Contact lifts profit by 24%, makes a case for ‘ThermalCo’

Contact Energy used the release of its annual result to make a case for a consolidation of New Zealand’s thermal power generation assets as the country heads towards its goal of deriving power from 100 per cent renewable sources by 2030.

The company’s ebitdaf – the industry’s preferred reporting measure – jumped by 24 per cent or $107 million to $553m in the June year, partially offset by increased depreciation on thermal generation stations and higher tax to pay on the improved financial performance.

Contact, which runs the Clyde and Roxburgh dams in the South Island, along with substantial geothermal and thermal assets, said its net profit jumped by 50 per cent to $187m.

Its total dividend for the year came to 35 cents per share, down slightly from 39 cents per share 2020 – in line with the company’s guidance.

Chief executive Mike Fuge said the company was engaging with “a range of stakeholders” about an option to consolidate New Zealand’s thermal generation arrangements into one entity, which it has dubbed “ThermalCo”.

Genesis Energy, which runs the country’s biggest coal- and gas-fired power station at Huntly, said it was not in discussion with Contact regarding its ThermalCo idea.

Fuge said there was “no doubt” flexible thermal generation would still be required as the New Zealand electricity sector moves toward the Government’s goal of electricity coming from 100 per cent renewable sources by 2030.

He said the industry needed to work together to “expedite sensible decarbonisation” while maintaining security of supply and affordability.

The company was also engaging with “a range of stakeholders” about an option to consolidate New Zealand’s thermal generation arrangements into one entity.

“We believe consolidating thermal assets could optimise electricity generation from coal and gas-fired plants in ways that are aligned with New Zealand’s emission reduction objectives, and also ensure affordable and stable electricity supply,” Fuge said.

Contact said the goal would be to spin assets off into ThermalCo and for the power generator to buy back power purchase agreements to manage risk.

Jarden’s director of equity research, Grant Swanepoel, said the formation of one entity to run the country’s thermal assets made sense.

“The industry probably needs it to be centralised over the five- to 10-year period,” he said.

Contact’s consolidation proposal may have more traction after this month’s ‘light’s out” event which saw thousands of North Island consumers without power during one of the coldest nights this winter, Swanepoel said.

Thermalco would allow thermal generation to occur while New Zealand goes through the transition period.

“Nobody wants to invest in thermal capacity backup because there is no reason to have it, with all these potential changes coming into the market throughout this transition,” he said.

Contact’s thermal assets comprise Taranaki Combined Cycle Power Station (TCC), which was commissioned in 1996, producing 377MW of electricity. It also has two fast-start peaking plants at Stratford, next to TCC.

Swanepoel said there was enough in Contact’s result to keep investors comfortable.

Based on supporting material released with the result, Contact could be looking at ebitdaf of $520m in 2022.

The company is also targeting another total dividend payout for the year of 35c, which Swanepoel said had the potential to increase slightly.

Chair Rob McDonald said Contact has performed ahead of expectations after successfully navigating the potential departure of the Rio Tinto-controlled NZ Aluminium Smelters at Bluff, short-term issues around low rainfall in the hydro catchments, and ongoing challenges around reliable gas supply.

McDonald said Contact had made significant moves to ensure the company is well-positioned for the future by spending $177m on capital investments during the year.

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