It is all about building Tauhara, a new flagship 'state of the art' geothermal power station that nevertheless plugs into the 'old' Wairakei field. But did they really need more capital? As a supporter of the 'thin air capital' theory, I would say 'no'. Contact themselves say in Slide 5 of the 'Capital Raising Presentation' the building of Tauhara is:Originally Posted by winner69
"Supported by a $400m equity raise and a new distribution policy."
That last underlined bit shouldn't be forgotten. 'Thin Air Capital' is, in essence, capitalising the improved earnings performance from long lived renewable energy generation assets. Capitalised earnings as an asset can be borrowed against. But debt ratings are more often measured against interest coverage ratios like EBITDA/I. So perhaps there is no need for Contact to capitalise this 'thin air capital' as rival gentailer Mercury Energy does?
Actual improved earnings can either be paid out as higher dividends or kept within the company for internal company reinvestment. Contact's new dividend distribution policy is no longer to pay out 100% of operating cashflow. That means they are retaining cashflow that has come from the improved earnings of these long lived assets. To this extent they are counting on the benefits of 'thin air capital', even if they don't recognise the concomitant 'strengthened capital position' that results from any underlying 'permanent incremental increase in earnings'.
This is the reason that I have removed the 'thin air capital' attributable to Tauhara from my valuation modelling of CEN (factor down from 1.271 to 1.092, see post 2032), even though Contact themselves have not banked it. For a power generating company, a generation asset is valued by discounting back the present value all future cashflows associated with that asset. So 'borrowing against assets' is really 'borrowing against future earnings' for a gentailer. I see borrowing against just one year's earnings (as limited by the snapshot 'EBITDA/I' borrowing covenant) as a similar borrowing process. Albeit one years earnings are a far more volatile borrowing stick manifestation of mean earnings for what is, in underlying terms, the same thing: borrowing against an asset. In this sense Contact Energy have recognised their 'thin air capital' on the income statement, if not on the balance sheet.
Back to the original question: "Did Contact Energy need more capital?" My answer is no they needed , and have, more earnings to borrow against instead. Unless that is you see 'gentailer earnings' and 'gentailer capital' as alternative manifestations of the same thing. My discussion in the above paragraphs gives weight to that argument.
SNOOPY
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