Contact turns focus toward debt reduction to support credit rating

Electricity and gas provider Contact Energy is turning its focus to reducing debt after returning $847 million to shareholders over the past two years.

"The strong cash flow of the business provides choices for the board of distribution to shareholders, paying down debt or reinvesting capital in maintaining and growing the business," chairman Ralph Norris told shareholders at the company's annual meeting in Auckland. "We expect to have a bias over the next 12 to 18 months to paying down debt, although we will continue to evaluate this as business risks and forecasts change."

Mr Norris took over from long-standing chair Phil Pryke last year following the sale by Australia's Origin Energy of the controlling stake it had held in Contact since the early 2000s. He told shareholders today that the New Zealand electricity market is mature, with no material growth in electricity demand and high levels of retail competition, which he expected would lead to consolidation over time and which he believed Contact was "well positioned" to participate in. However, he signalled the company's near-term focus was reducing debt, to ensure it maintains its investment grade status from credit rating agency Standard & Poor's.

Contact has had a BBB credit rating from S&P since 2002, which is based on its net debt divided by earnings before interest, tax, depreciation and amortisation, derived from a five-year rolling average. The ratio increased to 3.4x at the end of the 2015 financial year following the payment of a special dividend, reducing to 3.2x by the end of the 2016 financial year.

The company's net debt dropped to $1.63 billion by the end of the 2016 financial year at June 30, from $1.7 billion a year earlier. Its net interest expense increased by $3 million to $101 million due to a higher level of borrowings related to funding the share buyback programme and the special dividend distributed at the end of the 2015 financial year.

Contact shares last traded at $4.74 and have edged up 0.2% this year.

(BusinessDesk)