Contact Energy - CEN Chart

[sb9]

Can someone give me a bit more knowledge and education around reading operational data? and what the factors mean etc?

The key metric I look at is Customer data as detailed on last page of the report. Looks like they've gained few customers compared to last months however still way short of last year same month number.

[troyvdh]

Fairly impressive day....nearly $25 million dollars...believe a good return can be made from here...and like wise $25 million dollars believe not...just saying...

[Jantar]

Can someone give me a bit more knowledge and education around reading operational data? and what the factors mean etc?


The key metric I look at is Customer data as detailed on last page of the report. Looks like they've gained few customers compared to last months however still way short of last year same month number.
The main points I look for are the Netback in $/MW as this is the company's income from energy sold, and the cost of generation as that is what the energy actually costs. The bigger the difference the better

[fish]

The main points I look for are the Netback in $/MW as this is the company's income from energy sold, and the cost of generation as that is what the energy actually costs. The bigger the difference the better

I wish I had read this post Jantar before selling a portion of my CEN last week.
Looks like over the past 10 months netback is up 5% and the cost of energy is down 15% .

[Snoopy]

The main points I look for are the Netback in $/MW as this is the company's income from energy sold, and the cost of generation as that is what the energy actually costs. The bigger the difference the better.


I noticed on 'the comparative' that energy line losses were listed at 11% for April 2015, verses only 3% for April 2016. That is a huge difference. Contact's renewable energy is largely generated at Roxburgh and Clyde. So does that mean that last year a lot more of Contact's self generated energy was sent to the North Island, thus incurring larger line losses for the company? Or is that explanation too simplistic?

SNOOPY

[BlackPeter]

monthly ops: https://www.nzx.com/files/attachments/237601.pdf

Lots of storage and reduced demand (May temperatures more than 2 degree over the long term average). Good time for consumers, but the Gentailers (not just CEN) might keep dropping?

Discl: reduced my holding;

[Joshuatree]

Thanks for sharing BP thats really pertinent stuff ;have done the same, cheers JT

[Jantar]

I noticed on 'the comparative' that energy line losses were listed at 11% for April 2015, verses only 3% for April 2016. That is a huge difference. Contacts renewable energy is largely generated at Roxburgh and Clyde. So does that mean that last year a lot more of Contacts self generated energy was sent to the North Island, thus incurring larger line losses for the company? Or is that explanation too simplistic?

SNOOPY
There is a product in the NZEM called Financial Transmission Rights (FTRs) that allows a company to hedge against transmission losses. My take on this is that Contact bought the right amount of FTRs to meet their needs.

[BlackPeter]

Hmm ... just looking at the chart and wondering - is this going to higher highs - or turning into a head and shoulders pattern? Given the current bullish mood can't I really imagine the latter (unless the next world wide tragedy starts to unfold), but given the fundamentals (lots of hydro capacity and so far rather low power consumption this winter, though the current cold spell might improve at least July numbers a bit) do I doubt significant rises from here as well.

Most likely in my view to stay at this stage range bound somewhere between $5 and $5.50. Probably just one of these "wait and see's". I guess the 5% divie is not bad looking at the price, but not outstanding either and given the chances for the SP to further fall back (give another couple of warm months), not my share of choice - well, not for now.

[fish]

monthly ops: https://www.nzx.com/files/attachments/237601.pdf

Lots of storage and reduced demand (May temperatures more than 2 degree over the long term average). Good time for consumers, but the Gentailers (not just CEN) might keep dropping?

Discl: reduced my holding;

What did you think of todays monthly ops?
I also reduced my holding recently but am reconsidering.
Netback looks good.
Slight increase in customer numbers
Annual report out soon-I think it will point out reduced demand due to 2 degree increase in winter temperatures but profit should be increasing due to lower costs.
?increase in dividends

[Jantar]

...
Annual report out soon-I think it will point out reduced demand due to 2 degree increase in winter temperatures but profit should be increasing due to lower costs.
?increase in dividends Don't forget the one off impairment due to shutting down Otahuhu. I think that may reduce the annual profit substantially, but I would also hope for a nice divi.

[BlackPeter]

What did you think of todays monthly ops?
I also reduced my holding recently but am reconsidering.
Netback looks good.
Slight increase in customer numbers
Annual report out soon-I think it will point out reduced demand due to 2 degree increase in winter temperatures but profit should be increasing due to lower costs.
?increase in dividends

Hard to say - lots of hydro storage, low demand, low prices - does not look like a particularly flash year to me for a generator. Retail side obviously is a bit better - low production cost and high retail prices make the shareholders happy.

They are obviously a steady earner and their dividend yield is clearly better than the likes of AIA or any other of the by foreign demand pushed up big infrastructure companies, which means that they might well be in next to be propped up by foreign funds ...

Not currently on my watch list, but this might well be a mistake ...

[BlackPeter]

Hmm ... interesting choice of colours for the annual report: https://www.nzx.com/files/attachments/241241.pdf; I would associate this colour with little girls and with piggies. Nothing wrong with either, but still not sure I get the underlying message. Lipstick on a pig?

Anyway ... most numbers don't show a lot of surprises (roughly in line with expectations, just a wee bit lower ...), Revenue 2.163 vs roughly 2.2 billion expected, though earnings disappoint (even if write offs are responsible): negative 9.1 cts EPS is for such a predictable business quite a way lower than the analysts consensus of positive 9.8 cts EPS. Outlook: Well, they "expect to see a continued improvement in operational performance". YAWN.

5 year comparison though looks pretty uninspiring either:
8223

Nice slope - just wondering whether this is going to continue?

Lots of big earners though working for the company: 437 staff making more than 100k p.a., of them roughly 20 who make the same and some of them substantially more money than our prime minister (who is paid $393 k per year). It must be a pretty difficult job to drive a public funded monster like CEN slowly downhill, well - at least it is well paid!

Ahh - maybe now I understand the choice of colour - pigs at trough - Right?

Overall - the results are clearly not setting the world on fire, but I am sure everybody is waiting for which colour they choose for next years report ...

Discl: not holding;

[Snow Leopard]

What I have noticed is that they are supplying 80MW to Meridian for Tiwai for up to 14 years.
This is news to me, and the highlight of the report.

Otherwise, nothing to get excited about, but I have not finished reading yet.

Best Wishes
Paper Tiger

[NZSilver]

Not looking good, results average to me. Id say we will see sub $5.

[fish]

Not looking good, results average to me. Id say we will see sub $5.

Has the market factored in the big increase in free cash flow?
To me this is very important-I actually bought some more at the end of trade yesterday

[Hectorplains]

Siemen case doesn't look good for Contact. What's the substantive claim amount?

[Snow Leopard]

Siemen case doesn't look good for Contact. What's the substantive claim amount?

Just for the fun of it could you expand on that and provide some detail or a web-link?

Best Wishes
Paper Tiger

[Hectorplains]

Relates to the sale by Contact of a Siemen's turbine to GE (their competition) from the Otahuhu de-com. My reading so far is that CEN have stuffed up...

[Snow Leopard]

A Siemens turbine - that would be the generator unit of Otahuhu B?

If so I can imagine Siemens being 'a bit miffed' - :t_up: :p :p :p :t_up:

Best Wishes
Paper Tiger

Disc: In a past life I have been face to face with said turbine and it's suppliers - but the story will remain untold by me.

[NZSilver]

low 5's... I'm going to start buying back in at these levels...

[Jantar]

Don't forget that CEN went Ex $0.15 today. Based on Friday's close it was expected to be around $5.03 today. So effectively it is trading at a small increase on last week.

[Hoop]

Don't forget that CEN went Ex $0.15 today. Based on Friday's close it was expected to be around $5.03 today. So effectively it is trading at a small increase on last week.

Looking at the opening prices today it seems some forgot...a double dividend equivalent to the lucky seller(s)....nice :D

[Bobdn]

Gee, didn't take long for the share price to recover after going xd. Hope Air is the same.

[Snoopy]

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.



FY2016 Result (forecast)


EBITDA (normalised FY2015)$549m


less DA (FY2015)-$204m


less I-($98m+$24m)


Total EBT$233m


less Tax at 28%-$62m


NPAT forecast FY2016$161m



We can now divide that forecast profit figure by the reduced number of shares 'post buyback' to get a forecast eps figure.

$161m / (733m -20m) = 22.6c



It is always a good idea to check your past predictions against what actually happened.



FY2016 Hormalised Result


EBITDA $523m


less DA-$201m


less I-$101m


Total EBT$221m


less Tax at 28%-$62m


NPAT forecast FY2016$159m



So not a bad guess, although my guess was worse than it appears.

At my forecast time I had assumed the $24 'Retail Transformation' cost (a one off thing) had already been removed from the headline EBITDA figure. In fact it had not. So my forecast EBITDA should have read $525m, not $549m. This in turn would have reduced my forecast FY2016 NPAT to be $143m. So, everything considered, I think we shareholders can be pleased with the FY2016, being above my modest expectations.

The actual normalised eps figure turned out to be:

$159m / 715.5m = 22.2c

For yield investors, throwing a spanner in the works was the clean out of imputaion credits from the special dividend. This means that although the annual dividend was kept at 15cps+11cps=26cps, it was no longer fully imputed. In 'dollars received' terms for shareholders it reduced to 20cps. This is all history now. But what does it mean for shareholders going forwards? What will the real 'dividend yield' for FY2017 be, assuming Contact hold their dividend payment rate of 15c + 11c constant?

SNOOPY

[Snoopy]

For yield investors, throwing a spanner in the works was the clean out of imputaion credits from the special dividend. This means that although the annual dividend was kept at 15cps+11cps=26cps, it was no longer fully imputed. In 'dollars received' terms for shareholders it reduced to 20cps. This is all history now. But what does it mean for shareholders going forwards? What will the real 'dividend yield' for FY2017 be, assuming Contact hold their dividend payment rate of 15c + 11c constant?


FWIW I think the answer going forwards is to look at the 'earnings yield', not the 'dividend yield' when considering the 'income generating capacity' of your Contact investment going forwards.. If a company pays out more than their earnings in dividends then, long term, that is equivalent to paying out all of their earnings in dividends plus giving you some capital back. The unfortunate thing about this is that the 'returned capital' part of the dividend also comes with an income tax bill!

Last year (FY2016) the picture was distorted. The 50c Contact special dividend soaked up all of the available tax credits prior to Origin Energy selling out as controlling shareholder. That affected the imputation credits available to attach to the FY2016 dividend. So this year's FY2017 dividend should look better than the FY2016 dividend, from an imputation credit perspective. Nevertheless I calculated FY2016's 'normalised earnings at 22.2cps. If earnings do not improve in FY2017, and I am predicting no significant improvement, and dividends remain steady (15cps+11cps) as I predict, then we shareholders will get:

26cps - 22.2cps = 3.8cps

of shareholder capital returned to us. From that 3.8c of 'spare capital', the tax man will claim his slice! So is this 3.8c really capital? Remember we are dealing here with a power company. And power companies have very long lived assets.

Prior to Origin buying their controlling stake in Contact Energy in 2004, but subsequent to the original float, there were three years of large uplifts in asset values for Contact's generation assets totalling $2.066 billion. The capital increases were justified from a discounted cashflow analysis. This analysis was done on the increased earnings potential of the hydro dams. This 'asset rerating' was done in a different electricity market climate to that we find ourselves in today. Power was in short supply, and new energy generation projects were being set up to meet the increasing demand. As a result suddenly the hydro assets, in particular, were worth more. And more money could be borrowed against them. Will this situation again be repeated in the short term? It was Edison Mission Energy policy to revalue the power generating assets every three years, until they sold their stake to Origin. Origin initially continued with this three year asset revaluation policy. But later they changed their mind, reversing the 2007 assets revaluations and resetting FY2004, the year Origin bought their stake, as the 'base year' for valuation purposes. Now we at Contact are independently owned, who is to say that the asset revalutaion policy, which creates equity out of thin air, will not be revived?

SNOOPY

[horus1]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.

[peat]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.
not according to Infratil. They released a document a while ago that demonstrated solar was still a lot more expensive than hydro.
https://infratil.com/assets/Uploads/December-Update-2015.pdf

[Snoopy]

The problem is that the cost of alternative generation has reduced significantly and is now equal or below the cost from their assets so a revaluation may be -ve.


Yes, the generation asset revaluations creating 'capital out of thin air' are dependent on the marginal cost of generation increasing.

As you say Horus, if a very lowest capital cost way of putting new electricity inot the grid came to fruition, then existing high capital cost assets could be become stranded. That means the owner of those assets may indeed have to write them down in value, not up. Photovoltaics make sense for baseload consumption at home (for now), because there are no network transmission or ongoing billing costs to the home owner to pay for the power so generated. However, unless you can arrange to go completely off grid, your external electricity supply company still has network and billing costs of their own, regardless of any solar panel installations on any particular house on the network. So the big retailers are now looking to make you pay for those transmission charges anyway, with higher fixed daily charges.

Contact used to be the most 'retailer friendly' operator for people who generate their own power. Not sure if they still are. Current information on the subject may be found from the URL below.

https://www.contact.co.nz/personal/products/distributedgeneration

I see that Contact have now changed to a 'two tier' payment system. If your in house generation system creates less than 10kW of power, they will pay you 8c/kWh for any excess energy you want to export to the grid. If your system has a generating capacity of greater than 10kW, they say 'contact us'. This is code for saying:

"We will put up with dribs and drabs being fed into the power grid. It looks good for PR purposes. But if you want to get serious about rooftop power production, we don't want to know you."

If you are currently a 'rooftop generator' for Contact, there is more to worry about from Contact's submission to the Commerce Commission's pricing review. From p79 of the FY2016 Annual Report:

"Contact's view is that regulatory settings for investment in new technology should promote the best long term outcome for consumers and ensure that there is a level playing field and open access for the provision of new technologies like battery services. In other words networks retrailers and third parties should be able to provide battery services on the same basis and be able to access market prices for all related services they provide."

The 'level playing field' bit that I have emphasised means you as a 'home generator' are not going to get away with dodging your share of nationwide grid and distribution costs in the future. There is a further implication by omission that feeding power straight into the grid at any time will not be tolerated. In the future 'home generators' will need a battery installation at home, so that power will be fed into the grid only when Contact wants you to do so. This is all part of the 'level playing field' to put 'home generators' on the same footing as Contact's own hydro dams. I'd say Contact are out to get the likes of you Horus!

SNOOPY

[Snoopy]

Contact Energy commissioned its 200MW gas-fired peaking power station in early 2011. The facility plays an important role in providing New Zealand with a secure supply of electricity, while enabling the country to increase the level of electricity generated from renewable sources. The two fast-start gas turbine peaking units supply enough electricity for 200,000 average homes and can go from a cold start to full load in just 10 minutes. The gas turbine peaking units have been installed on the site of Contact's former Stratford power station, adjacent to the company's existing Taranaki Combined


I thought the Contact's position on the current emissions trading scheme was worthy of further comment. From p42 of AR2016.

"While over the past few years, the electricity sector has made substantial progress in reducing its emissions, our view is that without increasing the cost of generation or creating security supply challenges, the electricity sector's ability to make further changes is limited. This is because of the important role gas-fired generation currently plays in meeting electricity peak loads and at times of low hydro inflows and when the wind isn't blowing."

<snip>

"Under existing NZETS rules, companies like Contact currently submit one emissions unit per two tonnes of carbon emitted. As announced in May this year, companies with surrender obligations will transition to surrendering one emissions unit per two tonnes of carbon emitted to one emissions unit per one tonne of carbon emitted (1 for 1) by 2019. Transitioning to from a 50% unit cost to full market price for emissions from 1 January 2019 represents an increase in cost for Contact and other emitters.."

Carbon emisssion costs for FY2016 were $8m (AR2016 p63). Even if that were to double to $16m in FY2020, that is still manageable. But I am wondering if we are indeed nearing the end of the 'renewable substitution' road, how this change will be reflected in power prices for consumers going forwards. If the cost of running a peaking station goes up, that means the offer price of adding such a station into the power generation matrix goes up. This means the wholesale market will be paying more for peak power. In turn the retailers will be paying more for peak power. However, most consumers are on a fixed unit price scheme. So the only way for retailers to recover their higher peaking costs will be to put up fixed power unit charges for consumers all the year round. Is my logic correct?

SNOOPY

[horus1]

Surely if one generator doesn't pay for transmission neither should the local guy. Local generation is far better than remote generation . So solar should not pay for transmission, if it does over time people will leave the networks more and more. Solar is being installed and so it should be.

[BlackPeter]

Surely if one generator doesn't pay for transmission neither should the local guy. Local generation is far better than remote generation . So solar should not pay for transmission, if it does over time people will leave the networks more and more. Solar is being installed and so it should be.

You sure you thought that through?

Neither the local guy (as producer) nor any other generator pay for the network, but why should the local guy get more for the energy produced than the generator? Given your background you should know that the typical price in NZ per KWh produced is between 3 and 7 cents ... and I absolutely agree, this is what the local guy should get as well - not a cent more.

Giving him any more though is just stealing from the other consumers. Sure, this is what our lefties like to do, but I don't see any justification for this theft. It benefits nobody.

And - of course, if the local guy still needs energy from the net (like when everybody else needs it as well, when it is dark and / or cold), than (s)he needs to pay for the network as anybody else - and actually should pay more, because they only use the network during peak load (a quite expensive scenario).

[GTM 3442]

If I were building a new house I would be looking at 12v lighting run from a solar/battery combination.

Separate circuits entirely from the mains. With some 240v emergency-only stuff.

And checking out the possibility of doing the same for heat pumps.

[BlackPeter]

If I were building a new house I would be looking at 12v lighting run from a solar/battery combination.

Separate circuits entirely from the mains. With some 240v emergency-only stuff.

And checking out the possibility of doing the same for heat pumps.

Just go for it - probably cheaper and environmentally friendlier than throwing $150k or so (depending on your system) in paper notes into the log burner ... considering that the paper money around here is made of plastic :p. On the other hand - don't forget ... you need to replace the expensive batterie bank every 8 to 10 years ... maybe the idea with burning the money was not that bad at all ...;)

[Snoopy]

Contact used to be the most 'retailer friendly' operator for people who generate their own power. Not sure if they still are. Current information on the subject may be found from the URL below.

https://www.contact.co.nz/personal/products/distributedgeneration

I see that Contact have now changed to a 'two tier' payment system. If your in house generation system creates less than 10kW of power, they will pay you 8c/kWh for any excess energy you want to export to the grid. If your system has a generating capacity of greater than 10kW, they say 'contact us'. This is code for saying:

"We will put up with dribs and drabs being fed into the power grid. It looks good for PR purposes. But if you want to get serious about rooftop power production, we don't want to know you."


It is all long gone from the respective websites of course. But something twitched in my brain overnight about Contact offering a flat 12c/kWh for power fed into the network as recently as two years ago. IIRC Meridian topped that with an offer to buy power at around 18c/kWh. However the Meridian offer was limited to an an 'energy cap'. When that was exceeded the price paid dropped to a much lower rate, somewhere around 8c/kWh. I remember going into this in some detail at the time, because I was considering 'doing a Horus' myself.

If my memory is correct, it shows how quickly the gentailers have taken control of the situation. The apparent eco-credentials of Contact have been greenwashed down the gutter with the new pricing regime. I certainly feel for the likes of Horus who invested big time in their own home generation, only to have their system economics squashed by gentailer greed.

SNOOPY

[Harvey Specter]

If my memory is correct, it shows how quickly the gentailers have taken control of the situation. The apparent eco-credentials of Contact have been greenwashed down the gutter with the new pricing regime. I certainly feel for the likes of Horus who invested big time in their own home generation, only to have their system economics squashed by gentailer greed.

SNOOPYDont forget the lines companies are getting in on the act to, to limit the benefit of surplus solar generation (any solar generation since they want to charge an extra fee to anyone feeding into the grid, regardless of how much they feed in and when).

[Snoopy]

Dont forget the lines companies are getting in on the act to, to limit the benefit of surplus solar generation (any solar generation since they want to charge an extra fee to anyone feeding into the grid, regardless of how much they feed in and when).

The lines companies bill the gentailer/retailer who in turn bill the end line customer. I guess one thing to be said for having different companies in charge of "the network" and "the retailing" is that retailers on their own have no particular incentive to do the bidding of the lines company, at least in theory. In practice, because the lines companies are a monopoly, the retailer has little choioce but to do their bidding.

SNOOPY

[Snoopy]

Time to update my capitalised averaged eps valuation (excluding special dividends) for Contact, given the subdued outlook for FY2016 and the impending and current share buyback program.

Compared to last year, the special dividend ($367m total) has created an ongoing parcel of extra debt going forwards that must be serviced. Contact doesn't declare in their annual report the interest rate they pay over their whole debt portfolio. But we can:

1/ take last years total interest paid ($90m) AND
2/ divide this by the end of year term debt ($1,219m + $531m) LESS
3/ the capital paid out in the special dividend (because that payout only occurred just before the end of the financial year).

and calculate:

$90m / [($1,219m + $531m) - $367m] = 6.5%

So 6.5% is our indicative interest rate that Contact currently pays.

The extra interest bill because of the capital return is therefore: $367m x 0.065 = $24m

I am estimating that 20m Contact shares will be bought back and cancelled when the current share buyback program is finished.

Given EBITDA is forecast to be little changed from last year, we can now work out the expected NPAT for Contact for FY2016.



FY2016 Adjustments


EBITDA (normalised FY2015)$549m


less DA (FY2015)-$204m


less I-($98m+$24m)


Total EBT$233m


less Tax at 28%-$62m


NPAT forecast FY2016$161m



We can now divide that forecast profit figure by the reduced number of shares 'post buyback' to get a forecast eps figure.

$161m / (733m -20m) = 22.6c

And that eps figure can take its place in our multi year eps table below.



Yeareps


200927.0c


201025.3c


201122.4c


201224.6c


201327.5c


201427.1c


201524.3c


201622.6c



I get an average eps of 25.1c (net) over the eight year representative period.

25.1c (net) is equivalent to 25.1/0.72 = 34.9c (gross).

Using a target 6% gross return figure for 'fair value'.

34.9c/0.06 = $5.82

It is no wonder then that I have been buying in recent months and see today's closing price of $4.70 as a bargain. Even if you use this years forecast manic depressed profit on its own (ie assuming profits will never recover and remain low) I still get a valuation of:

[22.6/0.72]/0.06 = $5.23

Mr market can do what he likes as far as I am concerned. I have no problem taking advantage of him.


Actual FY2016 results are out, so time to update my valuation model.

First a few words for those who joined the Contact Energy (CEN) party late.

CEN operates in an industry where the weather plays a big part. No-one can predict for sure what the weather, and hence resultant rainfall, and consequently inspired power demand will be on the overall network. In addition there are competitive market pressures which see customers happy to flip flop between different retailers at regular intervals. However, Contact have been operating in volatile weather and consumer markets for many years. Furthermore, the energy market is relatively mature. Rather than try and guess what the weather and consumer market share for Contact in the future might be, I prefer to use 'actual data' from the last eight years, and superimpose the current forward dividend policy on that data. Because I am considering eight years of data, this will produce an 'averaging effect'. Thus, although I predicting a particular 'fair share value' for Contact, we can expect the market value of CEN shares to fluctuate both above and below that figure.

Gentailers have a lumpy demand for investing in new power stations. Right now we are at the bottom of the lump. Generally a gentailer must keep reinvesting in their generation plant to keep viable. But right now we are in a place where the big reinvestment is done. This means that the annual depreciation and amortization charges on assets do not need to be reinvested right now. That means 'extra cashflow' for Contact Energy, and 'extra money' that is available to pay out to shareholders, over and above earnings? How much extra money?

In FY2016 the depreciation and amortisation charge was $201m, and the offsetting capital expenditure was $128m. There are currently 715.5m Contact shares on issue. So the 'windfall cashflow' per share in FY2016 amounts to:

($201m-$128m)/ 715.5m = 10cps

Of course not all of this is available to be paid out. Contact currently has a relatively high debt load. Management have indicated that they wish to use some of that cashflow to pay down debt. But add 10cps to last years earnings of 22cps and you get 32c. There is plently of headroom there to indicate paying a cash dividend of 26cps per year going forwards will not be a problem.

Below I present my corrected earnings picture for the last eight years. You will note that:

1/ I have deleted last years 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 26cps being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.



Scenario Basis Financial Yeareps (A)Scenario dps (B)Difference (A)-(B)Divie Capital Component (C)Unimputed Tax Bill (D)Difference (B)-(C)-(D)


200927.0c26.0c+1.0c0c0c26.0c


201025.3c26.0c-0.7c0.7c0.2c25.1c


201122.4c26.0c-3.6c3.6c1.0c21.4c


201224.6c26.0c-1.4c1.4c0.4c24.2c


201327.5c26.0c+1.5c0c0c26.0c


201427.1c26.0c+1.1c0c0c26.0c


201522.0c26.0c-4.0c4.0c1.1c20.9c


201622.2c26.0c-3.8c3.8c1.1c21.1c


Total198.1c208.0c190.7c



The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern

SNOOPY

[Snoopy]

The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern


I have had requests before from those who don't want to read the whole nitty gritty. As above I am calling $5.50 fair value. Mr Market has been consistently bekow this figure. It is probably correct that the share should trade below this average figure for most of the businesss cycle, simply because of the threat of Tiwai closing. If Tiwai did close the CEN share price might take 8-10 years to get back to where it is today. IOW it would take that long for demand in the rest of the country to take up the slack. I recognise this as a possibility. But I am prepared to hold my investment in CEN at a suitably discounted price (i.e the actual market price) as risk compensation.

I see that Contact CEN020 bonds are trading at a yield of 3.21%. To me that is a 'crazy low' yield for a company with a BBB credit rating. Buying the CEN shares on a more than 6% yield makes so much more sense. If interest rates rise, those bondholders buying in a today's prices will surely lose capital. But shareholders will too, becasue Contact is a 'yield share'.

If as a result of interest rates rising, Contact shareholders required a 6.5% yield then my average share price valuation would change to:

33.0c / 0.065 = $5.08

With possible interest rate raises in mind, $5.08 would be the maximum price that I would be prepared for CEN shares in the latter half of CY2016..

SNOOPY

[sb9]

Did I see 475??? goodness getting close to that origin sell down price of 450 (from memory)...

[Blendy]

I'll be at the AGM today, and will post anything interesting here.

[Blendy]

Quite a large turnout! It begins with a Mihi and Board and staff performing a Waiata.

[Blendy]

Paying down debt over the next year will be a main focus

[Blendy]

Ranked 6th globally for Governance in the Thomson Reuters diversity and inclusion index.

Employee engagement is at 56% so some improvement being looked at.

Customer experience is improving and numbers increasing.

Goals to improve market share through consumer experience and brand value.

[Joshuatree]

Good stuff Blendy.

[Blendy]

Very good sustainability policy implemented, covering the Triple P approach which includes people, community, customer inspiration, environmental impact, digital communication, profits, corporate responsibility etc

[Blendy]

Won the safety award at Deloitte's. Empowering safety is a critical focus. Safety incidents increased 3.3 but the severity reduced.

[Blendy]

Very good ecosystem focus eg carbon emission reduction, water sustainability etc, and social sustainability such as energy efficiency of state housing, equality of energy access to all regardless of socioeconomic status. Nice to see.

[Blendy]

No questions on the financial statements

[Blendy]

Elena Trout presented a professional background discussion about what she brings to the Board.

Whaimutu Dewes presented a very inspirational talk about change - he is the best speaker so far. (He's the only one who hasn't simply read their notes)

Sue Sheldon presents a strong professional background.

[Blendy]

Customer service desk is in the foyer to deal with any customer questions - that's a good idea!

[Blendy]

Question about why otahuhu plant was closed.

It's older, high cost, surplus to requirements, and not very renewable

[Blendy]

Question: prompt payment discount is too generous, how does it compare in the market. It's set competitively in the market.

Also, hardship programs: competitive products are offered with payment budgeting methods. WINZ resources, medical life support etc.

[Blendy]

Question about merging with Trustpower.

Not on the radar.

[Blendy]

Question about driving price of electricity down in the derivatives markets since we've had so many wet years.

Not really is the summary.

[Blendy]

Net Promotor Score is used as a tool to measure customer satisfaction. The Board sees this as a financial value tool.

[LAC]

Anything on Divies or sharebuybacks to continue?

[Blendy]

No further share buy backs planned.

Employee engagement went up from 44% to 56%. Surveys on how they feel in the organization, culture etc. - helps the Board to understand issues so that they can improve productivity and therefore financial return because staff want to go the extra mile and are motivated to do a great job.

(I could go on and on about organizational behavior benefits - I'm really impressed with the Board's approach to this).

[Blendy]

90% of the electricity is provided by the major players - Contact, Meridian, Mercury, Genesis, Trustpower. Contact holds about 21% of this market share.

[Blendy]

Overall, a very well run meeting, with generally positive feeling. The heavy focus on customer satisfaction and engagement, as well as employee engagement is great to see. The Board and staff present were very friendly and mingled with people at morning tea (very well catered by the way - scones, jam, cream, sandwiches, mini pies etc etc). There was much discussion from shareholders about how Contact would assist those in poverty, and sort of an expectation that they would provide something towards fixing a social problem. But then on the other hand there is the expectation of returning a profit to shareholders. A balance will no doubt be found.

[Jaa]

Question about why otahuhu plant was closed.

It's older, high cost, surplus to requirements, and not very renewable

Sparky wasn't that old!

It was commissioned in January 2000, upgraded in 2005 from 385MW to 404MW and ceased generation at the end of September 2015. The typical lifespan of a combined cycle gas power station at 30 years is double that. What a debacle.

Contact's upgrade to SAP, which was forced (by Origin), expensive and ultimately customer value destroying also shows how relatively poorly the company was run by overseas management. Any update on that fiasco at the meeting?

The question is, have things changed?

PS: Thanks for the updates from the meeting Blendy, much appreciated.

[Blendy]

A pleasure. I realize most of the discussion focused on how they are running the company now and moving forward, and not on what amazing things are going to drive the share price dramatically or dividend increase. I feel the summary is that it's a sensible long term business operation. Slow and steady.

And no, no update on the SAP/Origin fiasco.

[Snoopy]

And no, no update on the SAP/Origin fiasco.


SAP I am lead to believe reaches right back inside Contact, and I can't say anything about any internal ructions it has created. But on the 'customer interface' side. as a recently returned Contact Energy customer, I do have something to say.

Years ago, I was with Contact under their old 'Empower' brand. Being 'old school' with my bill paying, I enjoyed my monthly walk down to the post office to pay 'over the counter'. I was somewhat incensed then to find that Empower intended to charge me for paying my own bill in the near future. Around that time I was 'door knocked' by Genesis Energy. Not only did they offer me a better price without a time contract. In addition they had a 'brownie points' scheme whre I could collect points and buy trinkets on line. Genesis also said that I could continue my monthly saunter to the post office without being charged extra to clear my account. So I quickly signed up.

A few days later I got a 'weak call' from Contact offering me a small cash incentive to stay. I worked out that if I stayed I would be better off in cash terms for four months, but thereafter I would be losing money on the comparative deal. So a Genesis Energy customer I became. I never did quite figure out the Genesis 'brownie points' system. I seemed to run into hurdles that my ancient computer at home could not jump. When it was abolished, I just lost all my points. That gave me a surprisingly negative feeling about Genesis, even though this was a 'benefit' that was never a deal clincher in the first place. Subsequently Genesis started charging me for paying my own bill as Empower had threatened to do, and that rankled. However one thing that kept me at Genesis was their customer billing system.

Each month my power bill had a graph of all my power use over the last year grouped in two monthly columns. I liked to see that, and I think the two month grouping tended to iron out fluctuating weather conditions over winter and points in time where I had had periods away from home. Then about three months ago I was 'door knocked' by Contact. The salesperson made a persuasive pitch with an up front cash incentive for a two year contract (around $150 IIRC). The price for power was more or less the same. But a 20% discount offer verses the 10% on offer for Genesis made a big difference. They also said I would no longer be charged for walking to the post office, a small point, but one I liked.

A few days later I got the 'counter call' from Genesis. A 15% discount, but for a one year contract, same power price. As a retail customer my expectation is for power charges to fall in the next two years. But I still figured a 10% fall 'in the hand' was better than a nebulous expectation of lower power prices at some time. So a Contact customer again I have become.

On receiving my first Contact Energy bill, I was pleasantly surprised to see my 'power use graph' was still there. However, the expectation is that I will be supplied monthly power use figures rather than two monthly. Monthly figures I expect will say more about the weather for that month rather than my power usage. Also Contact will make use of my 'slightly smart meter' to supply 'calendar month' power use figures rather than 'billing period' power use figures. I just say I can't forsee much benefit - for me- in doing things this way. Perhaps Contact benefits in some upstream way? Just because you have more 'customer data', that doesn't automatically make it more useful. But time will tell. Personally I think the Genesis billing system gave more useful information to me, yet I don't recall Genesis Energy ever crowing about it!

SNOOPY

[Snoopy]

Below I present my corrected earnings picture for the last eight years. You will note that:

1/ I have deleted last years 50cps special dividend forom the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 26cps being paid into the forseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without impuatation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.



Scenario Basis Financial Yeareps (A)Scenario dps (B)Difference (A)-(B)Divie Capital Component (C)Unimputed Tax Bill (D)Difference (B)-(C)-(D)


200927.0c26.0c+1.0c0c0c26.0c


201025.3c26.0c-0.7c0.7c0.2c25.1c


201122.4c26.0c-3.6c3.6c1.0c21.4c


201224.6c26.0c-1.4c1.4c0.4c24.2c


201327.5c26.0c+1.5c0c0c26.0c


201427.1c26.0c+1.1c0c0c26.0c


201522.0c26.0c-4.0c4.0c1.1c20.9c


201622.2c26.0c-3.8c3.8c1.1c21.1c


Total198.1c208.0c190.7c



The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern


In the interests of 'minimising work' in the future, I want to redo my valuation of CEN based on purely historical performance.



Financial Yearepsdps (imputed)


200927.0c28.0c


201025.3c28.0c


201122.4c25.0c


201224.6c23.0c


201327.5c23.0c


201427.1c25.0c


201522.0c26.0c


201622.2c20.0c


Total198.1c198.0c


Average24.8c24.8c



Interestingly, although the timing of the cashflows varies, the actual valuation, based on the 'average imputed dps paid' in one instance, and the 'average eps' in the second instance will be identical! Over an extended period, if a company has a policy of paying out 100% of earnings as dividends this is what you might expect. So it is comforting to see that 'expectation' actually does equal 'reality' in this case.

Using a tax rate of 28c this is equivalent to a gross income of: 24.8cps /(1-0.28) = 34.4c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

34.4/0.06 = $5.73

So $5.73 is therefore 'fair value'. Note that this is higher than my previous 'Forecast Dividend Perspective' valuation by 23cps. Nevertheless I believe my previous perspective on future dividends is probably more accurate going forwards. I am sticking to my $5.50 valuation. In this case the extra work I did to get the more accurate valuation was IMO worth it.

SNOOPY

[troyvdh]

Given a div at 6 % why is CEN becoming a 'dog'...on big volume to...bets me.

[fish]

Given a div at 6 % why is CEN becoming a 'dog'...on big volume to...bets me.

I would prefer to call it a cheap buy.
Quite honestly I dont believe people are selling on fundamentals-its value to me is that it will be the biggest part of my retirement fund-and it got a lot bigger today.
If people want to sell at this price I am very happy to buy.
I am buying for the dividend yield for long-term returns

[kiora]

I would prefer to call it a cheap buy.
Quite honestly I dont believe people are selling on fundamentals-its value to me is that it will be the biggest part of my retirement fund-and it got a lot bigger today.
If people want to sell at this price I am very happy to buy.
I am buying for the dividend yield for long-term returns

But that's why investors are selling down dividend producers and parking it in "safe haven'or looking at growth orientated investments aren't they?

[couta1]

But that's why investors are selling down dividend producers and parking it in "safe haven'or looking at growth orientated investments aren't they? I don't buy this story otherwise why are low yield growth stocks like Sum and RYM getting the same hammering?personally I reckon the NZX is in correction mode across the board right now, that as well as US Instos moving funds back to their own country now Trump is in and promising economic growth etc etc. There is simply not enough appetite from local investors to help stem the tide but once the tailwinds of January start blowing I'm sure things will turn.

[kiora]

I don't buy this story otherwise why are low yield growth stocks like Sum and RYM getting the same hammering?personally I reckon the NZX is in correction mode across the board right now, that as well as US Instos moving funds back to their own country now Trump is in and promising economic growth etc etc. There is simply not enough appetite from local investors to help stem the tide but once the tailwinds of January start blowing I'm sure things will turn.

Maybe???Doesn't sit with where the the NZD/USD exchange rate is though does it?

[fish]

Maybe???Doesn't sit with where the the NZD/USD exchange rate is though does it?

There are so many maybes.
In my opinion fear has become the main driving force and thats given us all a chance to buy a cheap dividend stock that is relatively safe.
Trump is the reason for most of this fear.
My belief is that he said things to get votes and is a populist.
We just arent going to get a wall dividing the USA from Mexico( unless its a metaphoric wall that doesnt work).I doubt that the USA will isolate itself
Maybe we get more immigration from the usa and the uk.
Maybe electricity demand will be reduced from global warming and greater efficiency.
Contact can produce electricity cheaply from renewable resources and whatever likely happens will keep making profits and maybe they will grow.
I doubt if the valuation carefully considered and kindly provided by snoopy has actually changed this week

[Snoopy]

Since I wrote the above post, Contact has paid a special dividend of 50c per share. So my equivalent purchase price for that last parcel of shares is now $5. As I write this, the share price is $4.90, so even cheaper!

When purchasing shares I always like to stack up any potential purchase with any alternative that is out there. Genesis Energy is also an electricity gentailer that, like Contact, has natural gas interests. So how do the two stack up?

Dividends are all fully imputed.



Contact EnergyGenesis Energy


Share Price$4.90$1.41+31c(Kupe)


Projected eps (FY2015)26.2c6.4c+2.6c(Kupe)


Projected dps (FY2015)11c+15c=26c8c+8c=16c


Gentailer PE18.722.0


Earnings Yield Gentailer (FY2015)7.4% (gross)6.3% (gross)


Share Price for 6% yield (fair value)$6.04$1.48+$0.31


Discount from fair value19%4%


My Investment ResponseBuyHold



This table is behind the reason that I added to my CEN holding today. Most of the extra discount is I believe rated to the uncertainty surrounding Origin's controlling stake. But what a wonderful opportunity that gives for we value investors to top up!


I wrote the above post on 31st July 2015. In today's context it is historical. However for comparative purposes I wish to bring it up to date. Since I made that post I have changed my mind on how Kupe should be valued. Back then I thought Kupe should be valued on an 'after tax' basis'. Now I consider valuation on a 'before tax' basis more appropriate. So how does this one small change affect my valuation of Genesis Energy?



Contact EnergyGenesis Energy


Share Price$4.90$1.29+43c(Kupe)


Projected eps (FY2015)26.2c6.4c+2.6c(Kupe)


Projected dps (FY2015)11c+15c=26c8c+8c=16c


Gentailer PE18.720.1


Earnings Yield Gentailer (FY2015)7.4% (gross)6.9% (gross)


Share Price for 6% yield (fair value)$6.04$1.48+$0.43


Discount from fair value19%10%


My Investment ResponseBuyHold



Result: No effect on the decision I made to invest more in CEN at that time. However, it does show that the gap between my perceived market value of GNE and CEN at the time was not as great as I had thought.

SNOOPY

[Bobdn]

I have both CEN and GNE but because GNE has a geoss dividend yield almost twice as much as CEN, I like GNE better. This is how sophisticated my investing is.

[Snoopy]

CEN values SAP at 265 million with a 15 year lifetime, I don't really see how the change to SAP will increase earnings.
At the stations it is just a hinderance because no-one knows where the spares are anymore.


Page 38 of the 23-11-2106 presentation gives some detail of what the Contact SAP system is scheduled to do.

Pre November 2015

SAP Go-live
SAP stabalization
SAP release 1 adds credit checking
SAP release 2 resolves billing issues

Progress since November 2015

SAP release 3 adds billing capability
SAP driven cost reduction
SAP release 4 adds new products
Leverage SAP data and insight

Go to page 39 and you can see how the customer statistics are measuring up:

Average number of bills paid more than 30 days late has plummeted to one tenth of what it was only two years ago. Yet overall bad debt expense hasn't decreased significantly (0.55% two years ago, 0.5% today). One factor could be that the number of retail customers on more than 10% discount have increased from 63% two years ago to 82% now. Myself, as a recent sign up, make sure that I keep a positive balance on my power bill about a month ahead of the bill cycle to be absolutely sure I don't miss that 20% discount which hooked me a new customer.

Slide 24 shows the cost of energy for FY2016 was just over $30/MWh, down from just under $40/MWh in FY2015. I presume a major contributor to this is becasue of the closure of Otahuhu. So even with more customers moving to a 20% discount on their power bills, there is enough cost reduction there for Contact to be increasing their profits while offering customers better deals

I see that "Digital customer Interaction' is a must have. So it looks like more 'apps' are under development. Contact are embracing mobile devices as a customer interaction tool if you can believe the presentation graphics. The graphics also say that 'Home Generation' will be embraced. That includes 'backup power' (that means battery storage) and time of use billing. Even "horus1" will be feeling all warm and fuzzy with that revelation!



SNOOPY

[Snoopy]

I made the above estimate with the Contact Energy August market update. But now we have the actual figures it is time to tidy my estimate up.

1/ Take EBITDAF.

$525m

2/ Remove one off profit effects.

+0.72x$24m (Add back one off cost from retail transformation project)

3/ Less Depreciation and Amortization

-$204m

4/ Less annual interest charge.

-$98m

5/ Less tax payable at 28%

-$67m

6/ Calculate NPAT (normalised estimate).

=$173m

From this the actual normalised earnings per share are:

$173m / 733m = 23.6cps

To my surprise the final dividend of 15cps was retained from last year (albeit this time unimputed). Coupled with the 11cps interim dividend, the normal dividend from FY2015 of 26cps represents 110% of net profit.


I am sad to report I have to make a correction to the reference calculation below. I had added back the one off effect of $24 because of costs associated with the retail transformation project. However, on inspection of the segmented results, it seems these costs were never incorporated into the EBITDAF earnings figure to start with. So I should not have added them back in after all!

1/ Take EBITDAF.

$525m

2/ Remove one off profit effects.

nil

3/ Less Depreciation and Amortization

-$204m

4/ Less annual interest charge.

-$98m

5/ Less tax payable at 28%

-$62m

6/ Calculate NPAT (normalised estimate).

=$161m

From this the actual normalised earnings per share are:

$161m / 733m = 22.0cps

SNOOPY

[Snoopy]

I am sad to report I have to make a correction to the reference calculation below. I had added back the one off effect of $24 because of costs associated with the retail transformation project. However, on inspection of the segmented results, it seems these costs were never incorporated into the EBITDAF earnings figure to start with. So I should not have added them back in after all!

1/ Take EBITDAF.

$525m

2/ Remove one off profit effects.

nil

3/ Less Depreciation and Amortization

-$204m

4/ Less annual interest charge.

-$98m

5/ Less tax payable at 28%

-$62m

6/ Calculate NPAT (normalised estimate).

=$161m

From this the actual normalised earnings per share are:

$161m / 733m = 22.0cps



Updating the normalised profit figure for FY2016:


1/ Take EBITDAF.

$523m

2/ Remove one off profit effects.

nil

3/ Less Depreciation and Amortization

-$201m

4/ Less annual interest charge.

-$101m

5/ Less tax payable at 28%

-$62m

6/ Calculate NPAT (normalised estimate).

=$159m

From this the actual normalised earnings per share are:

$159m / 715.1m = 22.2cps


SNOOPY

[Snoopy]

Updating the normalised profit figure for FY2016:

<snip>

6/ Calculate NPAT (normalised estimate).

=$159m

From this the actual normalised earnings per share are:

$159m / 715.1m = 22.2cps



The gentailers have a reputation for being 'yield' shares. The sort of thing you want to have in a portfolio if you want a steady income. Over the last couple of years the trend has been towards paying dividends out of cashflow, rather than earnings. This in turn means that most of the dividends from gentailers going out into the future will not carry full imputatiuon credits. Paying out dividends without imputation credits is nothing new. One example that comes to mind is the former Dorchester Pacific (now renamed Turners). Like other NZ finance companies, immediately post GFC, they got into terrible trouble and booked huge losses. Unlike most other finance companies they recovered and recouped their tax loss position over many years. During these years of recuperation, Dorchester paid out modest unimputed dividends. The gentailer position, as regards imputation credits on dividends , though, is quite different.

None of the big gentailers have ever been in the kind of trouble that almost sunk the entire finance industry in NZ. But most of the gentailers are coming out of a period of investment in new power stations that is now finished. Thus they have high depreciation charges (non cash) that will not require a corresponding reinvestment in new power plant in the medium term. These depreciation charges effectively become extra free cashflow. And that extra cashflow is being passed on to customers through 'top up' unimputed dividends.

Contact Energy has its own unique take on the imputed dividend issue. For many years they had been building up imputation credits on the books. Just before Origin Energy relinquished their controlling stake in Contact, these imputation credits were released in the form of being attached to a special dividend. The downstream effect of this was that due to tax payment timing issues, the following normal dividend, paid from normal business operations, was paid with no imputation credits at all! Shareholders should be assured that this is a temporary situation. With the settling down of the Contact share register, imputation credits will be resumed. Yet Contact suffers from my previously discussed point of having high positive cashflow that is in part not taxed as a result of the recent power station building program (Te Mihi Geothermal in the case of Contact) being completed. Like the other gentailers it is unlikely that dividends going forwards will be fully imputed. So an important question arises: How do you value a dividend that is only partially imputed?

My position is that the unimputed part of these gentailer dividends should not be counted in an investors return. Unimputed dividend are in effect a return of cash assets already held by the company and already owned by shareholders. Thus when Contact pays an unimputed dividend, what they are really doing is just paying your own share capital, that you already own, back. Unfortunately for shareholders, capital returned by the unimputed dividend method is taxed. I would argue that this capital tax, paid as income tax, should be taken off the investors return for the year. My position then is that unimputed dividends are not even neutral but negative for shareholders.

Companies never like reducing dividends paid to shareholders. Even if they have a poor year, they can often 'look through' that result to next years recovery and maintain their dividend. So the company 'dividends stream' is often more stable than the 'earnings stream'. In the case of Contact they have paid out an 11cps interim dividend and a 15cps final dividend in recent times. Cashflow forecasts indicate they will not need to reduce these payments, even if tax paid earnings fail to match the annual dividend payment of 11cps + 15cps = 26cps. My normalised earnings calculations show that in FY2015 eps was 22.0cps and in FY2016 is was 22.2cps. If we regard an eps of 22cps are the 'present market norm', and assume Contact do not reduce their annual dividend payment of 26cps, this points to future annual dividends of 26cps being made up of a 22cps imputed dividend component and a 4cps unimputed dividend component. Using this breakdown, we can calculated a forecast 'gross dividend' for Contact Energy going forwards as follows:

22cps/0.72 + 4cps = 30.5cps + 4cps = 34.5cps.

From this we must remove from shareholder 'return' the negative capital effect of paying tax on capital shareholders already own (the tax effect of the unimputed dividend), and the neutral effect of paying back capital that shareholders already own (the unimputed dividend itself).

34.5cps - 4cps - 0.28( 4cps ) = 29.4cps

Using a reference price of $4.73 per Contact Energy share this equates to a gross yield of:

29.4c / 473c = 6.2%

If we assume that in these days of low interest rates a 6% gross yield is an acceptable return, this leads to the fair value of a CEN share to be:

$4.73 x ( 6.2/6.0 ) = $4.89

SNOOPY

[Arbroath]

Hi Snoopy,

You raise a good point - I'd rather Contact reduced the dividend to 17-18cps that it can pay fully imputed and used the surplus free cash flow to conduct share buy backs annully over the next 3-4 years. That would have the effect of reducing shares on issue by up to 20% (if all surplus FCF above NPAT is spent - projected c. $200m+ each year for a few years). The reduced shares on issue will then enable a higher fully imputed dividend per share to be paid as the NPAT (assume flat around $160m) is spread over less shares on issue. By 2020 they could be paying 30cps fully imputed if they pursued that strategy which brings the gross yield up to near 9%.

[Snoopy]

Hi Snoopy,

You raise a good point - I'd rather Contact reduced the dividend to 17-18cps that it can pay fully imputed and used the surplus free cash flow to conduct share buy backs annully over the next 3-4 years. That would have the effect of reducing shares on issue by up to 20% (if all surplus FCF above NPAT is spent - projected c. $200m+ each year for a few years). The reduced shares on issue will then enable a higher fully imputed dividend per share to be paid as the NPAT (assume flat around $160m) is spread over less shares on issue. By 2020 they could be paying 30cps fully imputed if they pursued that strategy which brings the gross yield up to near 9%.

Arbroath, I do not disagree with any of your suggestions as regards managemnt of the cashflow of Contact in the best interest of shareholders. However, there is one more use of the unimputed earnings cashflow that Contact managment should consider. Paying down debt! If you go to section B4 of AR2016, you will see that in April 2017 $100m in 'Wholesale bonds' are maturing. At the moment Contact are paying an interest rate of 7.86% on those bonds. Pay that off and you get nearly $8m of savings on interest paid. This is not insignificant when your normalised profit is $161m. In fairness I believe that management are actively pursuing a debt reduction program.

SNOOPY

[Snoopy]

Using a reference price of $4.73 per Contact Energy share this equates to a gross yield of:

29.4c / 473c = 6.2%

If we assume that in these days of low interest rates a 6% gross yield is an acceptable return, this leads to the fair value of a CEN share to be:

$4.73 x ( 6.2/6.0 ) = $4.89


Medium time readers will notice a difference betweem the fair valuation that I have given above, $4.89 (post 1328) , and the $5.50 valuation I came to detailed in post 1288. So which of my two 'fair value' calcluations am I backing: $4.89 or $5.50?

Personally I do not like to make valuations made on the basis of a single year, or in the case of my $4.89 valuation just a couple of years. Granted these years are the most recent, and therefore most closely represent 'current market forces'. But personally I prefer to use the averaging effect that using eight years of market data brings. So I am sticking to $5.50 as my estimate for 'fair value'. Having said this, I do not dismiss my $4.89 valuation entirely. If you believe that current market forces are entrenched, then $4.89 could be taken to be a more current, and pessimistic 'fair value' view.

My investment philosophy is always to buy at 'below fair value', not 'fair value'. So in current market conditions I would consider up to $4.89 as an appropriate price to buy in Contact Energy from a new to the company investor perspective.

SNOOPY

[Arbroath]

Agree entirely although the actual saving is more like $3m to the bottom line as they can roll those bonds at c. 4.5% in the current market and the interest is a pretax expense.

[BlackCross]

The share price has taken a hit today:

.. demand down 0.6% to 4001 gigawatt hours in the six months ended December 31 while the average electricity sales price was down 1.3% to $179.01 per megawatt hour

[BeeBop]

Of course it has taken a hit, I bought in yesterday at 4.99....never mind.....patience patience patience.

[troyvdh]

Beebop...What a great post ..thanks..loved it.Go well.

[RTM]

Result published today. Seems OK, steady as you go.

I recall that someone once put a link on share-trader, I think to somewhere on the NZX, as to where one could find a list of the upcoming company announcements. Can't seem to find it...can anyone point me to the right place please.

Thanks,
RTM

[Master98]

Result published today. Seems OK, steady as you go.

I recall that someone once put a link on share-trader, I think to somewhere on the NZX, as to where one could find a list of the upcoming company announcements. Can't seem to find it...can anyone point me to the right place please.

Thanks,
RTM

https://nzx.com/companies/CEN/announcements/296628

[RTM]

https://nzx.com/companies/CEN/announcements/296628

Thanks Master...I can find that one.
But what I was after was a list of the upcoming company announcements. As there are quite a few on their way.

Cheers
RTM

[Master98]

Thanks Master...I can find that one.
But what I was after was a list of the upcoming company announcements. As there are quite a few on their way.

Cheers
RTM
How can you get a list of upcoming announcements before published?

[RTM]

I want a list so I know when to look for the announcements. Not the actual announcements.
e.g. CEN 13 Feb 17
HBL 21 Feb 17
AIR 23 Feb 17
etc

[couta1]

I want a list so I know when to look for the announcements. Not the actual announcements.
e.g. CEN 13 Feb 17
HBL 21 Feb 17
AIR 23 Feb 17
etc Go to NZX site, click on Markets, then Main Board, you will find what your looking for there.

[Master98]

I want a list so I know when to look for the announcements. Not the actual announcements.
e.g. CEN 13 Feb 17
HBL 21 Feb 17
AIR 23 Feb 17
etc
ah, that is upcoming events, i think you can find it on ASB web site.

[peat]

How can you get a list of upcoming announcements before published?

Haha yes indeed
But you can read the announcements that tell you when the announcements will be made

[RTM]

Probably need an ASB account tho.

[sideline]

Haha yes indeed
But you can read the announcements that tell you when the announcements will be made

Couta is correct, the NZX lists upcoming reports under the heading "Upcoming Meetings"
Categories for "meetings" are HALFYR, FLLYR and AGM

[RTM]

Ah...thanks Couta and Sideline. Got it.
Appreciated.
RTM.


Couta is correct, the NZX lists upcoming reports under the heading "Upcoming Meetings"
Categories for "meetings" are HALFYR, FLLYR and AGM

[Bobdn]

Yay, market is loving the result. Hold 8500, pity there's no DRP.

[fish]

Yay, market is loving the result. Hold 8500, pity there's no DRP.

Its my largest holding and the result was better than I expected-so much cheap hydro and reduced demand keeping power prices low.

Cost of generation substantially reduced.
I dont know why the market dropped from the high of 4.95.
Tomorrow will be interesting-I hope!

[BlackCross]

Morningstar fairly positive....Solid First Half for Contact; We Lift Our Valuation to NZD 5.80Contact Energy's first-half fiscal 2017 result was in line with expectations, with EBITDA up 3% to NZD 261 million and net income up 12% to NZD 82 million. However, January operating statistics, also released today, were strong and suggest EBITDA for the financial year to date (seven months) is up around 5%. We make minor upgrades to our forecasts, and increase our fair value estimate by 4% to NZD 5.80 per share. At the current price of NZD 4.80, we believe Contact is attractive, offering a 5.4% mostly imputed dividend yield. Net debt/EBITDA should fall to comfortable levels this financial year as earnings rise and as surplus free cash flow is used to reduce debt, likely allowing dividends to increase from fiscal 2018 onwards. Further adding to the appeal for investors, imputation should steadily increase to 100% over the next few years. There is no change to our opinion that Contact is a high-quality company, warranting a narrow economic moat rating.

[Blendy]

I was just speaking with the very helpful customer service team at Contact Energy, and I asked them if they've noticed an increase in new customers sparked by their fancy new loyalty deal with AA Smartfuel (you get 30c discount per litre every month for a year, which if you use this reward system is actually very good, plus you get a 22% discount off your power bill).

They said it has been very hectic with lots of new customers coming onboard. Thought you should know.

[Cricketfan]

I was just speaking with the very helpful customer service team at Contact Energy, and I asked them if they've noticed an increase in new customers sparked by their fancy new loyalty deal with AA Smartfuel (you get 30c discount per litre every month for a year, which if you use this reward system is actually very good, plus you get a 22% discount off your power bill).


They said it has been very hectic with lots of new customers coming onboard. Thought you should know.


Though of course they would say that. Did you happen to also ask if they lost customers when they left FlyBuys?

[couta1]

I was just speaking with the very helpful customer service team at Contact Energy, and I asked them if they've noticed an increase in new customers sparked by their fancy new loyalty deal with AA Smartfuel (you get 30c discount per litre every month for a year, which if you use this reward system is actually very good, plus you get a 22% discount off your power bill).

They said it has been very hectic with lots of new customers coming onboard. Thought you should know. You can choose your plan between 10-50c/litre with various levels of discount rates according to your fuel usage, just switched to the 30c option along with the 22% discount, great stuff. Disc-Happy Dual energy customer for many years, but no shares currently.

[sb9]

Though of course they would say that. Did you happen to also ask if they lost customers when they left FlyBuys?

Very true, there'll be that initial euphoria as always when customers see that kind of offer. Notice though 30c off per litre is once per month, guess not that great an incentive if you break it down further plus you need to really compare what are their variable rates and finally the contract is until 2018.

As a side note, have recently been shopping for cheap power deals and noticed contact does not display their rates outright on their websites like many other. Not sure if this is new strategy or been like that.

[stoploss]

Very true, there'll be that initial euphoria as always when customers see that kind of offer. Notice though 30c off per litre is once per month, guess not that great an incentive if you break it down further plus you need to really compare what are their variable rates and finally the contract is until 2018.

As a side note, have recently been shopping for cheap power deals and noticed contact does not display their rates outright on their websites like many other. Not sure if this is new strategy or been like that.

sb9, have you tried comparing via this site ?

https://www.powerswitch.org.nz

[macduffy]

You can choose your plan between 10-50c/litre with various levels of discount rates according to your fuel usage, just switched to the 30c option along with the 22% discount, great stuff. Disc-Happy Dual energy customer for many years, but no shares currently.

I'm another happy 22% discount customer, couta, although aware that the seductive "22%" has induced a degree of inertia in seeking other options. A 30c fuel discount, even once a month, will probably ensure further inactivity!

[sb9]

sb9, have you tried comparing via this site ?

https://www.powerswitch.org.nz

After signing with a new retailer, Mercury came back to me with a better offer with fixed pricing for 18 months with no contract and some goodwill credit. All good, those rates are slightly better than what it was previously with them.

[fish]

[QUOTE=sb9;661861]Very true, there'll be that initial euphoria as always when customers see that kind of offer. Notice though 30c off per litre is once per month, guess not that great an incentive if you break it down further plus you need to really compare what are their variable rates and finally the contract is until 2018.

30 cents a litre is a big discount-could store a lot of petrol and fill up my outboards as well.
How exactly doe this work.

I think despite the low SI hydro dams CEN is known to make big profits when there is a shortage of hydro and good demand

[macduffy]

30 cents a litre is a big discount-could store a lot of petrol and fill up my outboards as well.
How exactly doe this work.

You need an AA membership card or a Countdown card, I think. Register with Contact. One fill at 30c discount per month, hand over card, specify that you want the discount and - voila!
Works for me.

[BlackPeter]

[QUOTE=sb9;661861]
...
30 cents a litre is a big discount-could store a lot of petrol and fill up my outboards as well.
...

It is one fill per month up to a maximum of 50 liters (as per AA card conditions) ... i.e. maximum of 15 $ discount per month ...

[fish]

[QUOTE=fish;670934]
It is one fill per month up to a maximum of 50 liters (as per AA card conditions) ... i.e. maximum of 15 $ discount per month ...

thanks
50 litres doesnt take my boat far so wont bother

[couta1]

[QUOTE=fish;670934]
It is one fill per month up to a maximum of 50 liters (as per AA card conditions) ... i.e. maximum of 15 $ discount per month ... For me it was $30 last fill ,as they chucked in a bonus 30c because I joined up on the day they announced the fuel scheme early April but it takes a month to earn entitlement normally, nice of them.

[macduffy]

The 30c p/litre is nice but the 22% discount for direct debiting of the account has been enough to keep me from straying. Complacent? Possibly, but I've moved power retailers enough in the past for one lifetime.

:mellow:

[couta1]

The 30c p/litre is nice but the 22% discount for direct debiting of the account has been enough to keep me from straying. Complacent? Possibly, but I've moved power retailers enough in the past for one lifetime.

:mellow: On dual energy, you can't beat contact with that discount, fuel discount a bonus.

[peat]

The 30c p/litre is nice but the 22% discount for direct debiting of the account has been enough to keep me from straying. Complacent? Possibly, but I've moved power retailers enough in the past for one lifetime.

:mellow:

agreed
moving utilities to save a few bucks is a royal pain in the ar*e.
I've had a few power companies call me and they dont seem to be able compete when you take into account the 22% prompt payment factor

[iceman]

The 30c p/litre is nice but the 22% discount for direct debiting of the account has been enough to keep me from straying. Complacent? Possibly, but I've moved power retailers enough in the past for one lifetime.

:mellow:

And that´s exactly it. They advertised 30c off per litre but fine print showed it limited to 1 x 50 ltrs per month. Like you, I prefer the ontime online 22% discount from Contact. Used to always take my fuel at Z with Countdown discount receipts. After that stopped, I spent some time on studying all the various memberships and discounts and came to the conclusion it is best to stay with Contact for my power and take the best fuel offer off the day when I need it. There is hardly any difference between the various offers as nearly all of the petrol stations offer similar discounts each day.

[couta1]

Apparently the 22% discount is actually 23% if you are dual energy prompt payment customer. Fuel discount total is 36c for that one fill a month when you add the standard 6c to it.. Got $33 off my last fill with the bonus 30c they chucked in, made taking the big block for a good spin very cheap.:cool:

[fish]

Apparently the 22% discount is actually 23% if you receive your bill via email, rather than through the mail. Fuel discount total is 36c for that one fill a month when you add the standard 6c to it.. Got $33 off my last fill with the bonus 30c they chucked in, made taking the big block for a good spin very cheap.:cool:

Maybe I will have to relent-particularly since I have been buying a lot of their shares and sold out of genesis yesterday

[Snoopy]

They advertised 30c off per litre but fine print showed it limited to 1 x 50 ltrs per month. Like you, I prefer the ontime online 22% discount from Contact.


I am currently with Contact for my power, as well as being a Contact Shareholder. However, I joined Contact before they linked up with the AA rewards scheme so was not getting the 30c per litre off petrol offer. I rang Contact this morning and they said, yes I could go onto the fuel saver scheme. But to do that I would have to transfer to a new contract and that meant my power prices would change. I am on the 'low user' rate and the price for power I was offered was as follows. All figures are exclusive of GST and without the 20% discount factored in.



Existing Contact Contract Price (no petrol discount) New Contact Contract Price (30c/l petrol discount)Change


Daily Charge (low user)32.95c/day33.30c/day+1%


Anytime Power (low user)28.129c/kWh29.60c/kWh+5.2%


Anytime Power (low user)17.548c/kWh21.00c/kWh+19.7%



Unfortunately this meant that any 'savings' I would get from the 30c/l petrol price discount would be more than wiped out by the increase in electricity prices. So I have decided not to join the 30c off scheme. As a consolation Contact have offered me 10c per litre off. But the one off monthly discount has a two month expiry date. So that means if I don't buy any petrol in July, I can get two 10c off petrol fill ups in August.

Be careful to take into account all costs when you sign up to this scheme!

SNOOPY

[fish]

I am currently with Contact for my power, as well as being a Contact Shareholder. However, I joined Contact before they linked up with the AA rewards scheme so was not getting the 30c per litre off petrol offer. I rang Contact this morning and they said, yes I could go onto the fuel saver scheme. But to do that I would have to transfer to a new contract and that meant my power prices would change. I am on the 'low user' rate and the price for power I was offered was as follows. All figures are exclusive of GST and without the 20% discount factored in.

[Unfortunately this meant that any 'savings' I would get from the 30c/l petrol price discount would be more than wiped out by the increase in electricity prices. So I have decided not to join the 30c off scheme. As a consolation Contact have offered me 10c per litre off. But the one off monthly discount has a two month expiry date. So that means if I don't buy any petrol in July, I can get two 10c off petrol fill ups in August.

Be careful to take into account all costs when you sign up to this scheme!

SNOOPY

I certainly wont be signing up to this scheme-I have diesel cars anyway and it would just have been boat fuel.
Use n3 card and get big discounts-especially at caltex diesel stops-these are unmanned and have fast fills.

Snoopy have you done the sums yet on the impact of low lake levels and high spot prices. Contact have always said this scenario will produce big profits-is it true?

[iceman]

I am currently with Contact for my power, as well as being a Contact Shareholder. However, I joined Contact before they linked up with the AA rewards scheme so was not getting the 30c per litre off petrol offer. I rang Contact this morning and they said, yes I could go onto the fuel saver scheme. But to do that I would have to transfer to a new contract and that meant my power prices would change. I am on the 'low user' rate and the price for power I was offered was as follows. All figures are exclusive of GST and without the 20% discount factored in.



Existing Contact Contract Price (no petrol discount) New Contact Contract Price (30c/l petrol discount)Change


Daily Charge (low user)32.95c/day33.30c/day+1%


Anytime Power (low user)28.129c/kWh29.60c/kWh+5.2%


Anytime Power (low user)17.548c/kWh21.00c/kWh+19.7%



Unfortunately this meant that any 'savings' I would get from the 30c/l petrol price discount would be more than wiped out by the increase in electricity prices. So I have decided not to join the 30c off scheme. As a consolation Contact have offered me 10c per litre off. But the one off monthly discount has a two month expiry date. So that means if I don't buy any petrol in July, I can get two 10c off petrol fill ups in August.

Be careful to take into account all costs when you sign up to this scheme!

SNOOPY

Good work Snoopy and same conclusoon as I came to. The scheme had more fish hooks in it than a Sanford longline so I chose to stay away. Thanks for sharing this.

[couta1]

Good work Snoopy and same conclusoon as I came to. The scheme had more fish hooks in it than a Sanford longline so I chose to stay away. Thanks for sharing this. You will save money choosing the 30c option if you are a dual energy customer, due to the gas supply being cheaper.

[Ghost Monkey]

Existing Contact Contract Price (no petrol discount)
New Contact Contract Price (30c/l petrol discount)
Change


Daily Charge (low user)
32.95c/day
33.30c/day
+1%


Anytime Power (low user)
28.129c/kWh
29.60c/kWh
+5.2%


Anytime Power (low user)
17.548c/kWh
21.00c/kWh
+19.7%





Be careful to take into account all costs when you sign up to this scheme!

SNOOPY

Interesting. This wasn't my experience at all. I'm also with Contact and I switched across to the new scheme. My daily charge increased by 50% but the 'Anytime' variable power cost was set at almost 5c cheaper a kWh. As a family of five with frequent guests from overseas staying we use a fair amount of power, so the switch made complete sense. Plus my discount on the total bill went from 20% to 22%.
During these winter months I'm saving $20-$30 on the bill compared to my previous plan, plus getting the 30c off discount on fuel.
Was a no brainer.
(Switched from Genesis to Contact a year ago to take advantage of a winter deal, hold shares in both)

[Blackrose]

Yes the sun came out on these shares! A nice little creep up. Stoked.

[barleeni]

Yes the sun came out on these shares! A nice little creep up. Stoked.

Im glad someone has some positivity on this share. Its definitely not in my favourites category, I invested 18 or so months ago, expecting a step change in dividends. That was based on them pretty much stopping all capex (after Te Mihi was complete). I had thought that dividends would go up based on nil capex expenditure. It seems I was wrong! I think including divs. CEN has given about a 10% return over 18 months. Not good....... relative to the NZX50 rising something like 35% in the same period.

[fish]

Im glad someone has some positivity on this share. Its definitely not in my favourites category, I invested 18 or so months ago, expecting a step change in dividends. That was based on them pretty much stopping all capex (after Te Mihi was complete). I had thought that dividends would go up based on nil capex expenditure. It seems I was wrong! I think including divs. CEN has given about a 10% return over 18 months. Not good....... relative to the NZX50 rising something like 35% in the same period.

Patience is needed.
CEN is well-positioned to take advantage of the higher prices and I expect increased dividends will follow.

[Snoopy]

I invested 18 or so months ago, expecting a step change in dividends. That was based on them pretty much stopping all capex (after Te Mihi was complete). I had thought that dividends would go up based on nil capex expenditure. It seems I was wrong!


Contact emptied the piggy bank paying out a special dividend before Origin Energy exited the share register. The need to rebuild their capital base by retaining earnings to ensure they retained their credit rating was very well signalled.



I think including divs. CEN has given about a 10% return over 18 months. Not good....... relative to the NZX50 rising something like 35% in the same period.


The NZX50 was at 6324 on 31/12/2015, and 7617 as at 28/06/2017. That makes a actual gain of 20.4% over 18 months, well short of your 'something like 35%'.

Contact closed at $5.22 yesterday. On 05/01/2016 the share price was $4.74. Since that time you have received three dividends totalling 11+ 15 + 11= 37c.

So total return on your investment has been ($5.22 + $0.37)/ $4.74 = 17.9%.

That is a little less than the NZX50 has returned over the period but only a couple of points less. For a 'boring utility' I think that is quite a good return. Perhaps it is your expectations that need adjustment, rather than what the Contact total return has actually done for you?

SNOOPY

discl: hold CEN

[barleeni]

Contact emptied the piggy bank paying out a special dividend before Origin Energy exited the share register. The need to rebuild their capital base by retaining earnings to ensure they retained their credit rating was very well signalled.



The NZX50 was at 6324 on 31/12/2015, and 7617 as at 28/06/2017. That makes a actual gain of 20.4% over 18 months, well short of your 'something like 35%'.

Contact closed at $5.22 yesterday. On 05/01/2016 the share price was $4.74. Since that time you have received three dividends totalling 11+ 15 + 11= 37c.

So total return on your investment has been ($5.22 + $0.37)/ $4.74 = 17.9%.

That is a little less than the NZX50 has returned over the period but only a couple of points less. For a 'boring utility' I think that is quite a good return. Perhaps it is your expectations that need adjustment, rather than what the Contact total return has actually done for you?

SNOOPY

discl: hold CEN

Okay.... well it depends what dates you pick I guess. I purchased shares on 30/11/15 and 07/12/15, which is more like 19 months admittedly. Inclusive of dividends, tax, and trade costs my net return to date is 10.37% (still holding full quantum). That might be a nice result for some, but compared to my portfolio it is in the bottom few (over this time my main shareholdings have been AIR/ATM/NZR/THL). Granted though CEN has done much better than my WYN holding :)

NZX was closer to 6100 at that time. So still lagging NZX50 by quite some margin. I did miscalculate NZX50 gain, but based on 6100 vs. today I get a 25% gain.

Still........ all Im saying is im a bit disappointed...

[Blackrose]

I've held em for about a year now - I got them when they were a lot higher than now, but I like the all over story. This one is a steady grower that accumulates slowly I think. I jumped a we tad early but I suspect that it will go back up past the $2 mark later on next year or so. I am happy to take the long view (4-5 years) on some shares and as this has a good story behind it, solid company and I'm content to wait the mild slump on this one. I'm happy it has a slice of the energy retail market and the gas market to, which is important.

This is the non glamorous, very dull share grind that some shares "are." Yes some people like to make shares "sexy" and "exciting" like some venture capitalists with their shiny algorithmic models and hedge fund, exciting cocaine snorting ex- Goldman Sach day trader with $10,000 suits hanging out at Spearmint Rhino is the complete opposite of what this is.

Then there is me, boring, wearing PJs and ugg boots at home, trading with a few stocks and even spent the dividends on shock horror.... grocery shopping at Woolworth's; and could easily be mistaken for all the other house wives doing their thing. (The AIA dividends did indeed buy some exit mold and a car rego it was awesome) Yet oddly you get the weirdest looks when you buy a print copy of the National Business Review if it's on the rack at the supermarket.... Funny old world innit?

[fish]

[QUOTE=Blackrose;671774]I've held em for about a year now - I got them when they were a lot higher than now, but I like the all over story. This one is a steady grower that accumulates slowly I think. I jumped a we tad early but I suspect that it will go back up past the $2 mark later on next year or so. I am happy to take the long view (4-5 years) on some shares and as this has a good story behind it, solid company and I'm content to wait the mild slump on this one. I'm happy it has a slice of the energy retail market and the gas market to, which is important.

This is the non glamorous, very dull share grind that some shares "are." Yes some people like to make shares "sexy" and "exciting" like some venture capitalists with their shiny algorithmic models and hedge fund, exciting cocaine snorting ex- Goldman Sach day trader with $10,000 suits hanging out at Spearmint Rhino is the complete opposite of what this is.

Then there is me, boring, wearing PJs and ugg boots at home, trading with a few stocks and even spent the dividends on shock horror.... grocery shopping at Woolworth's; and could easily be mistaken for all the other house wives doing their thing. (The AIA dividends did indeed buy some exit mold and a car rego it was awesome) Yet oddly you get the weirdest looks when you buy a print copy of the National Business Review if it's on the rack at the supermarket.... Funny old world innit?[/QUOTE

I trust Blackrose that your sights are set a lot higher.I was lucky to sell out at $10 many years ago and buy back in-mainly at sub $5 prices so am very happy at the volatility of this stock.
Trouble is I dont fully understand how the market prices it.
The company doesnt help or maybe I am not looking in the right place for the information I need.
At this moment Tiwai point is reasonably likely to stay open for many years.
Wholesale prices are high,demand is good so why is the sp not responding.
Clean,cheap hydro and geothermal with a little wind is the way to go.
Volvo have announced no more ICE from 2019 so I presume electric future is close.
Genesis is struggling to meet demand-having to inport Indonesian coal.
Why cant contact tell us if they are having to buy power or if their CBGT,peaker and diesel are compensating for the low levels in SI lakes?

[Snoopy]

Trouble is I dont fully understand how the market prices it.
<snip>
Wholesale prices are high,demand is good so why is the sp not responding.
Clean,cheap hydro and geothermal with a little wind is the way to go.
<snip>.
Why cant Contact tell us if they are having to buy power or if their CBGT,peaker and diesel are compensating for the low levels in SI lakes?


Share price is up from around $5.17 three months ago to $5.27 today. We shareholders are hoping for a 15c dividend in early September. So the share price rise could be put down to the ex-dividend date drawing ever closer. That means CEN has effectively been flat since the shortage of river flow down south became public knowledge. Could the non-responsive share price be reflective of the cost of extra fuel needed to run those thermal stations exactly balancing out the lack of South Island river flow? I think you may have inadvertently answered your own question Fish.

SNOOPY

[fish]

Share price is up from around $5.17 three months ago to $5.27 today. We shareholders are hoping for a 15c dividend in early September. So the share price rise could be put down to the ex-dividend date drawing ever closer. That means CEN has effectively been flat since the shortage of river flow down south became public knowledge. Could the non-responsive share price be reflective of the cost of extra fuel needed to run those thermal stations exactly balancing out the lack of South Island river flow? I think you may have inadvertently answered your own question Fish.

SNOOPY

Thats one of the things I want to Know snoopy.I guess its commercially sensitive so the company isnt saying-but I did see a recent roadshow presentation that suggests the future is bright.
I understand they have gas contracts to have it supplied cheaply/take or pay so they take it all and pump it into an aged gas field and then extract it when prices are high to run their 400mw cgct which is very efficient and then they have a peaker-so maybe its cash flow neutral and any extra energy above their own needs can be sold at high prices.
The other thing is that the high prices are looking to run at least another 10 weeks.Futures will be up.They have also lifted prices to their own customers.
Next year is looking very promising and savvy investors may start buying.
Personally I decided earlier this year to balance my risk and sold most of my GEN to buy mercury.
I am holding onto CEN-by far my biggest investment

[fish]

Share price is up from around $5.17 three months ago to $5.27 today. We shareholders are hoping for a 15c dividend in early September. So the share price rise could be put down to the ex-dividend date drawing ever closer. That means CEN has effectively been flat since the shortage of river flow down south became public knowledge. Could the non-responsive share price be reflective of the cost of extra fuel needed to run those thermal stations exactly balancing out the lack of South Island river flow? I think you may have inadvertently answered your own question Fish.

SNOOPY

There can be a big difference between perception and reality.You have stated common knowledge and suggested I have answered my own question.
Looking at wholesale power prices this morning they are exceptionally high and likely to continue until the spring thaw.
Contact actually has most of its generation capacity in the North Islnd where it has most of its customers so is investor perception out of line with future profits-if so this is a cheap buy.
My thinking could be biased by the fact CEN is my biggest investment

[Bobdn]

There can be a big difference between perception and reality.You have stated common knowledge and suggested I have answered my own question.
Looking at wholesale power prices this morning they are exceptionally high and likely to continue until the spring thaw.
Contact actually has most of its generation capacity in the North Islnd where it has most of its customers so is investor perception out of line with future profits-if so this is a cheap buy.
My thinking could be biased by the fact CEN is my biggest investment

I have CEN and GNE. I don't know what's a cheap buy and what isn't. I find these daily reports below fascinating, however. Genesis seems to be doing an extraordinary amount of heavy lifting at the moment. On some days Huntly alone is out producing, for example, the combined production of Manapouri (Meridian), Clyde (Contact) and all the windpower produced in New Zealand (what a shame NZ didn't set up a couple more thermal plants, they're cheap as chips to build and our overall electricity prices would be substantially lower).

Anyway, I don't know what this means for Contact or Genesis but I guess someone is buying a lot of production from Genesis. As a buy and hold investor none of this influences my position and I don't have any understanding (or am trying to get a serious understanding) of what this means in any meaningful sense. It just makes interesting reading and is fun to look at.

https://www.energylink.co.nz/sites/default/files/Energy_Trendz_Daily_170705_Interim.pdf

https://www.energylink.co.nz/

Today is just another day in thermal generation heaven. The Rankine units are still running 24/7; electricity is still being sent south; wind is making next to no contribution.

[huxley]

"what a shame NZ didn't set up a couple more thermal plants, they're cheap as chips to build and our overall electricity prices would be substantially lower"

"As a buy and hold investor none of this influences my position…"



Err…This seems very short term thinking!
Just look what happened to Origin Energy's investment in Gas in Western Australia a couple of years ago? Underwater assets etc!?

[Bobdn]

"what a shame NZ didn't set up a couple more thermal plants, they're cheap as chips to build and our overall electricity prices would be substantially lower"

"As a buy and hold investor none of this influences my position…"



Err…This seems very short term thinking!
Just look what happened to Origin Energy's investment in Gas in Western Australia a couple of years ago? Underwater assets etc!?

Yes, true I'm not completely passive but if I had kept Microsoft and Apple (small holdings) and even little old Trademe, and not sold them like I did, I would be doing a little better than I'm doing now ;) So now I just tend to keep everything out of FOMO! I guess what I'm trying to say is, a dry winter here and high rainfall there doesn't make me want to sell or buy. I'm spread pretty far and wide with my investments and should one not do so well, oh well.

[fish]

Yes, true I'm not completely passive but if I had kept Microsoft and Apple (small holdings) and even little old Trademe, and not sold them like I did, I would be doing a little better than I'm doing now ;) So now I just tend to keep everything out of FOMO! I guess what I'm trying to say is, a dry winter here and high rainfall there doesn't make me want to sell or buy. I'm spread pretty far and wide with my investments and should one not do so well, oh well.

Hindsight is wonderful but what is better is that you are content and happy with your holdings because you have diversified.
I probably trade too much-i buy with the intention of holding long-term for the dividend but when i feel a stock is overvalued by the market cant resist taking profits Hence sold out of Gen and bought mercury and added afew more CEN.I do have doubts about the future of gen and thermal

I think all 3 should be doing well and the high winter prices are important for short-term good results but also partcularly as it should raise the futures

[Bobdn]

I think Contact Energy's Whirinaki Power Station was fired up today. Burns diesel/oil. Pricey to run.

"Following national power shortages in 2001 and 2003 due to low hydro lake levels, the New Zealand government commissioned Contact Energy (https://en.wikipedia.org/wiki/Contact_Energy) to build reserve generation on the Whirinaki site. This plant was intended to be a generator of last resort, providing back up generation when needed, usually during years of low hydro lake levels, but also when there was a shortfall in generation reserves on the electricity market, such as after the failure of a major power station or the HVDC Inter-Island link. The power station cost $150 million and was opened in June 2004." Wikipedia

https://www.transpower.co.nz/power-system-live-data

https://en.wikipedia.org/wiki/Whirinaki_Power_Station

[Marilyn Munroe]

I think Contact Energy's Whirinaki Power Station was fired up today. Burns diesel/oil. Pricey to run.


At midnight last night the needle on flow south gauge for the inter-island HVDC link was hard over on the red.

If you are a South Islander with standby generation it may pay to get your calculator out then give these guys a call;

https://www.transpower.co.nz/keeping-you-connected/demand-response

Boop boop de do
Marilyn

PS. Spot price now at Otahuhu $258 Mw/h

[sideline]

..............
Boop boop de do
Marilyn

PS. Spot price now at Otahuhu $258 Mw/h

how about $609.86 at 11:45 (and some SI places near $800

8990

[blackcap]

how about $609.86 at 11:45 (and some SI places near $800

8990

800 accross the board now and looking to get into the $1000's

not sure how to put the dashboard in here...

https://www1.electricityinfo.co.nz/

[Bobdn]

Whirinaki is running at full tilt now. Right at this moment, the supply of electricity is being held together by coal, gas and oil.

[sideline]

800 accross the board now and looking to get into the $1000's

not sure how to put the dashboard in here...


over $1000 in some SI places.

for including screens I
1) maximize the window with the info
2) then push prtScreen
3) save screen to disk
4) insert image just saved in post

[fish]

[QUOTE=sideline;673602]over $1000 in some SI places.

Now the NI is feeling the cold-currently had to look twice at the $100,000 prices

[stoploss]

[QUOTE=sideline;673602]over $1000 in some SI places.

Now the NI is feeling the cold-currently had to look twice at the $100,000 prices

Flick electric was 105.6 cents a unit before 8 this evening , that's got to be hurting the customers .

[fish]

[QUOTE=fish;673631]

Flick electric was 105.6 cents a unit before 8 this evening , that's got to be hurting the customers .

If those customers were awake to the market it would seem sensible to swap to a gentailer rather than risk these prices being sustained for weeks or months

[Dassets]

Wholesale looks like it is heading over $600 today for sustained periods. Yesterday it appears the hydro guys were instructed to intervene in both NI and SI at 1730 thru to 1930. The thermal guys were tapped out. Today likely to be similar. Next week going to be difficult. Very interesting. IMO shows the gentailer model doesn't work and has been a disincentive to new generation built. Basically the wholesale price has been too low but they haven't cared because the retail side of the business picked up the margin. Now we don't have new generation and can't for a while.

The gentailers should be broken up, splitting retail and generation. That would allow merchant generators to enter the market and allow capital markets to provide capital in that space.

[stoploss]

[QUOTE=stoploss;673633]

If those customers were awake to the market it would seem sensible to swap to a gentailer rather than risk these prices being sustained for weeks or months

My problem is I work as a volunteer budget adviser . " client " obviously believes the sales pitch - in the long term you will be better off. However the bill shock over the next two months If it stays like this will mean they can't pay . So I need to be able to illustrate in very simplistic terms why an immediate switch should occur .

[fish]

[QUOTE=fish;673634]

My problem is I work as a volunteer budget adviser . " client " obviously believes the sales pitch - in the long term you will be better off. However the bill shock over the next two months If it stays like this will mean they can't pay . So I need to be able to illustrate in very simplistic terms why an immediate switch should occur .

I see this kind of thing as well-in a different capacity.In a way being with a gentailer is like buying insurance-you know whatever disasters/weather changes etc you will get your electricity at a known price.Buying at wholesale prices plus a fee means you are vulnerable just when you need electricity for your health.Cold ,wet house and the stress of unknown prices is not good for health

[Jantar]

[QUOTE=fish;673634]

My problem is I work as a volunteer budget adviser . " client " obviously believes the sales pitch - in the long term you will be better off. However the bill shock over the next two months If it stays like this will mean they can't pay . So I need to be able to illustrate in very simplistic terms why an immediate switch should occur . Anyone who is on a fixed income and cannot easily vary their electricity usage should never be on a wholesale plan. They do need a degree of certainty about how much their power bill will be, and for that they need a gentailer or a retailer who is closely affiliated to a gentailer.

Flick's salespitch that " in the long term you will be better off" is quite correct if the customer banks the savings in the low cost periods to be able to manage these spikes when they happen. I see some Flick customers saying that these spikes have never happened before. However they have: 2008, 2003, 2001, 1996.

[Raz]

Well become a well informed budget advisor..there is no lock in....alternatives are clear to see.

Flicks real problems is people "flicking" from flick to other low cost options like electric kiwi on a seasonal basis...when we changed they really spinned out the change over..suspect they are grabbing as much revenue they can for as long as possible or the number of people changing overwhelmed their admin. It would be a shame if they failed because their clients are price takers and will go for the lowest option...We will be back in summer all things going as one would expect with the weather...

[stoploss]

Well become a well informed budget advisor..there is no lock in....alternatives are clear to see.

Flicks real problems is people "flicking" from flick to other low cost options like electric kiwi on a seasonal basis...when we changed they really spinned out the change over..suspect they are grabbing as much revenue they can for as long as possible or the number of people changing overwhelmed their admin. It would be a shame if they failed because their clients are price takers and will go for the lowest option...We will be back in summer all things going as one would expect with the weather...

Thanks Raz, I am aware they can leave at any time and can see the alternatives , it is making someone else see the alternative and point out they could get hammered with high pricing for longer than a coupe of weeks .
Only providing advice and cannot tell anyone what to do , so it is a matter of showing the likely outcome . I can see them coming back in a couple of months for a Kiwisaver hardship withdrawal to square up the electricity account .......

[fish]

I have CEN and GNE. I don't know what's a cheap buy and what isn't. I find these daily reports below fascinating, however. Genesis seems to be doing an extraordinary amount of heavy lifting at the moment. On some days Huntly alone is out producing, for example, the combined production of Manapouri (Meridian), Clyde (Contact) and all the windpower produced in New Zealand (what a shame NZ didn't set up a couple more thermal plants, they're cheap as chips to build and our overall electricity prices would be substantially lower).

Anyway, I don't know what this means for Contact or Genesis but I guess someone is buying a lot of production from Genesis. As a buy and hold investor none of this influences my position and I don't have any understanding (or am trying to get a serious understanding) of what this means in any meaningful sense. It just makes interesting reading and is fun to look at.

https://www.energylink.co.nz/sites/default/files/Energy_Trendz_Daily_170705_Interim.pdf

https://www.energylink.co.nz/

Today is just another day in thermal generation heaven. The Rankine units are still running 24/7; electricity is still being sent south; wind is making next to no contribution.

Thanks for those great links
After watching them since your posting it appears that renewables are generating twice that of thermal.
Mercury should be doing really well as the waikato is the main generator.
SI prices are much higher than NI so I wonder since most CEN customers are in the NI can they sell their hydro in the SI when spot prices are high-and they are still above minimum levels as far as I can tell-and buy NI electricity at lower prices for there NI customers?

[Bobdn]

Thanks for those great links
After watching them since your posting it appears that renewables are generating twice that of thermal.
Mercury should be doing really well as the waikato is the main generator.
SI prices are much higher than NI so I wonder since most CEN customers are in the NI can they sell their hydro in the SI when spot prices are high-and they are still above minimum levels as far as I can tell-and buy NI electricity at lower prices for there NI customers?

Yes, I guess Mercury is doing well.

Over the last week the big four all had 22% generation market share, with Trust power 5% and other 6%.

See: https://www.energylink.co.nz/sites/default/files/Energy_Trendz_Weekly_17-07-16-Issue_1053.pdf

Generation share over all of 2014 in comparison was

Meridian Energy – 35%
Contact Energy – 23%
Mighty River Power - 16%
Genesis Energy - 14%
TrustPower - 6%


(see: http://www.mbie.govt.nz/info-services/sectors-industries/energy/electricity-market/electricity-industry/electricity-generation)

Mercury and Genesis appear to be keeping busy this winter.

[fish]

Yes, I guess Mercury is doing well.

Over the last week the big four all had 22% generation market share, with Trust power 5% and other 6%.

See: https://www.energylink.co.nz/sites/default/files/Energy_Trendz_Weekly_17-07-16-Issue_1053.pdf

Generation share over all of 2014 in comparison was

Meridian Energy – 35%
Contact Energy – 23%
Mighty River Power - 16%
Genesis Energy - 14%
TrustPower - 6%


(see: http://www.mbie.govt.nz/info-services/sectors-industries/energy/electricity-market/electricity-industry/electricity-generation)

Mercury and Genesis appear to be keeping busy this winter.

And meridian must be suffering.Trust power I am not sure but maybe as well if they are having to buy power.
Contact profit is the conundrum -I understand they have 21% of customers so may be selling -and prices are 50% up over previous week

[Bobdn]

I'd like to buy Meridian and Mercury just so I have a full set. Maybe I'll reinvest my next Contact and Genesis dividends into them.

[fish]

I'd like to buy Meridian and Mercury just so I have a full set. Maybe I'll reinvest my next Contact and Genesis dividends into them.

I understand why and your timing should be right-annual reports are out soon and they have a tendency to affect the sp if the profits are out of kilter with expectations.

[Hectorplains]

June op. report hasn't excited the market.

[fish]

June op. report hasn't excited the market.

quite right-significant fall-no improvement in profit for past 12 months as far as I can see after a quick scrutiny.
Extra cost of gas over past 12 months.
Futures are significantly up so next year should be a different story
We need a snoopy summary

[Hectorplains]

quite right-significant fall-no improvement in profit for past 12 months as far as I can see after a quick scrutiny.
Extra cost of gas over past 12 months.
Futures are significantly up so next year should be a different story
We need a snoopy summary

Gas numbers climbing but electricity customer numbers in freefall again. New fuel discount scheme must be a bit of a fizzer? Surprising too that they can't get more gas customers on a dual contract for power too.

[stoploss]

https://www.youtube.com/watch?v=TzFnYcIqj6I

http://www.stuff.co.nz/national/94874334

[Snoopy]

Actual FY2016 results are out, so time to update my valuation model.

First a few words for those who joined the Contact Energy (CEN) party late.

CEN operates in an industry where the weather plays a big part. No-one can predict for sure what the weather, and hence resultant rainfall, and consequently inspired power demand will be on the overall network. In addition there are competitive market pressures which see customers happy to flip flop between different retailers at regular intervals. However, Contact have been operating in volatile weather and consumer markets for many years. Furthermore, the energy market is relatively mature. Rather than try and guess what the weather and consumer market share for Contact in the future might be, I prefer to use 'actual data' from the last eight years, and superimpose the current forward dividend policy on that data. Because I am considering eight years of data, this will produce an 'averaging effect'. Thus, although I predicting a particular 'fair share value' for Contact, we can expect the market value of CEN shares to fluctuate both above and below that figure.

<snip>

In FY2016 the depreciation and amortisation charge was $201m, and the offsetting capital expenditure was $128m. There are currently 715.5m Contact shares on issue. So the 'windfall cashflow' per share in FY2016 amounts to:

($201m-$128m)/ 715.5m = 10cps

Of course not all of this is available to be paid out. Contact currently has a relatively high debt load. Management have indicated that they wish to use some of that cashflow to pay down debt. But add 10cps to last years earnings of 22cps and you get 32c. There is plenty of headroom there to indicate paying a cash dividend of 26cps per year going forwards will not be a problem.

<snip>

The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern



quite right-significant fall-no improvement in profit for past 12 months as far as I can see after a quick scrutiny.
Extra cost of gas over past 12 months.
Futures are significantly up so next year should be a different story
We need a Snoopy summary.

I have decided to be extremely arrogant and not even bother to read the latest Contact quarterly operational results. There are more than enough diligent CEN shareholders on this forum to do this if they so desire. I can be arrogant like this because I am a 'big picture' Contact Energy investor. That means 'seasonal adjustments' over many years should even out. So it is best to divert my 'investing energy' to other things and just ignore them.

I don't think there is a risk to the current 26cps annual dividend payout, even if a lack of imputation credits reduces this dividend net value to less than 26cps. Therefore my valuation of Contact Energy remains largely unchanged. But if the dividend is not fully imputed in FY2017, then my $5.50 'fair value' will reduce a bit. Yet I don't expect that reduction be be significant because 'this year' will only provide 1/9 th of my company valuation data.

SNOOPY

[fish]

I have decided to be extremely arrogant and not even bother to read the latest Contact quarterly operational results. There are more than enough diligent CEN shareholders on this forum to do this if they so desire. I can be arrogant like this because I am a 'big picture' Contact Energy investor. That means 'seasonal adjustments' over many years should even out. So it is best to divert my 'investing energy' to other things and just ignore them.

I don't think there is a risk to the current 26cps annual dividend payout, even if a lack of imputation credits reduces this dividend net value to less than 26cps. Therefore my valuation of Contact Energy remains largely unchanged. But if the dividend is not fully imputed in FY2017, then my $5.50 'fair value' will reduce a bit. Yet I don't expect that reduction be be significant because 'this year' will only provide 1/9 th of my company valuation data.

SNOOPY and buy for the long-term.


Much appreciated and thanks snoopy.
It is good to hear your assessment.
I always try to invest for the big picture as well.
But then life gets in the way and I have to try and over-think the market when I need money.
For instance the lull in the Auckland property market has amongst other things given my son the chance to buy his own home but based on his income the bank will not lend him enough.Through my margin lending account I can and would make up the substantial difference but this would leave me stretched and exposed and I have to decide what to sell and when to sell.
CEN is by far my biggest holding but I never sell if a stock is undervalued.
I will be holding CEN long-term but reduce my holding if the sp approaches fair value.
Hopefully a good annual report and the current rain may kick the sp.

[fish]

Its surprising to me that this thread is so quiet whilst movement is being noted overseas

eg-Contact Energy Ltd (CEN.AX) has been garnering interest of retail and insitutional invenstors alike as the shares have seen its VMA (volume moving average) steadily rise over the past 7 sessions. In the most recent session, shares touched a high point of 4.92, while dipping down to 4.85. Shares closed with a change of -0.03 from the most recent open.
I sold 2% of my large holding yesterday because I needed the money and immediately regretted it.I feel they have a long way to go.
Annual results are out soon.I am not expecting any surprises here.
What I think is happening is that big investors have seen a big change in the outlook .
One month into this financial year and power prices remain high.Demand is up 3% on last year.
Tiwai is not going to close.National look like winning.Immigration will continue..
To meet this increase in demand Genesis imports coal-dirty and not cheap.Contact can just increase the flow-water is arriving today-no extra costs but big profits.Their CGCT is a lot cleaner and more efficient than Huntly

[fish]

Just a small heads up (ramp)
Last month it was annoucned electricity demand was up 3% so far this year.
Has increased even further last 7 days rolling demand.
Prices remain high.
Could this be a portent of things to come-ie much higher profits for cen this financial year-starting 1st july 2017?

[fish]

Just a small heads up (ramp)
Last month it was annoucned electricity demand was up 3% so far this year.
Has increased even further last 7 days rolling demand.
Prices remain high.
Could this be a portent of things to come-ie much higher profits for cen this financial year-starting 1st july 2017?

anyone noticed the annual report released today?
They have indicated a big lift in dividend payments for FY18-a rough calculation is around 9% return counting imp credits.
A lot better than money in the bank is likely to give

[Snoopy]

Below I present my corrected earnings picture for the last eight years. You will note that:

1/ I have deleted last years 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 26cps being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.



Scenario Basis Financial Yeareps (A)Scenario dps (B)Difference (A)-(B)Divie Capital Component (C)Unimputed Tax Bill (D)Difference (B)-(C)-(D)


200927.0c26.0c+1.0c0c0c26.0c


201025.3c26.0c-0.7c0.7c0.2c25.1c


201122.4c26.0c-3.6c3.6c1.0c21.4c


201224.6c26.0c-1.4c1.4c0.4c24.2c


201327.5c26.0c+1.5c0c0c26.0c


201427.1c26.0c+1.1c0c0c26.0c


201522.0c26.0c-4.0c4.0c1.1c20.9c


201622.2c26.0c-3.8c3.8c1.1c21.1c


Total198.1c208.0c190.7c



The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern


There you go fish. We have reached my 'fair value' projection of September 2016. You have my permission to sell down now if you like. Mind you, now we are on a roll, nothing to stop the CEN share price going higher from here.

SNOOPY

[fish]

There you go fish. We have reached my 'fair value' projection of September 2016. You have my permission to sell down now if you like. Mind you, now we are on a roll, nothing to stop the CEN share price going higher from here.

SNOOPY

Thanks snoopy,

With your permission I sold at 5.54 at close.
Still holding quite a lot but now have enough money so will keep the majority for now.

[winner69]

Business with electricity to 3 sites with Contact

Nova said they could do it ~15% cheaper

Rang Contact to see whether they would 'discuss' pricing - 'No, you already on best rate.' When pushed 'We don't compete with competitor prices'

Obviously churn hasn't been too bad this month and below budgeted levels so need to 'discuss'

I see Contact's churn is about 20% so we just 1 of the 5 they expect to switch,

Wonder how much cheaper it'll be if we switch back in a year or two.

Suppose Nova are a pack of ratbags and we'll just get screwed somewhere else.

Not a shareholder. just thought you guys might be interested

[minimoke]

Nz first mp Richard prosser has said sell your contact shares. Is he able to give this financial advice?

On the back of nz first policy to nationalize all generation

[LAC]

Prosser said that would be done over time, but NZ First's stance was the institutions would be purchased back at the price they were sold for.

Hehehe. Wonder if I can buy back his house for the same price he paid for it years ago:)

[artemis]

Prosser said that would be done over time, but NZ First's stance was the institutions would be purchased back at the price they were sold for.

Hehehe. Wonder if I can buy back his house for the same price he paid for it years ago:)

Mr Seymour's response was on the money! The asterisked bit anyway. Mr Prosser could be in trouble over his comment.

[couta1]

Mr Seymour's response was on the money! The asterisked bit anyway. Mr Prosser could be in trouble over his comment. Idiotic comments by Mr Prosser and modified by Winston. Put your hand up those who believe that any Govt going forward is going to cough up 10 Billion odd to buy back ownership of power companies ,without stuffing up the economy. Tui time folks. PS-Any panic selling caused by idiotic comments like these would be a great buying opportunity.

[Snoopy]

Business with electricity to 3 sites with Contact

Nova said they could do it ~15% cheaper

Rang Contact to see whether they would 'discuss' pricing - 'No, you already on best rate.' When pushed 'We don't compete with competitor prices'

Obviously churn hasn't been too bad this month and below budgeted levels so need to 'discuss'


Looking at p13 of the Annual Results for 2017 presentation, it does appear as though Contact are able to price themselves into an electricity market sweet spot.

------

1/"Contact’s hydro inflows typically peak during summer."

2/"Traditionally, wholesale and futures prices are lowest between October and February."

3/"Contact seeks to maximise the value of its renewable assets by selling all renewable generation at a fixed price."

4/ "Flexible thermal generation, limited hydro storage, gas storage and hedges allows us to “firm” the renewable variability"
"Over the past 3 years this has enabled fixed priced sales at 125% of mean renewable generation, in contrast to integrated renewable generation only peers who sell between 70-85%"

------

The above comments are made about a graph of "Contact’s mean renewable energy and purchase position." The graph shows the purchase price paid by Contact dipping over summer, which is no co-incidence, because according to 1/ above: Contact will have plenty of hydro inflows to generate their own power over that time.

Point 4/ is interesting in that it seems to be a tacit admission that Contact are 'gaming' the electricity market. I am not surprised a large gentailer would game the electricity market. But I am surprised they would admit to doing so in so public a way. I will need to work through this slowly as there is quite a lot that can be gained from studying this one presentation page.

If Contact are really selling all their renewable energy at a fixed price, as per point 3, that means either:

1/ Contact are out of the spot electricty market entirely, and only sell their expected generation capacity via fixed price hedge contracts OR
2/ Contact have decided on a sell price and will not sell into the wholesale market until the wholesale market price reaches that level, no matter what else is happening.

What does “firming the renewable variability" mean? One interpretation of that comment could be that when hydro storage is low, Contact will not bring their thermal stations on line until much later than when the first increased demand signal fires up the spot market price. Thus they leave the market price to overshoot, meaning they earn more from their renewable generation before the required thermal generation finally kicks in. If you only have renewable generation, that means you are a much more of a 'price taker' as you can't use (or not use in my example) the thermal generation that you don't have to manipulate the electricity spot market.

SNOOPY

[Jantar]

......
If Contact are really selling all their renewable energy at a fixed price, as per point 3, that means either:

1/ Contact are out of the spot electricty market entirely, and only sell their expected generation capacity via fixed price hedge contracts OR
2/ Contact have decided on a sell price and will not sell into the wholesale market until the wholesale market price reaches that level, no matter what else is happening.
All electricity generated is sold into the spot market, as is all electricity for retail and/or commercial bought off the spot market.

What it means when Contact say that they are selling all their renewable energy at a fixed price is that their retail and industrial sales are 125% of mean renewable generation, hence the fixed price.

Any additional thermal generation would not be sold into the electricity market unless the average price obtained is greater than they would recieve from their own retail and commercial customers.

That is not gaming the market. It simply ensuring that they receive value for their generation.

[cyclist]

Hi Jantar

You mentioned a while ago you had adjusted your exposure to the different generators based on your assessment of who the winners would be for the high power prices. You were unable to go into details at the time. Is that something you can now safely discuss or comment on? (e.g. after the fact, what did you change, and why?).

Thanks. Completely understand if it still inappropriate for you to go into the details.

[Jantar]

Hi Jantar

You mentioned a while ago you had adjusted your exposure to the different generators based on your assessment of who the winners would be for the high power prices. You were unable to go into details at the time. Is that something you can now safely discuss or comment on? (e.g. after the fact, what did you change, and why?).

Thanks. Completely understand if it still inappropriate for you to go into the details.
Based on the countries hydrology, I reduced my holdings very slightly in CEN, slighlty in GNE, about 50% in MEL and I bought more MCY. MEL is still my largest holding by value of the gentailers.

I was very surprised when CEN SP rose on what was really a very poor annual result.

[fish]

Based on the countries hydrology, I reduced my holdings very slightly in CEN, slighlty in GNE, about 50% in MEL and I bought more MCY. MEL is still my largest holding by value of the gentailers.

I was very surprised when CEN SP rose on what was really a very poor annual result.

I feel it was the news that they intend to be increasing their dividends.
I have been disappointed by their recent monthly results so reduced my holdings by 1/2 since they went ex-dividend and invested it in mercury and MEL to capture their dividends.
Spot market prices have been low in recent weeks as the hydro lakes have been filling.
I sold completely out of GNE

[Hectorplains]

Agreed, increased dividend payout has underpinned the sp increase. The result was mud. Still waiting for Norris to shine his light. Wasn't Pryke supposed to be the cause of all their ills?

[Snoopy]

Thanks for the clarifications below Jantar.



All electricity generated is sold into the spot market, as is all electricity for retail and/or commercial bought off the spot market.


I assume that if Contact generate their own electricity and sell that electricity to their own customers there is no need to put that electricity on the (spot) market. So while you are no doubt correct when you say "All electricity generated is sold into the spot market", it is not correct to say that all generators are receiving the 'spot market price' for everything they generate.



What it means when Contact say that they are selling all their renewable energy at a fixed price is that their retail and industrial sales are 125% of mean renewable generation, hence the fixed price.


Following on from my previous comment, if Contact are:

1/ in the business of selling kWhs of energy, AND
2/ they produce 100kWh of renewable energy, BUT
3/ their customers are expected to buy 125kWh of energy (yes, I know the absolutes of those numbers are not right),

THEN the energy price Contact receive for their renewable energy is 'effectively fixed', because Contact have enough customers signed up to fixed energy price deals to purchase all the renewable energy they generate.



Any additional thermal generation would not be sold into the electricity market unless the average price obtained is greater than they would receive from their own retail and commercial customers.

That is not gaming the market. It simply ensuring that they receive value for their generation.

So the reason that Contact are receiving more for their renewable energy than other gentailers in price terms is because they know that they won't have any renewable generation output left over to sell to other market players, because all their renewable energy generation is spoken for. By contrast the likes of Meridian has more renewable energy to sell and no physical thermal station back up (I am leaving out the back up option power deal that Meridian have in place with Genesis). So we can expect a good chunk of Meridian's hydro generation to end up on the spot market, when there is plenty in the lake tank and power prices are low. Thus 'overall' Meridian will get a lower price per kWh for their renewable generation that Contact will?

SNOOPY

[Jantar]

.......when you say "All electricity generated is sold into the spot market", it is not correct to say that all generators are receiving the 'spot market price' for everything they generate.
Well, yes and no.

Lets say that CEN are dispatched 1000 MW, and the spot price is $80, then for that 1/2 hour period they would receive from the market $40,000, (1000 x $80 x 0.5). If at the same time their retail side was buying 900 MW at that same price of $80, they would pay to the market $36,000, (900 x $80 x 0.5). The spot exposure being the remainder of 100 MW for which they would recieve $4000.

You could say that they have generated all that they need and sold an additional 100 MW into the market at the spot price. But that does not truely reflect the cost of generation, so they would have an internal price transfer, being the price at which the generation side charges the retail side. For the sake of this example lets say that transfer price is $76. In this case the generation side would re-imburse the retail side the sum of $1,800 (900 MW x ($80 - $76) x 0.5).

It is also highly like that they would have a number of CFDs with other companies, which may or may not net out in their favour.

[Snoopy]

Well, yes and no.

Lets say that CEN are dispatched 1000 MW, and the spot price is $80, then for that 1/2 hour period they would receive from the market $40,000, (1000 x $80 x 0.5). If at the same time their retail side was buying 900 MW at that same price of $80, they would pay to the market $36,000, (900 x $80 x 0.5). The spot exposure being the remainder of 100 MW for which they would recieve $4000.

You could say that they have generated all that they need and sold an additional 100 MW into the market at the spot price. But that does not truely reflect the cost of generation, so they would have an internal price transfer, being the price at which the generation side charges the retail side. For the sake of this example lets say that transfer price is $76. In this case the generation side would re-imburse the retail side the sum of $1,800 (900 MW x ($80 - $76) x 0.5).

It is also highly like that they would have a number of CFDs with other companies, which may or may not net out in their favour.

Leaving out the CFDs, which I acknowledge but which are not relevant to the point I would like to make, I am having trouble digesting the rest of your explanation Jantar.

The true incremental 'cost of generation' for a hydro station is surely close to zero? Granted this ignores the depreciated capital costs which arose from the depreciating capital value of the dam and associated electrical ancillaries. (Although I do note that, at least in the in the case of Mercury Energy, these costs are usually clawed back in subsequent years via generation asset revaluations anyway). But: -

With 'spot market power' costs determined by the lowest cost incremental offer to generate power by switching on some more generating capacity, THEN the spot price, particularly when a thermal power station has just been brought on line, does not affect the cost of running a hydro dam, does it? Our power pricing system pays all of those who are supplying power in any 'half hour period' the same price, equal to that of the highest cost provider of the instant, that is true. But I see that as an 'artificial market construct' in terms of costs.

If Contact chooses to see the electricity they generate from hydro as 'costing' the market price, then their retail arm may indeed have to reimburse the generation arm for 'market costs' as your example outlines. But surely an equally valid way of viewing things would be to take all of the internal transactions, where Contact generator sells to Contact retailer, 'off market' and let the pricing system handle the transactions between different generators and retailers only?

With a purely 'internal transaction', I can't see the point in valuing it at 'market levels'. Because in reality the perfect match of 'Contact Energy Buyers' and 'Contact Energy Sellers' means that you could price the transaction at whatever price you like. The price you chose could make it look like one arm of Contact was doing really well while the other arm was doing equally and oppositely badly. But since buyer and seller are both 'Contact Energy Parent', whether 'Contact Generator' takes all the profits or whether those profits are shuffled across to 'Contact Retailer' makes no difference to 'Contact Energy' at 'parent' or 'shareholder' level, does it?

SNOOPY

[Jantar]

The true incremental 'cost of generation' for a hydro station is surely close to zero? ......
That is not correct. G. Grilli did some work for Electrocorp back in the late 1990s that showed an incremental cost for the Waikato stations at around $2:00 per MW. That was 20 years ago. Next add on Transpowers HVDC cost of close to $9.00 per MW for all south Island generation, then add to that the cost of every circuit breaker operation at around $110 and there are measurable costs. Granted they are still very small compared to a thermal station.

But. and a BIG but, here is the difference. Thermal stations are cheap to build and expensive to operate. Hydro stations are expensive to build and cheap to operate. When selling enegry from a hydro station, if it is simply the incremental cost (SRMC) that is being recovered then the company will quickly go broke. Base load hydro needs to be priced at close to its long run marginal cost (LRMC), and the transfer price may reflect that.
Additional generation could be offered to the market at SRMC. but why would anyone sell to the market at a lower price than to their own customers?

[Snoopy]

That is not correct. G. Grilli did some work for Electrocorp back in the late 1990s that showed an incremental cost for the Waikato stations at around $2:00 per MW. That was 20 years ago. Next add on Transpowers HVDC cost of close to $9.00 per MW for all south Island generation, then add to that the cost of every circuit breaker operation at around $110 and there are measurable costs. Granted they are still very small compared to a thermal station.

But. and a BIG but, here is the difference. Thermal stations are cheap to build and expensive to operate. Hydro stations are expensive to build and cheap to operate. When selling energy from a hydro station, if it is simply the incremental cost (SRMC) that is being recovered then the company will quickly go broke.


I am not suggesting that external sales are made at anything less than the spot market price.



Base load hydro needs to be priced at close to its long run marginal cost (LRMC), and the transfer price may reflect that.
Additional generation could be offered to the market at SRMC. but why would anyone sell to the market at a lower price than to their own customers?


I could cook a gourmet dinner myself, sell it to myself for $100 then spend the next day complaining about why I had paid so much for my dinner the previous night, despite it being 'gourmet good'. But what would be the point of such a charge in the first place?

SNOOPY

[Jantar]

I am not suggesting that external sales are made at anything less than the spot market price..... But aren't retail sales "external" as well?

Your gourmet dinner example is flawed as you are consuming it yourself. How about you cook a gourmet dinner, sell it to your self for the $100 worth of ingredients, gas, electricity, cleaning products etc., then sell it to a customer for $110. Are you then complaining about the cost of that dinner?

[Snoopy]

But aren't retail sales "external" as well?


The general understanding is that 'retail' sales mean external sales to customers, yes.



Your gourmet dinner example is flawed as you are consuming it yourself.


I see you get my point, even though I think you are looking at what I said from a different angle.

The way I see it is this:

1/ Contact are buying electricity from their 'generation unit', selling it to their 'retail unit' who then sells it to the end line customer.
2/ But since the electricity market is highly competitive it is not the retail price that the customer pays that determines Contact's profitability. Profitability of 'Contact Retail' is affected far more greatly by 'input costs'.
3/ Most of 'Contact Retail' electricity is bought from 'Contact Generation'. So the profit from 'Contact Retail' is determined by what price 'Contact Generation' wants to supply electricity at. The hydro energy from 'Contact Generation' never makes it onto the market because it is all spoken for.
4/ SO 'Contact Generation' can, at least in theory, charge 'whatever price they like' to 'Contact Retail', depending on how profitable they want 'Contact Retail' to be and how much profit they want to retain inside the 'Contact Generation' business unit.

The gourmet dinner example that I gave about cooking my own dinner and then charging myself for it is exactly analogous, because this is exactly what Contact are doing. They are 'cooking up' their electricity in 'Contact Generation' and consuming it in 'Contact Retail': the transaction is entirely internal.

Of course to shareholders none of this matters, because we own both 'Contact Generation' and 'Contact Retail'. So it doesn't matter to us what business unit, be it 'Contact Generation' or 'Contact Retail', is generating the profits.

SNOOPY

[Snoopy]

I was very surprised when CEN SP rose on what was really a very poor annual result.


One thing we have to remember about annual results is that they are historical. While I agree the annual result for FY2017 was not good, is this a pointer to the annual result being not good in FY2018?

If we look at EBITDAF for the first and second halves of the year just gone, the two figures are $261m (1HY2017) and $233m (2HY2017).

If you go back nine years, that first half figure was the second best (only beaten in 1HY2014: $261m) and the second half figure was below that achieved in any of the previous five years. So my way of looking at this is that we had a year of two halves (or maybe even 'three good quarters' and 'one bad one': p12 of FY2017 result presentation shows under 550GWh Contact hydro generated in Q4 vs 900GWh in Q3).

Wet weather is not good for 'external' hydro sales, because the market price for hydro-energy is at its lowest when plenty of water is in the Clutha catchment (from a Contact perspective). This shouldn't matter to Contact because normally they seem to be able to sell all of their hydro energy to their own customers. In the fourth quarter the Clutha catchment suddenly changed from having an above average reservoir of water inside it to a well below average level. So Contact 'ran their gas generation units' hard, with the 'cost of energy' similarly spiking. If Contact budget on normal customer demand being 125% of renewable load, a 40% reduction in 'normal' hydro generating capacity must have hurt them.

60% of 125% is 75%. So Contact hydro generation in that last quarter would only be supplying 75% of budgeted customer demand. That means a substantial proportion of Contact's thermal generation must have been needed to supply their own customers, blowing out their fuel bill in the fourth quarter. I am looking at the poor second half for FY2017 from Contact as more a 'weather driven' rather than a 'management incompetence' event. It is true that management must allow for a variation of 'expected inflows' into their catchments. But they will still be caught out by extreme variations which is what Contact saw into their own catchments in Q4.

I am not happy with the FY2017 performance. But I am prepared to look through it as an 'exceptional weather event', and not a potent of what is to come in FY2018 and beyond.

SNOOPY

[Snoopy]

Looking at p13 of the Annual Results for 2017 presentation, it does appear as though Contact are able to price themselves into an electricity market sweet spot.

https://www.nzx.com/files/attachments/263317.pdf

------

1/"Contact’s hydro inflows typically peak during summer."

2/"Traditionally, wholesale and futures prices are lowest between October and February."

3/"Contact seeks to maximise the value of its renewable assets by selling all renewable generation at a fixed price."

4/ "Flexible thermal generation, limited hydro storage, gas storage and hedges allows us to “firm” the renewable variability"
"Over the past 3 years this has enabled fixed priced sales at 125% of mean renewable generation, in contrast to integrated renewable generation only peers who sell between 70-85%"

------


It looks like my first interpretation of the above referenced p13 was not quite right. There is still something that irks me though.

While selling all your renewable energy at what is a relatively high price sounds good, it is only possible to do this if you don't have a surplus of hydro energy to sell. And if you don't have a surplus of hydro energy, that opens up the prospect of having to 'make up the difference' in times of shortage by purchasing energy 'on market' or firing up your own thermal stations. Since both of these are more expensive that hydro, it looks like being 'top of the class' in selling hydro has a consequence of much higher power purchase costs in times of power shortage. So is “firming” the renewable variability really a thing to boast about?

"Keeping our hedge level in line with peers at 70-85%, would have resulted in an annual average of 1-2 TWh per annum of renewable generation being sold into the spot / futures market at $60-70/MWh"

Doesn't 'keeping our hedge level in line with peers at 70-85%', mean selling a lot more power than you can generate to retail customers? How can that mean selling more power on the spot market, when you don't have the capacity to generate that power in the first place? ,(from hydro)

SNOOPY

[Jantar]

It looks like my first interpretation of the above referenced p13 was not quite right. There is still something that irks me though.

While selling all your renewable energy at what is a relatively high price sounds good, it is only possible to do this if you don't have a surplus of hydro energy to sell. And if you don't have a surplus of hydro energy, that opens up the prospect of having to 'make up the difference' in times of shortage by purchasing energy 'on market' or firing up your own thermal stations. Since both of these are more expensive that hydro, it looks like being 'top of the class' in selling hydro has a consequence of much higher power purchase costs in times of power shortage. So is “firming” the renewable variability really a thing to boast about?.....
And this is where the whole question of pricing Hydro comes into force. If hydro was only ever sold at SRMC then no hydro generation would ever be profitable. Similarly if it was only ever offered at LRMC then there are very few times that it would ever be dispatched. But way back in the late 1930s early power systems text books explained about hydro pricing to fit in with other types of generation.

The basic principle is to say that if your hydro storage is full then the water is worth nothing nothing. If it isn't used then it will be spilled and wasted.

If your hydro storage is so close to empty, then that last MWh of storage must be priced higher than the most expensive other generation available, so that it will be dispatched prior to that last MWh of your hydro.

In between those two stages of full and empty will be steps at which the price will excced some other forms of generation, but not others. Thus there will be times that hydro will replace other cheap forms of thermal generation and there will be times that other thermal plant will be dispatched to firm up the hydro position.

Further complicating this position in NZ is that we have quite of lot of other types of renewable generation other than Hydro:
Wind, that is intermittant, and up till now is always dispatched ahead of all other types of generation. The EA have just published a discussion document, (I believe driven by NWF), that will address this issue and allow wind to offer into the market in a similar manner to all other generators.
Geothermal which operates as base load and is always dispatched ahead of all other generators except wind.
Solar, that is never dispatched but is simply treated as negative demand.

[Jantar]

...
Doesn't 'keeping our hedge level in line with peers at 70-85%', mean selling a lot more power than you can generate to retail customers? How can that mean selling more power on the spot market, when you don't have the capacity to generate that power in the first place? ,(from hydro)

SNOOPY

I need to careful here that I don't give away comercially sensitive information....

Our company, and at least one of our competitors, tend to offer renewable generation first, but priced as I described in my previous post. If we see that we have more renewable generation than we need, or that the NZX, and/or forcast prices are higher than the cost of generating with our non renewable plant, then we will offer to sell hedges to the other companies at a price that we would see as profitable. If other companies did not want to pay our asking price then we would sellany excess on spot.

If we appear to be short on our position, then we will seek to buy hedges at a price that would would be cheaper than starting our thermal plant.

If there are no favourable heges available and the price expectation was high, then we would start our thermal plant to cover our own postion and sell some at spot.

[Snoopy]

If hydro was only ever sold at SRMC then no hydro generation would ever be profitable. Similarly if it was only ever offered at LRMC then there are very few times that it would ever be dispatched.


For those who are not 'au fait' with all the electricity industry 'buzz abbreviations (and that includes me!)':

SRMC means 'Short run marginal cost' and
LRMC means 'Long run marginal cost'

SNOOPY

[Snoopy]

Wind, that is intermittent, and up till now is always dispatched ahead of all other types of generation. The EA have just published a discussion document, (I believe driven by NWF), that will address this issue and allow wind to offer into the market in a similar manner to all other generators.


At the risk of going 'off topic' (because Contact Energy currently doesn't operate any wind farms) but staying on topic (because Contact dispatches energy into the same market to their competitor wind farms), how can a generator not dispatch wind generated energy immediately? I thought that I understood that wind energy cannot be stored. Or has battery technology, and more particularly battery purchase and storage costs, now changed so that storing wind energy is now economically viable?

SNOOPY

[BlackPeter]

At the risk of going 'off topic' (because Contact Energy currently doesn't operate any wind farms) but staying on topic (because Contact dispatches energy into the same market to their competitor wind farms), how can a generator not dispatch wind generated energy immediately? I thought that I understood that wind energy cannot be stored. Or has battery technology, and more particularly battery purchase and storage costs, now changed so that storing wind energy is now economically viable?

SNOOPY

Still difficult to store wind energy - however, it does make a lot of sense for wind generators to stop their generators when the power price is too low. At current they tend to run losses when their cost (due to maintenance and wear) are higher than the price paid.

[Snoopy]

Still difficult to store wind energy - however, it does make a lot of sense for wind generators to stop their generators when the power price is too low. At current they tend to run losses when their cost (due to maintenance and wear) are higher than the price paid.

Makes sense to turn off the turbine if you aren't making money BP. But I still don't get the principle of :

"allowing wind to offer into the market in a similar manner to all other generators"

Let's say you offer a whole lot of wind energy to the market next winter and the wind doesn't blow. What do you do? Buy the energy you have contracted to sell on the market? Sounds a very risky proposition!

SNOOPY

[Snoopy]

I don't think there is a risk to the current 26cps annual dividend payout, even if a lack of imputation credits reduces this dividend net value to less than 26cps. Therefore my valuation of Contact Energy remains largely unchanged. But if the dividend is not fully imputed in FY2017, then my $5.50 'fair value' will reduce a bit. Yet I don't expect that reduction be be significant because 'this year' will only provide 1/9 th of my company valuation data.


The above was written back in July. Contact have subsequently announced a change to dividend policy. From p33 of the annual result presentation:

------

Contact will target distributions of between 80 – 90% of operating free cash flow as an ordinary dividend, on average over time, once the S&P net debt / EBITDAF ratio is below 2.8x

Contact will provide the market with the targeted distribution for the following financial year
» Distributions are expected to be split into an interim dividend paid in April, targeting 40% of the total expected
dividend, with the remainder paid as a final dividend in September
» Imputation credits will be attached to dividends to the extent they are available.

---------

The projected increase in gross dividend, based on gross profits being constant from FY2017 onwards is:



Financial YearProjected Gross Dividend


201726 cps


201832 cps


201934-38 cps



But there is the very important 'key rider' about imputation credits being available. My normalised result for NPAT for FY2017 was as follows:



EBITDAF$494m


less Depreciation & Amortisation($204m)


less Interest($92m)


equals Underlying NPBT$228m


less tax at 28%($64m)


equals Underlying NPAT$134m



Divide NPAT by the 715m of shares on issue and I get an earnings per share figure of:

$134m/715m = 18.7cps

It looks like only just over half of the dividend will be imputed from now on! This makes the 'fully imputed' 15c dividend that we shareholders have just received look like a manipulation from prepayment of tax. How can a company pay 23c of imputed dividend (Full year dividend was 26c, but the interim 11c dividend was only imputed to 8c) when underlying earnings look to be 19c in round figures? If Contact really are able to pay a 13c interim dividend followed by a 19c final in FY2018, something approaching half of that could be shareholders being paid their own capital back, with the tax man taking his slice on the way!

SNOOPY

[BlackPeter]

Makes sense to turn off the turbine if you aren't making money BP. But I still don't get the principle of :

"allowing wind to offer into the market in a similar manner to all other generators"

Let's say you offer a whole lot of wind energy to the market next winter and the wind doesn't blow. What do you do? Buy the energy you have contracted to sell on the market? Sounds a very risky proposition!

SNOOPY

Not a specialist for our very own electricity market ... but my understanding is that according to the rules of the game wind generators in NZ are required to offer all the electricity they think they can provide in the next 30 min slot for $10 per MWh. All other suppliers may ask for a higher price - reflecting as well their higher reliability. Obviously - at the end all generators get the price which was asked for by the dearest generator who's offer was still taken.

The network can cope with demand changes as well as with supply changes - wind generators don't have to provide or offer power they can't deliver (i.e. if the wind stops, this is fine and somebody else will supply more). The price wind generators pay for their unreliability is that they always need to offer their power at the lowest price.

Just my limited understanding of our power market. Can any of the power gurus around here confirm or amend?

[Snoopy]

------

Contact will target distributions of between 80 – 90% of operating free cash flow as an ordinary dividend, on average over time, once the S&P net debt / EBITDAF ratio is below 2.8x

---------



What does Contact's new dividend policy really mean in dollar terms? To answer that question I have overlaid the new dividend policy on the actual results over the last nine years.



FY2009FY2010FY2011FY2012FY2013FY2014FY2015FY2016FY 2017


Cashflows from Operating Activities$425m$368m$379m$440m$469m$446m$490m$556m $502m


less Stay in Business CAPEX($103m)($76m)($180m)($98m)($116m)($46m)($63m) ($87m)($75m)


less Net Interest Costs($63m)($56m)($62m)($72m)($66m)($77m)($98m)($1 01m)($92m)


equals Operating Free Cashflow$259m$236m$137m$270m$287m$323m$329m$368m$3 35m


Operating Free Cashflow x 0.8$207m$189m$110m$216m$230m$258m$263m$250m$228m


Dividend per Share (based on 715m shares on issue)29cps26cps15cps30cps32cps36cps37cps35cps32cp s



Those calculated dividends are rather higher than what was actually paid out in the past, with one exception: FY2011. Why was the operating cashflow over FY2011 anomalously low? In that year Contact built both the Stratford Peaker station, and commissioned the Ahuroa gas storage site. Both of these additions were not to add to the normal portfolio of generation assets. They were to enable the existing generation assets to be utilized more effectively. It looks like Contact may have classified any associated expenditure as 'stay in business' Capex, because of this.

I intend to use the above table as 'input information' into my 'capitalised dividend' valuation model, which is one window as to what Contact Energy shares might be worth today.

Another point of note is that I am assuming exactly 715m shares were on issue at the end of each year over the last nine years. In fact the number of shares issued varied with share issues and share buybacks. However the purpose of the table is not an historical retrospective. The purpose of the table is to answer the question:

"What would happen if we imposed the the weather events and demand from the last nine years over the current capital structure. Effectively we are modelling an array of nine possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect.

One more point to notice is the very last figure in the bottom RH corner of the table. That figure - 32cps - happens to be exactly the targeted dividend figure that Contact is looking to achieve for FY2018 assuming debt has been brought down to an acceptable level. By implication, debt was not at an acceptable level at the end of FY2017. But if the debt had been brought down, that means we might have expected that level of dividend from the year just gone, had today's dividend policy applied. The fact that the retrospectively calculated dividend for FY2017 aligns with the forecast dividend of FY2108 gives me confidence in the dividend numbers rolling out from this modelling.

SNOOPY

[blackcap]

Not a specialist for our very own electricity market ... but my understanding is that according to the rules of the game wind generators in NZ are required to offer all the electricity they think they can provide in the next 30 min slot for $10 per MWh. All other suppliers may ask for a higher price - reflecting as well their higher reliability. Obviously - at the end all generators get the price which was asked for by the dearest generator who's offer was still taken.

The network can cope with demand changes as well as with supply changes - wind generators don't have to provide or offer power they can't deliver (i.e. if the wind stops, this is fine and somebody else will supply more). The price wind generators pay for their unreliability is that they always need to offer their power at the lowest price.

Just my limited understanding of our power market. Can any of the power gurus around here confirm or amend?

John Worth at NWF AGM was saying that they had to supply all power at $.01 (ie 1 cent) and were not allowed to curtail under the current regime. But that is likely to change very soon.... (he said that some of the companies like CEN et al have weather forecasters in their team so they can work out when the wind generators are likely to start producing power and thus be able to "game" the bidding system. Very clever. But if curtailing is going to be allowed and if the wind generators can offer in 5 bands rather than at 1 cent as is suggested this will change the game.

This is how I understood his explanation in lay mans terms. I am not trying to mis-quote or put words in his mouth. This is my interpretation of what the NWF CEO said to us after the meeting in informal talks.

[Snoopy]

Actual FY2016 results are out, so time to update my valuation model.

First a few words for those who joined the Contact Energy (CEN) party late.

CEN operates in an industry where the weather plays a big part. No-one can predict for sure what the weather, and hence resultant rainfall, and consequently inspired power demand will be on the overall network. In addition there are competitive market pressures which see customers happy to flip flop between different retailers at regular intervals. However, Contact have been operating in volatile weather and consumer markets for many years. Furthermore, the energy market is relatively mature. Rather than try and guess what the weather and consumer market share for Contact in the future might be, I prefer to use 'actual data' from the last eight years, and superimpose the current forward dividend policy on that data. Because I am considering eight years of data, this will produce an 'averaging effect'. Thus, although I predicting a particular 'fair share value' for Contact, we can expect the market value of CEN shares to fluctuate both above and below that figure.

Gentailers have a lumpy demand for investing in new power stations. Right now we are at the bottom of the lump. Generally a gentailer must keep reinvesting in their generation plant to keep viable. But right now we are in a place where the big reinvestment is done. This means that the annual depreciation and amortization charges on assets do not need to be reinvested right now. That means 'extra cashflow' for Contact Energy, and 'extra money' that is available to pay out to shareholders, over and above earnings? How much extra money?

In FY2016 the depreciation and amortisation charge was $201m, and the offsetting capital expenditure was $128m. There are currently 715.5m Contact shares on issue. So the 'windfall cashflow' per share in FY2016 amounts to:

($201m-$128m)/ 715.5m = 10cps

Of course not all of this is available to be paid out. Contact currently has a relatively high debt load. Management have indicated that they wish to use some of that cashflow to pay down debt. But add 10cps to last years earnings of 22cps and you get 32c. There is plently of headroom there to indicate paying a cash dividend of 26cps per year going forwards will not be a problem.

Below I present my corrected earnings picture for the last eight years. You will note that:

1/ I have deleted last year's 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 26cps being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.



Scenario Basis Financial Yeareps (A)Scenario dps (B)Difference (A)-(B)Divie Capital Component (C)Unimputed Tax Bill (D)Difference (B)-(C)-(D)


200927.0c26.0c+1.0c0c0c26.0c


201025.3c26.0c-0.7c0.7c0.2c25.1c


201122.4c26.0c-3.6c3.6c1.0c21.4c


201224.6c26.0c-1.4c1.4c0.4c24.2c


201327.5c26.0c+1.5c0c0c26.0c


201427.1c26.0c+1.1c0c0c26.0c


201522.0c26.0c-4.0c4.0c1.1c20.9c


201622.2c26.0c-3.8c3.8c1.1c21.1c


Total198.1c208.0c190.7c



The expected average dividend per year, net of tax is therefore: 190.7 / 8 = 23.8cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 23.8cps /(1-0.28) = 33.0c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

33.0/0.06 = $5.50

So $5.50 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern



Below I present my corrected earnings picture for the last nine years. You will note that:

1/ I have deleted the FY2015 50cps special dividend from the record, because it will not be possible to repeat that into the future.
2/ The 'Scenario Dividend Per Share Column' represents a prediction of an ongoing dividend of 80% of free cash flow being paid into the foreseeable future.
3/ The (A) - (B) difference column, if negative, represents the amount of the projected dividend not covered by imputation credits. This is important, because a dividend paid without imputation credits is in accounting terms, equivalent to giving shareholders their own capital back (equal to the amount of the unimputed dividend) complete with a tax bill. This is generally bad for investors. It is necessary to make a negative adjustment to account for any expected tax to be paid on the unimputed dividend component.
4/ The capital component of the dividend is the portion of shareholder equity being returned to shareholders. This will need to be removed from the dividend return calculation. Because to pay it is to return to shareholders money on the balance sheet that they already have, so it isn't a shareholder benefit.
5/ The unimputed component tax bill column, represents the income tax charged on share capital that is expected to be paid by the shareholder. A 28% tax rate is assumed. Note that if the (A)-(B) differnce is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column represents the dividend per share adjusted for any extra tax obligation.



Scenario Basis Financial Yeareps (A)Scenario dps (B)Difference (A)-(B)Divie Capital Component (C)Unimputed Tax Bill (D)Difference (B)-(C)-(D)


200922.2c29.0c-6.8c6.8c1.9c20.3c


201021.4c26.0c-4.6c4.6c1.3c20.1c


201121.8c15.0c+6.8c0c0c15.0c


201224.7c30.0c-5.9c5.9c1.7c22.4c


201328.2c32.0c-3.8c3.8c1.1c27.1c


201427.8c36.0c-8.2c8.2c2.3c25.5c


201522.5c37.0c-14.5c14.5c4.1c18.4c


201622.2c35.0c-12.8c12.8c3.6c18.6c


201718.7c32.0c-13.3c13.3c3.7c15.0c


Total209.5c272.0c182.4c



The expected average dividend per year, net of tax is therefore: 182.4 / 9 = 20.3cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 20.3cps /(1-0.28) = 28.1c

If we assume that a business cycle investment 'gross return' of 6% is required, then this equates to a CEN share price of:

28.1/0.06 = $4.69

So $4.69 is therefore 'fair value'. Naturally this valuation assumes no gross disruption to the market, i.e. Tiwai Point remains a going concern

Readers should note that $4.69 represents 'business cycle neutral' fair value. We could argue that we are currently at the top of a low interest rate inspired valuation cycle. My rule of thumb would suggest a 'top of cycle' value some 20% higher than my calculated fair value.

$4.69 x 1.2 = $5.62

This isn't too far removed from the $5.54 Contact is trading at as I write this post. However, I would suggest that if Contact breaks out of this trading range (towards $6), that might be an appropriate time to look at lightening your shareholding.

SNOOPY

[tobo]

Contact dropped yesterday and Genesis today.

[Arbitrage]

The trend is my friend. The last 12 months have been kind to shareholders.

[fish]

Is there a trend?

[Hectorplains]

Operating report out. Electricity customer numbers are still drifting down. LPG customer base continues slow growth though - how 'sticky' are these customers?.

It doesn't appear that the fuel loyalty scheme is doing much to retain or attract customers? The recent announcement of bundling internet (but only for current customers) feels like a belated 'me too' response to Trustpower's success in this.

How important is the customer base as a metric for CEN?

[fish]

Operating report out. Electricity customer numbers are still drifting down. LPG customer base continues slow growth though - how 'sticky' are these customers?.

It doesn't appear that the fuel loyalty scheme is doing much to retain or attract customers? The recent announcement of bundling internet (but only for current customers) feels like a belated 'me too' response to Trustpower's success in this.

How important is the customer base as a metric for CEN?

I see this metric as a function of wholesale prices-a positive metric if wholesale prices are low and negative when high.
eg in a drought with high demand a gentailer would have to buy power to supply customers they cannot supply by their own generation at higher prices than they can recoup from the customer.
I dont know what this price point is but want to know if anyone has the answer?

[macduffy]

Don't know thw answer, fish, but the theory sounds logical to me. Of course, the other factors would be individual gentailers' mix of generation - hydro, wind, geothermal, fossil fuel - and the weightings between retail and commercial/industrial customers.

A separate question would be - If Contact and Genesis are losing customers, which gentailers are winning them?

[percy]

Don't know thw answer, fish, but the theory sounds logical to me. Of course, the other factors would be individual gentailers' mix of generation - hydro, wind, geothermal, fossil fuel - and the weightings between retail and commercial/industrial customers.

A separate question would be - If Contact and Genesis are losing customers, which gentailers are winning them?
MEL.Meridian's customer numbers are up 1.9% since June 2017.

[stoploss]

Mercury called me with a good deal this week. Pricing locked in till 2019 . Also no contract so free to leave whenever . Roughly $ 500 pa saving , Trustpower would only offer $ 200 to stay .( I was Energy Direct before it was merged)

[huxley]

Mercury called me with a good deal this week. Pricing locked in till 2019 . Also no contract so free to leave whenever . Roughly $ 500 pa saving , Trustpower would only offer $ 200 to stay .( I was Energy Direct before it was merged)


I guess you didn't sign on for gas and internet ;)

[stoploss]

I had gas with Trustpower, and much cheaper price via Mercury and daily charge is way less as well .
If for whatever reason this doesn’t work out I can go elsewhere ...

[huxley]

I had gas with Trustpower, and much cheaper price via Mercury and daily charge is way less as well .
If for whatever reason this doesn’t work out I can go elsewhere ...

Ha, all good, I’m not really commenting on your individual choice (which seems like a good move), just that Trustpower would probably argue that the multi customer segment is more “sticky “

[Ggcc]

All companies get you in and hope your laziness makes them stay. Look at gym memberships I know of at least 5 people who have gym memberships and never go

[Snow Leopard]

A few Contact shares (7.1% of the company) changed hands in the NZX close today.

Add in another 4% for the rest of the day and that is 'quite a lot'.

Also down 2.2% in price, if you are into On Balance Volume and similar indicators you are going to need to widen your chart scales !

Best Wishes
Paper Tiger

[minimoke]

All companies get you in and hope your laziness makes them stay. Look at gym memberships I know of at least 5 people who have gym memberships and never go
I think the same applies to my set and forget portfolio in which CEN sits. Gone nowhere in 5 years

[kiora]

Index rebalancing https://www.nbr.co.nz/article/market-close-nz-shares-rise-14b-plus-day-fp-health-contact-reweightings-b-210652

[Hectorplains]

What put the rocket under the sp? Nearly 5% leap on the day. Genesis on the move too.

[fish]

What put the rocket under the sp? Nearly 5% leap on the day. Genesis on the move too.

These 2 do well in a dry year with high prices.
The situation we have now
Both can generate more than their needs from thermal so should be maximising profits as demand is up 3%
roughly thermal costs say $50 but market price $180+megaprofit plus rise in profits from future contracts.
I think craigs have cen as a buy at up to 630 so probably someway to go yet

[horus1]

As solar and batteries come in ,which they are doing, the spot prices get more volatile at least for a start. Contact is the big benificiary. To see it at work you only have to look at the AU markets.

[fish]

As solar and batteries come in ,which they are doing, the spot prices get more volatile at least for a start. Contact is the big benificiary. To see it at work you only have to look at the AU markets.
It always seems a pity to me that there isnt more incentive to invest in solar alone without the need for expensive and inefficient batteries.
We are so lucky that we have hydro to store energy and solar generation would reduce the daily draw on hydro and reduce the need to burn carbon

[blackcap]

It always seems a pity to me that there isnt more incentive to invest in solar alone without the need for expensive and inefficient batteries.
We are so lucky that we have hydro to store energy and solar generation would reduce the daily draw on hydro and reduce the need to burn carbon

I heard somewhere that NZ's topography is not that efficient for solar. In that our land costs too much as it is used predominantly for agriculture. The vast deserts in China and Australia are more suitable habitats for solar and therefore you will never really see solar take off in NZ.

[horus1]

You are seeing solar starting to increase markedly. The power cos have spread a lot of disinformation about solar. There is plenty of land for it plus a large no of roofs.

[blackcap]

You are seeing solar starting to increase markedly. The power cos have spread a lot of disinformation about solar. There is plenty of land for it plus a large no of roofs.

That maybe, but its not as efficient as solar in Australia or China where there are also more direct sun hours in comparison to NZ. NZ also has other alternate forms of generation that are comparable cheaper and more environmentally friendly. Huge 1000 hectare solar farms will never eventuate here.

[horus1]

It is not about cost it is about customers and PRICE to customers. The real deal is to leave the networks and not pay transmission,distribution or energy prices ever again. Those that have left , and there are many, are happy they left.

[Jantar]

As New Zealand does not have interconnection to other grids in different time zones our generation mix must take into account the daily demand profile and the intermittancy of solar and wind generation. We are already at the stage of wind generation causing our grid to reach load stability limits. Any additional solar without accompanying storage would only exacerbate that situation.

There is a solution, but one that none of the power companies are interested in. That is Pumped Storage Hydro. For every 1 MW of PSH the country can accept a further 2 MW of intermittant generation. PSH can pump water to storage when there is an excess of intermittant geneation, and generate withit when there is a deficit.

This thread is obviously the right place for this discussion as the two best sites for PSH are both in Contact's catchments. Lake Onslow could increase NZ's energy storage by 200% and provide 1200 MW, allowing up to a further 2400 MW of intermittant generation. This scheme would cost between $3.5 and $4 billion. The Neck between Hawea and Wanaka would only be 1/10 the size and cost around $400 million. Either of these would allow a huge increase in wind or solar and decrease the reliance on gas fired generation.

[Joshuatree]

Thanks again Jantar , thats very int info re the PSH. Seems like a win/win/win in the future and its not IF but When they utilise PSH.

[fish]

What put the rocket under the sp? Nearly 5% leap on the day. Genesis on the move too.

monthly report released today-looks really good
cost energy down and sales price up-both significantly.
Also futures are well up

[Joshuatree]

BTW Jantar there is a stock (and thread) with solar and PSH developing ,GNX on the ASX section.

[Jantar]

BTW Jantar there is a stock (and thread) with solar and PSH developing ,GNX on the ASX section.
That GNX project will demonstrate the flexibility that PSH can provide. It is a pity that the limited storage on the project effective makes it an intra day load shifting system rather than a full blown PSH scheme. It will be interesting to see the final result.
The Tasmanian project would appear to more along the lines of what I have suggested. https://www.brandtasmania.com/energy-stories/?item=1422&utm_medium=email&utm_campaign=Tasmanias+Stories+Edition+190+Decembe r+2017&utm_content=Tasmanias+Stories+Edition+190+December +2017+CID_abe1c1eebec756a2e2871ccaf30b46ff&utm_source=Email+marketing+s

[Dassets]

Some interesting comments. I would say that the price per MWh for PSH does not make sense when compared to other forms of generation by a long way. I looked at the SA Tesla battery. For the circa $100m build cost I could only work out lifetime $35m of revenue in a NZ context excluding maintenance and energy cost in. So doesn't make sense. With respect wind, get the intermittent issues but with hydro control and gas fast start combined with wind forecast which is good for days out wind should not be penalised as it is. The other forms of generation can easily deal with it. In reality if it doesn't rain much then we have bigger issues. We are 6 weeks away at any time from an energy crisis due to hydro reliance in reality.

NZ market has particular characteristics that differentiate it from other markets. Hey here's a serious idea. Why not built a sub cable to Victoria. Now that would be interesting(and it is techinically viable).

[Jantar]

...with wind forecast which is good for days out .... This comment would make for a good comedy sketch. In TP 14 - 16 this morning was the first time this year that the actual wind generation was close to forecast for more than 1 hour.

On the price per MWh for PSH. The possible lake Onslow scheme would have an operating cost of around 30% more than a run-of river hydro scheme. The possible Hawea Neck scheme would have an operating cost of around 5% more than a run-of-river scheme as it already has large natural inflows. The added cost comes from greater transmission costs

[horus1]

The message is that the cost to the consumer Must come down as the cost of alternatives is decreasing fast. Customers will and are leaving the networks. Building big capital is out.

[Snoopy]

On the price per MWh for PSH. The possible lake Onslow scheme would have an operating cost of around 30% more than a run-of river hydro scheme. The possible Hawea Neck scheme would have an operating cost of around 5% more than a run-of-river scheme as it already has large natural inflows. The added cost comes from greater transmission costs


I thought Transpower met the transmission costs? So with transmission and energy generation costs separated already , and transmission costs out of the Contact cost book (obviously Contact will pay transmission costs, but in conjunction with every other power generator as a collective group) , is there not every incentive already for Contact to pursue Pumped Stored Hydro?

SNOOPY

[Jantar]

I thought Transpower met the transmission costs? So with transmission and energy generation costs separated already , and transmission costs out of the Contact cost book (obviously Contact will pay transmission costs, but in conjunction with every other power generator as a collective group) , is there not every incentive already for Contact to pursue Pumped Stored Hydro?

SNOOPY The new transmission lines from the power station to the grid interconnection point have to built and paid for by whoever is building the power station. Transpower own and operate the main grid, but not those spur lines.

[Dassets]

Just not true. I have been tracking wind forecast v output and it is broadly accurate. When you are talking about wind making up 5% of NZ generation and maybe 1 day out being +- 10% of forecast you are talking about output vairiation v forecast of max 0.5% of national demand. Given the price bucket offer in and offer in exceeds demand by at least 10% in winter(summer better) then there is no issue if wind varies to a small degree. For wind to be penalised by having to offer in at $0.01 per Mwh and be gamed by other generators is just a joke. Thankfully a rule change is coming(after 15 years) next year and should have happened sooner.

[Jantar]

Right at the moment, Long Schedule offers for Wind are for 301 MW. Short schedule, based on persistence is for 269 MW. Actual, right now, is 237 MW. That is 22% less than offered.

With NZ's power system not being cross connected to any other, then dispatch has to be at 5 minute periods, based on 30 minute offers. You can NOT take long term averages.

Edit: I have just looked a bit closer and at present it is Maraetai on the Waikato River that is taking up the short time slack as in intra trading period, and Huntly Unit 1, an old Rankine unit, that is making up the daily difference.

[Dassets]

22% off 269 is 209. Offer in has to be for name plate. All Tararuas(I think) are out, (at least NWF is) due to Transpower upgrades for 5 days. Offer in will still be for those also. Be careful of numbers, they can bite.

[Jantar]

22% off 269 is 209. Offer in has to be for name plate. All Tararuas(I think) are out, (at least NWF is) due to Transpower upgrades for 5 days. Offer in will still be for those also. Be careful of numbers, they can bite.
The offer for that period was for 301 MW, 269 was Transpower's persistence offer. The offer submitted by generators has to be "a reasonable estimate of their ability to generate" The name plate info is NOT the offer but is included in the capability data supplied to transpower for their SPD model. And you are correct that both Tararua and NWF are out, but they are not offered. If the offers included those two sites then the total offers would be considerably higher still.

It is now TP 24 and the Long Schedule offer for North Island wind generation is 323 MW, Transpower's persistence offer is for 309 MW. Actual wind generation is 251 MW. Is that forecast still good for "days out"?

[macduffy]

"We don't know how lucky we are."

Nothing to do with Contact, or any of the NZ gentailers for that matter, but a revealing look from the Guardian on the parlous state of the UK nuclear power industry.

https://www.theguardian.com/news/2017/dec/21/hinkley-point-c-dreadful-deal-behind-worlds-most-expensive-power-plant

Warning: It's a "long read", possibly best left until the New Year!

[fish]

"We don't know how lucky we are."

Nothing to do with Contact, or any of the NZ gentailers for that matter, but a revealing look from the Guardian on the parlous state of the UK nuclear power industry.

https://www.theguardian.com/news/2017/dec/21/hinkley-point-c-dreadful-deal-behind-worlds-most-expensive-power-plant

Warning: It's a "long read", possibly best left until the New Year!

Or possibly best to skim read.
As a summary of a skim read-nuclear power is a very expensive and risky option.It needs govenrment investment/subsidy and leads to massive cost overuns.We are unlikely to see new investment.

[GTM 3442]

Or possibly best to skim read.
As a summary of a skim read-nuclear power is a very expensive and risky option.It needs govenrment investment/subsidy and leads to massive cost overuns.We are unlikely to see new investment.

New Zealand is lucky in that it has enough hydro power to essentially run the country. The U.K. is not so fortunate, and so will continue to require something other than wind and solar to provide power.

Connections to Europe and the Nordics probably won't be sufficient, and if thermal is off the table, then that rather leaves nuclear.

There is also the question of nuclear weapons and submarines. I'm not sure if the U.K. has enough demand in those areas to sustain a stand-alone defense nuclear capability.

But reactor technology is a dying art in the West. I don't know when the U.K. commissioned their last nuclear power station, and I don't think that the US has built a civilian reactor since the early 1980s. I think it's been the Chinese, the Russians, and the Koreans leading the way for quite a while now.

The French are coming to terms with the de-commissioning issue.

So I suspect that nuclear will continue, but at least in part for "national security" reasons.

[value_investor]

A little bit misleading but this is promising http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11954346

I say misleading because a "record 465 electric cars were sold in November 17" but looking at the total November registrations from NZTA was 25,208 and this was just for cars. Add in motorbikes and mopeds and you're over 26k..

I think we are a little disadvantaged with our geography in this space because these cars are expensive already as it is for a NZ market even before importing. Also the fact that EV's are still further from market penetration than we like to think. Perhaps due to the hysteria over Tesla.

Still nice to see some progress being made though.

[fish]

A little bit misleading but this is promising http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11954346

I say misleading because a "record 465 electric cars were sold in November 17" but looking at the total November registrations from NZTA was 25,208 and this was just for cars. Add in motorbikes and mopeds and you're over 26k..

I think we are a little disadvantaged with our geography in this space because these cars are expensive already as it is for a NZ market even before importing. Also the fact that EV's are still further from market penetration than we like to think. Perhaps due to the hysteria over Tesla.

Still nice to see some progress being made though.

I dont feel hysteria over tesla is the real reason for the slow uptake.
A lack of choice ,Expensive batteries, cheap oil ,-could all change soon and the economics,performance and lack of fumes become compelling reasons to buy.
I do wonder,however,how much impact this will have on power demand eg-maybe coupled with solar panels to give free motoring.

[tobo]

I think the uptake of solar panels and electric cars in NZ are both going to be minimal in the short term (next few years) due to only people with wealth and the preponderance to buy expensive things being likely buyers. (I acknowledge remote people buying solar panels, and the likes of Air NZ buying $75k BMW electric bubble cars for image reasons). In that time, even unlikely dramatic oil price increase will not allow people time to move across en mass (insufficient supply will keep prices up.)
Longer term may be a different story: The Logic of owning your own solar panels may combine with falling solar panel costs. And the car companies may bring enough hype to build massive buyer desire combined with regulatory pressure to reduce emissions.
Yes, our geography works against electric cars, and emissions in Auckland and Wellington are not the problem of overseas cities due to continual breeze/wind.
And worldwide production forecasts of electric cars over the next few years are small proportion of total. 78 million cars were produced in 2017 according to
https://www.statista.com/statistics/200002/international-car-sales-since-1990/ of which 1 million were electric
Toyota see mass production 4-5 years away. https://www.reuters.com/article/us-toyota-batteries/electric-cars-not-ready-for-mass-production-yet-toyota-chairman-to-spiegel-idUSKBN1DH28U

[tobo]

the real threat to power generators would be solar panel uptake with no offsetting increase in demand from electric cars.
Solar Electric Cars are in development but not sure if they will be so much more expensive than electric car without the solar that they won't become mainstream.
"(Dutch manufacturer) Lightyear is still in the concept phase. It hopes to build 10 cars by 2019. Cost of the completed cars is said to be €119,000."
https://cleantechnica.com/2017/07/07/1st-solar-electric-cars-consumers-come-lightyear/
"Toyota is now offering a solar roof on the Prius Prime that uses solar cells manufactured by Panasonic. Tesla is moving rapidly toward making glass roofs available on all its cars. With is close partnership with Panasonic in the Gigafactory project, there’s a good chance that solar-powered Teslas will be offered in the near future."

[BlackPeter]

the real threat to power generators would be solar panel uptake with no offsetting increase in demand from electric cars.
Solar Electric Cars are in development but not sure if they will be so much more expensive than electric car without the solar that they won't become mainstream.
"(Dutch manufacturer) Lightyear is still in the concept phase. It hopes to build 10 cars by 2019. Cost of the completed cars is said to be €119,000."
https://cleantechnica.com/2017/07/07/1st-solar-electric-cars-consumers-come-lightyear/
"Toyota is now offering a solar roof on the Prius Prime that uses solar cells manufactured by Panasonic. Tesla is moving rapidly toward making glass roofs available on all its cars. With is close partnership with Panasonic in the Gigafactory project, there’s a good chance that solar-powered Teslas will be offered in the near future."

Not really a threat. Just apply the laws of physics ... The sun delivers in the outside regions of our atmosphere roughly 1.367 kW/sqm (the so called solar constant). Filter that through the atmosphere and you can get on any one sqm under really good conditions realistically maybe one kW sunlight per hour as input for your solar cells. That's solar energy, not electricity produced by solar panels. Solar panels are rather inefficient in producing electricity - so you are lucky to turn this 1 kW into some 100 W per sqm in electrical power (this is while the sun is shining and hitting the panels at an angle close to 90 degrees).

You have these good conditions only a handful of hours per day on sunny days. On cloudy or foggy days the output is between 1 to 10% of above.

Now - even a small car with a weak electrical engine driven very economically will need between 10 and 20 kW (for how long you choose to drive it). Just do your numbers - a solar roof with a handful of sqm might be a fancy gadget, but it will never power a car - even if you live in a country with 360 days sunshine per year. The numbers just don't add up.

Clearly no danger to the electricity industry.

Thinks might look different if everybody builds a large solar farm onto their front lawn and store the energy in an spare battery for their car. This might work as long as you live in a country without clouds and winter ...

[tobo]

Thanks for those numbers, BP. I did have a feeling that it seemed a tall order to get enough power from just a little car roof and was surprised to find that Dutch company thinking they could do it.

[oldtech]

Not liking the look of the chart on this at the moment, the 50-day EMA has crossed the 200-day EMA. Unfortunately I bought this at too high a level so it's probably not worth getting out at this point, I might just have to ride it out.

Still, there's always the dividend to look forward to ... :mellow:

[rmnz]

I paid too much for CEN too, lesson learned! :rolleyes:

[dreamcatcher]

Plenty of water now so expecting SP to increase

[Snoopy]

FY2015Contact EnergyMighty River Power


No. Shares733.4m1,400m


Share Price$5.13$2.61


Normalised eps23.6c11.1c


Normalised PE21.723.5


Normalised NPAT Margin7.1%9.3%


ROE (Assets at Cost)10.5%117%


Bank Debt$1,750m$1,177m


Min. Debt Repayment Time10.1 years7.6 years


Snoopy's Fair Share Price Valuation$5.87$2.99


Market Discount to Fair Value-13%-13%



Notes:

1/ ROE for MRP of 117% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MRP does. But now that CEN has closed down their baseload Otahuhu B station, the power stations that are left may start to develop 'thin air capital' as MRPs power stations do now. Nevertheless up until now it has been Contact policy not to create 'thin air capital'.
3/ Share prices taken from the middle of the afternoon in the market today. MRP share price reduced by 11c to allow for upcoming final dividend. (CEN is already ex the final dividend).
4/ Contact balance sheet is ex the payment of the 50c special dividend on June 23rd, but prior to payment of the 15c final dividend. This is why Contact is more indebted, as reflected in the 'minimum debt repayment time' ( Total bank debt/NPAT ).

With all that , in relative terms, each investment at this afternoon's price is equally as good as each other. It is possible to buy both at a 13% discount to Snoopy's fair value. In one way I am annoyed because I was hoping to figure out which was the better one to buy. In another way I am relieved because it shows that perhaps my valuation method is not too far out of whack with the view of Mr Market. IOW Mr Market is doing his job valuing these two shares appropriately!


I have got behind in my 'head to head' comparison of the two gentailers I now hold. Time for a catch up.



FY2016Contact EnergyMercury Energy


No. Shares715.5m1,400m


Share Price$4.95$2.96


Normalised eps22.2c10.3c


Normalised PE21.428.7


Normalised NPAT Margin7.4%9.3%


ROE (Assets at Cost)21.0%70.2%


Bank Debt$1,696m$1,177m


Min. Debt Repayment Time10.6 years8.1 years


Snoopy's Fair Share Price Valuation$5.74$2.83


Market Premium or Discount to Fair Value-14%+4.6%



Notes:

1/ ROE for MCY of 70.2% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MCY does. But now that CEN has closed down their baseload Otahuhu B station, the power stations that are left may start to develop 'thin air capital' as MRPs power stations do now. Nevertheless up until now it has been Contact policy not to create 'thin air capital'.
3/ Share prices taken from the market close on 30-09-2016.

The snapshot view shows a clear 'investor value advantage' for Contact Energy. This is possibly a downstream effect of the discounted share placement from the Origin Energy sell down still affecting the market. This sale occurred early in the financial year (announced 4th August 2015). So by 30-09-2016, investors have had several months to accumulate CEN shares at a discount to its closest peer. Note that the indicators of 'Net Profit margin' and 'MDRT' favour Mercury Energy though. You could argue that on these fundamental metrics, Mercury is the stronger company and that investors will happily pay more to acquire a piece of Mercury on that basis.

SNOOPY

[Snoopy]

FY2016Contact EnergyMercury Energy


No. Shares715.5m1,400m



Normalised eps22.2c10.3c





My normalised 'eps' figure for Contact Energy is a whole of business cycle figure. I have deemed FY2009 as the start of the representative electricity market from here on in.



Financial YearCEN Normalised epsMCY Normalised eps


200927.0cps


201025.3cps


201122.4cps11.5cps


201224.6cps10.8cps


201327.5cps10.5cps


201427.1cps13.3cps


201522.0cps10.1cps


201622.2cps10.3cps


Multi Year Average24.8cps11.1cps



CEN Business Cycle share Price Average Value:

= 24.8c / ( 0.72 x 0.06) = $5.74 (based on a 6% gross desired earnings yield before tax). This is the 'fair value' as published in the adjacent table.

MCY Business Cycle share Price Average Value:

= 11.1c / ( 0.72 x 0.06) = $2.57 (based on a 6% gross desired earnings yield before tax). This is the 'fair value' as published in the adjacent table.

$2.57 x 1.1 = $2.83 (see post 887 MCY thread "FY2016 Gross earnings yield valuation (Part 2)")

SNOOPY

[Snoopy]

FY2016Contact EnergyMercury Energy


No. Shares715.5m1,400m


Share Price$4.95$2.96


Normalised eps22.2c10.3c


Normalised PE21.428.7


Normalised NPAT Margin7.4%9.3%


ROE (Assets at Cost)21.0%70.2%


Bank Debt$1,696m$1,177m


Min. Debt Repayment Time10.6 years8.1 years


Snoopy's Fair Share Price Valuation$5.74$2.83


Market Premium or Discount to Fair Value-14%+4.6%



Notes:

1/ ROE for MCY of 70.2% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MCY does. But now that CEN has closed down their baseload Otahuhu B station, the power stations that are left may start to develop 'thin air capital' as MRPs power stations do now. Nevertheless up until now it has been Contact policy not to create 'thin air capital'.
3/ Share prices taken from 30-09-2016.

The snapshot view shows a clear 'investor value advantage' for Contact Energy. This is possibly a downstream effect of the discounted share placement from the Origin Energy sell down still affecting the market. This sale occurred early in the financial year (announced 4th August 2015). So by 30-09-2016, investors have had several months to accumulate CEN shares at a discount to its closest peer. Note that the indicators of 'Net Profit margin' and 'MDRT' favour Mercury Energy though. You could argue that on these fundamental metrics, Mercury is the stronger company and that investors will happily pay more to acquire a piece of Mercury on that basis.





FY2017Contact EnergyMercury Energy


No. Shares715.5m1,400m


Share Price$5.50$3.39


Normalised eps18.7c12.0c


Normalised PE29.428.3


Normalised NPAT Margin6.4%10.6%


ROE (Assets at Cost)18.9%55.6%


Bank Debt$1,527m$1,107m


Min. Debt Repayment Time11.4 years6.6 years


Snoopy's Fair Share Price Valuation$5.58$2.85


Market Premium or Discount to Fair Value-5.2%+19.0%



Notes:

1/ ROE for MCY of 55.6% not a misprint.
2/ CEN valuation does not contain an allowance for 'thin air capital', while MCY does. But now that CEN has closed down their baseload Otahuhu B station, the power stations that are left may start to develop 'thin air capital' as MRPs power stations do now. Nevertheless up until now it has been Contact policy not to create 'thin air capital'.
3/ Share prices taken from the market close on 30-09-2017.

The snapshot view shows a clear 'investor value advantage' for Contact Energy, although the PE ratio gap has now closed substantially. Could this still be a downstream effect of the discounted share placement from the Origin Energy sell down still affecting the market? This sale occurred early in the previous financial year (announced 4th August 2015) yet it still could be casting a very long shadow. More likely is the relatively poor operational result for Contact over FY2017. Note that the indicators of 'Net Profit margin' and 'MDRT' still favour Mercury Energy though. Yet despite being relatively weaker, Contact is still in a strong position given the relative security of cashflows in the energy markets in which it operates.

As I write this both shares are trading below their September 30th valuations ( CEN is $5.35 and MCY is $3.22. ) This means the the variations from my fair value are a 4.1% discount (CEN) and a 13.0% premium (Mercury). The Mercury premium is not sufficient to make me sell up though. I rather like the fact that of late when Mercury has had a good year it has not been so good and Contact and vica versa. Holding both seems to have given me a natural hedge against fluctuating values in the electricity market.

SNOOPY

[Snoopy]

My normalised 'eps' figure for Contact Energy is a whole of business cycle figure. I have deemed FY2009 as the start of the representative electricity market from here on in.



Financial YearCEN Normalised epsMCY Normalised eps


200927.0cps


201025.3cps


201122.4cps11.5cps


201224.6cps10.8cps


201327.5cps10.5cps


201427.1cps13.3cps


201522.0cps10.1cps


201622.2cps10.3cps


201718.7cps12.0cps


Multi Year Average24.1cps11.2cps



CEN Business Cycle share Price Average Value:

= 24.1c / ( 0.72 x 0.06) = $5.58 (based on a 6% gross desired earnings yield before tax). This is the 'fair value' as published in the adjacent table.

MCY Business Cycle share Price Average Value:

= 11.2c / ( 0.72 x 0.06) = $2.59 (based on a 6% gross desired earnings yield before tax). This is the 'fair value' as published in the adjacent table.

$2.59 x 1.1 = $2.85 (see post 887 MCY thread "FY2016 Gross earnings yield valuation (Part 2)")

[fish]

snoopy my 2 biggest holdings are mercury first then contact so obviously I admit bias towards mercury.
You have analysed the past but I look more to what is happening now and the future.
CEN losing customers,mercury gaining.
SI prices for power much lower than NI.
Mercury is having a bumper year and they are very green with very cheap to produce hydro near to Auckland.
A valuation should mention all the factors