategy and implemented a 22 percent discount for customers paying online and on time.

That policy has made Contact the lowest priced electricity retailer in the country, according to new Treasury analysis, and the company gained a net 5,000 customers over the last 10 months of the last financial year.

King said it was "particularly pleasing that the strategy for increased flexibility in Contact's generation and fuel portfolio is now contributing to improved financial performance."

"When New Zealand does experience increased demand for electricity or older, less efficient plant is retired Contact is well positioned with some of the most competitive development opportunities, particularly in geothermal power generation," King said.

CEO Dennis Barnes told shareholders his 18 months at the helm had been spent "changing the focus from a development company to one with an acute focus on maximising operational performance and delivering cash."

Contact has already declared an uplift in annual dividends to reflect reduced capital expenditure plans, and has ended its dividend reinvestment scheme, which was used to husband capital during the recent investment phase.

"Our focus, therefore, will be on optimising the value of our current world-class assets and minimising the costs required to retain our high quality range of development options such as the world-class geothermal resource at Tauhara," said Barnes.

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