ContourGlobal’s electric income potential

So far, there has been no material impact from Covid-19. In the three months to 31 March, adjusted cash profits rose by a fifth year on year to $173m, benefiting from the acquisition of two natural-gas-fired combined heat and power (CHP) plants in Mexico in November. Full-year adjusted cash profits are guided to climb from $703m to $710m-$745m .

Long term, contracted revenues support a growing dividend – the weighted average remaining lifespan of the group’s contracts is 10 years and its customers are typically state-owned or supported utilities, or large investment-grade companies. Because it doesn’t distribute power and operates under fixed-price contracts, it is insulated from price fluctuations. Meanwhile, it receives payments for its thermal generation capacity regardless of demand. 

ContourGlobal lifted its full-year dividend by 10 per cent in 2019 and aims to do so again this year. Generating $213m of free cash flow (excluding corporate overheads and bond interest), this covered the payout 2.2 times. The group also paid a 4.06¢ first-quarter dividend in June and is running a £30m share buyback programme until the end of September.

Vulnerability comes from its 1,073MW of coal assets – ContourGlobal owns 73 per cent of a 908MW plant in coal-friendly Bulgaria and has a minority holding in Colombia. Both plants have power purchase agreements running to 2024, but risk becoming stranded assets amid the green energy transition. The danger is at least contained – after domestic opposition scuppered plans for a coal plant in Kosovo, the group will no longer pursue new coal projects or acquisitions. While the Kosovo decision triggered a $12m impairment last year, ContourGlobal believes it can recover $22m of costs.

Following the $724m Mexican CHP acquisition, net debt surged by almost a quarter last year to $3.5bn. But at 4.4 times pro-forma cash profits, this is inside the 4-4.5 times target range. Somewhat reassuringly, three-quarters of debt is linked to specific project level and is paid down steadily from assets’ cash flows. The company has also demonstrated its ability to generate cash from ‘farming down’ assets – having acquired 250MW of concentrated solar power plants in Spain in 2018, a 49 per cent stake was sold to Credit Suisse Energy Infrastructure Partners last year for €134m.