Contact's improved first half a sign of greener things to come

Contact Energy wants to build a new geothermal plant near Taupō and put its gas-burning assets under review. Photo / Grant Bradley

Contact Energy's move to a build geothermal plant near Taupō, while putting its carbon-heavy thermal assets under review, is being seen as a big sea change for the company.

The company said it would undertake review of thermal assets under over the next few months and signalled a lower dividend payout, reflecting its growth aspirations.

The assets under review are the Taranaki combined cycle power station and peakers at Stratford, the Te Rapa power station and the Whirinaki peaker plant. The review is expected to take several months.

Contact has started a $400 million equity raise to build the new 152 megawatt geothermal power station at Tauhara.

The company said it planned to raise $325m from an underwritten institutional placement at $7 a share - a 2.8 per cent discount to Friday's closing price - and a $75m non-underwritten retail offer.

The company's shares have been put on a trading halt until Wednesday while it undertakes the placement.

At the same time, Contact reported a statutory first half profit of $78m, up 32 per cent on the same period last year.

Contact's EBITDAF increased by $25m to $246m, up 11 per cent on the prior year and in line with market expectations.

Operating free cash flow for the period increased from $120m to $157m in the first six months, up 31 per cent year-on-year.

One energy analyst said it had been a long time coming for Contact to set out a path towards becoming more 100 per cent renewable, like its competitor Mercury.

"So today they have pulled the trigger on Tauhara, and they have indicated that there is a lot more resource there," the analyst, who did not what to be named, said.

"They have indicated that they are reviewing their gas-heavy book in its entirety - potentially setting a path towards being 100 per cent renewable and they are raising capital, which will make them more flexible," he said.

He said the size of the capital raising, taken against the background "noise" of recent exchange traded fund (ETF) selling in the stock, had obscured the message from Contact.

"It is quite an important day for Contact because we have been waiting for this sea of change for many years now.

"It has been a long time coming but now that we have some certainty over Tiwai, they can actually state their strategy and start delivering on it," he said.

Contact has revised its dividend policy. It will now target a pay-out ratio of between 80-100 per cent of the average operating free cash flow of the preceding four financial years, away form its previous policy of paying out 100 per cent of cash flow.

The lower dividend payout is aimed at providing financial flexibility to fund the renewable investment programme.

It will also introduce a dividend reinvestment plan.

The interim dividend was set at 14 cents, down from 16c, and under the new policy, Contact's total dividend for the year was forecast to be 35c from 39c in the last financial year.

Contact's chief executive Mike Fuge said it was a strong financial result despite challenging headwinds in the form of ongoing uncertainty around gas availability, and the doubt swirling around the future of the Tiwai Point smelter until the extension was announced a month ago.

Meridian and Contact struck a deal power supply deal with the smelter's majority owner Rio Tinto, and Fuge said his company was "proud to have played our part" in helping secure the financial sustainability of Tiwai until at least the end of 2024.

Low carbon opportunity

Chairman Rob McDonald said Tauhara was now New Zealand's "best low-carbon renewable electricity opportunity".

The plant will operate continuously, would not rely on the weather and would be ideal for displacing baseload fossil fuel generation from the national grid which would significantly reduce New Zealand's carbon emissions.

McDonald said the equity raise would give Contact the flexibility to execute on a development pipeline beyond Tauhara, comprising up to $800m of additional projects including the potential replacement and expansion of the company's geothermal power station at Wairakei.

Once operational in mid-2023, Contact expects that the new generation could provide incremental EBITDA of around $85 million a year.

Ratings agency S&P Global said the decision by the Rio Tinto-controlled New Zealand Aluminum Smelter (NZAS) to continue its operations at Tiwai at least to 2024 had provided Contact and the industry with at least a four-year demand outlook and had avoided any potential excess market capacity.

"This time period should allow the industry to resolve the transmission constraints that are present on the South Island, retire some thermal assets in an orderly manner, as well as decarbonise certain industrial processes by switching them over to electricity, notwithstanding that NZAS may continue to operate beyond the current contract period," S&P said in a report.

S&P said could achieve EBITDA in the range of $460m to $520m for the year.

Japan's construction contractor Sumitomo Corporation is leading the Tauhara build, in partnership with New Zealand construction company Naylor Love and Fuji Electric.

Fuge said the development would support New Zealand's transition to a low-carbon economy and McDonald said it would provide a foundation to support New Zealand's increased electricity needs over the next decade.