Contact increases dividend as it abandons uneconomic wind projects
Contact Energy is not ruling out further dividend increases after completing a geothermal project and halting $2 billion of wind-powered projects it had on its books.
The power company controlled by Origin Energy says windfarms are not making a return on capital in an over-supplied New Zealand power market that it expects to last for at least five years.
Contact today reported earnings before interest, tax, depreciation, amortisation and changes in fair value instruments of $541 million in the year ended June 30, up 6 percent on the previous year. Net profit of $199 million was slightly above First NZ Capital's expectation of $191.7 million and up 5 percent on last year.
Contact increased its final dividend by two cents a share to 14 cents to be paid on Sept. 16. It is paying out 92 percent of underlying earnings after tax. The total dividend for the year is 25 cents a share.
"I was pleased to see a lift in the dividend payment, that was something we really wanted to see happen now they've finished their major capital programme," said Grant Williamson, director at Hamilton Hindin Greene.
The shares gained 1.9 percent to $5.40 and have gained 11 percent in the past 12 months, lagging behind the NZX 50 Index's 23 percent gain. The stock is rated a 'buy' based on a Reuters survey.
"We've started to reward the shareholders who stuck with us," Chief Executive Dennis Barnes said.
He is not ruling out further dividend increases as capital expenditure drops following the commissioning of the Te Mihi geothermal power station which should provide power to the grid "a bit later than expected" in the next few months.
Contact has to refinance $300 million of debt and wants to see Te Mihi established before deciding dividend policy, Barnes said.
"We have signalled previously that as the capital expenditure profile rolls off and the cashflow of the business increases we will be reviewing the dividend policy," he said. "But we don't want to declare victory too early."
The company can get more power out of the Te Mihi than it planned for a low capital cost, and has $100 million on its balance sheet for the development of Tauhara geothermal field when market conditions dictate, he said.
Contact booked $67 million of costs for exiting the Hauauru ma raki wind generation project on the Waikato coast and halting the Waitahora wind project near Dannevirke for the foreseeable future.
If developed to their full potential the projects would have cost more than $2 billion, of which $1.5 billion was for the abandoned Waikato project.
Barnes says Waitahora has more of a chance because it is smaller and closer to transmission connections but wind generators "are currently not getting a return on capital at current wholesale prices.
He expects oversupply to persist for at least five years.
The company has been saying for some time that it expects little growth in demand for electricity and that the retail market will remain highly competitive.
Investment in a flexible generation portfolio has reduced Contact's reliance on large volumes of contracted gas.
Commenting on the outlook, Barnes said there will be continued earnings momentum into next year.
Contact's revenue fell to $2.5 billion from $2.68 billion.
Te Mihi Power Station is a 159 MW geothermal power station north of Taupo.