PAUL MCBETH: Powering growth is a Contact sport

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years.

Contact Energy took the local market by surprise when it went cap in hand to institutions and its shareholders for $525 million to accelerate its efforts to electrify New Zealand.

The $450 million underwritten placement to institutions and $75 million retail offering aren’t just to get ahead of the curve – Contact wants to squeeze a bit more juice from the hefty development programme it’s got lined up.

As chief executive Mike Fuge told analysts in the ritualistic briefing accompanying the capital raising and the electricity generator-retailer’s first-half result, the money’s about speeding its five-year strategy and potentially upsizing some of the renewable projects in the $4.5 billion programme.

Forsyth Barr analysts reckon Contact will spend an extra $90 million on those growth projects, projecting capital expenditure of roughly $1.65 billion over the next three years.

That’s a hefty start, but as the Infrastructure Commission’s hefty tome of a national infrastructure plan laid out, New Zealand will need to spend about $26 billion over the next three decades to build the 40 gigawatts of generation needed if our electricity use is going to jump the 60% needed to meet our 2050 emissions targets.

Oh, and that investment will probably be front-loaded in the next 10-to-15 years.

Took all you had

That’s quite the uplift from the current 10.66 GW of generation capacity currently operating across the nation.

And to be fair, our captains of industry seem to be up to the challenge, with 288 projects with a combined capacity of 44.3 GW lined up in the development pipeline, some 17.5 GW of which are solar projects.

Of course, big arm-waving intentions don’t always turn into reality and just 1.4 GW of developments have actually got to the stage where people have committed to build them. Of that, Contact has projects committed to adding 700 megawatts, with another 1.26 GW with a high priority under its Contact31+ strategy and a further 2.51 GW of projects being assessed.

The thing that got under the skin of some commentators about Contact’s plans to raise $525 million is that it also declared dividends of $159.1 million, giving with one hand and taking with the other. Yes, keeping the dividend reinvestment plan mitigates just how much actual cash goes out the door, but it’s hardly the cleanest of scenarios for a poor old investor to actually work out how much money is going towards the new programmes.

And that’s before we get to the $7.7 million of fees for UBS as the lead manager and underwriter of the placement and another $1.4 million incentive fee to be paid at Contact’s discretion.

Contact pulled the same deal back in 2021 when it raised $400 million to build its Tauhara geothermal station – which came on stream in 2024 – while also paying $100.6 million in dividends.

So many ways for me to show you

It might very well be easy to wrap your head around the intellectual argument that the dividends are paid from the cash generated by the power company’s day-to-day business, and that long-running development programmes sometimes demand a little extra cash.

But that presents the artifice of separate pots of money that never the twain shall meet. Because let’s be clear, the operations generating the cash to be spat out to the owners in the form of dividends or reinvested into new and exciting opportunities come from the same source.

It’s a simple fact that if Contact hadn’t paid the dividend, it would raise a smaller amount of money and investors choosing not to participate wouldn’t have their ownership watered down as much.

Which isn’t to say that there aren’t opportunities for the gentailers in developing new generation. Contact and its state-controlled peers – Mercury NZ, Meridian Energy and Genesis Energy – have prided themselves on tacking on new power sources to fuel the ever-increasing demand.

But after a decade or so of fairly subdued demand plus the threat of the Lake Onslow white elephant putting a crimp on their appetite to build ahead of the expected uptake, the greenfields opportunities are much greener than their traditional approach of simply falling back on the operating cashflows to cover any bank debt needed to build those projects.

Never thought to question why

That makes this development pipeline a different prospect to what we’ve grown comfortable with when it comes to our power companies, and presents itself as a different investment to the reliable utilities spitting out cash like clockwork to a happy cohort of shareholders owning their stock for reliable income.

But it also begs the question as to why the gentailers are largely keeping their development inhouse.

Sure, some of those energy developments through joint ventures, such as Contact’s tie-up with Lightsource in building solar farms, but it does make you wonder why we haven’t seen any of the gentailers seriously consider spinning out their growth arms in the way Trustpower birthed Tilt Renewables almost a decade ago.

The thinking behind that demerger was to free the wind farm developer Tilt to take advantage of the opportunity driven by Australian efforts to drive more renewable generation with a new capital structure able to tap investors willing to back a riskier project offering the potential for a steeper return.

In turn, the remaining Trustpower gentailer operations wouldn’t have to retain as much of their earnings to fund that development, meaning a shareholder preferring a reliable dividend could enjoy a juicier distribution.

You’re such an inspiration

As it turned out, Tilt was later carved up along regional lines, while Trustpower sold its retail business to Mercury and the remaining generation assets – renamed Manawa Energy – were subsequently taken over by Contact.

But the lesson in rethinking your reason for being and focusing your efforts on what outcome you’re trying to achieve still stands.

Running lean and mean electricity generation and retailing businesses is tough enough without having to overlay the crystal-ball gazing and heroic assumptions required to take a punt on whether a new project will deliver the promise locked in a spreadsheet.

Contact could just as easily carve out its own development arm into a separately listed vehicle, able to tap investors who’ve got the appetite and capacity to turbocharge the country’s push in electrifying everything.

He did it all for you

Then the power company’s 58,400 or so shareholders could make up their own minds as to whether they owned shares of a reliable dividend payer or a plucky upstart developer.

In fact, given the competition for resources New Zealand constantly struggles with in trying to deliver long-lived infrastructure, you could mount the case for a monopolistic developer to oversee and deliver that 40GW of electricity generation over the coming decades, taking on the inhouse talent of the four gentailers and tapping the local stock exchange to find the equity capital required to help fund that $26 billion programme.

Not that you’d trust the government to run such an ambitious programme.

Best keep that to the professionals who’ve managed it time and again, especially when you’ve got the likes of Morrison still headquartered on these fair shores.

There’s a wealth of information and expertise at the power company’s fingertips with Morrison-managed Infratil as Contact’s biggest shareholder – let’s hope they’re tapping into it.

Image from Thomas Coker on Unsplash.

This column has been updated to change a repeated subheading.