1 Refer to slide 36 of the 2021 interim results presentation for a definition and reconciliation between statutory profit and the non-GAAP profit measures earnings before net interest expense, tax, depreciation, amortisation, change in fair value of financial instruments (EBITDAF)
2 Refer to note A3 of the 2021 interim financial statements for a definition and reconciliation between cash flow from operating activities and the non-GAAP measure operating free cash flow. Operating free cash flow represents cash available to repay debt, to fund distributions to shareholders and growth capital expenditure.
New Zealand energy company Contact Energy (‘Contact’) released its interim financial results for the six months to 31 December 2020 and announced it will proceed with the development of a new 152 megawatt geothermal power station at Tauhara (near Taupō) and raise $400 million of equity to support funding of the development.
Contact reported a statutory profit of $78m, up 32 per cent ($19m) on the same period last year. EBITDAF increased by $25m to $246m, up 11 per cent on the prior year. Operating free cash flow for the period increased from $120m to $157m in the first six months of FY21, up 31 per cent year-on-year.
Contact CEO Mike Fuge said it had been a very heartening start to the year, in a complex environment. “We’re pleased to have delivered 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 announced a month ago. We’re also proud to have played our part in helping secure the financial sustainability of the unique low-carbon smelter at Tiwai until at least the end of 2024.”
He said the interim result was underpinned by active channel management, strong asset availability, and a disciplined approach to managing commodity risk. “There is no room for complacency as there is an ongoing challenge around the deliverability of gas from declining gas fields and preparing for the exciting opportunity to grow demand for our low carbon energy.”
The Board has approved an interim cash dividend of 14 cents per share which will be imputed up to 9 cents per share for qualifying shareholders3 and paid on 30 March 2021.
3 Being Contact shareholders on the register at close of business on 15 March 2021, following the allotment of new shares under the Equity Raise
Tauhara geothermal development: additional $580m investment approved
The Contact Board has also confirmed the company will proceed with the $580m4 development of a new geothermal power station on the Tauhara field, near Taupo.
Contact Chair Rob McDonald said: “We’re absolutely delighted that market conditions now allow us to proceed with this important development for New Zealand – one which has been in the planning stages for over a decade.
“We believe the Tauhara geothermal project is New Zealand’s best low-carbon renewable electricity opportunity. It will operate 24/7, is not reliant on the weather and is ideal for displacing baseload fossil fuel generation from the national grid which will significantly reduce New Zealand’s carbon emissions.”
Construction will begin shortly and is expected to be completed in the middle of 2023. Japanese engineering, procurement and construction contractor Sumitomo Corporation is leading the build, in partnership with New Zealand construction company Naylor Love and Fuji Electric.
Mr Fuge said the investment in Tauhara was a significant commitment aligned with Contact’s vision to build a better New Zealand. “It’s hugely exciting to be moving into a growth and development phase. We have a fantastic team from within and beyond Contact who will ensure the construction of a world-class power station that everyone can be very proud of.
“Proceeding with Tauhara is also the next chapter in our longstanding commitment to the central North Island and is expected to make an important contribution towards the region’s post-COVID19 economic recovery.”
Beyond those economic benefits, Mr Fuge said the development would support New Zealand’s transition to a low-carbon economy.
“Tauhara will provide a foundation to support New Zealand’s increased electricity needs over the next decade. Geothermal is something of an unsung hero in Aotearoa, but it plays a crucial role in our generation mix and the transition away from fossil fuels.”
4 Excluding capitalised interest, sunk costs and capitalised transmission assets
Contact has also announced a $400m equity raise. The proceeds of the equity raise will initially reduce net debt and provide financial flexibility to fund the Tauhara Project and other future growth projects.
Mr 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. “It will mean Contact can maintain optionality in respect of future investment decisions, which will be able to be sized and timed to meet market demand.”
5 See ‘Details of the equity raise’ in the Additional information section
Review of thermal assets
Mr Fuge said the company was also undertaking a strategic review of the future role of all thermal assets in the Contact portfolio.
“We believe the time is right to consider our plans for our thermal assets, including the Taranaki Combined Cycle Power Station and Peakers at Stratford, the Te Rapa Power Station and the Whirinaki Peaker Plant. We expect this review will take several months.”
Dividend policy revised
The Board of Contact has updated the company’s dividend policy. Under the new policy, Contact will distribute ordinary dividends targeting a pay-out ratio of between 80 per cent and 100 per cent of the average operating free cash flow6 of the preceding four financial years7. For the FY21 financial year, the target payment for the full year dividend is 35 cents per share.
Contact also intends to implement a dividend reinvestment plan and will be providing shareholders with more information on this in the coming months. The dividend reinvestment plan will not apply to the dividend to be paid on 30 March 2021.
6 Operating free cash flow is a non-GAAP cash measure that represents the amount of cash Contact has available to distribute to shareholders, reduce debt or reinvest in growing the business. Calculated as operating cash flow less stay-in-business CAPEX.
7 This includes Board consideration of the sustainable financial structure of Contact including the targeting of a long-term investment grade credit rating. Dividend payments are expected to be split into an interim dividend paid in March, targeting around 40% of the total expected dividend for the financial year, and a final dividend to be paid in December. It is the intention of the Board to attach imputation credits to dividends to the extent they are available.
Looking ahead, Mr Fuge said Contact was committed to leading the decarbonisation of New Zealand. “We are excited about the critical role that Contact’s renewable electricity generation is set to play in the decarbonisation of the New Zealand economy over the next decade.
“As the Climate Change Commission signalled last month, renewable electricity provides a key solution to the climate change equation. Sectors such as transport and industrial process heat will need to move to low-emission electricity for their energy supply, and away from their stubborn reliance on high-carbon fossil fuels.”
He said the Contact team was looking forward to accelerating its refreshed growth strategy and building on the company’s strong record of operational performance delivery. “Today’s announcements of the Tauhara investment and the strategic review of the future role of all thermal assets in the Contact portfolio are the next steps on this exciting journey.”
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