Contact Energy expects new geothermal projects will boost its earnings prospects. Photo / File
Contact Energy says its new Tauhara and Te Huka geothermal projects will help boost operating earnings to $720 million by calendar 2025.
The power generator and retailer reported earnings before interest, tax, depreciation, amortisation and financial instruments (ebitdaf) of $537m for the June year, down 3 per cent on the previous year. Contact's total dividend was 35c, unchanged.
Materials released alongside the result pointed to normalised ebitdaf of $550m in the current financial year, then ballooning out to $720m in calendar 2023.
Jarden director of equity research Grant Swanepoel told the Herald it was a bold profit projection from one of the country's biggest power companies.
"That [projection] has a lot of implications for the 35c dividend and where that goes to, that's what everyone is looking at," Swanepoel said.
"If operating cash flow holds steady over those periods, that uplift can lead to expectations of the dividend getting through 35c to in excess of 50c," he said.
"It's a good number and the market should be excited," Swanepoel said.
"This is a growth company that we have here, not just a low-risk infrastructure company."
Swanepoel said Contact was improving its business mix and getting ready for its new geothermal assets to come on stream.
Contact said it would build a new $300m 51.4 megawatt geothermal power station adjacent to its existing Te Huka power station, near Taupo.
Te Huka "Unit 3" would be the latest investment commitment into Contact's world-class geothermal development pipeline after Tauhara.
Once both stations were operational, they would produce clean, low carbon, renewable electricity 24/7, Contact said.
The combined investment would increase Contact's renewable electricity generation by 25 per cent from what is produced today and increase New Zealand's total renewable electricity supply by over 5 per cent on average per year.
In its result, Contact said lower operating earnings and higher depreciation drove its net profit down by $5m, or 3 per cent, to $182m.
The decline was partially offset by lower interest costs reflecting the capitalisation of interest to major growth capital projects, lower tax on earnings and favourable movements to the fair value of financial instruments against the prior year.
Chief executive Mike Fuge said it was a "solid" financial performance despite "unpredictable and volatile" trading conditions.
"This unpredictability has been compounded by a combination of global energy supply and security concerns, exacerbated by the impact of Russia's invasion of Ukraine, with subsequent unprecedented increases in international energy prices, including coal, which has also coincided with a reduction in gas output from the domestic gas market."
Contact, along with Meridian Energy, are the main suppliers of power to the Rio Tinto majority-owned Tiwai Point aluminium smelter.
Rio had previously advised that it planned to close the plant late in 2024.
Contact said Rio was looking to continue operating its unique low carbon smelter at Tiwai Point beyond 2024 and had announced it has begun exploring potential pathways with electricity generators.
"Contact has been approached by Rio, and we will constructively engage," Fuge said.
"It's still early days, but we are encouraged that the smelter's owner recognises the renewable advantages of our electricity system and Contact supports their engagement approach with key local stakeholders."
Meridian and Contact have entered into a "swaption" and a contract for difference (CFD).
The two financial contracts provide Meridian with additional portfolio flexibility and are for a two-year period starting from January 2023.
Fuge said Contact had been saying for some time that the role of thermal assets would change from running baseload - or continuous power - to providing risk management support; backed by fixed insurance-style payments.
Contact has championed the idea of rolling all the country's coal and gas-fired thermal generation assets into one under "Thermal Co".
"Contracts like this one show the merits of Thermal Co – an industry-wide entity that could provide the risk management support the market needs, at the lowest cost with the lowest carbon emissions while new renewable generation is built."
The arrangement with Meridian demonstrated the efficiency of the market and would reduce the use of coal.
Contact runs the Clyde Dam on Lake Dunstan and has extensive geothermal capacity in the central North Island.
It also has the Taranaki Combined Cycle Power Station (TCC), which has two fast-start gas turbine peaking units.
Shares in Contact last traded at $7.81, up 10c.