Contact Energy - CEN Chart

[BlackPeter]

The Administrator and owner of ST has asked people not copy & paste full texts from articles on access controlled sites They can get into trouble if this site is used for such plagiarism but posting a paragraph with a link to the article or referencing where it is taken from, seems to be OK. Subscribers of the Herald or other websites, are also breaking the law by doing so.

New Zealand copyright laws apply. It is not o.k. to publish anything copyrighted without consent of the copyright owner, however under the "fair use-rules" (fairly used from Consumer NZ) is it allowed to:


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A court decision some years ago limited "fair use" according to the above rules to not more than 10% of the original ...

[trader_jackson]

https://www.nzx.com/announcements/357656

Today's results confirm the dividend is simply not sustainable... they are paying out 97% of free cash flow... How the dividend will increase in the near future is beyond me, and the dividend is one of the few things supporting the current fairly high share price.

[tango]

https://www.nzx.com/announcements/357656

Today's results confirm the dividend is simply not sustainable... they are paying out 97% of free cash flow... How the dividend will increase in the near future is beyond me, and the dividend is one of the few things supporting the current fairly high share price.

I am just happy that a dividend is being paid!

As to the future… From what I’ve seen outlined in the annual report contact energy is on the right track. I’m happy to continue holding

[bull....]

I am just happy that a dividend is being paid!

As to the future… From what I’ve seen outlined in the annual report contact energy is on the right track. I’m happy to continue holding

i mentioned on the power shares thread a while ago that peak dividends had been met , but the fact they are able to maintain them in a bad year is truely a reflection of a well run company.

[trader_jackson]

i mentioned on the power shares thread a while ago that peak dividends had been met , but the fact they are able to maintain them in a bad year is truely a reflection of a well run company.

Not sure borrowing to pay dividends is a reflection of a "well run" company...
Gearing was 31.4% at 30 June 2020, up from 28.3% at 30 June 2019, and $46m more was borrowed in FY20. It was either cut the final dividend by about a third, or borrow more... the "well run" company decided to borrow more. Not sure borrowing more and more to pay increasing (or even maintain) dividends is a great thing long term for a utility...

[bull....]

Not sure borrowing to pay dividends is a reflection of a "well run" company...
Gearing was 31.4% at 30 June 2020, up from 28.3% at 30 June 2019, and $46m more was borrowed in FY20. It was either cut the final dividend by about a third, or borrow more... the "well run" company decided to borrow more. Not sure borrowing more and more to pay increasing (or even maintain) dividends is a great thing long term for a utility...

46m was borrowed for investments so that is good borrowing

[trader_jackson]

46m was borrowed for investments so that is good borrowing
But they could have paid a smaller dividend and not needed to borrow anything?
Nice spin that is for sure.
I note market consensus was (an already low) $459m EBITDA... actual came in at $451m... bit like borrowing to fund dividends, not sure how the market would view this as good news, but maybe.

[bull....]

But they could have paid a smaller dividend and not needed to borrow anything?
Nice spin that is for sure.
I note market consensus was (an already low) $459m EBITDA... actual came in at $451m... bit like borrowing to fund dividends, not sure how the market would view this as good news, but maybe.

guess they could have paid a smaller dividend if they wanted to save lots of money , but whats the point it would be detrimental to the company when they dont need too. in fact all the power companies dont need to save lots of money at this point in time as ther is no need for very large capital investments .

[iceman]

https://www.nzx.com/announcements/357656

Today's results confirm the dividend is simply not sustainable... they are paying out 97% of free cash flow... How the dividend will increase in the near future is beyond me, and the dividend is one of the few things supporting the current fairly high share price.

I topped up a little recently on the assumption we will have 30c annual dividend in the next few years, which I think will be sustainable. That is still a pretty good return in today's world

[see weed]

It is still going on, end of day shenanigans. Have been buying in bits and pieces on close the last couple of days to get av. price down and hopping they don't drop the div too much. The yld is looking good at 6% plus. Best time to buy is on close lately, but will probably do the opposite tomorrow. Anyone on here topping up at these lower levels?
From post 1700--14/7/20. Closing price that day $5.60c. Am happy with that little gamble and looking forward to nice big divy soon:).

[tomm]

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12355074
While both the Government and Meridian pointed to the finality of the decision, analysts have speculated that constraints in the transmission network, which could force Meridian and Contact Energy to have to spill water from South Island hydro stations for several years, could set conditions for the closure to be delayed for several years.

"Meridian has put a confidential proposal to NZAS with the objective of allowing NZAS to close down the smelter over a longer period of time - Meridian has proposed up to four years," the company told the NZX.
"To date that proposal has not been accepted and Meridian's current expectation is that the smelter will close on 31 August 2021 as previously announced by NZAS."

[dibble]

Not sure borrowing to pay dividends is a reflection of a "well run" company...
Gearing was 31.4% at 30 June 2020, up from 28.3% at 30 June 2019, and $46m more was borrowed in FY20. It was either cut the final dividend by about a third, or borrow more... the "well run" company decided to borrow more. Not sure borrowing more and more to pay increasing (or even maintain) dividends is a great thing long term for a utility...

Following that logic should any company with long term debt pay a dividend? The gearing is usually what contributes to such a large div, CEN's ROE is roughly 6% so borrow at 3-4% then increase dividend and hope nothing goes wrong with cashflow (that services the debt).

[tomm]

Contact reported a drop in its net profit to $125 million in the year to the end of June.
That was down from a $345m profit the previous year, when its result was boosted by a $170m gain from the sale of its Rockgas business and its Ahuroa gas storage facility.
Its underlying profit from continuing operations was down 22 per cent at $129m.

[see weed]

Contact reported a drop in its net profit to $125 million in the year to the end of June.
That was down from a $345m profit the previous year, when its result was boosted by a $170m gain from the sale of its Rockgas business and its Ahuroa gas storage facility.
Its underlying profit from continuing operations was down 22 per cent at $129m.
That is what is written. The question is-- Are you looking forward to your nice big juicy 23c div:t_up: ? I know I am:D.

[RTM]

That is what is written. The question is-- Are you looking forward to your nice big juicy 23c div:t_up: ? I know I am:D.

Yes...I am looking forward to my dividend. Its a beauty. I am not an accountant (as I am sure my questions shows) and I have a couple of questions, can anyone help ?

I see they have paid out $280mil in Dividends for the year.
I also see these three statements:
Free cash flow of 290million..sounds good, lots of money.
Generated profit of $125 million EBITDAF (I'm ok with what EBITDAF means )
Continuing operations of 451 Million.
Where is the divi paid from. Is the profit of 125mil after the dividend has been paid ?

Anyone got a quick description of "Continuing operations of 451 Million " ?

[tomm]

Yes...I am looking forward to my dividend. Its a beauty. I am not an accountant (as I am sure my questions shows) and I have a couple of questions, can anyone help ?

I see they have paid out $280mil in Dividends for the year.
I also see these three statements:
Free cash flow of 290million..sounds good, lots of money.
Generated profit of $125 million EBITDAF (I'm ok with what EBITDAF means )
THIS IS WHY:

Davies said Contact's result was reasonably solid, ‘’no real surprises and although some were picking a little bit of a cut in dividend, that has been maintained. Obviously in this environment, if you can keep paying dividends than investors are going to be happy'’.
Continuing operations of 451 Million.
Where is the divi paid from. Is the profit of 125mil after the dividend has been paid ?

Anyone got a quick description of "Continuing operations of 451 Million " ?
THIS IS WHY:

Davies said Contact's result was reasonably solid, ‘’no real surprises and although some were picking a little bit of a cut in dividend, that has been maintained. Obviously in this environment, if you can keep paying dividends than investors are going to be happy'’.

[macduffy]

Yes...I am looking forward to my dividend. Its a beauty. I am not an accountant (as I am sure my questions shows) and I have a couple of questions, can anyone help ?

I see they have paid out $280mil in Dividends for the year.
I also see these three statements:
Free cash flow of 290million..sounds good, lots of money.
Generated profit of $125 million EBITDAF (I'm ok with what EBITDAF means )
Continuing operations of 451 Million.
Where is the divi paid from. Is the profit of 125mil after the dividend has been paid ?

Anyone got a quick description of "Continuing operations of 451 Million " ?

No, profit is calculated before the dividend is paid.

"Continuing operations " describes just that, as distinct from operations that were discontinued (sold, closed down or otherwise disposed of ) during the year.

[RTM]

No, profit is calculated before the dividend is paid.

"Continuing operations " describes just that, as distinct from operations that were discontinued (sold, closed down or otherwise disposed of ) during the year.

Thank you Macduffy. That is what I thought.
So profit of 125mil
And after that they paid out 280mil in dividends.
Doesn't sound ideal to my way of thinking.

Very simply...if I had a company and it made a profit of 50,000....and I paid out 100,000 in dividends, doesn't feel like my company would be very solvent.
Realise it is perhaps a bit more complex than that.

RTM

[Snoopy]

Thank you Macduffy. That is what I thought.
So profit of 125mil
And after that they paid out 280mil in dividends.
Doesn't sound ideal to my way of thinking.

Very simply...if I had a company and it made a profit of 50,000....and I paid out 100,000 in dividends, doesn't feel like my company would be very solvent.
Realise it is perhaps a bit more complex than that.


Just to explain the 'bit more complicated ' bit.

All working assets on the books are subject to depreciation and in the case of hydro-dams themselves this is usually done over 100 years. However, this does not mean such a dam will need rebuilding in 100 years. Indeed it may last 2,000 years. That means the depreciation on the books is excessive, which in turn means the real underlying profit, which can be approximated by cashflow, is rather greater than the declared profit as dictated by accounting standards.

The other thing working in favour of something like a hydro dam is that the marginal profitability of the whole power generating grid is determined by the just built most recent addition to the power generation network. A hydro dam built with the labour costs of, say, 50 years ago and which pays nothing for borrowing water to generate its power can suddenly become hugely more profitable in these circumstances. Some power generators revalue their long life generation assets frequently to take into account this increased profitability, (although Contact has chosen not to do this of late). So in the case of Contact there are hundreds of millions of dollars in asset revaluations that could be brought onto the balance sheet if they ever looked like running out of borrowing capacity.

SNOOPY

[horus1]

Snoopy the trouble is that the cost of solar is a lot cheaper than present prices especially for domestics who have been ripped of for years. If you do the solar yourself the payback is low, say 5 years . Industry do not believe this but those that have solar do.

[Snoopy]

Snoopy the trouble is that the cost of solar is a lot cheaper than present prices especially for domestics who have been ripped of for years. If you do the solar yourself the payback is low, say 5 years . Industry do not believe this but those that have solar do.


The problem with solar is that unless you are completely 'off grid', you will still have to pay the Transpower and Local Lines company line charges that makes up 2/3 of your energy bill. (You will also be offered a measly price for any surplus power you want to put back into the grid). The real issue is that you will be paying for the grid infrastructure and your own solar infrastructure (the storage battery is the biggie) which makes solar less than competitive.

The other problem is that the grid operators need to maintain their infrastructure and someone generating their own power on site won't help do that. So some lines companies charge those with solar panels a special higher charge rate for the energy that these 'solar pioneers' extract conventionally from the grid, all to make solar less economic. In summary, the entrenched power bureaucracies don't want larger scale distributed solar energy to get a foothold in NZ and will use pricing signals to discourage it.

SNOOPY

[kiwitrev]

https://a.msn.com/r/2/BB17Q3np?m=en-nz&referrerID=InAppShare

[BlackPeter]

The problem with solar is that unless you are completely 'off grid', you will still have to pay the Transpower and Local Lines company line charges that makes up 2/3 of your energy bill. (You will also be offered a measly price for any surplus power you want to put back into the grid). The real issue is that you will be paying for the grid infrastructure and your own solar infrastructure (the storage battery is the biggie) which makes solar less than competitive.

The other problem is that the grid operators need to maintain their infrastructure and someone generating their own power on site won't help do that. So some lines companies charge those with solar panels a special higher charge rate for the energy that these 'solar pioneers' extract conventionally from the grid, all to make solar less economic. In summary, the entrenched power bureaucracies don't want larger scale distributed solar energy to get a foothold in NZ and will use pricing signals to discourage it.

SNOOPY

You make this sound as if there is some evil conspiracy against decentralised solar. It is not. The cost of maintaining the network are real and it makes sense to make everybody who benefits from the network (including the solar pioneers) pay for it.

Who else in your view should pay for the network if not its beneficiaries?

[Snoopy]

Snoopy wrote
"In summary, the entrenched power bureaucracies don't want larger scale distributed solar energy to get a foothold in NZ and will use pricing signals to discourage it."

You make this sound as if there is some evil conspiracy against decentralised solar. It is not. The cost of maintaining the network are real and it makes sense to make everybody who benefits from the network (including the solar pioneers) pay for it.

Who else in your view should pay for the network if not its beneficiaries?


My answer was in the context of horus's comment on solar energy being cheaper. Sometimes it is easier to see points of argument if you consider what will happen in the extreme.

Let's say every household in Christchurch (for example) put in solar panels with an energy storage battery. In this case the power load could be spread evenly over 24 hours. As Southpower the network owner, you might find you could redesign your sub stations with switches and breakers with a brief to be around half the current loading they have now. Other components in the system might be subject to less heat stress too. The wire in power lines could be a smaller diameter. Equipment used to raise such lines into place could be smaller. There is a whole cascade of savings that could ripple through the Southpower grid if it was constructed along these lines, Except - such a change would require all consumers to get on board. And that includes cash strapped landlords having to fit out all their tenanted properties with solar panels and power storage batteries. It isn't going to happen.

The current grid was set up prior to the few solar panels that were around being anything other than off peak water heaters. If the Southpower grid was set up today from scratch, and consumers were able to benefit from a capital light grid by agreeing to pay for solar and/or micro-wind turbine fuelled battery storage packs in their houses -at very low interest rates-, then I am sure that everyone would be better off. The problem is we are stuck with a 'legacy' grid, and no obvious pathway to move to something more 2020 and beyond friendly. The conspiracy (your words) to retain the current twentieth century electricity system is because of historical factors that ensured the local power grid was constructed in a certain way to give resilience at peak demand times. It is an accident of historical circumstance that drives today's network pricing policies, not corporate malevolence.

So to answer your question, yes 'solar pioneers' should pay a higher price for power units drawn from the grid that other users if the legacy grid structure is to be maintained. But should the legacy grid structure be maintained? By charging solar battery pack users more, are you not subsidising long term network inefficiency?

SNOOPY

[horus1]

I am sorry but the line cos have to act naturally and take write offs and they should have been taking accelerated depreciation years ago. If THEY DONT MANY CUSTOMERS WILL LEAVE THE NETWORKS as is happening in AU. Have a look at BOSCH and their 10 KW stand alone fuel cell . That allows independence .

[BlackPeter]

...

Let's say every household in Christchurch (for example) put in solar panels with an energy storage battery. In this case the power load could be spread evenly over 24 hours. As Southpower the network owner, you might find you could redesign your sub stations with switches and breakers with a brief to be around half the current loading they have now. Other components in the system might be subject to less heat stress too. The wire in power lines could be a smaller diameter. Equipment used to raise such lines into place could be smaller. There is a whole cascade of savings that could ripple through the Southpower grid if it was constructed along these lines, Except - such a change would require all consumers to get on board. And that includes cash strapped landlords having to fit out all their tenanted properties with solar panels and power storage batteries. It isn't going to happen.
...

SNOOPY

Great example. Batteries might be able to buffer a day or so of typical house hold consumption if it is gray and cold ... but not more. Take your scenario above and put Christchurch into one of these bloody cold and grey winter months with sometimes weeks of little or no sunshine. Give it a day or so and the grid will need to supply 100% of peak load due to solar not supplying and batteries already flat. This is the problem with all these decentralised solar systems (well, in our region) - no matter how much you invest into them, you still need to dimension the network to be able to provide peak load without any solar supplement. Same wires, same transformer capacity, same switch load, all the same at peak, just less average use of the equipment (maybe none in summer, which adds some more problems). No savings for network providers, just less consumed units paying for the service ... i.e. network cost (per kWh) will rapidly rise thanks to solar.



...

So to answer your question, yes 'solar pioneers' should pay a higher price for power units drawn from the grid that other users if the legacy grid structure is to be maintained. But should the legacy grid structure be maintained? By charging solar battery pack users more, are you not subsidising long term network inefficiency?

SNOOPY

Good question - and probably larger than this thread. Personally do I not see any economic method to reduce in our regions the peak load on the network (s. above) - i.e. no matter what we do, the network will need to stay as it is (no savings to distribute) unless we manage e.g. to move heating over to to other forms of energy ...

I love my wood burner :p;

[Snoopy]

Great example. Batteries might be able to buffer a day or so of typical house hold consumption if it is gray and cold ... but not more. Take your scenario above and put Christchurch into one of these bloody cold and grey winter months with sometimes weeks of little or no sunshine. Give it a day or so and the grid will need to supply 100% of peak load due to solar not supplying and batteries already flat. This is the problem with all these decentralised solar systems (well, in our region) - no matter how much you invest into them, you still need to dimension the network to be able to provide peak load without any solar supplement. Same wires, same transformer capacity, same switch load, all the same at peak, just less average use of the equipment (maybe none in summer, which adds some more problems). No savings for network providers, just less consumed units paying for the service ... i.e. network cost (per kWh) will rapidly rise thanks to solar.

Personally do I not see any economic method to reduce in our regions the peak load on the network (s. above) - i.e. no matter what we do, the network will need to stay as it is (no savings to distribute) unless we manage e.g. to move heating over to to other forms of energy ...

I love my wood burner :p;


Heating (as in space heating) is likely the biggest component of your power bill, at least for those of us who do not have a wood burner ;-). But actually cooking in the evening is, I think, the largest immutable power peaking ingredient, at least for those of us who do not have gas cookers. Remember the old night store heaters? Pretty crude devices, basically bricks in a box, but very effective in taking off-peak energy and letting it radiate out the following day. Day after day of grey did not stop them doing their heating job every Christchurch winter's day. I am pretty sure the 'crossover' use of electric vehicles is coming. Those original Nissan Leafs had 24kWh batteries. After ten years lets say the battery in a 2010 Nissan Leaf now only holds 20kWh of energy. That would be enough to run a 2kW heater for 10 hours. OK you wouldn't heat a whole house with that. But if you used that same energy input for a heat pump, you would run a 6kW heat pump for 10 hours. I think many homes could be warm enough with that. You can buy those early Leafs for around $10k-$12k. Sure the driving range might be down to 80km or so. But 80km is OK for running around the city. As a battery with a secondary role as a shopping basket, I think a NIssan Leaf could make sense to a lot of households. Plus you could could fully charge an early Leaf up at night in around 10 hours using a conventional three pin plug. Sounds like a 'becoming more economic' option to reduce peak loads to me.

SNOOPY

[see weed]

Three bus. days left before ex div on 26/8/20. Am looking forward to nice big juicy 23c div. The 6%+ yld is much better than the banks. To get the div you have to buy in by 5pm on 25/8/20.:t_up:

[Beagle]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/357656/328001.pdf

Not trying to rain on anyone's parade and acknowledge there's a very juicy dividend 23 cps 65 % imputed due shortly and they will pay good level's of dividends going forward at vastly more than term deposit rates but at what level ?
Page 43 could be of significant of interest to dividends hounds. The title of the page suggests there could be a material cut to future dividends.

I am curious what shareholders expectations are in terms of the total amount of dividends per annum going forward ?
(Note average analyst forecast from market screener is 34 cents for FY21 and 33 cents for FY22 and FY23).

[BlackPeter]

...

I am curious what shareholders expectations are in terms of the total amount of dividends per annum going forward ?
(Note average analyst forecast from market screener is 34 cents for FY21 and 33 cents for FY22 and FY23).

They say it is difficult to predict things, particularly if they are in the future ;);

However - if you can give us an accurate prediction of how Rio's arm wrestling (bully games?) in Southland will play out plus a correct weather forecast for the next decade (with particular focus on rain and wind events) than it will be easy to predict Contacts future dividends, won't it?

I did accumulate some Gentailers (including CEN) during the time their SP's moved below the MA400 - but not because I think I am able to predict the future dividends, but because I expected that the income coming from them is likely to be better than the income coming from bonds or similar ... which - btw is likely to support the share price as well. Nice bonus.

I have no clue how Rio's one-sided arm wrestling will end (though it might be worthwhile to look at the outcome of Rio's previous bully games ... difference now is that the current government does not like to be bullied, good on them) nor what the weather will do (though it is probably a fair assumption that strong rain events in the catchment areas as well as strong wind events for the wind farms will increase, which might be good or bad for CEN), but I expect electricity markets apart from a potential (short) Rio shock to grow.

NZ population growing faster than ever (still more than 1 million overseas Kiwis waiting to return :) and with fossil fuel consumption dropping electricity consumption will go up.

Just one of these things - utilities sell something people need - and it is hard for them to do bad in a growing market particularly given dropping interest rates. Not worrying about next years dividends, but pretty sure that share holder value (divvies plus capital growth) will go up over the years to come.

For what its worth: historical PE for CEN is slightly below 30, but given that they pay dividend out of the cashflow - their historic dividend yield was better (around 20 - or 5%). Forward PE seems to move closer to 40 (but I don't think the analysts know more than us), so I recon future dividend yield might drop to something like 3.5%, which would make sense it times of negative interest rates;

In my view a good time to invest some money into utilities as part of a diversified portfolio ...

[Beagle]

Cool answer mate but I am a genius and I have sniffed the breeze with my long range super sniffer beagle nose and I can predict the weather for the next ten years with 100% accuracy, it will be changeable ;)

Even if future year dividends are 30 cps on a gross basis inclusive of imputation credits that's 5.7%.

I think there's an absolute tsunami of money that's going to be looking for safe yield in the share market as term deposit's mature and people spit the dummy with accepting 1% from their bank for reinvestment.

Any deal on an orderly exit regarding Tiwai would be rocket fuel for this sector which in my opinion has fully priced in a complete closure next year.

I prefer GNE's yield of ~ 8% gross.

[RTM]

I prefer GNE's yield of ~ 8% gross.

Its not one or the other. You can own both and maybe weight according to your preference.
Agree, there is a tsunami of cash looking for a home right now. I have some if it.

[iceman]

Its not one or the other. You can own both and maybe weight according to your preference.
Agree, there is a tsunami of cash looking for a home right now. I have some if it.

Totally agree with that RTM. I think a mixture of GNE, CEN and MCY in whatever proportions one likes, is a good strategy ATM. All 3 in my view will pay very reasonable dividends (5-8%) in the next few years despite Tiwai closure. I would be surprised if we don't see Government (Whether Labour or National) lead incentivised discussions with the likes of Fonterra and others to stop using coal and change their factories to our abundant clean electricity post Tiwai.

[Beagle]

Fair enough guys.

For those interested in the maths here's what it looks like for CEN.
I have used the average forecast figure of 33 cps future dividends off market screener and assumed 65% imputation credits and that an investor looking at this now is treating the almost imminent dividends of 23 cps as a partial return of the purchase price.

Looking at the medium term yield.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield

[macduffy]

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.


In theory, yes. But I have a problem with "netting" the purchase price. If one spends the div, as income, it seems strange to also treat it as a deduction from the purchase price. Having one's cake and eating it too?

;)

[Beagle]

In theory, yes. But I have a problem with "netting" the purchase price. If one spends the div, as income, it seems strange to also treat it as a deduction from the purchase price. Having one's cake and eating it too?

;)

Just my own "dogged" way of trying to get the yield to me as a possible new investor as accurate as possible. Doubt you'll find my methodology in any investment textbook ;)

[limmy]

Fair enough guys.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield
I acted on this good tip yesterday Mr Beagle, and doubled up my holding in CEN at $6.36. I'm glad I did cos it's now going at 8 to 10c higher this morning. Thanks Mr. Beagle.

[see weed]

I acted on this good tip yesterday Mr Beagle, and doubled up my holding in CEN at $6.36. I'm glad I did cos it's now going at 8 to 10c higher this morning. Thanks Mr. Beagle.
Yes, thanks Mr Beagle. Good buying in the last month. Look at the one month chart. Up 76c plus,:t_up: and a 23c div coming very soon.

[Snoopy]

Time to update Contact's restated FY2018 dividend policy, to pay out 100% of free cashflow, from an FY2018 ten year perspective.



FY2009FY2010FY2011FY2012FY2013FY2014FY2015FY2016FY 2017FY2018


Cashflows from Operating Activities$425m$368m$379m$440m$469m$446m$490m$556m $508m$457m


less Stay in Business CAPEX($103m)($76m)($180m)($98m)($116m)($46m)($63m) ($87m)
($116m)($78m)


less Net Interest Costs($63m)($56m)($62m)($72m)($66m)($77m)($98m)($1 01m)($92m)
($84m)


equals Operating Free Cashflow$259m$236m$137m$270m$287m$323m$329m$368m
$299m$295m


Operating Free Cashflow x 1.0$259m$236m$137m$270m$287m$323m$329m$368m$299m$2 95m


Dividend per Share (based on 716m shares on issue)36cps33cps19cps38cps40cps45cps46cps51cps42cp s41cps



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.

Annoyingly between FY2017 and FY2018, the definition of 'Stay In Business' (SIB) Capital Expenditure seems to have changed slightly.

Over FY2017 there were three classes of CAPEX;
'Generation TTC', 'Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement

Here TCC stands for the 'Taranaki Combined Cycle' Plant at Stratford. Contact had a plan for a now $50m do-over, with a revised start date in November 2017. Despite the later than anticipated on the ground start, the expenditure for this was budgeted for over FY2016, FY2017 and FY2018. The Stratford generator has undergone its fifth big refurbishment and that will see it through to 2022. Every 25,000 operating hours the turbine needs new blades. The TCC Station tyoically generates power for three to five months a year during the months of peak demand.

Over FY2018 there were only two classes of CAPEX;
''Customer and Corporate' and 'Generation Plant Maintenance and Continuous Improvement.

The forecast total CAPEX for FY2018 from the Annual Result Presentation in FY2017 does not appear to have varied from the actual CAPEX for FY2018 This suggests that the 'TCC refurbishments' have now been combined with the formerly separate 'Stay in Business' (SIB) category of capital expenditure. Oddly in another exposition of detail, CEN now make a distinction between 'accounting capex' and 'Cash Spend SIB capex.' I cannot explain this. But the result is the 'cash SIB capex' for FY2018 is now greater than the 'Total Capex'' for FY2018! (Refer to AGM Presentation 2018 p28 and AGM Presentation 2017 p26).

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 716m shares were on issue at the end of each year over the last ten 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 weather events and demand from the last ten years over the current dividend policy. Effectively we are modelling an array of ten possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect.


Time to look at a ten year scenario analysis. This analysis takes the current dividend policy and looks back to see what level of dividend might have been expected had that policy been in place for all of the last ten years, This involves using actual 'Cashflow from Operational Activity', 'Stay in Business Capital Expenditure' and 'Net Interest Costs'. In my view using as much real data as possible is preferable when investigating these scenarios.



FY2011FY2012FY2013FY2014FY2015FY2016FY2017
FY2018FY2019FY2020


Cashflows from Operating Activities$379m$440m$469m$446m$490m$556m$508m$457m $466m$390m (1)


less Stay in Business CAPEX($180m)($98m)($116m)($46m)($63m)($87m)
($116m)($78m)($60m)($52m)


less Net Interest Costs($62m)($72m)($66m)($77m)($98m)($101m)($92m)($ 84m)($70m)($55m)


equals Operating Free Cashflow$137m$270m$287m$323m$329m$368m
$299m$295m$336m$283m



Operating Free Cashflow (OFC) x 100%$137m$270m$287m$323m$329m$368m
$299m$295m$336m$283m


Modelled Dividend per Share (based on 718m shares on issue)19cps38cps40cps45cps46cps51cps42cps41cps47cp s39cps



Actual Dividend per Share (based on 100% of OFC payout policy)39cps39cps


EBITDAF-DA-I-T (Normalised NPAT)$156m$177m$202m$199m$161m$159m
$134m$131m$175m$127m


Normalised eps (based on 718m shares on issue)21.7cps24.7cps28.1cps27.7cps22.4cps22.1cps18 .7cps18.2cps24.3cps17.7cps



The policy to declare dividends of 100% of operating free cashflow (OFC) was announced in AR2018 in time for the Financial Years of 2019 and beyond. So why was only 82% of OFC paid out for FY2019? As explained in the FY2019 investor briefing from August 11th p8, the plan is to pay out 100% of OFC in a mean hydrological year, further corrected for abnormal plant maintenance requirements and volatile market conditions. So the '100% payout of Operating Free Cashflow' policy is not quite as simple as it sounds. Water inflows over FY2019 were way above average. Water inflows over FY2020 returned nearer to average although not in the way you might expect. From the integrated report for FY2020 p6:

"We also had an unusual hydrology sequence where the Clutha River experienced periods of extremely low inflows and a one in 20 year flood."

So FY2020 is the first year that has produced the dividend payment that the AR2018 announced headline dividend policy promised. If Contact get a year of bad hydrology, will they borrow to make the dividend up to the level previously promised for an average year? That part of the payout 100% of OFC policy is yet to be tested.

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

Another point of note is that I am assuming exactly 718m shares were on issue at the end of each year over the last ten 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 weather events and demand from each of the last ten years over the current dividend policy?"

Effectively we are modelling an array of ten possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect. Yet history cannot model future macroeconomic changes, and Chair Robert McDonald delivered this rather ominous warning to shareholders on p5 of Contacts 'Integrated Report' for FY2020.

"It is particularly pleasing to deliver investors the same 39cps annual dividend this year as last year. However as we look forward to a likely period of disruption in the industry, we will need to reconsider the level of future dividends as the status of Tiwai is cemented and mitigations emerge."

The Tiwai Point aluminum smelter, based in Bluff, uses around 13% of New Zealand's generated power. If it were to close, there is not enough Transpower infrastructure reserved to transfer all the surplus power from Contact's Central Otago located Roxburgh and Clyde dams north. So we could see some surplus power go down the dam spillways after August 2021, if Tiwai does indeed close on that date. And that could lead to a permanent rethink on what constitutes an 'average hydrological year', with a consequential negative effect on future Contact Energy dividends.

(1) If all this wasn't complicated enough, it appears the definition of 'Operating Cashflows' has slightly changed between FY2019 and FY2020. If you look in the respective 'Cashflow Statements' for AR2019 and AR2020, you will see that 'Operating Cashflow' for FY2019 is listed as $466m in the former and $401m in the latter. Why the difference? In FY2020 the FY2019 figure has been reduced by a net interest figure of $69m -$4m = $65m. In AR2019 the 'interest paid' is reported in 'Financing cashflows' and the 'interest earned' is reported under 'Investing cashflows'. For consistency I am using the earlier definition of cashflows in the above table, with no interest charges deducted or added. This explains why 'Operating Cashflows' for FY2020 are listed as $390m in my table, but only $341m in the FY2020 Integrated Report.

SNOOPY

[Snoopy]

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 imputation credits.

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.

So an important question arises: How do you value a dividend that is only partially imputed?


Below is a copy of my latest (7th April 2020) Contact Energy dividend statement, normalised down to one share.



Security Description
Participating Holding
Payment Rate
Declared Dividend
Supplementary Dividend
Withholding Tax
Imputation Tax Credit
Gross Taxable Dividend
Net Payment


Fully Paid Ordinary Shares
1
0.16
0.16
0.00
0.0267
0.0388
0.1988
0.1333



If the dividend had been 'fully imputed' (which means 28% of company tax has already been deducted) then the gross income would have been: 16c / (1-0.28) = 22.22c. Thus the imputation credits would have been: 22.22c - 16c = 6.22c. But of course the actual dividend declared only 3.88c of imputation credits, because it was only partially imputed.

If 6.22c represents 100% imputation, then 3.88c represents: 3.88c/6.22c = 0.624 or 62.4% imputation.

My dividend statement says, "Your dividend has been partially imputed to 19.55%". That is well out of line with my calculation. But there is another way of looking at the situation.

If we regard a 28% imputed credit as 'full imputation', then a 19.55% imputation rate would represent: 19.55%/28% = 69.8% of a fully imputed dividend. That is more than the 62,4% I calculated, so someone has still got it wrong. Can anyone out there figure out if it is I or Contact?

SNOOPY

[Ferg]

Snoopy, the gross dividend is 19.88c. The IC's are 3.88c. 3.88c / 19.88c = 19.5%. By re-basing using 28% full IC's you are moving the base hence the maths doesn't work - you have calculated a theoretical gross based on IC's that are not being delivered - so you are comparing 22.22c with 19.88c. A pre-RWT dividend of 16c with 19.5% IC's implies a gross dividend of .16/(1-0.195) = 19.88c, which agrees to their statement.

[Ferg]

Also, 3.88/6.22 = 62% imputation is correct per your note. If we look at the gross dividend of 19.88/22.22 = 89%. .62/.89 = 69% per your later calculation of 19.5/28 = 69%.



Pre RWT
IC's
Gross
IC%


16.00
3.88
19.88
19.52%


16.00
6.22
22.22
27.99%


100.00%
62.38%
89.47%
69.72%










69.72%

[Snoopy]

I'm a bit slow with this Ferg, so I am reformatiting your data so that it becomes blindingly obvious, even to me.




Dividend Alternative Scenarios
Dividend Declared
plus Imputation Credits {A}
equals Gross Dividend {B}
Imputation Credits as %ge of Gross DividendI {A}/{B}


Partially Imputed 07-04-2020
16.0000c
3.8888c
19.8888c

19.55%


Fully Imputed
16.0000c
6.2222c
22.2222c
28.00%


Partial to Full Ratio
100%
62.50%
89.50%
69.82%



The figure in italics is the one Contact refer to on the dividend statement when they say: "Your dividend has been partially imputed to 19.55%."

Extending the number of decimal places has fixed the rounding error on the 'partially imputed percentage' in post 1792. It didn't occur to me to compare the imputation credits with the gross income because the gross income changes with the imputation credit whereas something like the net income of 16c does not. In fact I took a different path entirely by comparing 'imputation credit' with 'imputation credit' directly across the partial to full scenario. I guess what this table shows is that it is possible to compare two different dividend scenarios in many different ways. And what I think is the logical way to do things might not be the right way for Contact to do it. Thanks Ferg for putting me on the right track and finally allowing me to get my head around all of this!

SNOOPY

[Ferg]

You're welcome. In the end you were both right, you were just measuring different things.

I had forced mine to 2 decimal places hence some of the funky numbers.

[Snoopy]

Below I present my corrected earnings picture for the last ten 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 100% 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) difference 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)


200922.2c36.0c-13.8c13.8c3.9c18.3c


201021.4c33.0c-11.6c11.6c3.2c18.2c


201121.8c19.0c+2.8c0c0c19.0c


201224.7c38.0c-13.3c13.3c3.7c21.0c


201328.2c40.0c-11.8c11.8c3.3c24.9c


201427.8c45.0c-17.2c17.2c4.8c23.0c


201522.5c46.0c-23.5c23.5c6.6c15.9c


201622.2c51.0c-28.8c28.8c8.1c14.1c


201718.7c42.0c-23.3c23.3c6.5c12.2c


201818.3c41.0c-22.7c22.7c6.4c11.9c


Total227.8c391.0c178.5c



The expected average dividend per year, net of tax is therefore: 178.5 / 10 = 17.5cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 17.5cps /(1-0.28) = 24.3c

If we assume that a business cycle investment 'gross return' of 5.5% is required, then this equates to a CEN share price of:

24.3c /0.055 = $4.42

So $4.42 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 $4.42 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.

$4.42 x 1.2 = $5.30

Contact Energy is trading at $6.79 as I write this post. This technique would suggest that Contact Energy is now significantly overvalued (28% above fair valuation). But does a capitalised dividend valuation give the full picture?



Below I present my corrected earnings picture for the last ten 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 100% of free cash flow being paid into the foreseeable future. Howewver, in the two years this policy has been in existence, only 39cps has been paid out. So where the 100% of operating free cashflow exceeds that figure I have capped the dividend payout to 39cps.
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) difference is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column (Column D) represents the 'effective' dividend per share adjustment for any extra tax obligation from paying tax on unimputed distributions.



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


201121.7c19.0c+2.7c0c0c19.0c


201224.7c38.0c-13.3c13.3c3.7c21.0c


201328.1c39.0c-10.9c10.9c3.1c25.0c


201427.7c39.0c-11.3c11.3c3.2c24.5c


201522.4c39.0c-16.6c16.6c4.6c17.8c


201622.1c39.0c-16.9c16.9c4.7c17.4c


201718.7c39.0c-20.3c20.3c5.7c13.0c


201818.2c39.0c-20.8c20.8c5.8c12.4c


201924.3c39.0c-14.7c14.7c4.1c20.2c


202017.7c39.0c-21.3c21.3c6.0c11.7c


Total225.6c (E)369.0c (F)182c


Business Cycle Imputation Rate (E)/(F)61.14%

.

The expected average dividend per year, net of tax is therefore: 182 / 10 = 18.2cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 18.2cps /(1-0.28) = 25.3c

Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream, albeit not quite a 'bond equivalent'. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the previously unthinkable is happening in that the Tiwai Point aluminium smelter is closing, and the power market is consequently in a state of flux as to how particularly Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh while transmission north is constrained. To balance these competing factors, I have assessed that a gross return of 4.5% iThe bulk of these tax credits came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the first quoted post on this thread of 71.64% (post 1799) as now appropriate for Contact Energy.

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

25.3c /0.045 = $5.62

So $5.62 is therefore 'fair value'.

Readers should note that $5.62 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.

$5.62 x 1.2 = $6.74

Contact Energy is trading at $6.25 as I write this post. This technique would suggest that Contact Energy is now 11% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

But does a 'capitalised dividend valuation' give the full picture?

SNOOPY

[Snoopy]

Fair enough guys.

For those interested in the maths here's what it looks like for CEN.
I have used the average forecast figure of 33 cps future dividends off market screener and assumed 65% imputation credits and that an investor looking at this now is treating the almost imminent dividends of 23 cps as a partial return of the purchase price.

Looking at the medium term yield.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield


Some of you may be puzzled where that '0.818' divisor came from in Beagles partial imputation calculation.

Sometimes it is easier to understand what is going on 'in the middle' (i.e. with partial imputation) if you can understand the extremes. Let's take an example where our net yield from holding the investment is 33c.

Extreme 1/ If there was no imputation the gross income calculation is easy because 'net yield' = 'gross yield' and the divisor is '1': 33c/ 1 = 33c

Extreme 2/ If there was full imputation credits, that means tax has already been paid on the 33c payment at the company tax rate of 28%. Conversely if 28% has gone in tax that must mean that 72% is left. So our divisor to calculate the gross income before the tax is taken out becomes 0.72: 33c/ 0.72 = 45.83c

Now we know the result in both extreme cases, we know the divisor for any 'partial imputation' will be between these two figures. Imagine a straight line starting out at number 72(%) -representing full imputation- with 28 single steps going forwards until you reach 100% - representing zero imputation. Now let's pick an imputation percentage you want to check out, let's say 65% ;-). We know from our imaginary line that the difference between nil imputation and full imputation (a total journey of 100%) is 28 steps. So how many steps on our journey do we need to walk if we only want to go 65% of the way?

Answer: 65% of 28 steps = 0.65 x 28 = 18.2 steps

Now we observe that 65% is closer to 100% than 0%. So starting at the 100% end of the line and walking backwards by 18.2 steps will be the way to get nearer to the 72 figure, representing 100% imputation. By starting at step 100 and walking backwards what step do we come to a halt at? Answer: 100-18.2 = 81.8. Step 81.8 therefore represents the divisor that you need to work out the gross payment that leads to the net payment of 33c: 33c / 81.8% = 40.34cps. Incredibly, this is exactly the same figure that the other Beagle got!

Of course you can repeat the basic procedure in this post with any partially imputed percentage figure that you choose. I am putting this post up because I know not everyone is a whiz banger at numbers. I hope this post helps de-mystify the calculation.

SNOOPY

[Ferg]

Snoopy

Is the deduction of the unimputed tax bill (D) double counting? It is funded personally from the unimputed portion of the dividend (C) received by the shareholder, noting that (C) has already been deducted from the declared dps (B), which excludes imputation credits. I agree with what you are doing - just this one part had me scratching my head.

[Snoopy]

Snoopy

Is the deduction of the unimputed tax bill (D) double counting? It is funded personally from the unimputed portion of the dividend (C) received by the shareholder, noting that (C) has already been deducted from the declared dps (B), which excludes imputation credits. I agree with what you are doing - just this one part had me scratching my head.


This is the way I think of it Ferg.

If you own a share you can sell it at any time and get your capital back (or more fully get your capital back at the market rate). If you are paid an unimputed dividend that is the same as getting some of your capital back. Why? The reason the dividend is unimputed is that no income has been earned by the company before they pay you that dividend. Because if they had earned some money to pay it, the dividend would have come with an imputation credit attached. Of course the tax man sees you getting your unimputed dividend and says "Hey I want my slice of that". So the tax man takes his slice of your unimputed dividend leaving you effectively with less capital than you started with.

The tax efficient way to handle this payment, from a shareholder perspective, would be for the company to make a capital return of the exact same amount of the unimputed dividend payment., Done this way, the company would reduce its capital by a set amount that would go into the pockets of shareholders and our tax man would be nowhere to be seen, in this perfectly legal alternative payment scenario.

The way I see it, paying an unimputed dividend is simply giving shareholders their own capital back with an extra tax bill. So I subtract from the 'total partially imputed dividend' all the unimputed bit (because giving shareholders the capital that they own already back is not really income from where I sit) AND I also take off the extra tax paid to the taxman for the pleasure of shareholders being given their own capital back. That isn't double counting the way I see it.

SNOOPY

[Snoopy]

For those interested in the maths here's what it looks like for CEN.
I have used the average forecast figure of 33 cps future dividends off market screener and assumed 65% imputation credits


Imputation credits are sometimes a hard thing to pin down as companies can keep them on their books for years, and distort the imputation credits attached to future dividends with those imputation credit reserves. Companies can even front load imputation credits by paying a tax bill to the IRD before it is due. Yet over a longer period of time it becomes harder to distort imputation credits paid if shareholders consider a multi year company overview. In the case of Contact Energy, they cleaned out their stash of imputation credits just before Origin Energy gave up their controlling shareholding by paying a special 50c dividend on 23rd June 2015 that was fully imputed. That means that, post that special dividend payment, Contact Energy started with a 'clean imputation credit slate'. There have been ten dividend payments since that time. So what payments, with what percentage of imputation credits attached, have been made since Origin Energy left the share register?



Dividend Payment DateAmountDividend Imputed to... {A}Imputed to Maximum (B)Dividend Imputation Rate (A)/(B)


25-09-201515cps0%28%0%


23-06-201611cps19.84%28%70.9%


23-09-201615cps15.36%28%54.9%


17-03-201711cps22.04%28%78.7%


19-09-201715cps28.00%28%100.0%


06-04-201813cps28.00%28%100.0%


18-09-201819cps28.00%28%100.0%


09-04-201916cps19.55%28%69.8%


17-09-201923cps20.23%28%72.3%


07-04-202016cps19.55%28%69.8%


Average71.64%



I thought about what would be the best way to calculate the average imputation rate. Each dividend would have been individually considered by the board, and a decision made on what the appropriate imputation rate should be at each dividend payment time. So I have decided to just average the raw figures, exactly as they were presented to shareholders at the time.

By contrast, the dividend imputation rate that I used in my own capitalised dividend model (my post 1795) was somewhat lower.



Scenario Basis Financial Yeareps (A)Scenario dps (B)


Total225.6c(E)369.0c (F)


Business Cycle Imputation Rate (E)/(F)61.14%



So there we have it, three perspectives on what the imputation credit rate should be: 61.14%, 65% (as assessed by Beagle, post 1811), 71.64%

Which to choose?

SNOOPY

[Ferg]

Thanks for clarifying. I understand what you are saying 100% and that a return of capital via unimputed dividends is not income, and that then results in a real cash outflow for the shareholder. I agree a share buyback would make more sense. And in the absence of a share buyback, then debt reduction would also be beneficial. Unimputed dividends are not an efficient use of capital, nor are they tax efficient. There is no absolutely debate from me on that.

However, I guess I was looking at it from the angle that if we are going to exclude the unimputed cash given to the shareholder, then the payment of tax from those same proceeds should also be excluded. Why? Assuming returning capital via unimputed dividends does not impact upon future profitability, P/E ratio or SP, then the overall personal and enterprise value should remain unaffected. The funding of tax payments on imputed dividends is independent of all of these factors. Therefore by excluding the unimputed dividend from the valuation, then the tax payment on the unimputed dividend should also be excluded. Yes unimputed dividends erode NTA but, in my opinion, NTA is the floor price for a share valuation and is not highly correlated to the share price or its movements for entities such as MEL. Such entities have a low ratio of capex to depreciation which generates FCF, and the non-retention of this cash erodes the NTA but not the share price or the shareholder wealth. Accordingly, the tax on the unimputed dividend should have no bearing on the overall share, or enterprise, valuation under this train of thought.

Another angle was that if the share price is $6.25 and MEL is returning capital of say $0.20c per share per annum via unimputed dividends, then after 31 years you have all your capital back (admittedly before tax), plus an ongoing imputed dividend flow and an unimputed payment ad infinitum. Shouldn't that be worth something over above the imputed dividends...? Maybe others are not making the adjustments you are making to their calculations, hence they are comfortable with the SP being higher than your calculations. I'm merely exploring other avenues of thought, not saying any method is more or less accurate.

Anyway, I have a numerical proof exploring the financial impact of various scenarios but I'm struggling to retain the formats from Excel....it looks like an unreadable wall of numbers, so I will spare you. :)

[Snoopy]

Thanks for clarifying. I understand what you are saying 100% and that a return of capital via unimputed dividends is not income, and that then results in a real cash outflow for the shareholder. I agree a share buyback would make more sense. And in the absence of a share buyback, then debt reduction would also be beneficial. Unimputed dividends are not an efficient use of capital, nor are they tax efficient. There is no absolutely debate from me on that.

However, I guess I was looking at it from the angle that if we are going to exclude the unimputed cash given to the shareholder, then the payment of tax from those same proceeds should also be excluded. Why? Assuming:

1/ returning capital via unimputed dividends does not impact upon future profitability,
2/ returning capital via unimputed dividends does not impact on P/E ratio
3/ returning capital via unimputed dividends does not impact on SP,

then the overall

a/ personal and
b/ enterprise value

remain unaffected.

The funding of tax payments on imputed dividends is independent of all of these factors. Therefore by excluding the unimputed dividend from the valuation, then the tax payment on the unimputed dividend should also be excluded.


Ferg, I appreciate your wider thinking on this matter and it may take me a bit of time before all your comments sink in. What I can say now is that I was thinking along much more narrow lines when doing my capitalised dividend analysis. I was looking at Contact Energy as a 'black box', albeit a black box built with shareholder funds, with both an imputed and an unimputed dividend stream coming from it. Also I was looking at things from a purely personal (shareholder) perspective, and in particular the 'before' and 'after' position of the shareholder.

'Before' the unimputed dividend is paid, the shareholder has a certain slice of capital, a part of the total capital that they own, that I will call 'UD' (for unimputed dividend capital). After the unimputed dividend is paid our shareholder has a dividend 'UD' (less a tax deduction 'UDT' that has gone to Inland Revenue) that is now in the shareholder's bank account. The dividend 'UD' is paid from the company capital 'UD'. When the dividend is paid, the company capital goes down by an equal amount. I think that particular point is beyond argument.

If I may indulge you a bit further into my tunnel visioned dog brain thinking, 'Before' there was 'UD' capital within Contact Energy. 'After' that same 'UD' capital has been moved to my own shareholder bank account (less the UDT tax deduction that the Inland Revenue has taken). 'Before' I had this UD capital contained within the company courtesy of my shareholder interest. 'After' I have this same capital in my bank account (less UDT tax). My argument then is that the transfer of 'UD' capital is not a dividend, by any conventional 'transfer of declared earnings' measure. It is a transfer of capital and the capital really has been lost to the company that paid it out. And by dint of being a shareholder in Contact, I as a shareholder have lost my share of that capital from within the company. So it makes sense to remove the UD capital from the total 'dividend' payment, because there is in effect no net payment being made from a shareholder perspective. Giving shareholders their own capital back does not constitute a 'return' on the investment. It is a return of the investment, However, what has been lost to the shareholder, and is a real loss, is the part of the UD capital return that has been filtered off to Inland Revenue, the UDT. The UDT represents capital that the shareholder had 'before' the UD dividend was paid and does not have 'after' the UD dividend was paid. The UDT represents real capital that the shareholder had 'before' the UD dividend was paid and does not have afterwards. The company Contact has paid the UDT on your behalf before you get the balance of the UD dividend in your bank account. The UDT capital is real money, a slice of your UD capital , that has gone to the IRD and you will not see it again. Thus I would argue you have to make the UDT deduction from your dividend return calculation because you really are that much worse off in real dollars and cents.

At this point I return to your points 1/ 2/ and 3/ above.

I would argue that returning capital via unimputed dividends may indeed affect future profitability, because as a result the company will have less money to invest to improve the business going forwards. The PE ratio is probably more influenced by wider market interest rates in a utility type share so is probably not relevant to this discussion. The share price represents a short term 'voting machine' perspective of where the market judges the earnings capacity of Contact Energy is heading. The share price will very likely discount changes in the business that might occur two to three years down the track when the results of any capital investment made today start to come though. So while you are correct in saying the share price may not be affected in the short term by a defacto capital repayment, I am not sure you can say that when you look out at the share price in the medium to longer term.

SNOOPY

[Snoopy]

Yes unimputed dividends erode NTA but, in my opinion, NTA is the floor price for a share valuation and is not highly correlated to the share price or its movements for entities such as CEN. Such entities have a low ratio of capex to depreciation which generates FCF, and the non-retention of this cash erodes the NTA but not the share price or the shareholder wealth. Accordingly, the tax on the unimputed dividend should have no bearing on the overall share, or enterprise, valuation under this train of thought.


I have highlighted one of your sentences in bold. Read on its own it is a very odd thing to say, yet I think this sentence also highlights a crucial point in how we recognize earnings from the gentailers. What you are saying here is that there is little correlation between the value of the assets on the books and the capacity of those assets to generate shareholder wealth. Do you think you could go into a valuers office and say that and come out alive? Because what you are really saying here is that the 'valuation' of these long life generation assets has little value. Nevertheless, I think you might be right in this regard.

I am not sure that current accounting standards can cope with the gentailer earnings model. If you look at AR2019 p76, you will see that under 'Depreciation & Amortisation' that Generation and Plant Equipment will depreciate by between 1 and 33% over the year. So with those long lived generation assets, the accounting standards are telling us that even using the most sympathetic view, a civil structure of a hydro dam will depreciate by 1% per year and will be fully depreciated in 100 years. I don't believe that is in any way realistic or accurate.

1/ Earthquakes aside, I would estimate the lives of these hydro dam to be measured in several hundred and maybe even thousands of years, So the annual depreciation charges in the Contact accounts are way too high, and consequently real profit each year is significantly understated.
2/ I would further argue that for certain long lived assets, their value should be 'appreciated' each year, not 'depreciated'. This is a consequence of the power pricing model the NZ electricity market operates under. New generation is added on the understanding that returns will be based on the marginal cost of building that new generation. But by charging for all generation at the current marginal cost, this can allow enormous profit margins for older generation assets that are on the books at historical cost. The way to get around this is for frequent revaluation of your generation assets. Mercury Energy routinely does this but Contact Energy does not.

I ended my capitalised dividend valuation post with a rather cryptic comment

"Does a 'capitalised dividend valuation' give the full picture?"

My comments 1 and 2 above were really what I was getting at here. I think there is some adjustment factor needed to make the capitalised dividend valuation analysis complete for the gentailers.



Another angle was that if the share price is $6.25 and CEN is returning capital of say $0.20c per share per annum via unimputed dividends, then after 31 years you have all your capital back (admittedly before tax), plus an ongoing imputed dividend flow and an unimputed payment ad infinitum. Shouldn't that be worth something over above the imputed dividends...?


I don't think you would get an unimputed dividend at infinitum. You would get the same as now. An imputed dividend payment from accounting standard recognised earnings and an unimputed payment from the excess cashflow. But the excess cashflow above earnings would have to be accounted for. So the unimputed dividends would still have to come out of the accounts and Contact would start to build up negative assets once the book asset base went below zero. It sounds like a silly concept but that is exactly what will happen if the current accounting policy is continued. So in 31 years time the accounting rule makers will finally realise how silly the current accounting rules at Contact Energy are.

SNOOPY

[Ferg]

Hey Snoopy, interesting discussion and I appreciate the replies. I think you may have misinterpreted my statement about the linkage between NTA and wealth. I was referring to a point in time value for wealth, rather than the ability to generate wealth in future. But it leads to some other interesting points nonetheless.

Picking up on your point about revaluing generation assets versus historical cost. You are right in that historical cost methods start to look ridiculous over the longer useful lives of generation assets. At some point they will be fully depreciated and if unimputed FCF is regularly distributed instead of going into capex, growth projects or debt reduction, then you will end up with negative NTA.

But revaluing generation assets will result in higher depreciation charges (and a lower earnings and EPS) resulting in surplus ICs versus reported EPS given the extra depreciation charges will not be tax deductible. However, given capex is still less than depreciation (with a higher nett FCF contribution than previously given cash capex has not changed but depreciation has increased) this will still result in excess FCF above EPS and the final nett position for FCF and IC's does not actually change. I know that sounds weird, but model the scenario and you will see it. So either way we are back to making what are effectively capital distributions if, as you point out, the funds are not used for funding more productive uses within the business.

Speaking of which, I would also question the reasoning behind making such unimputed payments - do the directors think the shareholders can get a better return than they can? Or is it done to prop up the SP by investors who don't use your valuation methods and don't realise they are only getting some of their capital back less tax? Or is there some other reason for the dividends policy? I don't know.

As for your other question about which % to use for imputation modelling, I suspect the answer lies in the historical relationship between taxable profit versus FCF times the % dividend policy. I can look into that tonight.

Cheers, Ferg.

[Snoopy]

As for your other question about which % to use for imputation modelling, I suspect the answer lies in the historical relationship between taxable profit versus FCF times the % dividend policy. I can look into that tonight.


Here are my thoughts on the two goes I had at calculating a suitable imputation rate for calculating gross returns.

My Post 1795

This approach takes a ten year history of 'normalised earnings' which I define as:

EBITDAF - DA - I - T = Normalised Net Profit After Tax.

EBITDAF means Earnings Before Interest Tax Depreciation Amortisation and Financial Instruments - and Significant Items

That means 'Normalised Net Profit' is based on a 'stay in business' earnings profile, which is exactly what we want. The curse of using a multi year averaged earnings profile is that the further back you go, the less likely yesterday's market is a true alternative reflection on what could conceivably be a picture of trading today. How far back you should go depends on how dynamic the market is. By starting in FY2011 we leave behind the HVDC transmission constraints that affected the distribution of energy nationwide particularly in FY2009. But it does take in the construction of Contact's Te Mihi $623m geothermal power station project, which wasn't fully on song until FY2014, and the associated $351.4m FY2012 capital raising,

Te Mihi ended up effectively replacing the Otahuhu gas power station that closed in FY2016. Contact still has Taranaki Combined Cycle Gas Turbine, but is now less dependent on gas than it once was. So things have changed over the last ten years. But enough of the core business from ten years ago remains and the market that Contact operates in has been relatively stable. One area I did modify when using the historical data as an indicative alternative scenario for today is that I assumed a significantly higher dividend payout ratio, That's because it was announced at the of FY2018 that Contact was looking to give back to shareholders 100% of operating cashflow from then on. Note that whether earnings are paid out as dividends or not makes no difference to the tax paid by Contact Energy as a company. The other factor I calculated was my estimate of tax paid each year using the formula: 0.28 x (EBITDAF-DA - I). Imputation credits are generated by the actual tax paid. So it might be useful to compare the actual tax paid against the figure(s) I calculated (see table below).

We do know that the imputation credit balance held on the Contact Energy books was reduced to zero by a special dividend of $367m, (not in the table below), that was paid just prior to Origin Energy selling their controlling stake in the company. The special dividend was paid on 25th June 2015, just days before the end of FY2015.



Scenario Basis Financial Year
Modelled Income Tax PaidActual Income Tax PaidModelled Income Tax PaidActual Income Tax Paid


2011
$61m$60m


2012$69m$65m


2013$78m$64m


2014$78m$94m


2015$62m$29m


2016
$62m($40m)$62m($40m)


2017
$64m$59m$64m$59m


2018https
$51m$41m$51m$41m

https
2019
$68m$69m$68m$69m


2020
$49m$46m$49m$46m


Total
$642m$487m$294m$175m




Business Cycle Imputation Rate (modelled)61.1%


Business Cycle Imputation Rate (implied actual)46.3%



I would not expect these figures to line up exactly year by year. That is because there are timing issues with real tax payments relating to provisional tax and terminal tax. But I would expect that over a longer period that the total tax payments, modelled verses actual, should converge. I find it startling that they haven't. And the sub-totals from FY2016 onward (after the imputation credit balance was exhausted at EOFY2015), make the difference between modelled tax paid and the actual tax paid hard to explain. This could imply two or three things.

1/ Contact was sitting on a large pile of imputed tax credits before FY2011 that it was able to add those to dividend payments (up until June 2015 at least) to make the imputation on dividends higher than they otherwise would have been (certainly true until EOFY2015).
2/ I have been too generous with my imputation credit tax assumptions.
3/ Contact Energy have paid a lot of tax before it was due to inflate their imputation credit account before certain dividends were payable to shareholders. This would, IMO, be tantamount to an attempt to deceive shareholders about the real tax paying status of the company.

In case you were wondering, the income tax refund in FY2016 came about because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. The tax effect of this refund is the substantial difference between the modelled tax paid and the actual tax paid.

SNOOPY

[blackie]

and who said accounting wasn't riveting?
not I, thats for damn sure

[Snoopy]

Here are my thoughts on the two goes I had at calculating a suitable imputation rate for calculating gross returns.

My Post 1795


Here is the second half of my imputation credit hunt. In this post my 'modelled' payments are actually the real payments that must have been handed over to IRD allow to allow a dividend to be paid with a specified level of imputation credits attached. The actual tax declared I have taken from the representative 'Statement of Comprehensive Income'. I am reporting in half year periods. The tax declared in the second half (calendar year period from 1st January to 30th June) has been worked out by taking the tax paid for the full year and subtracting that paid in the first half.

My Post 1799 covers the period after the imputation credit balance was exhausted by the paying of a special dividend. The following table has evolved from information presented in that post. It should be no surprise to see the first dividend to be paid after the imputation credit clean out, the first line in the table, has no imputation credits attached as a result. Not only was no income tax paid by Contact Energy over that period. The company received a $51m income tax credit.

The second line of the table shows a dividend being paid with $19m of imputation credits attached, against an actual tax liability over the period of only $11m. I don't understand how attaching such a large imputation credit to the dividend payment is possible, unless Contact have stumped up with a $9m 'tax paid in advance' payment to the IRD to make up the difference. The only other explanation I can think of is that part or all of that declared in the prior period $51m tax credit has found its way into Contact's imputation account. The second explanation looks more likely because the sum of imputation credit tax paid from 23-06-2016 onwards greatly exceeds the declared income tax liability for the same period. And $51m would go a long way to making up the difference. However, if my second explanation is correct, why was the dividend declared on 23-06-20!6 not fully imputed (that $51m tax refund should have ensured there were plenty of imputation tax credits available in the tax credit bucket)? An unsolved mystery?

If indeed the tax refund from HY2016 has been treated as a 'tax credit' for imputation purposes (I still have my doubts about that because imputation credits are normally only issued for actual tax paid) then the deficit over the ten half year period listed comes down to:

$289m - ($226m + $51m) = $12m

It is at least conceivable that Contact may have overpaid their tax by $12m over the last five years.




Dividend Payment Date
Net Amount
Dividend Imputation Rate
Gross Dividend Divisor
Imputed Dividend Tax Paid {A}
Half Year Income Tax Declared {B}
Tax paid less Tax Declared {A}-{B}

25-09-2015$110m0%
1.0$0m
($51m)$51m


23-06-2016$79m70.9%0.8015
$19m (2)$11m$8m


23-09-2016$107m54.9%0.8463$19m$38m
($19m)


17-03-2017$79m78.7%0.7796$22m$21m
$1m


19-09-2017$107m100.0%0.72$42m$24m
$18m


06-04-2018$93m100.0%0.72$36m$17m
$19m


18-09-2018$136m100.0%0.72$53m$43m
$10m


09-04-2019$115m69.8%0.8046$28m$26m$2m
to

17-09-2019$165m72.3%0.7976$42m$26m$16m


07-04-2020$115m69.8%0.8046$28m$20m$8m


Average71.64%


Total 23-06-2016 Onwards

$289m$226m
$63m



Notes


1/ The 'gross dividend divisor' column is calculated according to the method explained in my post 1796.

2/ A sample calculation to derive the amount of tax that has to have been paid to satisfy the imputation credit attached to the dividend paid on 23-06-2016 is shown below.

Imputation tax payment = ($79m / 0.8105) - $79m = $18.5m

SNOOPY

P.S. This post is based on actual declared dividend payouts, and the tax paid implications from those payouts and company declared tax (not the derived tax from my 0.28x (EBITDAF - DA -I) calculation in post 1804, referred to in part 1). However, actual earnings are subject to various one off earnings blips (both up and down) from non core transactions that are not reflective of core business activity into the future.

[see weed]

A good dividend payer. The yld on ASB site is showing 6%. Started buying in early July around the smelter closure. I think it was a bit over sold, but was only buying in for the div. Am in the process of selling 82% of my holding, to chase other div stocks. Will start buying back in again early next year if price is right.

[Snoopy]

Fair enough guys.

For those interested in the maths here's what it looks like for CEN.
I have used the average forecast figure of 33 cps future dividends off market screener and assumed 65% imputation credits and that an investor looking at this now is treating the almost imminent dividends of 23 cps as a partial return of the purchase price.

Looking at the medium term yield.

$6.38 - 23 cents = $6.15 net purchase price on a medium term view.

33 cps per annum in dividends with 65% imputation credits = 33 / 0.818 = 40.34 cps gross. 40.34 / 615 = 6.56% Gross Yield


I can't wind up my analysis without mentioning the third option as espoused by Beagle. I don't know where Beagle pulled his 65% imputation figure from. Maybe he will explain? But Beagle does have a good nose for getting a dividend feed. And whether he is actually feeding on CEN or not, you have to respect his numbers. It might be telling that his 65% is right near the middle of my 61% and 72% guesses.

IMO the important factor in the variation of my two imputation credit rate guesses is the difference between basing earnings on EBITDAF and profit derived from that (which is the internal performance measure preferred by Contact management since FY2006) and NPAT. In both cases I do take into account 'net interest payments' and 'depreciation and amortisation'. I also take into account tax in both cases, although with EBITDAF this is my own calculation that will produce a slightly different figure depending on what NPBT figure you start with and the timing of certain tax payments. Nevertheless tax is always a derived figure determined by other inputs. So in this post I want to look further at the factor that is clearly different between my two approaches and that is 'F' (for financial instruments). It is all very well to say that 'F' could be behind any differences. But what does that statement actually mean?

'Financial Instruments' are a way Contact can gain certainty over areas of future spending that are material to the business but are not under management's influence. There are four general categories listed in AR2006 p68.

1/ Cross Currency Interest Rate Swaps
2/ Interest Rate Derivatives
3/ Forward Foreign Exchange Rate Hedges
4/ Electricity Price Hedges

These hedges may be further classified as 'Cash Flow Hedges', which are used to deliver certainty on interest rate payments and 'Fair Value Hedges' which are used to deliver certainty around 'bond capital repayments'. It is easy to forget that Contact Energy has significant debt that is funded by the USPP (United States Privately Placed) Debt Market of $US340m (AR2020 p79) and also local bonds CEN030, CEN040 and CEN050 listed on the New Zealand debt market summing to $NZ350m (AR2020 p79). The former can be hedged three ways ( 1/, 2/ and 3/) whereas the latter category can be hedged around point 2/. The fair value adjustments on these borrowings over the last five years make interesting reading.



FY2020FY2019FY2018FY2017
FY2016Reference



Fair Value Adjustments on Hedged Borrowings$144m$86m$52m$11m$72m
(Refer Note B4, respective Annual Report)


Movement in Hedged Reserve($10m)($46m)$14m($15m)$2m
(Refer Statement of Comprehensive Income, respective Annual Report)



I am not clear on how these above two table lines are related. In AR2019 p79 there is a suggestion that on the adoption of IFRS9 (from July 1st 2018) a new 'cost of hedging reserve' was established. There is a cost to convert foreign currency cash flows into New Zealand under cross currency interest rate swaps. This cost can change from year to year (I do not understand why) and this change is recorded in the relatively new 'Cost of Hedging Reserve'.

It is only the second line that appears in the 'Statement of Comprehensive Income'. There is no separate tax entry relating to these 'Items that may be reclassified to 'profit and loss' (in particular 'movement in hedged reserve'). So I am not sure if tax for this has already been accounted for in the only 'Tax Expense' entry, or if there is no tax effect.

Here is what investopedia

https://www.investopedia.com/ask/answers/102714/what-are-differences-between-comprehensive-income-and-other-comprehensive-income.asp

says about taxes on 'Other Comprehensive Income'.

"In regards to taxes, it is permitted to report other comprehensive income after taxes, or one can report before taxes as long as a single income tax expense line item is included at the end of the statement. Conversely, this can also apply to a tax benefit."

In the case of Contact Energy, there is no single income tax line at the end of the income statement. I therefore conclude that 'Other Comprehensive Income' is reported 'after taxes' and there is no 'extra tax' to report that would increase the amount of imputation credits available.

SNOOPY

[Snoopy]

One star remains out of line, and it is a big one. The overall electricity market is just as likely to shrink as it is to grow, as 'economic growth' now seems decoupled from power consumption. And short of selling Tiwai to the Chinese and bringing in billions of Chinese national capital and labourers, the inevitable corollary to no new investment is that the aluminium smelter will close.

I think that going forward from here, the sensible investor must view the NZ power market as a static one in terms of demand. On the customer side, power company switching will ebb and flow. But I think the big five are large enough to survive and customers swings are likely to be balanced by customer roundabouts in the longer term.

For me then the key factor in the profitability of power companies going forwards comes under the heading "resilience". It will be the companies who are best prepared to fill holes in the power production line that will prosper. 'Holes' might mean a drought. But it also might mean a spike in gas prices. It looks like those reasonably strategically located geothermal power stations are the most hole-proof going forwards.

As for the CEN share price going forwards. I agree $6 is possible. $9 occurred when power was a 'growth' market and Origin didn't have any gas field development in Australia and when there were far fewer CEN shares on issue. I do think CEN will eventually get back to $9. But sadly I don't think anyone on the share register now will still be alive at that point. Except perhaps for you fish, as I believe the Orange Roughy can live for a couple of hundred years.


Quite a prophetic post of mine from seven years ago. The only bit I really got wrong is the bit about all of us on the forum being dead (except for fish who I picked as a survivor). The share price closed at $9.03 on 9th October 2019 (the only day the share price did close at over $9) thus releasing the rest of us from our own death warrants. Don't thank me for you all still being here though, you probably should thank bull and his "get your income while you can" campaign from last year. On 30th September 2013, the share price closed at what I thought was a high $5.41, implying an historical normalised profit PE ratio of 19.7 for a boring utility! Heady stuff I thought at the time. Yet on 9th October 2019 the $9.03 closing price implied an historical PE ratio of 37, a figure that would have blown me off the doghouse in 2013. But somehow, as with the best Sopwith Camel pilots, I have managed to hold on. At $6.33, the Friday close we are on an historical PE of 36. With the pending closure of the Tiwai Point smelter, this $6.33 price looks very toppy still, As one of the few companies still paying dividends, I wonder if investors, including me, are now suffering a blindness caused by 'dividend shortage sickness'?

SNOOPY

[RTM]

....... As one of the few companies still paying dividends,......

SNOOPY

Really Snoopy ? While my dividend payers have shrunk slightly, way less than I thought it might.
So far.

[Beagle]

Hey Snoopy,

I got the 65% imputation credit from the latest dividend. F.Y.I. I didn't go back and look at previous imputation levels in earlier dividends.

For me the big unknown here is the dividends going forward. The extent to which the company is very clearly issuing a major caution about forward dividends without providing any guidance was enough to keep me sidelined so I bought more GNE instead. The tone of page 43 is cause for concern for a protracted and significant reduction in dividend level http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/357656/328001.pdf

[Snoopy]

Hey Snoopy,

I got the 65% imputation credit from the latest dividend. F.Y.I. I didn't go back and look at previous imputation levels in earlier dividends.


Ah thanks for that. I see the 65% figure as a footnote on p56 AP2020. FYI the interim dividend for FY2020 of 16cps as paid on 7th April was imputed to 70% (69.82% to be exact). Last year (FY2019) the final dividend, paid on 17th September 2019, was also 23cps but that was imputed to 72.25%.



For me the big unknown here is the dividends going forward. The extent to which the company is very clearly issuing a major caution about forward dividends without providing any guidance was enough to keep me sidelined so I bought more GNE instead. The tone of page 43 is cause for concern for a protracted and significant reduction in dividend level http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/357656/328001.pdf


You are right to be cautious. But maybe you should have read slide 38 on Contact's annual presentation for FY2020 as well.

"There appears no role for base load thermal generation post NZAS exit."

This means that Geneis's Huntly is dead, in less than a years time. Oh and from slide 33

"Premature decline of the oil and gas sector."

That doesn't sound very good for Genesis does it? It will be a blow if the recently upgraded gas field reserves become 'stranded assets'. Although from what I have seen in the comments on the NZ electricity market from Genesis's CEO Marc England, he seems to be in denial ( using the phrase 'if Tiwai Point closes' ). Given all of the big five gentailers are operating in the same market, I wouldn't be too reassured by Marc's up beat comments. But if the government can come to the party on transmission costs, maybe we can get another two or three years out of Tiwai? Marc 'the optimist' England might yet be right.

SNOOPY

[Snoopy]

Really Snoopy ? While my dividend payers have shrunk slightly, way less than I thought it might.
So far.

Maybe it is just my portfolio RTM. I have lost dividends from TRA (now paying again although I am not sure they should be) AWF, HGH (probably), SCT, SKC and PGW post Covid-19. Earlier I lost RBD as well (although the dividend cancellation there was nothing to do with Covid-19). I am only getting dividends from my utility shares now :-( and SKL :-). I seem to have made the switch from being an 'income' investor to a 'growth' investor without knowing it or doing anything!

SNOOPY

[RTM]

Maybe it is just my portfolio RTM. I have lost dividends from TRA (now paying again although I am not sure they should be) AWF, HGH (probably), SCT, SKC and PGW post Covid-19. Earlier I lost RBD as well (although the dividend cancellation there was nothing to do with Covid-19). I am only getting dividends from my utility shares now :-( and SKL :-). I seem to have made the switch from being an 'income' investor to a 'growth' investor without knowing it or doing anything!

SNOOPY

That's annoying. Yes, I am waiting somewhat anxiously as well on Heartland. Although I have not written them off and am expecting a smaller dividend rather than nothing.
My diversified portfolio has stood me in good stead to date. A lot of the commentary on ShareTrader has contributed to my decision making and I thank you all for that.
So far !
3 Stocks 5-8 %, 14 stocks 2.6-5%. 23 stocks 0-2.5%
Additionally CRAIGS convinced me that holding some bonds was a good idea. So I picked up some a few years ago and these are generally still returning a pretty attractive dividend. Of course it is a problem when they expire.

[Beagle]

You are right to be cautious. But maybe you should have read slide 38 on Contact's annual presentation for FY2020 as well.

"There appears no role for baseload thermal generation post NZAS exit."
This means that Geneis's Huntley is dead, in less than a years time. Oh and from slide 33

"Premature decline of the oil and gas sector."

That doesn't sound very good for Genesis does it? It will be a blow if the recently upgraded gas field reserves become 'stranded assets'. Although from what I have seen in the comments on the NZ electricity market from Genesis's CEO Marc England, he seems to be in denial ( using the phrase 'if Tiwai Point closes' ). Given all of the big five gentailers are operating in the same market, I wouldn't be too reassured by Marc's up beat comments. But if the government can come to the party on transmission costs, maybe we can get another two or three years out of Tiwai? Marc 'the optimist' England might yet be right.

SNOOPY

One leading broking house has GNE's dividends steadily rising each year to 18 cps in 4 years time. EBITDAF rising to $450m in three years time.
It'll take an quite some years for Manopouri power to find it's way up north and there are of course limits on inter island power transmission.
I think your statement that Huntly is dead in less than a years time misses the mark by quite a considerable distance.
I suspect a lot of gentailiers are talking their own book.

There's always going to be huge demand for gas and LPG, usage of these are deeply imbedded in the economy.
Just because Huntly might gradually wind down as GNE's wind power generation gradually winds up doesn't mean Kupe is a stranded asset, far from it.
I for one think its great N.Z. has about a 25 year supply of LPG and Gas...the massive upgrade to Kupe's reserves is a game changer and completely overlooked by the market, (other gentailiers have rallied more since that announcement as bond proxies).

[Snoopy]

There is no separate tax entry relating to 'Items that may be reclassified to 'profit and loss' (in particular 'movement in hedged reserve'). So I am not sure if tax for this has already been accounted for in the only 'Tax Expense' entry, or if there is no tax effect.

Here is what investopedia

https://www.investopedia.com/ask/answers/102714/what-are-differences-between-comprehensive-income-and-other-comprehensive-income.asp

says about taxes on 'Other Comprehensive Income'.

"In regards to taxes, it is permitted to report other comprehensive income after taxes, or one can report before taxes as long as a single income tax expense line item is included at the end of the statement. Conversely, this can also apply to a tax benefit."

In the case of Contact Energy, there is no single income tax line at the end of the income statement. I therefore conclude that 'Other Comprehensive Income' is reported 'after taxes' and there is no 'extra tax' to report that would increase the amount of imputation credits available.


I want to look at the other part of EBITDAF that slides outside the normalised NPAT capture net. That factor is 'S', the contribution from special items. Yes I know that EBITDAF does not contain an 'S', but special items are definitely not in the EBITDAF picture.

Investopedia tells us that all tax, including that from 'Other Comprehensive Income', should appear in one line in the income statement. But as the table below shows, this is not the case for Contact Energy and the special profit items associated with one off transactions. The following table is compiled from below the 'Underlying Profit' line on the respective earnings break down in report section A2 of the respective annual reports, and after the 'Tax on Underlying Profit' has already been spelt out.



FY2020FY2019FY2018FY2017FY2016


Change in Fair Value of Financial Instruments $0m$2m$3m$23m($21m)



Gain of sale of Rockgas$165m


Gain of sale of Ahuroa Gas Storage Facility$5m


Remediation for Holidays Act Non-compliance($5m)$2m($5m)


Transition to Replacement Customer Service and Billing System($7m)($10m)


Otahuhu closure and site sale($217m)


Write down of inventory gas($43m)


Asset Impairments($38m)


Reinstatement of tax on Depreciation of Powerhouses$4m


Tax on Significant Items$1m($5m)($1m)($2m)$100m



A slightly annoying aspect of Contact's reporting over recent years is the tendency to round numbers up or down to the nearest million. This isn't a problem with big totals. But drilling down into the minutiae of results this policy can cause distortions.

Apart from FY2016, the extra tax paid, or refunded is small. But there are couple of other points that can be gleaned from this table.

1/ In FY2018 there was a tax bill that can only be associated with a 'Change in Value of Financial Instruments'. This shows that a 'Change in Value of Financial Instruments' is a taxable event: Tax Paid: $1m/$3m = 33% (could be 28% within rounding errors).

2/ Using similar logic over FY2020, 'Remediation for Holidays Act Non-compliance' is also a taxable event. This is not a surprise as wages are a tax deductible expense. Yet I am curious as to why the tax rate was only: $1m/$5m = 20%. (This may be another example of rounding error because $1.5m/$4.5m=33%, greater than the 28% I was expecting. So the real tax rate could still be 28%).

The very large elephant in the tax room is that $100m tax credit from FY2016. Now I am not a tax expert. But I do know that the tax return that is supplied to Inland Revenue and the tax treatment outlined to shareholders in the income statement of the annual report are not always the same. It could be that this $100m refund is tax that has already be paid but will not be refunded in one lump as just reading the income statement in the annual report implies. If instead the refund happens gradually over the normal depreciation life of those 'written off' Otahuhu generation assets, then Contact may have already paid more tax to the IRD than their reported earnings requires. And if Contact have paid more tax than their declared comprehensive tax position implies, that would mean they have a higher imputation credit balance on the books than shareholders might expect. That in turn might mean that dividends could be imputed to a higher rate than would otherwise be expected. Of course, any such tax balance differences between what is declared to the IRD and what is shown as the 'tax expense' in the income statement of the annual report will ultimately converge. But in the interim, the rate of dividend imputation on Contact shareholder dividend payments might have given shareholders a false picture of what dividend imputation rates are going to be possible looking forwards. I don't know if I am right about this. But there is some 'smoking gun' evidence in AR2016 that is not inconsistent with my theory.

From the Income Statement



Tax on Underlying Profit($64m)


add Tax Refund on Significant Items$100m


equals Total Tax (Refund)$46m





compare to Statement of Cashflow, Tax Received$1m



Where is the missing $45m?

SNOOPY

[dreamcatcher]

Few more days and divvie in the bank...........

[clearasmud]

Few more days and divvie in the bank...........
True.
Also last chance to Buy GNE cum divi

[Snoopy]

A reprise where this series of posts is coming from: I am trying to figure out why Contact's rate of dividend imputation is consistently higher than normalised profits would suggest is possible over the medium to long term. The quite below is from post 1806.



The following table has evolved from the period after the imputation credit balance was exhausted by the paying of a special dividend.



Dividend Payment Date
Net Amount
Dividend Imputation Rate
Gross Dividend Divisor
Imputed Dividend Tax Paid {A}
Sum of Half Year Income Tax Declared {B}
Tax paid less Tax Declared {A}-{B}


Various Dates Averaged71.64%



Total 23-06-2016 Onwards

$289m$226
$63m



This post is based on actual declared dividend payouts, and the tax paid implications from those payouts and company declared tax (not the derived tax from my 0.28x (EBITDAF - DA -I) calculation in post 1804, referred to in part 1). However, actual earnings are subject to various one off earnings blips (both up and down) from non core transactions that are not reflective of core business activity into the future.


How much tax is unaccounted for?

In the above quoted table, The (Sum of Half Year) 'Income Tax Declared' total is the 'Tax Expense' figure totalled from the respective full year and half reports in the respective 'Statements of Comprehensive Income' over five years. The 'Imputed Dividend Tax paid' is calculated from adding up the tax paid in the respective period dividend statements. Any positive difference between the two totals therefore must represent 'other tax' paid by Contact Energy, not recorded in the ''tax expense' income statement line entry. To pinpoint the 'missing tax' is the obvious way to make up the tax pay gap between the tax story told by the collective dividend payment statements and the tax story told by the 'tax expense' line of the 'Statements of Comprehensive Income'. This table quoted above shows this 'missing tax' from the tax expense line of the combined statements of Comprehensive Income over the period comes to a not insignificant $63m.






Scenario Basis Financial YearModelled Income Tax PaidActual Income Tax Paid


2016post
$62m($40m)[/


2017
$64m$59m


2018
$51m$41m

2019
$68m$69m


2020
$49m$46m


Total
$294m$175m



The sub-totals from FY2016 onward (after the imputation credit balance was exhausted at EOFY2015), make the difference between modelled tax paid and the actual tax paid hard to explain. This could imply ...

<snip>

3/ Contact Energy have paid a lot of tax before it was due to inflate their imputation credit account before certain dividends were payable to shareholders. This would, IMO, be tantamount to an attempt to deceive shareholders about the real tax paying status of the company.


A conspiracy to mislead debunked

I am doing a slight retake on my explanation 3/ as quoted above. The tax that I am saying Contact 'paid in advance' was only 'paid in advance' from a shareholder income statement reporting perspective. In fact I now believe the tax was paid 'on time' in accordance with IRD rules. Nevertheless there was no word in the FY2016 report about what the future effects of doing this might be: the phenomenon I am terming 'Superimputed Dividends'. In recent years I have struggled to understand why the imputation rate paid on Contact Energy dividends was so much higher than I expected. It was only by piling through five years of retrospective dividend payments that I have been able to shed some light on what must have happened.

Why is the actual income tax paid so much less than what I modelled? I believe that is because that $175m total does not include the net $97m of tax paid from 'Significant Items' transactions as outlined in the quoted table below (Total Significant Items Tax = $4m + $100m+ $1m - $5m -$1m - $2m = $97m). Add that $97m back in and most of the difference between the 'Modelled Income Tax' and the 'Actual Income Tax Paid' is closed. I would not expect the totals to be exactly the same because actual tax payment bills for any five year period are spread across seven years (because of provisional tax and terminal tax billing requirements), not the five years shown in the table.






FY2020FY2019FY2018FY2017FY2016

I
Reinstatement of tax on Depreciation of Powerhouses$4m


Tax on Significant Items$1m($5m)($1m)($2m)$100m



The very large elephant in the tax room is that $100m tax credit from FY2016. Now I am not a tax expert. But I do know that the tax return that is supplied to Inland Revenue and the tax treatment outlined to shareholders in the income statement of the annual report are not always the same. It could be that this $100m refund is tax that has already be paid but will not be refunded in one lump as just reading the income statement in the annual report implies. If instead the refund happens gradually over the normal depreciation life of those 'written off' Otahuhu generation assets, then Contact may have already paid more tax to the IRD than their reported earnings requires. And if Contact have paid more tax than their declared comprehensive tax position implies, that would mean they have a higher imputation credit balance on the books than shareholders might expect. That in turn might mean that dividends could be imputed to a higher rate than would otherwise be expected. Of course, any such tax balance differences between what is declared to the IRD and what is shown as the 'tax expense' in the income statement of the annual report will ultimately converge. But in the interim, the rate of dividend imputation on Contact shareholder dividend payments might have given shareholders a false picture of what dividend imputation rates are going to be possible looking forward.


The mechanics of paying 'phantom tax'

The story behind Contact Energy paying 'extra tax' is told in the panel I quote above. In summary I believe that Contact have used a timing difference between 'income tax that had to be paid to the IRD' and 'income tax on profit reported to shareholders' to generate extra imputation credits. From a shareholder perspective, these are 'phantom imputation credits' to boost the imputation rate on shareholder dividends.

Despite the name, these 'phantom imputation credits' are real. They are only seen as 'phantom' because they are 'seemingly materialising' (even though they already exist) by being drip fed through the declared income statements over several years. Eventually this drip feed will dry up. For the five financial years from FY2016 to FY2020 inclusive, I add up $97m of 'Significant Item' tax credits.

Total Significant Items Tax = $4m + $100m+ $1m - $5m -$1m - $2m = $97m

The bulk of these tax credits came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up (post 1806), which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the first quoted post on this thread of 71.64%.

SNOOPY

[Snoopy]

Scenario Basis Financial Yeareps (A)Scenario dps (B)


Total225.6c (E)369.0c (F)


Business Cycle Imputation Rate (E)/(F)61.14%

.


The key figures in the first part of my 'Capitalised Dividend Valuation' for FY2020 I have quoted above. I now wish to change my modelled dividend imputation rate from 61.14% to 71.64% and see what difference that makes to my valuation. So how do I do that?

The first point to remember is that I am not making any changes to my assumption of the number in cents of each dividend I am modelling to be paid. The only change I am making is to the amount of imputation credits attached to each dividend. For Part 1 of my 'Capitalised Dividend Valuation' modelling I used the example of a total of $3.69 in dividends declared over 10 years (note all earnings values quoted are in 'earnings per share'). But full tax had only been paid on $2.256 of that dividend total. If tax had been paid on all of that dividend total, then the dividend imputation rate would have been:

$3.69 / $3.69 = 100%

But the actual rate of dividend imputation, based on $2.256 worth of normalised profits was only:

$2.256 / $3.69 = 61.14%

The question then is, what rate of normalised profits are necessary to produce an imputation rate of 71.64% if the dividend payment stays as it is? The algebraic way of writing that question is:

$ ? / $3.69 = 71.64%

And the answer is: 0.7164 x $3.69 = $2.644

So the difference in imputed earnings between the two different rates of imputation is: $2.644 - $2.256 = $0.388.

If I spread these extra underlying normalised tax paid earnings out over ten years (this is the equivalent of assuming straight line depreciation for any 'Phantom assets' over ten years) then the extra underlying earnings per year amount to: 38.8c / 10 = 3.9c

Now let's put this extra 3.9c per year of tax paid underlying earnings into the 'Capitalised Dividend' model and see what happens to Contact Energy's valuation

SNOOPY

[Snoopy]

Below I present my corrected earnings picture for the last ten 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 100% of free cash flow being paid into the foreseeable future. However, in the two years this policy has been in existence, only 39cps has been paid out. So where the 100% of operating free cashflow exceeds that figure I have capped the dividend payout to 39cps.
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) difference is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column (Column D) represents the 'effective' dividend per share adjustment for any extra tax obligation from paying tax on unimputed distributions.



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


201121.7c19.0c+2.7c0c0c19.0c


201224.7c38.0c-13.3c13.3c3.7c21.0c


201328.1c39.0c-10.9c10.9c3.1c25.0c


201427.7c39.0c-11.3c11.3c3.2c24.5c


201522.4c39.0c-16.6c16.6c4.6c17.8c


201622.1c39.0c-16.9c16.9c4.7c17.4c


201718.7c39.0c-20.3c20.3c5.7c13.0c


201818.2c39.0c-20.8c20.8c5.8c12.4c


201924.3c39.0c-14.7c14.7c4.1c20.2c


202017.7c39.0c-21.3c21.3c6.0c11.7c


Total225.6c (E)369.0c (F)182c


Business Cycle Imputation Rate (E)/(F)61.14%

.

The expected average dividend per year, net of tax is therefore: 182 / 10 = 18.2cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 18.2cps /(1-0.28) = 25.3c

Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream, albeit not quite a 'bond equivalent'. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the previously unthinkable is happening in that the Tiwai Point aluminium smelter is closing, and the power market is consequently in a state of flux as to how particularly Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh while transmission north is constrained. To balance these competing factors, I have assessed that a gross return of 4.5% iThe bulk of these tax credits came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the first quoted post on this thread of 71.64%.s now appropriate for Contact Energy.

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

25.3c /0.045 = $5.62

So $5.62 is therefore 'fair value'.

Readers should note that $5.62 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.

$5.62 x 1.2 = $6.74

Contact Energy is trading at $6.25 as I write this post. This technique would suggest that Contact Energy is now 11% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

But does a 'capitalised dividend valuation' give the full picture?


Note: The incremental profit in the table below of 3.9cps, represents the change in gross profit spread out over ten years that would result if the business cycle imputation rate were to increase from 61.24% to 71.64% (ref Post 1820).



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


201121.7c+3.9c19.0c+6.6c0c0c19.0c


201224.7c+3.9c38.0c-9.4c9.4c2.6c26.0c


201328.1c+3.9c39.0c-7.0c7.0c2.0c30.0c


201427.7c+3.9c39.0c-7.4c7.4c2.1c29.5c


201522.4c+3.9c39.0c-12.7c12.7c3.6c22.7c


201622.1c+3.9c39.0c-13.0c13.0c3.6c22.4c


201718.7c+3.9c39.0c-16.4c16.4c4.6c18.0c


201818.2c+3.9c39.0c-16.9c16.9c4.7c17.4c


201924.3c+3.9c39.0c-10.8c10.8c3.0c25.2c


202017.7c+3.9c39.0c-17.4c17.4c4.9c16.7c


Total264.6c (E)369.0c (F)226.9c


Business Cycle Imputation Rate (E)/(F)71.64%



The expected average dividend per year, net of tax is therefore: 226.9 / 10 = 22.7cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 22.7cps /(1-0.28) = 31.5c

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

31.5c /0.045 = $7.00

So $7.00 is therefore 'fair value'.

However, I am only predicting the 'superimputation' effect to last for two years. If we look out over ten years, then eight of those ten years will only have regular imputation. This means the business cycle value of Contact shares is actually a weighted average of the two parts of my valuation, calculated like this:

( 2($7.00) + 8($5.62) )/10 = $5.90

SNOOPY

[Snoopy]

Utility type companies can carry a higher level of debt than others because of the greater certainty of cashflows. As to whether Contact are paying the special dividend to be 'capital efficient' I am not sure. But on one thing I do agree with Hoop. I do like to see a company keep their overall debt levels low.


With interest rates headed for unprecedented lows, I may have to revise my opinion on what equity ratios that I think of are acceptable, Yet the picture at Contact over the last eleven years has been unexpectedly consistent.


5394[/
Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2010$2,777m$5,148m0.5394


FY2011$3,236m$5,643m0.5735


FY2012$3,418m$6,112m0.5592


FY2013$3,537m$6,197m0.5708


FY2014$3,582m$6,186m0.5790


FY2015$3,171m$6,089m0.5208


FY2016$2,823m$5,652m0.4995


FY2017$2,778m$5,455m0.5093


FY2018$2,727m$5,311m0.5135


FY2019$2,782m$4,954m0.5616


FY2020$2,621m$4,896m0.5353



SNOOPY

[Snoopy]

I think you will find the change on page 60 of the 2010 annual report, where it explains that the 2007 valuation gains were reversed in a move back to cost basis:

"Contact has elected to make a voluntary change in accounting policy in relation to the measurement basis for generation plant and equipment and move to a cost basis as it is reliable and more relevant. The change in accounting policy has been applied retrospectively to 1 October 2004, the date of Contact’s transition to NZ IFRS and the date of acquisition of 51.4 percent of the shares in Contact by Origin. Fair value at 1 October 2004 is considered deemed historical cost owing to the impracticability of determining actual cost back to the original asset purchase date. As a result of the change, the revaluation reserve at 1 October 2004 ($1,547.6 million) has been transferred to retained earnings. In addition, the revaluation in 2007($401.1 million) and the consequential deferred tax ($120.3 million) have been reversed."


In FY2010 Contact changed their policy from revaluing assets every three years according to their earnings capability, to what I have quoted above. However, what more recent shareholders may not know is that there were earlier revaluations of generation assets that were not reversed.

Revaluation of Generation Assets



FY1999$673m


FY2002$843m


FY2004$550m


Total$2,066m



These revaluations are incorporated into the baseline valuations adopted by Contact at EOFY2010. Assets are funded by a combination of equity and debt. So using the equity ratio at EOFY2010, we can calculate the proportion of these revaluations that are supported by equity.: 0.5394 x $2,066m = $1,114m. Why does this matter? Because when we calculate the return of shareholder equity as presented in AR2010:

$155m / $2,777m = 5.6%

Then compare that return on equity to that achieved with the generation assets revaluations removed:

$155m / ($2,777m - $1,114m) = 9.3%

the results are very different. The picture of how efficiently Contact is using its assets to generate profits changes significantly.

SNOOPY

[dreamcatcher]

Wow nice 38c jump today.......... $7 by Friday :)

[dreamcatcher]

Nothing has changed for CEN since March's sudden drop so expecting a re-rate back to $7 plus from here...........

[bull....]

cen been on fire last few days must be pricing in done smelter deal?

[BlackPeter]

cen been on fire last few days must be pricing in done smelter deal?

Isn't it nice to see that even the promise of taxpayer money is already flowing directly into the share portfolios? Good as gold.

Both of our big parties seem to be hell bent to keep subsidizing mining as well as electricity share prices ...

[dreamcatcher]

Isn't it nice to see that even the promise of taxpayer money is already flowing directly into the share portfolios? Good as gold.

Both of our big parties seem to be hell bent to keep subsidizing mining as well as electricity share prices ...

I believe if Electricity or Fuel are not kept high could start an avalanche of deflation.

Every time oil become cheap amazingly Govt uses the opportunity to rise extra taxes on fuel.

[blackie]

do the brains trust have any comments on latetest run if it continues to push past $7.55?

[dreamcatcher]

10th October 2019 CEN SP $9.04 ................plenty of room for a re-rate especially with 0% interest rates looming

[Snoopy]

10th October 2019 CEN SP $9.04 ................plenty of room for a re-rate especially with 0% interest rates looming


,,,,except that was before the closure of Tiwai was announced, and the probable closure of New Zealand Refining's 'refining' operations and the slashing of jobs at NZ Steel. For Contact in particular, this means a higher bill from Transpower as they struggle to get their excess hydro power north (if they can get it north at all) and a delay in the construction of their new Tauhara geothermal power station. So all in all higher power supply costs and lower demand. That doesn't sound like a recipe for increasing profits to me.

If zero interest rates are built into your share decision acquisition process, that means theoretically the value of any share paying a dividend is infinite. By that measure paying $100 for your Contact shares sounds like a bargain. Be careful out there in this investment market. Having said that, I have no intention of selling my Contact Energy shares that I already own. I am effectively 'looking through' the next three to five years.

SNOOPY

[bull....]

,,,,except that was before the closure of Tiwai was announced, and the probable closure of New Zealand Refining's 'refining' operations and the slashing of jobs at NZ Steel. For Contact in particular, this means a higher bill from Transpower as they struggle to get their excess hydro power north (if they can get it north at all) and a delay in the construction of their new Tauhara geothermal power station. So all in all higher power supply costs and lower demand. That doesn't sound like a recipe for increasing profits to me.

If zero interest rates are built into your share decision acquisition process, that means theoretically the value of any share paying a dividend is infinite. By that measure paying $100 for your Contact shares sounds like a bargain. Be careful out there in this investment market. Having said that, I have no intention of selling my Contact Energy shares that I already own. I am effectively 'looking through' the next three to five years.

SNOOPY

you should be happy just collected your div and its up nearly $2 since at this rate once smelter confirmed it might even make new highs?

[Checkmate]

Why is Contact Energy the latest hype stock?

[bull....]

Why is Contact Energy the latest hype stock?

cen was the hype stock last time all the gentailers took off , way outperformed the others. this is what happens a group takes off and 1 off them becomes the darling to it isnt. this time it is pretty much all together last 6 mths
cen just got sold down more than the others when the hype ran out last time so its playing a bit of catchup at the moment. there all together this time on the expectation of a smelter deal if it happens and on going low rates

[Jim]

Why is Contact Energy the latest hype stock?

Rumor going round that CEN might be joining the MSCI in 3 November

[BlackPeter]

Rumor going round that CEN might be joining the MSCI in 3 November

Good point. I think if they keep their current SP its not a rumor but very likely, but obviously - anything can happen by the 3rd of November ... exciting times ahead.

[winner69]

Is this good or bad

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/361271/332674.pdf


Disc ... know nothing about these energy stocks except TRINA says they pay good divies

[peat]

I see it as

sales stable to up
netback improving (i googled netback - it means profit per unit)
connections down not drastically but still.
storage returning to mean still down but less so.
Nth Is. still a bit short of storage huh

[peat]

market says its ok, so thats all that counts.

[Checkmate]

Still a buy at 46 times earnings? pssh.. It was borderline at $6.25 last week IMO

[BlackPeter]

Still a buy at 46 times earnings? pssh.. It was borderline at $6.25 last week IMO

Well, that's still more than 2% earnings, and don't forget - they pay dividends out of the cashflow. You need to compare the dividends they pay to what a recent bond would pay. CEN wins hands down in this contest.

But yes, I understand what you mean :):

Discl: hold. Was nice buying around $5.75:

[Mothman]

Contact is not valued on a PE basis. Mostly on dividend yield and potential growth (of which there is very little). It has been the laggard in performance of the gentailers and it is a well run business. That said it looks a little bit pricy up here at $8.

[NZSilver]

It will get close to or above $9 In the next month

[dreamcatcher]

It will get close to or above $9 In the next month

I agree will bypass $9 seems someone has been accumulating for a while and still short..........

[Simsee]

Any idea why CEN fell back end of last week?

[oldtech]

Any idea why CEN fell back end of last week?

No idea, but it shot up in the last month so maybe just taking a breather ... it's still waaay above the 30 day MA.

[macduffy]

Any idea why CEN fell back end of last week?

Probably a bit of pre-election caution.

[Phant]

Forbar has them this morning not making the Global MSCI index this time around. Prev thinking was that they might but share price now has to be around 8.60 over a period.
This was probably around the traps last week...

[oldtech]

What happened yesterday?? Dropped from 7.75 to 7.56 in the closing minutes ...

[ananda77]

What happened yesterday?? Dropped from 7.75 to 7.56 in the closing minutes ...

Happens on a regular basis and it usually has been a sign of accumulation. Blackrock's holding now close to 9% 20 October 2020. Last time 16 October 2020 was around 7.5%.

[dreamcatcher]

Happens on a regular basis and it usually has been a sign of accumulation. Blackrock's holding now close to 9% 20 October 2020. Last time 16 October 2020 was around 7.5%.
Here's the reason for the games with MEL & CEN over the last month

"Meridian Energy led the market higher, climbing 3.8 percent to $5.54, although it has had volatile movements in the past week,
Goodson said the stock price had been destabilised by its inclusion, alongside Contact Energy, in a clean energy index and the wait for confirmation of extension at the Tiwai Point aluminium smelter".

[calledone]

Here's the reason for the games with MEL & CEN over the last month

"Meridian Energy led the market higher, climbing 3.8 percent to $5.54, although it has had volatile movements in the past week,
Goodson said the stock price had been destabilised by its inclusion, alongside Contact Energy, in a clean energy index and the wait for confirmation of extension at the Tiwai Point aluminium smelter".

Are they not required to inform the market when this happened?

[oldtech]

Keeping an eye on this - although I am not surprised that the SP has fallen from the $8.10 level of mid-October, it is now getting rather close to the 30-day MA.

[BlackPeter]

Keeping an eye on this - although I am not surprised that the SP has fallen from the $8.10 level of mid-October, it is now getting rather close to the 30-day MA.

I see what you mean, however - using MA30 for this stock is only for investors without patience.

Much more satisfying to buy them below the MA400 :); They regularly get there (at least once every other year). Their MA400 is currently sitting at $6.67 ...

[Checkmate]

Why has there been such high volume on Contact today?

[Jantar]

Why has there been such high volume on Contact today?
Possibly $100 prices coupled with 800 cumecs in the Clutha river. That is revenue of $75000 per hour just from the two Clutha stations. I would suspect that net company revenue yesterday would have been in excess of $1.8 M

[NZSilver]

I sold out @ 7.95 I still see plenty of risk around tiwai. I prefer safer yield plays like ARG

[Checkmate]

Possibly $100 prices coupled with 800 cumecs in the Clutha river. That is revenue of $75000 per hour just from the two Clutha stations. I would suspect that net company revenue yesterday would have been in excess of $1.8 M
Oh right so $100 price per megawatt? Was that recently announced in operating results for September? And can you tell me how the prices are set? Is it just by market demand? I’m a bit new to the power sector. Lol.

[turnip]

Oh right so $100 price per megawatt? Was that recently announced in operating results for September? And can you tell me how the prices are set? Is it just by market demand? I’m a bit new to the power sector. Lol.

Have a read of Jantar's post in the NWF thread for a bit on how the NZ market works:
https://www.sharetrader.co.nz/showthread.php?2947-NZ-Windfarms-IPO&p=705981&viewfull=1#post705981

You can get data on current NZ prices at:
https://www.electricityinfo.co.nz/

Transpower have data on generation, transmission and storage levels, and a weekly market summary with a bit of commentry on what factors are affecting NZ prices:
https://www.transpower.co.nz/power-system-live-data
https://www.transpower.co.nz/system-operator/market-insights

This site is quite interesting too, it has prices in some other countries for comparison:
https://www.electricitymap.org

[Jantar]

Thanks for linking that information turnip. Further price information and historical prices are also available at https://www2.electricityinfo.co.nz/

[Checkmate]

Have a read of Jantar's post in the NWF thread for a bit on how the NZ market works:
https://www.sharetrader.co.nz/showthread.php?2947-NZ-Windfarms-IPO&p=705981&viewfull=1#post705981

You can get data on current NZ prices at:
https://www.electricityinfo.co.nz/

Transpower have data on generation, transmission and storage levels, and a weekly market summary with a bit of commentry on what factors are affecting NZ prices:
https://www.transpower.co.nz/power-system-live-data
https://www.transpower.co.nz/system-operator/market-insights

This site is quite interesting too, it has prices in some other countries for comparison:
https://www.electricitymap.org

Thanks for the help guys!

[Snoopy]

Contact is committed to being a leading energy retailer in New Zealand, They look to bolt on adjacent sales lines, like piped or bottled gas, broadband, and the recently bought fully in house 'Simply Energy'. 'Simply Energy' can supply data analytics, hedging and advise on innovative generation projects, like waste to energy, advice to larger industry customers. Over FY2020, the 'big four' gentailers NZ generation and customer metrics are as follows:



No. NZ Customers EOFY2020NZ Power Station Electricity Generation (TWh)


Contact Energy510k8.5


Genesis Energy435k6.8


Mercury Energy348k6.3


Meridian Energy324k14.2



Contact, has the largest number of customers and generated the second largest amount of electricity over FY2020. So Contact is a 'top three' player on both counts.

Conclusion: Pass Test

SNOOPY

[Snoopy]

I have to admit I am not exactly worried either fish. All trends eventually end and if you just look at the NPAT figure you will see this has been on the up since FY2010.

However NPAT trends do not tell the story for long term investors, because a significant number of new shares have been issued over the last five years. The earnings per share trend is not quite as positive:

FY2008: $247.4m / 576.6m = 42.9cps
FY2009: $158.7m / 587.9m = 27.0cps
FY2010: $152.9m / 604.9m = 25.3cps
FY2011: $155.9m / 695.1m = 22.4cps
FY2012: $177.1m/ 718.7m = 24.6cps


The net profit values that I am using are the 'normalised profit' figures, which exclude 'one off asset sales' or 'other non-recurring profit hits'. The formulae I use for these 'earnings per share' calculations are:

NPAT = (1-T)x(EBITDAF - DA -I), where T is the company tax rate of 28%.

and ''Earnings Per Share' = NPAT / (No.shares on issue at EOFY)

FY2016: 0.72( $523m-$201m- $101m)/715.6m = $159m/ 715.5m = 22.2cps

FY2017: 0.72( $494m-$204m- $72m)/715.5m = $143m/ 715.5m = 19.9cps

FY2018 0.72( $481m-$215m- $84m)/716,3m = $131m/ 716.3m = 18.3cps

FY2019 0.72( $518m-$205m- $70m)/716.7m = $175m/ 716.7m = 24.4cps

FY2020 0.72( $451m-$220m- $55m)/718.1m = $127m/ 718.1m = 17.6cps

The 'eps' only went up once in five years!

Conclusion: Fail Test

SNOOPY

[Dlownz]

Are you going yo do this for all energy companies 🙂

[Snoopy]

Are you going yo do this for all energy companies 🙂


Nope! And I haven't even done one yet. But since I am giving you the formulae and showing you the method, you are more than welcome to roll out equivalent calcs for the others if you like!

SNOOPY

[Dlownz]

I'll look into it. But I already have my genesis shares so I'm pretty happy

[Snoopy]

I invite readers to look back on my posts 1822 and 1823. Thees posts show the 'hidden asset revaluations' that were brought into Contact's balance sheet prior to FY2010. Revaluations like this artificially reduce the return on shareholder equity going forwards, with the result that Contact's reported 'Return On Equity' is lower than the real figure. I have corrected for this effect by subtracting a proportion of the revalued power stations by equity ratio, from the declared value of shareholder equity.

Return On Equity = (Adjusted NPAT) / (Declared Equity adjusted for historic power station revaluations)

FY2016: $159m/ ($2,823m - 0.4995x$2,066m) = 8.9%

FY2017: $143m/ ($2,775m - 0.5093x$2,066m) = 8.3%

FY2018 $131m/ ($2,727m - 0.5135x$2,066m) = 7.9%

FY2019: $175m/ ($2,782m - 0.5616x$2,066m) = 10.8%

FY2020 $127m/ ($2,621m - 0.5353x$2,066m) = 8.4%

Despite my equity adjustments downwards, I haven't been able to calculate a return on equity higher than 15% for even one year.

Conclusion: Fail Test

[Snoopy]

I can't answer for Lizard, but notice the discussion on financial fundamentals is a bit light on CEN. So here is my thought of the day:

Margin = NPAT/sales

2008: $247.4m/ $2,757m = 8.8%
2009: $158.7m/ $2,200m = 7.2%
2010: $152.9m/ $2,143m = 7.1%
2011: $156.0m/ $2,209m = 7.1%
2012: $177.1m/ $2,679m = 6.6%

Doesn't make for a satisfying trend, does it?

discl: hold CEN


Net Profit Margin = (Adjusted NPAT) / (Revenue - Energy Transmission Costs)

FY2016: $159m/ ($2,163m - ($637m -$32m) ) = 10.2%

FY2017: $143m/ ($2,775m - ($632m - $32m) ) = 6.6%

FY2018 $131m/ ($2,727m - ($635m - $32m) ) = 6.2%

FY2019: $175m/ ($2,782m - ($609m - $32m) ) = 7.9%

FY2020 $127m/ ($2,621m - ($560m - $32m) ) = 6.1%

Notes

1/ $32m is my subtraction derived 'annual electricity metering cost' as calculated from the same FY2015 reporting year being reported differently in:

'Electricity transmission, distribution and levies" (AR2015 page 58). VERSES
"Electricity networks, transmission, levies and meter costs" (AR2016 p60)


Except for one blip in FY2019, I see an ever descending downward path. On this five year snapshot, there is no evidence that Contact energy has any price raising power.

Conclusion: Fail Test

SNOOPY

[Jantar]

…...Notes

1/ $32m is annual metering cost as disclosed in AR2016 page 58.

Except for one blip in FY2019, I see an ever descending downward path. On this five year snapshot, there is no evidence that Contact energy has any price raising power.

Conclusion: Fail Test

SNOOPY

Snoopy, I am not an accountant, but I do like reading your analysis on various companies. If there is one thing I do understand it is the electricity industry, yet some of your formulae here do leave me a bit confused. The first one is your treatment of the metering costs, which must be paid out to get the metered data, as if it were revenue, or money coming in.

The formula you use is not
Net Profit Margin = (Adjusted NPAT) / (Revenue - Energy Transmission Costs), but
Net Profit Margin = (Adjusted NPAT) / (Revenue - (Energy Transmission Costs-metering costs),
and even 1st year high school maths tells that the end result of this calculation is to add the metering costs on to revenue. Surely the correct formula would be
Net Profit Margin = (Adjusted NPAT) / (Revenue - Energy Transmission Costs - metering costs)

The second point I struggle with a bit is the treatment of revaluation of generation assets. Part of the issue here is how power stations and their plant are treated for devaluation purposes.

Thermal plant has a finite life of 25 - 30 years. Very few thermal generators ever go beyond 30 years. Genesis' Rankine units are a very good example of 4 units built in 1982 - 1986. Two of these units were shut down in 2007 when they were 25 years old, and put into a mothballed stage while the other two units were kept running. Over the years as the other two units have become uneconomic they have been swapped out and the mothballed units brought back online. Parts are now being cannabalised from one of those shut down units to keep the present two running units going, but even these are now close to the end of their time. So the value of a $300 M thermal unit after 30 years is $0. Easy to value.

Hydro Plant is the complete opposite. It almost never devalues, but actually appreciates in value over time. A $100 M hydro plant built in 1950, would have required $8 M spent in refurbishment in 1980 - 1990, and $64 M in refurbishment in 2010 - 2030. But today that station would have a value of around $900 M and probably another few hundred years of life to go.


Geothermal plant is different again. The individual units are valued in the same way as thermal units, and these units must be rebuilt completely every 25 - 30 years. But the station, steamfield, and associated infrastructure is a bit like hydro with a relatively long life. Not hundreds of years, but probably closer to 100 years. Waiarakei is valued a lot more today than when it was first built, but probably only has a maximum life of a further 20 - 30 years, taking it close to 100 years of usable time. This becomes very difficult to value at any point in time.

The net result of all the changes in asset valuations was indeed to reduce the return on equity for the years going forward, but showed a massive increase in return on equity for the year in which the revaluations took place. I know all the energy companies treat their revaluations differently. Perhaps there is a case for requiring them to do so at regular intervals like the retirement sector has to do with their property valuations.

[Snoopy]

Your treatment of the metering costs, which must be paid out to get the metered data, as if it were revenue, or money coming in.

The formula you use is not
Net Profit Margin = (Adjusted NPAT) / (Revenue - Energy Transmission Costs), but
Net Profit Margin = (Adjusted NPAT) / (Revenue - (Energy Transmission Costs-metering costs),
and even 1st year high school maths tells that the end result of this calculation is to add the metering costs on to revenue. Surely the correct formula would be
Net Profit Margin = (Adjusted NPAT) / (Revenue - Energy Transmission Costs - metering costs)


Hi Jantar. Just to fill in some background pre your first question,....

There was a move a few years ago to remove transmission costs from gentailer revenue, when calculating performance metrics. Why? Because transmission costs are not controlled by the gentailer. These charges are simply passed through from Transpower and the local lines company to the customer by the retailer. They are monopoly costs that the retailer can do nothing about. So it doesn't make sense to include them when you are trying to generate a statistic that represents the performance of the gentailer.

Between FY2015 and FY2016 there was a slight revision in how Contact's financial figures were reported. To derive my representative 'electricity metering costs', I compared reporting figures for FY2015, with ostensibly the same figures for FY2015 reported for year to year comparison purposes in FY2016.

On p60 in AR2016 there is an entry referring to FY2015: Electricity networks, transmission levies & meter costs $665m
On p58 in AR2015 there is an entry referring to FY2015: Electricity, transmission, distribution and levies: $633m

The difference between the two is $32m, which I took as indicative of electricity meter costs. If you look further down on p58 in AR2015 you will see an entry for 'meter costs' of $36m. This is slightly different to my calculated figure. I explain the difference as being due to the higher figure also including retail gas metering costs,. which are distinct from electricity gentailer costs. Metering costs are no longer disclosed by Contact. So I am taking this $32m figure as indicative of electricity metering costs going forwards from FY2015.

Moving back to FY2016, p60 of FY2016 contains the following entry: Electricity networks, transmission levies & meter costs $637m

In my calculation for FY2016 to subtract the 'transmission revenue' from the 'total revenue' ( $2,163m - ($637m -$32m) = $1,558m ) you are quite correct Jantar in observing that the way the mathematics is expressed, I am adding the meter revenue back onto the total revenue. This is what I want to do because in general, metering revenue is under the control of the gentailer, not the lines companies.

SNOOPY

[Snoopy]

The second point I struggle with a bit is the treatment of revaluation of generation assets. Part of the issue here is how power stations and their plant are treated for devaluation purposes.

Thermal plant has a finite life of 25 - 30 years. Very few thermal generators ever go beyond 30 years. Genesis' Rankine units are a very good example of 4 units built in 1982 - 1986. Two of these units were shut down in 2007 when they were 25 years old, and put into a mothballed stage while the other two units were kept running. Over the years as the other two units have become uneconomic they have been swapped out and the mothballed units brought back online. Parts are now being cannabalised from one of those shut down units to keep the present two running units going, but even these are now close to the end of their time. So the value of a $300 M thermal unit after 30 years is $0. Easy to value.

Hydro Plant is the complete opposite. It almost never devalues, but actually appreciates in value over time. A $100 M hydro plant built in 1950, would have required $8 M spent in refurbishment in 1980 - 1990, and $64 M in refurbishment in 2010 - 2030. But today that station would have a value of around $900 M and probably another few hundred years of life to go.


Geothermal plant is different again. The individual units are valued in the same way as thermal units, and these units must be rebuilt completely every 25 - 30 years. But the station, steamfield, and associated infrastructure is a bit like hydro with a relatively long life. Not hundreds of years, but probably closer to 100 years. Waiarakei is valued a lot more today than when it was first built, but probably only has a maximum life of a further 20 - 30 years, taking it close to 100 years of usable time. This becomes very difficult to value at any point in time.

The net result of all the changes in asset valuations was indeed to reduce the return on equity for the years going forward, but showed a massive increase in return on equity for the year in which the revaluations took place. I know all the energy companies treat their revaluations differently. Perhaps there is a case for requiring them to do so at regular intervals like the retirement sector has to do with their property valuations.


Jantar, as you probably know, there was a change in Asset Revaluation Policy at Contact from FY2010 ( AR2010 p60 ). Assets were, at that time, written back to book value at EOFY2004 which was when IFRS accounting rules became the standard in New Zealand. Up until EOFY2004 the asset revaluation policy at Contact Energy was as follows (from p50 AR2003):

"Contacts accounting policies require the valuation of all generation assets on three yearly intervals, with interim revaluations where there is deemed to be a significant change to the valuation of these assets. Due to the policies all generation assets were revalued to the net present value of future earnings of the assets, on an existing use basis,"

I believe that almost all revaluations up until EOFY2004 - the revaluations that were not written back- were Clyde and Roxburgh hydro dam related. Contact's other Crown jewel renewable plant, the Te Mihi geothermal station, was not commissioned until FY2014. And the original Wairakei geothermal generation was 40 year sold, even back then. Of the other geothermal stations on the books at EOFY2004, Poihipi was small. And Ohaaki may have, even then, looked like running into capacity problems. None of those three geothermal plants scream 'revaluation' to me.

What I have done in my ROE calculations is reverse the revaluations of, most likely, Clyde and Roxburgh up until EOFY2004. These days any such revaluations would flow straight through to the bottom line as 'bumper profits' in the year of revaluation, as you rightly note above. However, back then, in pre-IFRS days, this didn't happen. So my act of reversing these one off windfall gains does not impact on the reported profit history of Contact. What it does do though, is increase the calculated 'Return on Equity' of Contact shares. I make no apologies for this. I believe that the true measure of profitability of Contact's assets must be based on the original book value. 'Deciding that your assets are worth' more will consequently decrease the company ROE for no good reason.

Jantar, I don't believe you should have an issue with revaluation of assets in the Contact context. There haven't been any (lasting) revaluations for sixteen years. By undoing the revaluations prior to FY2004, I am effectively seeing those hydro dams as more valuable than the end of year accounts record. From what I have read in your post, I don't think you have any issue with recognising the high inherent earnings value of hydro assets that are not reflected in the earnings results as presented. I will happily try to calm any qualms you have on the subject if you can tell me where you can see a problem. I don't see a problem myself, but maybe you are seeing something that I don't?.

SNOOPY

[Jantar]

Thank you for those explanations Snoopy. As I commented I am not an accountant so had difficulty seeing where you were coming from. I still can't say I fully understand it all, but obviously you had correct reasons for treating the numbers as you did.

With the metering costs, as they are already incorporated into the gross revenue, I still think you are double counting them by adding them back in again.

[Snoopy]

Thank you for those explanations Snoopy. As I commented I am not an accountant so had difficulty seeing where you were coming from. I still can't say I fully understand it all, but obviously you had correct reasons for treating the numbers as you did.

With the metering costs, as they are already incorporated into the gross revenue, I still think you are double counting them by adding them back in again.


Perhaps you are thinking that I have already worked out a profit, and that profit has already had expenses (including metering costs) deducted from it. So it is therefore 'double counting' to add back in the metering costs from revenue. And you would be right. Except that is not what I am doing.

We are looking at a ratio of profit to revenue in this exercise. The profit is on the top half of the fraction, and the revenue is in the bottom half. So altering the revenue in the denominator of the fraction by adding back in metering costs isn't doing anything -directly- to the profit which is in the numerator of the fraction.

I suppose thinking about this more carefully that strictly, because I have taken the lines revenue out of the denominator, I should also take the lines profit out of the numerator. But we do not know how much 'clipping the ticket' that Contact does in passing the lines charges onto the customer. I would guess it does the same 'cliipping the ticket' that all the other retailers do. And if that is the case, and the real object of this exercise is to be able to compare the net profit margin of one gentailer with another, then the actual 'lines profit' clipped and booked by Contact doesn't matter. Because exactly the same proportion of lines profit will be in the accounts of competitor retailers as well. In any event because Contact is simply 'clipping the ticket' for someones else's lines service, I don't expect the 'lines profit' booked by Contact will be very much.

Thanks for your prodding Jantar, because sometimes I do make mistakes and sometimes I find these by going over my working again. But I don't think this is one of those times.

SNOOPY

[Snoopy]

The second point I struggle with a bit is the treatment of revaluation of generation assets.


This is a big topic that I struggle with myself. But I will try to explain my thoughts on adjusting asset values when calculating ROE and readers will have to see if it makes sense to them.

The following is an excerpt from AR2010 p60, which was the year that Contact decided to stop revaluing it's generation assets

-------

"Contact adopted a policy of revaluing its core generation plant and equipment from the commencement of the Group. Contact has relied upon an independent valuation of such assets as determining fair value. As there is a limited market for trading comparable generation assets in New Zealand, the valuation has primarily relied upon the discounted cashflow analysis of the estimated long term cashflows from generation plant and equipment. Given the long life (up to 100 years) of such assets, the valuation is very sensitive to any variation in assumptions. Events like the global financial crisis have added increased uncertainty to the independent valuation assumptions. The range in the current independent valuation has correspondingly increased compared with prior valuations, such that a single point fair value within the valuation range is difficult to determine."

"In the alternative, the cost valuation basis is considered a reliable basis for measurement of generation plant and equipment. Cost also provides relevant information about the long term cash generating performance of the core generation plant and equipment. For example core metrics such as return on capital invested in plant and equipment can be calculated without adjustment to the return or the investment for the impact of asset revaluations."

<snip>

"Fair value is at 1st October 2014 is considered deemed historical cost owing to the impracticality of determining actual cost back to the original purchase date"

---------

Going back to the original purchase date may be a problem, as Contact's assets came from what was ECNZ 'way back when'. But is is relatively easy to go back to the floating of Contact itself and the historic asset revaluations made prior to 1st October 2014.



FY1999$673m


FY2002$843m


FY2004$550m


Total$2,066m



Having made the argument for using historic cost, I find it very odd that Contact has chosen not to unwind the prior to 1st October 2014 asset revaluations that are readily accessible via their own annual reports. All I am advocating here is the extension of Contact's own current asset revaluation policy back to the float of Contact Energy incorporating the extra asset revaluations recorded in the published accounts.

Having $2,066m in revalued 'phantom assets' on the books is pretty substantial. Particularly so in the EOFY2020 context of Contact having $4,896m of total assets (including those just described phantom assets) on the books. Net assets at EOFY2020 were $2,621m. ROE is calculated on 'net assets', the end of period 'shareholder equity'. So what to do about it?

A company's assets are funded by a combination of equity and debt. This also applies to those $2,066m in phantom assets included on the Contact books. Removing those phantom assets from the books means removing both the 'debt funded component' and the 'equity funded component'. From an ROE perspective, we are only interested in the 'equity funded component'.

As at EOFY2020, Contact $2,621m worth of shareholder equity and $2,275m of liabilities funding total assets of: $2,621m + $2,275m = $4,896m

This means we can consider any asset the company owns (including the $2,066m of phantom assets I have identified) as funded:

$2,621m/$4,896m = 53.53% by equity

From that figure we can work out the underling equity at EOFY2020 removing the $2,066m of phantom assets from the equity picture:

$2,621m - 0.5353 x $2,066m = $1,515m

Using a normalised profit figure of $127m for FY2020, I calculate a 'Return on Equity' figure for FY2020 of:

$127m / $1,515m = 8.4%

The final question to ask here is, does removing the phantom equity from the picture matter? I argue that it does because if I didn't do it, the ROE calculated for FY2020 would be very different:

$127m / $2,621m = 4.8%

That figure is little more than half my revised ROE figure! I would argue that a figure of 4.8% gives a very false picture on how efficiently Contact Energy are using their equity to generate a return for shareholders. Because that $2,621m of shareholder equity on the books contains:

$2,621m - $1,515m = $1,106m of shareholder equity that was created, from pre 1st October 2004 generation asset revaluations out of thin air.

SNOOPY

[dreamcatcher]

Probably helping SP same as MEL ............aluminum prices strong

[Snoopy]

Probably helping SP same as MEL ............aluminum prices strong


At the end of year FY2020 result brokers briefing one analyst asked about negotiating with Tiwai. CEO Mike Fuge's response was that although they had put some money in the negotiating pot with Meridian, Contact was a passenger in the process. The exact words he used talked about being a 'contractor' to Meridian. So I don't think anyone inside Contact is on the negotiation hotline. This was before all the pre-election promises of NZ First, National and Labour on government involvement for a medium term more managed exit for Rio Tinto. When asked about a 2-4 year managed exit time frame that he had previously spoken about, Fuge said that time frame was the reality in terms of getting alternative uses for that power consented and built. IIRC Fuge also said that a five year exit plan would be better for NZ Inc.

SNOOPY

[Snoopy]

After I started on my Buffett test evaluation of Contact Energy, I remembered why I hadn't been through the full Buffett test performance before. I knew it would fail! However to those followers of Buffett this shouldn't have come as a surprise. The Buffett tests reward growing companies with expanding profit margin potential and a high return on shareholder equity. That last hurdle was never going to be easy with a highly capital intensive business like electricity production. The New Zealand electricity market is mature with limited growth potential, not helped by the pending departure of the Tiwai Point aluminium smelting plant. And that is just the highest profile industrial looking to downsize or leave NZ entirely. Furthermore unexpected changes in catchment inflow can make profit margins volatile.

Nevertheless the failure was spectacular, with the only success being the significant business size test (BT1). I didn't write up this series of posts to beat up Contact investors though. After all I am a CEN shareholder myself. What this conclusion shows is that if you want to invest in Contact, then you need other reasons to do it. The buffettology book must be put away.

Instead investors should look back to my post 1821:

"Valuation: From a FY2020 projected dividend 'capitalised valuation' perspective."

The best investment strategy I can come up with, taking shorter term view is to seek out a share purchase price of no more than $7. With the shares closing at $8.06 today, we are trading north of where I see fair value. But in this generally overvalued market, $8.06 is not grossly overvalued. And with an average buy price of $4.81 and a median holding period of 7 years I am 'sitting pretty' on what for me has been a very successful investment.

The next opportunity to enter at a good price may be when the freshly evaluated Tauhara geothermal field gets a turbine stuck on top of it. At the FY2020 result briefing, CEO Mike Fuge reminded analysts that Tauhara is sitting 'ready to go'. And that Contact Energy management believe it will be the next big power station development off the block. More capital will be required to build Tauhara, and that may mean a short term fall in dividend. Then again, the new power station may be able to be funded with a hybrid equity bond, without any new shares having to be offered. The general message from the analysts briefing was that all options are on the table and Tauhara will be first out of the blocks, whenever the Tiwai wind down determined race start happens to be.

For now I will continue to hold and watch.

SNOOPY

discl: shareholder

[Snoopy]

Jantar kindly identified some errors in my first version of this table. Time to put in his corrections



Mercury Energy HydroStation Generation CapacityMercury NotesContact Energy HydroStation Generation Capacity


Aratiatia78MWUpgrade by FY2020


Atiamuri74MWClyde464MW

[/TR]

Waipapa51MWRoxburgh320MW

[/TR]

Ohakuri112MW


Whakamaru100MWUpgrade to 124MW by FY2020


Arapuni196MWReceived 12MW upgrade in FY2011


Maraetai 1 & 2352MW


Karapiro96MW


Total1059MWTotal784MW







Mercury Energy GeothermalStation Generation CapacityMercury NotesContact Energy GeothermalStation Generation CapacityContact Notes


Kawerau100MWOhaaki48MW


Mokai (25% owned)112MWTe Huaka28MWCompleted FY2010


Rotokawa34MWRefurbished FY2015Wairakei145MW

[/TR]

Nga Awa Purua (65% owned)138MWCompleted FY2010Poihipi65MW


Ngatimariki82MWCompleted FY2014Te Mihi166MWCompleted FY2014


Total466MWTotal452MW



The first purpose of this comparison is to show how similar the renewable generation of each company is.

The second purpose of this comparison is to come up with a 'quantitative factor' that shows how we can estimate any undeclared 'thin air capital' on the Contact balance sheet. Competitor Mercury are very forthcoming with their 'thin air capital', regularly upgrading the value of their generation assets on an annual basis. Contact do not follow this policy, but that doesn't mean that no thin air capital is accumulating at Contact. It just means they are not trumpeting it in the annual accounts. Sniffing out hidden value is this hound dog's specialty, so this is why I remain 'on the case'.

I was a bit disturbed by Jantar's opinion that there is no fix for Contact's Ohaaki. The required water re injection rate quenching the field looks to be a long term death sentence for Ohaaki, and no doubt would require an annual write down in the value of that station should Contact adopt the policy of revaluing their generation assets each year. There is also a 'field risk' with most of the rest of the Contact geothermal portfolio all plugged into the Wairakei field. It is still possible that long term wholesale price increases over the geothermal portfolio will cancel out any production deterioration at Ohaaki though. Given this, I would suggest that for 'valuation purposes' we should assume that it is only the South Island hydro assets that are accumulating thin air capital. But even then with climate change changing the snow melt in the South, there could be some long term valuation adjustments to be made as a result.

Clearly there is not as much 'thin air capital' being accumulated at Contact than is being accumulated at Mercury. Also. I don't believe it is prudent that in a market with electricity wholesale prices largely flat, that we can assume any thin air capital accumulated in the past is a pointer to more of the same happening in the future. I do believe we investors can bank the thin air capital that has already been accumulated though, even if it hasn't been recorded in Contact's books.

Mercury has already calculated how much thin air capital they have accumulated over the last few years. I think it is a fair assumption that if we take this figure for any time period, then multiply it by a factor of:

784/1059 = 0.74

Or if you consider that the Mercury Geothermal power stations have increased in value over time, unlike their Contact counterparts, the multiplication factor might be:

784/(1059+466) = 0.51

One of those fractions will allow us to make an approximation of how much thin air capital has been accumulated by Contact over the same period. Once we know that figure, we can work out what size new power station that Contact can build, without going back to shareholders for more capital.


Jantar has previously told us of the technical issues at Ohaaki. That strictly should be written down in value due to what appear to be permanent operational constraints (Contact's policy is not to annually review the value of its generation assets so it hasn't been). He has also spoken of the risks of Contacts geothermal generation largely being dependent on the health of a single geothermal field: Wairakei. I have therefore decided to set aside any 'thin air capital' that may be raised from any underlying increase in Contact Energy's geothermal assets (if indeed there is any) and concentrate on calculating thin air capital that has likely been raised from Contact's hydro generation assets.



Mercury Energy HydroStation Generation CapacityMercury NotesContact Energy HydroStation Generation Capacity


Aratiatia78MWUpgraded FY2020


Atiamuri74MWClyde464MW

[/TR]

Waipapa51MWRoxburgh320MW

[/TR]

Ohakuri112MW


Whakamaru124MWUpgraded from 100MW FY2020


Arapuni196MWReceived 12MW upgrade in FY2011


Maraetai 1 & 2352MW


Karapiro96MW


Total1083MWTotal784MW



Clearly there is not as much 'thin air capital' being accumulated at Contact than is being accumulated at Mercury. Also. I don't believe it is prudent that in a market with electricity wholesale prices largely flat, that we can assume any thin air capital accumulated in the past is a pointer to more of the same happening in the future. I do believe we investors can bank the thin air capital that has already been accumulated though, even if it hasn't been recorded in Contact's books.

Mercury has already calculated how much thin air capital they have accumulated over the last few years. I think it is a fair assumption that if we take this figure for any time period, then multiply it by a factor of:

784/1083 = 0.72

then this will give us an estimate of the thin air capital accumulated, but not booked, by Contact Energy over the same period.

SNOOPY

[BlackPeter]

Jantar has previously told us of the technical issues at Ohaaki. That strictly should be written down in value due to what appear to be permanent operational constraints (Contact's policy is not to annually review the value of its generation assets so it hasn't been). He has also spoken of the risks of Contacts geothermal generation largely being dependent on the health of a single geothermal field: Wairakei. I have therefore decided to set aside any 'thin air capital' that may be raised from any underlying increase in Contact Energy's geothermal assets (if indeed there is any) and concentrate on calculating thin air capital that has likely been raised from Contact's hydro generation assets.



Mercury Energy HydroStation Generation CapacityMercury NotesContact Energy HydroStation Generation Capacity


Aratiatia78MWUpgraded FY2020


Atiamuri74MWClyde464MW

[/TR]

Waipapa51MWRoxburgh320MW

[/TR]

Ohakuri112MW


Whakamaru124MWUpgraded from 100MW FY2020


Arapuni196MWReceived 12MW upgrade in FY2011


Maraetai 1 & 2352MW


Karapiro96MW


Total1083MWTotal784MW



Clearly there is not as much 'thin air capital' being accumulated at Contact than is being accumulated at Mercury. Also. I don't believe it is prudent that in a market with electricity wholesale prices largely flat, that we can assume any thin air capital accumulated in the past is a pointer to more of the same happening in the future. I do believe we investors can bank the thin air capital that has already been accumulated though, even if it hasn't been recorded in Contact's books.

Mercury has already calculated how much thin air capital they have accumulated over the last few years. I think it is a fair assumption that if we take this figure for any time period, then multiply it by a factor of:

784/1083 = 0.72

then this will give us an estimate of the thin air capital accumulated, but not booked, by Contact Energy over the same period.

SNOOPY

Interesting exercise, but not sure I would put too much emphasis on "thin air capital" for valuing the assets of Gentailers. At the end - there is not a thriving market place for large electricity generating assets (i.e. its not really capital, but just not realizable paper gains or losses) and the respective value of these assets is solely dependent on their future capacity to generate money.

Latter is dependent on

- future (unknown) electricity prices and
- future (unknown) electricity demand and
- future (unknown) competing electricity supplies and
- future (uncertain) ability of above assets to generate electricity at a time when the markets needs it and
- future (unknown) decisions of market regulators and
- future (unknown) climatic or seismic events

Lots of unknowns ... and while it is probably a fair assumption that most of the gentailers assets might still be around and operational in a handful of years or decades - I don't think that anybody is able to predict with any certainty how profitable they will be at that stage. And this is exactly what we would need to know to calculate a net present value with or without thin air :):

[Snoopy]

Interesting exercise, but not sure I would put too much emphasis on "thin air capital" for valuing the assets of Gentailers. At the end - there is not a thriving market place for large electricity generating assets (i.e. its not really capital, but just not realizable paper gains or losses) and the respective value of these assets is solely dependent on their future capacity to generate money.


Thanks for those comments BP, and yes that is a legitimate alternative viewpoint. In fact that is Contact's own viewpoint. However, although it appears there is no ready market for these long lived generation assets, I will bet you that if some of those assets were 'put on the block' then buyers would suddenly appear. The other point is that there are no plans to sell any of these long lived assets. So the lack of a readily identifiable daily market for them is not an issue. The fact that they are saleable is all that matters. Finally the incremental increase in equity values are based on their ability to generate money.



Latter is dependent on

- future (unknown) electricity prices and
- future (unknown) electricity demand and


Those are unknowns in the sense the that future is always unknown. But there are full time boffins within the industry whose full time job is to forecast demand, and forecast what is happening to price. Furthermore they can influence the wholesale price by determining which of their generation assets to operate. Furthermore they can also put their money where their mouth is by participatng in the power futures market. So I would argue there is a lot of predictability in both pricing and demand that can be locked in as a certainty by signing up to short and long term supply/demand contracts.



- future (unknown) competing electricity supplies and


I can't really agree with that. Everyone knows Contact has a new consented geothermal power station with the build set to go at short notice. Everyone knows that Mercury and Genesis are currently building new wind power stations, the capacity of those and what the likely generation profiles will be. Everyone knows that Huntly will be used less as a commitment to a less carbon intensive power generation base ramps up. There are no real supply surprises.



- future (uncertain) ability of above assets to generate electricity at a time when the markets needs it and


Gentailers that are lucky enough to have significant hydro generation assets are re-purposing their hydro assets as hydro batteries to get around exactly this problem.



- future (unknown) decisions of market regulators and


Always a risk. But the current system has survived the 'threat' of various coalition governments and has not been changed.



- future (unknown) climatic or seismic events


Lot's of seismic design expertise has gone into these geothermal and hydro assets. That is never a guarantee in the face of 'the really big one'. But if that was the critical factor in operating a business, there would be no businesses operating at all. I am not sure you can model against events with an expected return period of more that 100 years.



Lots of unknowns ... and while it is probably a fair assumption that most of the gentailers assets might still be around and operational in a handful of years or decades - I don't think that anybody is able to predict with any certainty how profitable they will be at that stage. And this is exactly what we would need to know to calculate a net present value with or without thin air :):

If forecast prices and demand go down then the market value of those power generation assets goes down. Then the thin air capital disappears just as easily as it arrived. However, with almost zero fuel costs, those long lived power generation assets benefit hugely from even tiny price rises that go straight to the bottom line. The rising population would suggest that power prices will continue to go up in the long term, despite the one off loss of big industrial users. The conversion of the vehicle fleet from fossil fuels to an electric power base over the next 30 years will underpin that electric power demand trand. Over my many years of paying power bills, and renegotiating my power pricing along the way, I can't recall the price of power ever falling!

SNOOPY

[Snoopy]

Mercury has already calculated how much thin air capital they have accumulated over the last few years. I think it is a fair assumption that if we take this figure for any time period, then multiply it by a factor of:

784/1083 = 0.72

then this will give us an estimate of the thin air capital accumulated, but not booked, by Contact Energy over the same period.


I have previously stated that I am not considering any thin air capital that may (or may not) arise from Contact's geothermal assets. Focussing on Contact's hydro assets only, requires us to look at what happened to the 'thin air capital' of Mercury's hydro assets only.

FY2014 was a significant year for Contact Energy, because it represented the last year in which they constructed a brand new geothermal power station, Te Mihi. Contact raised new capital for this project in FY2011, via a share issue, with a view to having the company in the right capital shape when Te Mihi construction came to an end. Contact's capital structure following that construction project can therefore be thought of as 'optimised'. It therefore makes sense to only consider the 'thin air' capital growth path from that Te Mihi construction completion date, starting with FY2015 and going forwards.

What does 'optimised capital position' mean in terms of numbers? The position at EOFY2014 was: Assets $6,183m, Shareholder Equity $3,582m

Equity Ratio as at EOFY2014 = $3,582m / $6,183m = 58%

The 'thin air' capital growth for Mercury hydro assets is shown below. Both Mercury and Contact operate in the same electricity market. That is why I consider the thin air capital accumulated by Mercury as an indicative factor to use for the thin air capital accumulated (but not recognised) by Contact management over that same period. Information in the table below is derived from posts 1349 and 1308 in the Mercury thread.



Mercury EnergyReval. Hydro & Thermal Assets ($m)Reval. Geothermal & Other Generation Assets ($m)Total Revalued Generation Assets


2015355142497


20168255137


201705252


201805555


201915199250


202025343296


Total841



That $841m of thin air incremental capital raised was based on a total hydro generating capacity of 1059MW (Post1347, Mercury Thread). The total Contact Energy hydro electric generation capacity is 784MW (my post 1514). So I can determine my 'best guess' at the thin air capital accumulated by Contact Energy subsequent to the FY2014 balance date by ratio:

$841m x 784MW/1059MW = $623m

Debt can be borrowed against this 'thin air capital'. This means the total amount of investment capital (equity and debt) that can be utilised as a result of this 'thin air capital' is:

$623m / 0.58 = $1,074m

Now, what sort of power station could Contact build with that?

SNOOPY

[Snoopy]

Debt can be borrowed against this 'thin air capital'. This means the total amount of investment capital (equity and debt) that can be utilised as a result of this 'thin air capital' is:

$623m / 0.58 = $1,074m

Now, what sort of power station could Contact build with that?




Have just re-referenced my 28 April 2011 cash issue prospectus. On page 22 of that offer document is the following quote:

"The project is expected to cost $623m, which includes construction of the Te Mihi power station (including two steam turbine generators and associated equipment), electrical switchyard and transmission connection works, incremental steamfield works on the Wairakei geothermal system, including drilling of geothermal wells and other ancilliary works."

Conspicuous by its absence is any mention of buying outright or leasehold the underlying land.

For comparative purposes, the Ngatamariki 82MW geothermal power station, owned by Mighty River Power and under construction at the same time is forecast to cost $475m. On a Megawatt per dollar basis the Contact station is 54% more bang for the buck. I find it hard to reconcile this for two modern geothermal stations being built in the centre of the North Island at the same time. My only plausible explanation is that Ngatamariki is built on leasehold land and perhaps the extra money is related to buying a long term lease on this land?

Whatever the reason for the difference, my view has been strengthened that Te Mihi, built by Contact Energy is a good base figure to work from when estimating the replacement costs of other geothermal power stations excluding land costs.


Te Mihi has a design output of 166MW. FY2014 is six years ago. So I am going to allow for build inflation of 4% per year, about twice the inflation target, since that date to get FY2020 construction costs.

$623m x (1.04)^6 = $788m

The amount of construction capital available would suggest Contact can build its next geothermal station larger than Te Mihi.

166MW x($1,074m / $788m) = 226MW

If Contact constructed such a station today, how would that affect the size of their generation portfolio?

SNOOPY

[Snoopy]

Te Mihi has a design output of 166MW. FY2014 is six years ago. So I am going to allow for build inflation of 4% per year, about twice the inflation target, since that date to get FY2020 construction costs.

$623m x (1.04)^6 = $788m

The amount of construction capital available would suggest Contact can build its next geothermal station larger than Te Mihi.

166MW x($1,074m / $788m) = 226MW

If Contact constructed such a station today, how would that affect the size of their generation portfolio?




Contact Energy HydroStation Generation CapacityNotes
Contact Energy GeothermalStation Generation Capacity
Notes


Clyde464MWCommissioned FY1992
Ohaaki48MWCommissioned FY1989

[/TR]

Roxburgh320MWCommissioned 1956Te Huaka28MWCommissioned FY2010



Wairakei145MWCommissioned 1958, Modified FY2005



Poihipi65MWCommissioned FY1997



Te Mihi166MWCommissioned FY2014


Total784MW

Total452MW


Effective Capacity Factor0.514Effective Capacity Factor0.940


Total Operationally Adjusted
403MW
Total Operationally Adjusted425MW



Adding a new geothermal station of 226MW that would operate at 94% availability would lift Contacts expected operating generating capacity by:

(226MW x 0.94) / (403MW + 425MW) = +25.7%

SNOOPY

[Snoopy]

The budget for constructing Te Mihi (166MW) back in FY2013 was $623m (refer to my post 617).

It doesn't look like Contact have accumulated enough thin air capital to construct another Te Mihi. But I reckon there might be enough in the kitty to build a 100MW geothermal station. Assuming that station had a utilisation rate of 85%, by how much would the power generating capacity of Contact Energy increase?

Energy Generated by New Station Over one year:

(100MW x 0.85) x 25 x 365 x (1/1000) = 776GWh

776GWh / 8449GWh = 9.2%

So this is the multiplication factor we need to increase the value of CEN shares by if we are to include in that the earnings value of the new station that 'could be built', without recourse to raising new capital from shareholders.

Note the normalised earning valuation does not make any allowance for off balance sheet 'thin air capital' that has been accumulated by Contact Energy. Making this adjustment I get a fair value for Contact Energy of:

$5.58 x 1.092 = $6.09

Given that Contact is trading well below that figure, it looks like an 'accumulate' at current market prices. Yet, ever the bargain hunter, I would be on the look out for 20% discount to fair value. That equates to $4.87. I say Contact would be a 'strong buy' should the current market volatility see the share price drop to that level.





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


201121.7c+3.9c19.0c+6.6c0c0c19.0c


201224.7c+3.9c38.0c-9.4c9.4c2.6c26.0c


201328.1c+3.9c39.0c-7.0c7.0c2.0c30.0c


201427.7c+3.9c39.0c-7.4c7.4c2.1c29.5c


201522.4c+3.9c39.0c-12.7c12.7c3.6c22.7c


201622.1c+3.9c39.0c-13.0c13.0c3.6c22.4c


201718.7c+3.9c39.0c-16.4c16.4c4.6c18.0c


201818.2c+3.9c39.0c-16.9c16.9c4.7c17.4c


201924.3c+3.9c39.0c-10.8c10.8c3.0c25.2c


202017.7c+3.9c39.0c-17.4c17.4c4.9c16.7c


Total264.6c (E)369.0c (F)226.9c


Business Cycle Imputation Rate (E)/(F)71.70%



The expected average dividend per year, net of tax is therefore: 226.9 / 10 = 22.7cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 22.7cps /(1-0.28) = 31.5c

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

31.5c /0.045 = $7.00

So $7.00 is therefore 'fair value'.

However, I am only predicting the 'superimputation' effect to last for two years. If we look out over ten years, then eight of those ten years will only have regular imputation. This means the business cycle value of Contact shares is actually a weighted average of the two parts of my valuation, calculated like this:

( 2($7.00) + 8($5.62) )/10 = $5.90





Adding a new geothermal station of 226MW that would operate at 94% availability would lift Contacts generating capacity by:

(226MW x 0.94) / (403MW + 425MW) = +25.7%



With the 'thin air capital' future earnings improvement factor now calculated, we can at last nail down a fair value for CEN shares, (according to this model at least.)

$5.90 x 1.257 = $7.42

CEN are trading at $8.06 as I write this. I therefore consider CEN shares on the market today to be 8.6% overvalued.

SNOOPY

discl: hold CEN, but these are not overvalued enough for me to consider selling down. I won't be buying more at today's prices though

[Snoopy]

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.




FY2020Contact EnergyMercury Energy


No. Shares718.1m1,400m


Share Price (17-12-2020)$8.06$6.18


Normalised eps17.6c11.7c


Normalised PE45.852.8


Normalised NPAT Margin6.1%11.8%


ROE (Assets at Cost)8.4%9.2%


Bank Debt$1,198m$1,291m


Min. Debt Repayment Time9.4 years7.9 years


Snoopy's Fair Share Price Valuation$7.42$6.34


Current Market Premium or Discount to Fair Value+8.6%-2.6%



Notes:

1/ Both CEN valuation and MCY valuation contain adjustment factors to include the value of 'thin air capital' accumulated. For Mercury this is +23.4%. For Contact Energy the adjustment factor is +25.7% It is no longer Contact policy to revalue their assets annually. Hence Contact's balance sheet does not contain 'thin air capital', but Mercury's balance sheet does.

2/ The FY2020 financial statements of both companies were compiled on the assumption that the Tiwai Point Aluminium Smelter is to remain as a going concern.

My snoopshot view shows a clear 'investor value advantage' for Mercury Energy. Despite the stratospheric PE ratios now commanded by both companies, Mercury is trading modestly below fair value. My modelling shows that both companies are now in a position to build substantial new power stations at no additional cost to shareholders. In fact Mercury is doing this right now., and has the ability to build yet another similar sized wind power station when Turitea is finished. In the case of Contact, the new Tauhara Geothermal Station is fully planned (250MW output) and costed ($600m build cost) and consented, with the O.K. from head office all that is keeping construction starting. IMO these renewable energy projects are being priced by the market as already built and operating. Once they come on stream, those stratospheric market PEs for MCY and CEN should reduce.

Mercury Energy currently owns a strategic stake in 'Tilt Renewables', a listed entity that develops and operates wind farms in New Zealand and Australia. 'Tilt Renewables' is currently the subject of undisclosed market interest, that may result in Mercury's interest being sold at a good profit. I have not included any speculation from such a deal in my valuation for Mercury directly. However I have included the capital currently committed to Tilt as 'spent;' on construction of Puketo wind farm (still on the drawing board). So in my judgement ascribing any extra value to the Tilt renewable stake now would be both speculative and also double counting the capital I have already modelled as committed to Puketo.

Important profitability indicators of 'Net Profit margin' and the debt risk indicator of 'MDRT' continue to favour Mercury Energy.

As I write this, both shares are trading above their September 30th 2020 market valuations ( CEN $6.65 and MCY $5.10.) The recovery in share price since that date is primarily because of the political will shown to accommodate an extension to the time frame of the Tiwai Point closure. However, as I write this, the official position remains that the Tiwai Point aluminium smelter will cease production by August 2021. This means there is a substantial downside risk for both share prices if an extension to the Tiwai Point closure date cannot be negotiated,

The current Contact Energy market price premium is not sufficient to make me sell up. 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]

Contact Energy HydroStation Generation CapacityContact Energy GeothermalStation Generation CapacityContact Notes


Clyde464MWOhaaki48MW

[/TR]

Roxburgh320MWTe Huaka28MWCompleted FY2010


Wairakei145MW


Poihipi65MW


Te Mihi166MWCompleted FY2014


Total784MWTotal452MW


Effective Capacity Factor0.514Effective Capacity Factor0.940


Total Operationally Adjusted403MWTotal Operationally Adjusted425MW





An issue has emerged on the MCY thread regarding Mercury claiming a high capacity utilisation of their geothermal power generation stations of 95%. Yet when actual figures are calculated from operational data , the utilisation never rises above 70%, a huge difference. One theory I have to explain this is that Mercury does not fully own all of their geothermal power stations. Therefore the maximum amount of power that can be generated reflects the equity percentage ownership of the of those power stations, not the total power station output. One way to check this theory is to look at Contact Energy. Contact is also a significant operator of geothermal power generation in the volcanic plateau of the North Island. However, unlike Mercury, Contact fully owns the output of all their geothermal power stations. So if Mercury is correct in their 95% capacity utilization claim, this kind of capacity utilisation figure should apply to Contact Energy as well. Let's see if it does.

Let's run the calculation for FY2020 using the reported 'equity accounted generation base', which in this instance is the same as the whole generation base.

https://contact.co.nz/-/media/contact/mediacentre/operating-reports/operating-report-for-june-2020.ashx?la=en (See page 7)

The geothermal generation capacity at Contact is 452MW (table above). If run at 100% capacity for twelve months those five geothermal stations can generate

452MW x 24 hrs/day x 365 days/quarter = 3,959,520 MWh/year

So the Contact geothermal stations, over FY2020, operated at: 3,333,000 / 3,959,520 = 84.2% capacity

As a check, I shall do the same calculation for the FY2019 year

3,256,000 / 3,959,520 = 82.2% capacity

That is consistent with the following year. But why is the capacity utilisation a full ten percentage points lower than Mercury has been achieving?

SNOOPY

[Jantar]

…...
That is consistent with the following year. But why is the capacity utilisation a full ten percentage points lower than Mercury has been achieving?

SNOOPY Perhaps MCY are not reporting their NCF (Nett capacity factor) correctly. Contact's geothermal used to make an error in their reporting. It could be that there was a problem in the steam field that caused a loss of generation even though the generator itself was still available. As the Operation Manager had his bonus linked to NCF, he would report the plant as fully available, and so claim a high capacity factor. It took some convincing before geothermal separated availability from NCF.

[Snoopy]

Why is the capacity utilisation a full ten percentage points lower than Mercury has been achieving?




Perhaps MCY are not reporting their NCF (Nett capacity factor) correctly. Contact's geothermal used to make an error in their reporting. It could be that there was a problem in the steam field that caused a loss of generation even though the generator itself was still available. As the Operation Manager had his bonus linked to NCF, he would report the plant as fully available, and so claim a high capacity factor. It took some convincing before geothermal separated availability from NCF.


Interesting possibility there Jantar. I have had some thoughts of my own on this matter.

One issue may be that the geothermal generation portfolio at Contact is on average significantly older than that of Mercury. As equipment gets older there may be need for either more maintenance or more frequent maintenance. Any incremental downtime will reduce the capacity utilisation of the installation. Of course an 'old' installation is not necessarily static. Although Wairakei has been producing power since 1958 (rating 165MW), an additional 16MW was extracted from the field with the construction of the Wairakei Binary Plant in June 2005. This is an addition and has not directly replaced older equipment. There are three types of geothermal power plants: dry steam, flash steam, and binary cycle. A binary cycle plant can operate on cooler geothermal reservoirs than the others. Heat from the geothermal fluid causes the secondary fluid to flash to vapor, which then drives the turbines and subsequently, the generators.

Yet even with new equipment any turbines will be operating on a 'design curve'. A certain pressure differential will be designed for. If the input temperature and volume of the geothermal liquid harvested changes, then the turbine will still operate. But it may not operate at its optimum efficiency. So when compared with its original design specification, the maximum energy output has not changed. But due to changed input conditions, the turbine can never run at its design output.

Such efficiency constraints will definitely be manifesting themselves at Ohaaki (commissioned 1989) because of steam availability (Contact have had several attempts at drilling new wells to improve this but I think they have given up). Furthermore another modern plant at Poihipi Road (commissioned 1997, also tapping into he Wairakei field) had been restricted by resource consent restraints (Not sure of the current state of these) . According to AR2006 p15 the combined design capability of Ohaaki and Poihipi Road was 160MW. The 2004 target Company Statement in response to the Origin Energy takeover, states the design capability of Ohaaki is 104MW. That means the design capability of Poihipi Road must be 56MW. The latest figure I have seen is that their combined output is rated at no more than 113MW. This indicates that one or both will be operating at a sub-optimal point on the turbine design curve. We think of these plants as 'new' compared to Wairakei. But at 30 and 20 years old respectively, in mechanical terms, I guess they are getting quite elderly!

The other issue is the Wairakei geothermal field itself. After being 'mined' for energy for 62 years, it is possible that drilling new bores to keep up the design turbine pressure is becoming an issue ( I think this is the point that Jantar was making). However, I see the new proposed Tauhara geothermal station is tapping into a source contiguous with the Wairakei field. This would indicate Wairakei has a whole has another 50 years life left in it, in its current tapped form.

Just sharing these thoughts, because I think a lower geothermal field capacity utilisation at Contact verses the apparently comparable situation at Mercury does make sense. And it isn't due to any incompetence of those operating the geothermal fields at Contact!

SNOOPY

[Snoopy]

Just sharing these thoughts, because I think a lower geothermal field capacity utilisation at Contact verses the apparently comparable situation at Mercury does make sense. And it isn't due to any incompetence of those operating the geothermal fields at Contact!


I want to wrap up this topic by focussing on what a pointy headed techno-splurge into the minutiae of power station operation at Contact has to do with investment returns for CEN shareholders. Fortunately, for those who are already lost, you don't need to know anything about the minutiae of operating geothermal power stations to appreciate this point.

I have previously brought up the idea of 'thin air capital' increasing the value of certain power companies above what seems to be sensible when measured in PE or earnings yield terms. How effective 'thin air capital' is at raising the value of an investment depends on the value of the base (existing) assets it is bouncing off. If the value of the base generation assets is less (and that is what a power station operating at a lower capacity utilisation factor means), then it follows that the incremental effect of a fixed amount of 'thin air capital' is worth more (in relative terms, which is what matters in a comparison like this). It appears that for its geothermal assets at least, Contact Energy is operating those assets at a lower efficiency than that I have modelled. That means the 'thin air capital' appreciation factor will be greater than the one I calculated. And that means that the underlying fair value value of Contact shares will be slightly greater than the value which I calculated previously ($7.42).

Redoing the calculation (for original, refer to my post 1883):

0.94 x 226MW / (0.514x784MW + 0.84x452MW) = 0.271

So my multiplication factor to allow for 'thin air capital' changes from 1.257 to 1.271

My new Contact Energy 'fair value' share price valuation is now: $5.90 x 1.271 = $7.50 (up from $7.42 before)

Not a huge difference. It doesn't change any of my conclusions from previous posts. But the extra 8cps is worth having nonetheless.

SNOOPY

[Simsee]

My word. What’s up with Contact? Not at all unhappy as it’s my largest holding but jeepers!

[dreamcatcher]

Blackrock increasing their holding to 12.2% SP now almost back to highs of OCT......flicked a few but holding balance for divvies

[Snoopy]

My word. What’s up with Contact?




Blackrock increasing their holding to 12.2% SP now almost back to highs of OCT......


Price rise makes no sense to me. But since it is a US based international player like Blackrock, I will guess they are betting on a stronger NZ dollar, and using a boring utility like Contact as a 'proxy entity' they do not believe will move against them, once a smelter deal is confirmed with our Labour government.

SNOOPY

[Waltzing]

"thin air capital"

A good description for an industry where global warming is a potential factor in asset prices.

A simple expression of a complex modelling problem. Calculating the future value of assets when global and local macro events are factored into a business.

[850man]

Price rise makes no sense to me. But since it is Blackrock, I will guess they are betting on a stronger NZ dollar, and using a boring utility like Contact as a 'proxy entity' they do not believe will move against them, once a smelter deal is confirmed with our Labour government.

SNOOPY

"If" the smelter deal is done. Even if it is, it will be a bit like a dentist filling a tooth that really needs to come out. It's going to go in the end

[Snoopy]

"thin air capital"

A good description for an industry where global warming is a potential factor in asset prices.

A simple expression of a complex modelling problem. Calculating the future value of assets when global and local macro events are factored into a business.




"If" the smelter deal is done. Even if it is, it will be a bit like a dentist filling a tooth that really needs to come out. It's going to go in the end.


Industrial plants do have a finite life as, no matter how well the plant has been operated, after fifty years or so, you probably would not design Tiwai Point to operate in the exactly way it does today. But I regard the closing of Tiwai point as a 'greenwash' exercise. Particularly so when aluminium looks to be a very useful commodity -globally- going forwards. And the plan is to replace Tiwai with a new coal fired plant in Indonesia, where a policy of

"Environmental standards, what's that?"

applies. From a global perspective, it makes no sense at all to shut Tiwai down. Better to rebuild it with the latest technology so it is good for another 50 years.

I looked at the reason for the rise and rise of MEL and MCY referenced in the Infratil thread

https://www.goodreturns.co.nz/article/976517989/renewables-power-to-new-highs.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+25+Dec+ 2020

They say a large part in the rise in the share price of those two is related to ESG investor funds discovering them. But Contact is phasing out their gas powered power production. So it is only a matter of time before it is as 'green' as those two. Maybe Blackrock figured this out last week?

SNOOPY

[kiora]

Agree with you Snoopy but why bother keeping Al on?
Rio aluminum is getting price premium due to being manufactured using hydro power

BUT would the Manapouri power not be better used for proposed Data center or manufacturing green hydrogen.

https://www.nzherald.co.nz/business/700m-data-centre-for-southland-proposal-could-hinge-on-an-age-old-question/JHEEDNTKQGPANNYRFAMEWT3JWU/

https://www.stuff.co.nz/business/123673990/hydrogen-plant-for-southland-in-the-future

Save having to build new transmission lines to NI

[Snoopy]

Agree with you Snoopy but why bother keeping Al on?
Rio aluminum is getting price premium due to being manufactured using hydro power

BUT would the Manapouri power not be better used for proposed Data center or manufacturing green hydrogen.

https://www.nzherald.co.nz/business/700m-data-centre-for-southland-proposal-could-hinge-on-an-age-old-question/JHEEDNTKQGPANNYRFAMEWT3JWU/

https://www.stuff.co.nz/business/123673990/hydrogen-plant-for-southland-in-the-future

Save having to build new transmission lines to NI


The only problem with that suggestion is that Transpower are already upgrading the capacity of the power grid to carry that Manapouri power north. I guess that shows what they think of the likelihood of those alternative high energy industries succeeding!

SNOOPY

[Jantar]

The only problem with that suggestion is that Transpower are already upgrading the capacity of the power grid to carry that Manapouri power north. I guess that shows what they think of the likelihood of those alternative high energy industries succeeding!

SNOOPY The upgrade was planned before Tiwai announced their intentions to close. It will increase north transfer by around 400 MW, still leaving 200 - 400 MW stranded.

[Snoopy]

The upgrade was planned before Tiwai announced their intentions to close. It will increase north transfer by around 400 MW, still leaving 200 - 400 MW stranded.


Thanks for the timing correction Jantar. I am curious why such an upgrade was approved while Tiwai was very much a going concern, with a solid track record of 25 years in business. Are you able to offer any insight on why such a Transpower upgrade would be approved, when it seemingly wasn't a priority for the previous 25 years?

SNOOPY

[kiora]

What is the best use of Manapouri power?
"Transpower has estimated it would take five to eight years and another $450m to fully "re-balance" the grid so any surplus power from Manapouri could also be efficiently distributed across the whole country."
If the power was distributed to Auckland my understanding is that there would be 50% energy loss in transmission?
https://www.stuff.co.nz/national/122113863/the-power-game-where-will-manapouris-electricity-go
https://www.stuff.co.nz/business/117888748/surplus-power-from-smelter-could-be-freedup-for-south-island-in-2022
https://en.wikipedia.org/wiki/National_Grid_(New_Zealand)
https://www.scoop.co.nz/stories/AK2007/S00249/tiwai-point-closure-lets-not-squander-this-opportunity-to-use-surplus-energy-responsibly.htm

[Jantar]

Thanks for the timing correction Jantar. I am curious why such an upgrade was approved while Tiwai was very much a going concern, with a solid track record of 25 years in business. Are you able to offer any insight on why such a Transpower upgrade would be approved, when it seemingly wasn't a priority for the previous 25 years?

SNOOPY It is likely that the Tiwai announcement sped the process up a bit. The upgrade was planned around the time that Meridian were planning Project Hayes. There were public meetings at the time in Alexandra and Ranfurly to discuss the impact on land owners along the route. The first stage of the upgrade took 2 years and involved duplexing the line between Roxburgh and Clyde, and thermal tensioning of the line between Clyde and Twizel. This was completed about 3 years ago. A change in the protection system at Roxburgh allowed a further increase in the power transfer north from Roxburgh. Duplexing the Clyde - Twizel circuits was always planned for 2021 and the duplexing of the Roxburgh - Naseby - Livingston circuit was to be the final stage in around 3 years time.

The reasons for the upgrade were because of the new wind farms planned for Otago. Even though Project Hayes was cancelled, the Mahinerangi wind farm has already completed stage 1, but the next 2 stages cannot go ahead until there is sufficient transmission capability. Add in Kaiwera Downs wind farm and that is a lot of energy to try and get out of the lower South. With Tiwai closing it is likely to delay Mahinerangi even further unless Onslow gets built.

[Jantar]

..
If the power was distributed to Auckland my understanding is that there would be 50% energy loss in transmission?... Try 8% loss.

[bung5]

Are we going to talk about this share price rally or just keep pretending everything normal :)

[Snoopy]

Are we going to talk about this share price rally or just keep pretending everything normal :)


Elon Musk has just announced that his southern hemisphere manufacturing plant for the Tesla model 3 and model Y is to be located in Bluff New Zealand, thus filling the hole to be left by Tiwai and some! How could you have missed that news?

To answer my own rhetorical question very easily because none of the above is true. Or maybe it is true but only the 'insiders' know so far ;-). Nevertheless I can't think of any logical reason why the CEN share price should suddenly bust through $10. All I can say is I was on the CEN share register on day one and have gradually built my holding up in the ensuing years, vowing never to sell any. I am for the first time considering 'breaking my vows;'

SNOOPY

[850man]

up 8% today, anyone know what's driving it?

[winner69]

up 8% today, anyone know what's driving it?

Insatiable desire for NZ energy stocks .....almost lustful .....just following the others

Good eh ....cant go wrong at the moment

[bull....]

@Bull........ Both CEN & MEL starting to look like Gold

https://www.goodreturns.co.nz/article/976517289/nz-shares-flat-as-tiwai-smelter-rumours-swirl.html

too true , i said rocking close of cen last div but now im gone too these prices too good to be true lol only mcy left lol

get your income why you can was so true last year and now it has delivered bigggg time

[dreamcatcher]

too true , i said rocking close of cen last div but now im gone too these prices too good to be true lol only mcy left lol

get your income why you can was so true last year and now it has delivered bigggg time

Thanks for finding @Bull always felt Cen & Mel were sleeping giants.........:p

[Simsee]

Thanks for finding @Bull always felt Cen & Mel were sleeping giants.........:p

I note today CEN closed up 7% on nzx.
Wow I thought until I glanced at the ASX close up 14%.

[dreamcatcher]

I note today CEN closed up 7% on nzx.
Wow I thought until I glanced at the ASX close up 14%.

NZ High $11.10 closed $10.60.................. Aus closed higher but 22k volume

[iceman]

NZ High $11.10 closed $10.60.................. Aus closed higher but 22k volume

And on a huge turnover of $ 54.5 M. Blackrock certainly read this right and probably knew what was coming when they started buying in large a few months ago !

[kiora]

https://www.goodreturns.co.nz/article/976518004/meridian-energy-shares-keep-on-defying-gravity.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+7+Jan+2 021

[Cricketfan]

Up another 5% this morning. This seems a bit crazy, surely it's going to go back to more sensible levels eventually? Thinking of selling, but I don't have a good history when it comes to selling - in most cases I'd be better off if I just held.

[winner69]

Up another 5% this morning. This seems a bit crazy, surely it's going to go back to more sensible levels eventually? Thinking of selling, but I don't have a good history when it comes to selling - in most cases I'd be better off if I just held.

Guru Mark i that goodreturns piece


“The utilities are not being driven by decisions made by active investors, they are driven by a flow of money from clean energy ETFs,” said Mark Lister, head of private wealth research at Craigs Investment Partners.

Lister said that with long term interest rates moving higher, utility stocks - often bought for their high dividend payout - should be coming down in price as investors rotate towards more speculative stocks.

Instead, shares in yield-heavy Meridian jumped 10.2 percent to $9.40 bringing its total gain just this week to 34 percent. In the past six months, the stock has more than doubled in value.

“You should never ever see a utility go up 15 percent in a day. These are safe, predictable boring companies that shouldn’t behave like that,” Lister said.

But these are strange times indeed so anything could happen

[alex f]

The US dollar is tanking, even more money being printed. (Hence the Crypto demand) COVID free NZ and div paying utilities are in demand and they are businesses isolated from global factors. A good place to park US$. Those are my thoughts. Maybe other utility stocks will rise

[bung5]

The temptation was too great and I have had to sell due to the great price on offer. Will have to find a more boring place for a dividend

[Checkmate]

Surely people are now only buying this because of FOMO the Div yield isn’t that great anymore.. which was the main attraction previously. Only room to drop from here.

[Snoopy]

And on a huge turnover of $ 54.5 M. Blackrock certainly read this right and probably knew what was coming when they started buying in large a few months ago !



From the Wikipedia page on Blackrock:

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

"On January 14, 2020, BlackRock CEO Laurence Fink declared that environmental sustainability would be a key goal for investment decisions."

"BlackRock's largest division is iShares, a family of over 800 exchange-traded funds (ETFs) that comprises more than $1 trillion in assets under management. iShares is the largest provider of ETFs in the U.S. and in the world. "

I take it from this that the open ended iShares 'global clean energy fund' that is buying up shares in Meridian and Contact is part of Blackrock. From p58 AR2020, Blackrock appears as a significant holder of 38.710m shares. Contact was notified of this on 20th April 2020 as that holding represented 5.390% of the company. I can find no reference to substantial shareholders in AR2019. So I assume that Blackrock held less than 5% of the CEN shares on issue on that reporting date.

The iShares Global Clean Energy ETF appears to have started in January 2008, so it has been going for 13 years. I don't know the historical composition of the fund. I also don't know what kind of 'Chinese walls' are set up between individual fund managers within Blackrock. But it seems most plausible that Blackrock from last year knew exactly what would happen to CEN shares in the new year, because it is they themselves who are causing this sudden CEN price surge!

SNOOPY

P.S. Today's share market disclosure shows Blackrock holding 13.345% of all Contact Energy shares on issue.

[dreamcatcher]

P.S. Today's share market disclosure shows Blackrock holding 13.345% of all Contact Energy shares on issue.

Increased from 12.2% = 8.22m shares probably more future buying to come.........same for MEL

[Scrunch]

Increased from 12.2% = 8.22m shares probably more future buying to come.........same for MEL

The daily chart looks like a switch was flicked at 1pm NZ time. CEN was about $11.00 at the time and up another 40c. By 2.41 as I write this, the price had collapsed back to $10.27 and looks on-track to fall further. Have blackrock perhaps stopped buying for a little bit?

[dreamcatcher]

The daily chart looks like a switch was flicked at 1pm NZ time. CEN was about $11.00 at the time and up another 40c. By 2.41 as I write this, the price had collapsed back to $10.27 and looks on-track to fall further. Have blackrock perhaps stopped buying for a little bit?

Expect will buy more for their funds but currently 'bargain hunting' from last few days

[dreamcatcher]

Contact says extension for NZAS is good news14/1/2021, 8:30 am GENERAL14 January 2021
Contact Energy (‘Contact’) CEO Mike Fuge welcomed the news that the life of New Zealand’s Aluminium Smelter (‘NZAS’) at Tiwai Point will be extended until at least the end of 2024 while an economic transition for Southland is developed.
“Today’s announcement of the deal between Meridian and NZAS ensures sustainable smelter operations in the medium term and allows time to plan for an ultimate exit of New Zealand’s largest energy user. This is great news for Southland and New Zealand, global carbon emissions, and Contact’s shareholders.”
As part of the arrangement announced today, Contact has agreed to supply Meridian Energy with a portion of the electricity required to power the NZAS smelter at Tiwai Point. Contact will provide an average of 100 megawatts of baseload electricity through until the end of 2024 (assuming the smelter requires 572 megawatts of electricity).
“We are pleased to have played our part in helping secure the financial sustainability of the unique low-carbon smelter at Tiwai and retain the 1,000 high-paying jobs in Southland and the 1,600 associated contractor and supplier roles too,” Mr Fuge said. “Many other jobs around New Zealand would also have been lost if there was a disorderly exit.”
He said Contact was continuing to advance its “world-class” Tauhara project in readiness for an investment decision. “The Tauhara geothermal project is New Zealand’s best low-carbon renewable electricity opportunity. It will operate 24/7, is not reliant on the weather and is ideal for displacing baseload fossil fuel generation.”

[see weed]

My little success story for 2020. CEN was my best stock. Bought 17 blocks over 6 weeks from $6.70 on 3/7/20 to $6.31 on 18/8/20. My average price for the lot was $6.179. CEN paid me 20k div on 15/9/20. Sold my last block of 4000 on 12/1/21 for $9.58 which I had bought on 14/7/20 for $5.60.:t_up::cool::t_up:

[KJMLimited]

My little success story for 2020. CEN was my best stock. Bought 17 blocks over 6 weeks from $6.70 on 3/7/20 to $6.31 on 18/8/20. My average price for the lot was $6.179. CEN paid me 20k div on 15/9/20. Sold my last block of 4000 on 12/1/21 for $9.58 which I had bought on 14/7/20 for $5.60.:t_up::cool::t_up:nice story, well done.

[Norwest]

My little success story for 2020. CEN was my best stock. Bought 17 blocks over 6 weeks from $6.70 on 3/7/20 to $6.31 on 18/8/20. My average price for the lot was $6.179. CEN paid me 20k div on 15/9/20. Sold my last block of 4000 on 12/1/21 for $9.58 which I had bought on 14/7/20 for $5.60.:t_up::cool::t_up:

Well done see weed, thank you for sharing!

[dreamcatcher]

As expected Contacts TP upgraded to more then $9..............:)

"The renewable electricity generators bounced back from recent selling, Meridian Energy up 4.4 percent at $7.68 and Contact Energy up 4.1 percent to $8.83.

McIntyre said some brokers had upgraded Contact’s target price to more than $9 after it was announced the Tiwai Point aluminium smelter would remain open until 2024.
Both stocks have also benefited in the past month from investors buying clean energy ETFs to position themselves for Biden’s push to clean up the US energy sector."

[FatTed]

Mr Snoopy are you still of the opinion that Fair value for CEN is $7.42? #1884

[Scrunch]

Mr Snoopy are you still of the opinion that Fair value for CEN is $7.42? #1884

Because CEN's back down there at 720, in stark contrast to just a few weeks ago.

[Snoopy]

Mr Snoopy are you still of the opinion that Fair value for CEN is $7.42? #1884


Because CEN's back down there at 720, in stark contrast to just a few weeks ago.

Good question FatTed. The search function on the forum appears to be down as I write this. But my key valuation post is actually 1821. You can go through that post and look at all the key assumptions on how the valuation was built up. But I can short circuit that procedure by asking you a few key questions.

1/ Do you think a 4.5% gross dividend return over the business cycle for CEN is fair?

2/ Do you think climatic conditions of the last ten years and all the inflows and outflows and weather events that that time frame incorporates is indicative of what we will see over the next ten years?

3/ Do you think that Contact's tax payments of the last few years have been excessive and that consequently the imputation rate on dividends will reduce going forwards?

4/ Do you believe that Contact's 'thin air capital' has real value going forwards?

5/ Do you believe that the electricity market will be generally flat from a demand perspective for the next ten years?

I can answer a qualified 'yes' to all those questions, 'In my opinion'. But I may not be right in answering with five 'yeses'. Consequently if you have a different opinion than I do answering those questions -and it is quite reasonable that you might - then you will not agree with my valuation.

The key questions, where I waiver on my own answers, are questions 4 and 5. 'Thin air capital' (Q4) really only has value if you are going to build a new power station with it. But if electricity demand is flat for ten years (Q5), then you don't need to build a new power station. (Unless of course you are replacing one of your existing power stations OR taking generation market share from your competitors.)

That is the long answer to your question.

The short answer is I think the 'thin air capital' adjustment to my valuation to my base price of $5.90 (post 1841) is still valid. I also believe my revised 'thin air capital' multiplication factor of 1.271 (post 1889) is valid.

My current Contact Energy 'fair value' share price valuation is now: $5.90 x 1.271 = $7.50 (up from the $7.42 you referenced before).

With the share closing at $7.20, CEN is therefore 'modestly undervalued' (by 4%). I prefer to buy my shares at a bigger discount to fair value than that. And I notice the closing offer price is still $7.55 (above fair value).

I wouldn't be surprised to see the share price bounce on Monday. But we shall see!

SNOOPY

[FatTed]

Thanks for such a detailed reply

[Snoopy]

The short answer is I think the 'thin air capital' adjustment to my valuation to my base price of $5.90 (post 1841) is still valid. I also believe my revised 'thin air capital' multiplication factor of 1.271 (post 1889) is valid.

My current Contact Energy 'fair value' share price valuation is now: $5.90 x 1.271 = $7.50 (up from the $7.42 you referenced before).

With the share closing at $7.20, CEN is therefore 'modestly undervalued' (by 4%). I prefer to buy my shares at a bigger discount to fair value than that. And I notice the closing offer price is still $7.55 (above fair value).

I wouldn't be surprised to see the share price bounce on Monday. But we shall see!


One more comment on where my investment style differs from some of my fellow CEN shareholders. I don't worry too much about even reading those monthly operational reports. I know they can be a pointer as to whether a year is going well or not, and maybe whether a special or increased dividend might be paid . But as long as the dividend policy does not change, I think many of these seasonal adjustments eventually average out. IOW they make no difference to the big picture of the long term investor. And long term I am. I bought my initial CEN holding at float time over twenty years ago, (although I do admit most of my holding has been acquired far more recently than that). Still I have never sold any. And as long as they keep satisfying my long term income target from my shareholding I doubt if I ever will!

SNOOPY

[Scrunch]

Post 2216 on the Mel thread

For those wanting some additional background, S&P just announced a change to their weighting methodology for the underlying index that the Blackrock ETF replicates. MEL are currently around 4-5% weights in this index which has at least 6-7bn of ETF money folowing it. S&P launched a review in response to the clear observation of the effects that their buying was having on a whole lot of underlying stocks in the index.

Now, effectively the MEL and CEN weights are going to be liquidity capped after the next rebalance which will happen at the end of March. Broker estimates are for up to 500m worth of stock to be sold by Blackrock for both to make this rebalance.

The price is tanking because local fund managers and instos are getting out ahead of the ETF selling wave. MEL is getting hit more as there was already less fundamental support (lower dividend yield).

[biker]

One more comment on where my investment style differs from some of my fellow CEN shareholders. I don't worry too much about even reading those monthly operational reports. I know they can be a pointer as to whether a year is going well or not, and maybe whether a special or increased dividend might be paid . But as long as the dividend policy does not change, I think many of these seasonal adjustments eventually average out. IOW they make no difference to the big picture of the long term investor. And long term I am. I bought my initial CEN holding at float time over twenty years ago, (although I do admit most of my holding has been acquired far more recently than that). Still I have never sold any. And as long as they keep satisfying my long term income target from my shareholding I doubt if I ever will!

SNOOPY

But surely when CEN hit a totally irrational $11 the dividend policy was irrelevant. They have dropped 35% from that level and are still falling. That’s a lot of future dividends......
I sold at $11 because it made no sense not to.
I’ll look to re-enter when the S&P index and Blackrock sort themselves out.

[Scrunch]

Some details of the S&P proposal (which are light on company by company specifics)

Initial consultation (9 Dec)
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20201209-1275359/1275359_spglobalcleanenergyconsultationonweighting liquiditycount12-9-2020.pdf

Confirmation of what is changing (11 Feb)
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20210211-1316359/1316359_spglobalcleanenergyconsultationonweighting liquiditycountresults2-11-2021.pdf

[Snoopy]

But surely when CEN hit a totally irrational $11 the dividend policy was irrelevant. They have dropped 35% from that level and are still falling. That’s a lot of future dividends......
I sold at $11 because it made no sense not to.


Did the share price really get to $11? Looking back at the chart I see it did -even if it was a short lived spike- and with hindsight you certainly 'nailed the trade' Biker. Well done! I think $9 was irrational. So why didn't I sell at $11? It is the old question of 'if you sell, where do you put your money? I have a term deposit maturing with an interest rate of under 1%. I certainly don't want more of those. Even at $11, the CEN yield is better!

The other factor that was weighing on my mind was that I am still a little underweight in CEN for my liking and my average entry price is well under $5. So really I am well in profit and expect to remain so, no matter how low this dip goes. If CEN was a person, I would be on the sidelines of the swimming pool shouting :

"Dive, dive dive!"



I’ll look to re-enter when the S&P index and Blackrock sort themselves out.


By the time that happens it will be too late. The buying window for CEN is about to open.

SNOOPY

[winner69]

Contact need more capital

What’s that all about

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/367533/340251.pdf

[trader_jackson]

Contact need more capital

What’s that all about

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/367533/340251.pdf

Maybe they shouldn't have paid out so much over the years?
Might not be the only power co suddenly wanting to raise capital for a new plant only to realize they've not just paid out everything but borrowed to do so...

[winner69]

Maybe they shouldn't have paid out so much over the years?
Might not be the only power co suddenly wanting to raise capital for a new plant only to realize they've not just paid out everything but borrowed to do so...

....and slashed the divie big time


Snoops might need to review his dividend model.

[bull....]

dividends slashed alright , but in the context of things they were over - paying past div's anyway. so going ahead be lower div's on a higher amount of shares unless they significantly grow revenues.

glad i sold out near high's will be able to re-invest one day for double the amount of shares and a bigger dividend income because of that.

[Checkmate]

Juicy. Big drop coming. $78m interim earnings for a $5b+ company and dividend slashed which was one of the only things keeping this pumping.. oh plus now they need to raise capital!?

[Entrep]

wooooooooooosh

12304

[bull....]

be interesting what price they get for the cap raise considering you have the cloud of the ETF selling to come. might want a bigger discount?

[ratkin]

be interesting what price they get for the cap raise considering you have the cloud of the ETF selling to come. might want a bigger discount?

I thought it was 7 dollars. With nearly all of it going to institutions, if they want it of course, which they usually do. However seems very close to the current price, especially since in a few days it would probably have been below 7.00

[JohnnyTheHorse]

I really wonder when the underwriters signed on the dotted line for the $7 price. I suspect it was well before Friday. Just saw a note from Sharesies that they have an allocation in the placement. A sure sign that a very wide net is being cast to suck these placement shares up.

[Scrunch]

I thought it was 7 dollars. With nearly all of it going to institutions, if they want it of course, which they usually do. However seems very close to the current price, especially since in a few days it would probably have been below 7.00

There's an old saying re floats - you want in on the one's that are hard to get. Not sure if that also applies to capital raise placements. I just received a generic sharesies email advising of an "opportunity" to take part in the CEN placement at $7.00

[Joshuatree]

$580m further investment approved to develop a new 152MW geothermal power station
at Tauhara, near Taupō.

$400m equity raise announced to support a capital investment programme, including the Tauhara Project.

Strategic review of thermal assets under way over the next few months.

Revised dividend policy to distribute ordinary dividends targeting a pay-out ratio of between 80-100% of the average operating free cash flow of the preceding four financial years.

[Joshuatree]

Dividend policy revised
The Board of Contact has updated the company’s dividend policy. Under the new policy, Contact will distribute ordinary dividends targeting a pay-out ratio of between 80 per cent and 100 per cent of the average operating free cash flow6 of the preceding four financial years.7 For the FY21 financial year, the target payment for the full year dividend is 35 cents per share.
Download Document 8.96MB (https://hotcopper.com.au/documentembed?id=uOMxKKzFkiWRTLKhOROKAxjvSDYL4Qa8y xfxv%2FR88bFiGug%3D)

[777]

Good to see that the next div is to be paid on 30/3/21 instead of an April payment. Saves 6c/$ tax for those over $180k. Just hope the other power companies follow suit.

[Snoopy]

The other factor that was weighing on my mind was that I am still a little underweight in CEN for my liking and my average entry price is well under $5. So really I am well in profit and expect to remain so, no matter how low this dip goes. If CEN was a person, I would be on the sidelines of the swimming pool shouting :

"Dive, dive dive!"


Hmmm, did I just get my wish?



....and slashed the divie big time


Last years dividend payout was 39cps.





Dividend policy revised


The Board of Contact has updated the company’s dividend policy. Under the new policy, Contact will distribute ordinary dividends targeting a pay-out ratio of between 80 per cent and 100 per cent of the average operating free cash flow of the preceding four financial years. For the FY21 financial year, the target payment for the full year dividend is 35 cents per share.




'Dividend Slashed' might be overplaying things Winner. From 39cps to 35cps is more a minor nick, Barely a flesh wound.




Revised dividend policy to distribute ordinary dividends targeting a pay-out ratio of between 80-100% of the average operating free cash flow of the preceding four financial years.





....
Snoops might need to review his dividend model.


On the job. 90% of the free cashflow is straight down the middle of the new policy. So I will start there.

SNOOPY

[sb9]

Good to see that the next div is to be paid on 30/3/21 instead of an April payment. Saves 6c/$ tax for those over $180k. Just hope the other power companies follow suit.

Good spotting and thanks for mentioning it.

[Snoopy]

Te Mihi has a design output of 166MW. FY2014 is six years ago. So I am going to allow for build inflation of 4% per year, about twice the inflation target, since that date to get FY2020 construction costs.

$623m x (1.04)^6 = $788m

The amount of construction capital available would suggest Contact can build its next geothermal station larger than Te Mihi.

166MW x($1,074m / $788m) = 226MW



The new Tauhara geothermal station is to be rated at 156MW and cost $580m in go forward capital expenditure. (Source Slide 6 of today's power point presentation). That looks pretty good pricing when compared to what Te Mihi cost way back in 2014 (Te Mihi was 166MW). There are a couple of riders in there though. 'Estimated go forward capital expenditure' presumably excludes all the preliminary investigation work done up to now. According to slide 18 of the FY2020 annual result presentation, the most recent evaluation of the Tauhara field has cost $40m.

I also see there is a footnote

"excludes capitaised interest or capitalised transmission asset."

Contact has said that they are raising $400m in equity to build the project, so that that leaves $180m to be funded by debt. The interest on that debt will be added to the cost of the project until it is finished. So what does $180m compound funded over three years cost? If we assume an interest rate of 3.55% (equivalent to the longest dated NZ fixed term bond maturing in 2024)

$180m(1+0.0355)^3 = $200m less $180m gives $20m of capitalised interest cost.

It is probably smart to fund the construction this way given all time low borrowing costs.

From what I have been managed to ferret out so far, the projected cost of Tauhara is: $580m + $40m + $20m =$640m, Compared to Te Mihi ($623m construction cost in FY2014) , this does sound like a good price though. Perhaps we can thank low interest rates?

I seem to recall Jantar telling us that those who construct a new power station have to pay for it to be connected to the grid. I guess whatever that might cost must be added to the overall cost on the Contact balance sheet of Tauhara too. Anyone dare to guess what that connection cost might be?

SNOOPY

[Snoopy]

Contact Energy HydroStation Generation CapacityNotes
Contact Energy GeothermalStation Generation Capacity
Notes


Clyde464MWCommissioned FY1992
Ohaaki48MWCommissioned FY1989

[/TR]

Roxburgh320MWCommissioned 1956Te Huka (Tauhara 1)28MWCommissioned FY2010



Wairakei145MWCommissioned 1958, Modified FY2005



Poihipi65MWCommissioned FY1997



Te Mihi166MWCommissioned FY2014


Total784MW

Total452MW


Effective Capacity Factor0.514Effective Capacity Factor0.840


Total Operationally Adjusted
403MW
Total Operationally Adjusted380MW



From what I can tell, the above is the current picture of Contact's renewable generation asset portfolio. Add into this the suggestion that the 68 year old geothermal station at Wairakei could be decommissioned and replaced by an entirely new 167MW unit. (Slide 14 in today's presentation). The presentation suggests that 'replacement and expansion' could increase geothermal capacity by 70MW. My maths says such an upgrade will increase capacity by: 167MW - 147MW = 20MW. Why the difference? Are Contact saying that due to age and wear and tear, Wairakei is currently only operating at under 100MW? This lost 50MW is puzzling.

I see in Slide 16 of today's presentation that generation from Wairakei A and B power stations was 954GWh over FY2020.

Working on a 147MW maximum output running 24 hours per day 365 days per year, the maximum energy that could be generated from Wairakei is:

147MW x 24hrs/day x 365days/year = 1287720 MWh/year = 1288GWh of energy per year

So it looks like Wairakei A & B only operated at 954GWh/1288GWh = 74% capacity over FY2020.

Operating at 74% capacity is quite low for a Geothermal Baseload station. when something like 94% might be expected for a newly commissioned geothermal station. So I wonder if the point Contact is trying to make is that the reduction in Wairakei A & B generating capacity through age (if that is a reality):

(0.94-0.74) x 147MW = 29MW

is what Contact is aiming to get back with a proposed Wairakei redevelopment?

The trouble is 29MW (recovered old plant inefficiencies, my speculation) + 20MW (incremental new generation capacity, declared by Contact) do not sum to the expected 70MW gain from Wairakei if future spending on that field in approved in the future. Slide 16 in today's presentation appears to show an underlying decline in generation capacity from the 'Wairakei Field' after year FY2024 until FY2027. So perhaps the 70MW incremental generation is counting the recovery of this decline when a new Wairakei station is built: the so called 'Geofuture ' project. But the yet to be approved 'Geofuture project' rated at 167MW although the most important part of the Wairakei redevelopment, is not shown as part of Wairakei on the actual slide 16 diagram. I have to admit to being confused by slide 16.

SNOOPY

[Norwest]

I seem to recall Jantar telling us that those who construct a new power station have to pay for it to be connected to the grid. I guess whatever that might cost must be added to the overall cost on the Contact balance sheet of Tauhara too. Anyone dare to guess what that connection cost might be?

Yes you have to pay to connect, but I always thought this would connect via Te Huka?

[turnip]

I seem to recall Jantar telling us that those who construct a new power station have to pay for it to be connected to the grid. I guess whatever that might cost must be added to the overall cost on the Contact balance sheet of Tauhara too. Anyone dare to guess what that connection cost might be?

Tauhara and capital management presentation (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/367535/340243.pdf), page 12, note 3:


3 The total addition to PPE on Tauhara commissioning will include ~$18m capitalised transmission asset, ~$70m of capitalised interest ($27m sunk) and $24m of residual sunk capex related to the next phase of development of the field expected total of $790m ($678m + $18m + $70m + $24m)

[Snoopy]

Tauhara and capital management presentation (http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/CEN/367535/340243.pdf), page 12, note 3:


Hey Turnip that footnote was well spotted!

"3 The total addition to PPE on Tauhara commissioning will include ~$18m capitalised transmission asset, ~$70m of capitalised interest ($27m sunk) and $24m of residual sunk capex related to the next phase of development of the field expected total of $790m ($678m + $18m + $70m + $24m)"

It now emerges that with all things considered, the all up cost of Tauhara will be $790m. This is somewhat higher than the $580m figures in big print that was admittedly qualified as being only "go forward capital expenditure".

If I compare that $790m with my original guess based on 4% construction inflation per year since Te Mihi was developed.



Te Mihi has a design output of 166MW. FY2014 is six years ago. So I am going to allow for build inflation of 4% per year, about twice the inflation target, since that date to get FY2020 construction costs.

$623m x (1.04)^6 = $788m


Then my original guess looks pretty good.

SNOOPY

[Snoopy]

Yes you have to pay to connect, but I always thought this would connect via Te Huka?


I see Te Huka is otherwise known as 'Tauhara 1'. This is confusing because the development of Tauhara which was given the green light today should strictly be 'Tauhara 2'. Yet if you look on slide 13 of today's presentation, there is a third Tauhara project already consented for called 'Tauhara 2' which, to avoid confusion, should actually be Tauhara 3'.

Anyway with Te Huka actually being plugged into the Tauhara geothermal field, it would be logical for the one that Contact calls Tuhara to connect through that. However, thanks to our friend Turnip, we can now see that there is a "~$18m capitalised transmission asset" cost associated with 'Tauhara', which I believe is the incremental connection cost I was seeking.

SNOOPY

[Snoopy]

Hey Turnip that footnote was well spotted!

"3 The total addition to PPE on Tauhara commissioning will include ~$18m capitalised transmission asset, ~$70m of capitalised interest ($27m sunk) and $24m of residual sunk capex related to the next phase of development of the field expected total of $790m ($678m + $18m + $70m + $24m)"

It now emerges that with all things considered, the all up cost of Tauhara will be $790m.


OK next step is to find out how Contact shareholders earnings will be diluted in the future as a result of today's announced $400m capital raise. At $7 per share, this will result in

$400m / $7 = 57.143m new shares being issued. The total number of shares issued as at 12th February 2021 was 718,565,905. After the share issue it is expected that:

718,565,905 + 57,143,000 = 775,708,905 shares will exist,

Thus all else being equal, we can expect an 'earnings per share' reduction of: 718.566/775.709 = 0.9263, equating to a reduction of 7.37%.

SNOOPY

[Snoopy]

Yesterday's capital raising document was the first I had heard of Contact Energy investigating building their own battery storage unit to become intergrated with their wholesale generation of power. I do wonder if anyone proof read the announcement, because batteries store energy, which means their capacity is measured in MWh (Mega Watt Hours) not MW (MegaWatts), I presume what the announcement was getting at was that the battery had to be able to supply power at the rate of 50MW. But that says nothing about how big the battery installation is proposed to be. For example a 50MWh battery could theoretically supply 50MW of power for one hour. But 50MWh would seem too small to be very useful.

Mercury has a much smaller battery along these lines that it is operating as an R&D project

https://totalutilities.co.nz/grid-connected-battery-research/

This is a 1MW/2MWh system. That means at maximum discharge it could supply 1MW over a period of two hours. For Mercury this was a $3m investment. If Contact is thinking along the same lines, albeit on a larger scale, we might be looking at a 50MW/100MWh system. That would be 50 times the size of Mercury's. With the same cost per MWh, Contact would be looking at 50 x $3m = $150m to build it. That seems a lot, and indeed Contact has only budgeted up to $60m for this project (Presentation Slide 14). Of course my costings do not take into account 'economies of scale' and improvements in price since Mercury brought their R&D project on line in September 2018. Perhaps it will soon be possible to build an industrial scale 100MWh battery for $60m?

Contact has a couple of very large 'hydro batteries' in the South Island, otherwise known as the Clyde and Roxburgh dams. But these dams are in the wrong island and are constrained in supply capacity by the Cook Strait cable which must be shared with Meridian. So I can see the logic of Contact building their own North Island battery. But it all goes to show how valuable the Waikato River 'hydro battery' system is, And that is owned by the opposition- Mercury Energy.

I remain puzzled by how such a relatively small grid scale battery will fit into Contact's generation asset portfolio. Is it a very expensive replacement for a gas peaker unit?

SNOOPY

[winner69]

Snoops ...and a DRIP to add to the denominator in your eps model

[Snoopy]

Hey Turnip that footnote was well spotted!

"3 The total addition to PPE on Tauhara commissioning will include ~$18m capitalised transmission asset, ~$70m of capitalised interest ($27m sunk) and $24m of residual sunk capex related to the next phase of development of the field expected total of $790m ($678m + $18m + $70m + $24m)"

It now emerges that with all things considered, the all up cost of Tauhara will be $790m. This is somewhat higher than the $580m figures in big print that was admittedly qualified as being only "go forward capital expenditure".


From slide 6 of the presentation:

"Projected EBITDAF uplift of ~$85m p.a. at wholesale price of $80/MWh."

From slide 12 of the presentation:

"Estimated cash costs of generation ~$15/MWh" (Includes operating costs, carbon costs and stay-in-business capex (excluding make-up drilling and major mid-life capex replacement)

I am liking reading about this 'earnings uplift', EBITDAF up $85m, from Tauhara. That cash cost of generation is low enough to make me think that even if that wholesale power price ends up being a tad optimistic, Tauhara should still do well. Nevertheless I am unsure if EBITDAF for the company will go up by $85m. If I go to slide 16, it looks like the rise of Tauhara goes 'hand in hand' with the decline of the original Wairakei. This tells me that from 2024, Tauhara is largely replacing an original declining asset. Hmmmm.

SNOOPY

[Jantar]

Yesterday's capital raising document was the first I had heard of Contact Energy investigating building their own battery storage unit to become intergrated with their wholesale generation of power. I do wonder if anyone proof read the announcement, because batteries store energy, which means their capacity is measured in MWh (Mega Watt Hours) not MW (MegaWatts), I presume what the announcement was getting at was that the battery had to be able to supply power at the rate of 50MW. But that says nothing about how big the battery installation is proposed to be. For example a 50MWh battery could theoretically supply 50MW of power for one hour. But 50MWh would seem too small to be very useful.....

SNOOPY
The South Australia battery originally had a storage capacity of 129 MWh (later increased to 150 MWh) and an output of 100 MW for a cost of A$90M or NZ$100 M, So a 50 MW output with a storage of 75 MWh would be around $50 - 60 M to build. That is 1200 times the cost of storage at Onslow which Contact are not keen on.

[Jantar]

I see Te Huka is otherwise known as 'Tauhara 1'......

SNOOPY
Names, names, names... Have always been an issue in Contact's portfolio. When Te Huka was first commissioned, the consents, the interconnection agreement with Transpower etc all carried the name Tauhara. The CEO at the time decided to play to the local IWI wishes and changed the name to Te Huka.

This gives the traders the unfortunate task of calling the station Te Huka when talking to the geothermal operators, but calling it Tauhara when talking to Transpower. Two names, one station.

But there is an even worse example at Stratford. The combined cycle plant there was originally owned by Stratford Power Limited, a subsidiary of AGL, and was registered with Transpower under the station name SPL. When Contact bought the station and incorporated it with the existing Stratford station it was renamed as TCC (Taranaki Combined Cycle), but it is offered into the market as Stratford Unit 5. So 3 different designations to remember, depending on who you are talking to.

[Snoopy]

The South Australia battery originally had a storage capacity of 129 MWh (later increased to 150 MWh) and an output of 100 MW for a cost of A$90M or NZ$100 M, So a 50 MW output with a storage of 75 MWh would be around $50 - 60 M to build. That is 1200 times the cost of storage at Onslow which Contact are not keen on.


I found this article outlining some history that lead to the installation of South Australia'a 'Big Battery'

https://www.abc.net.au/news/2019-11-19/sa-big-battery-set-to-get-even-bigger/11716784

I see it was financed through the Federal Government. Does that mean the economics in dollar terms do not stand up? I guess it depends on what citizens are prepared to pay to avoid blackouts.

"The original battery deal, partly funded by taxpayers, saw the battery's owner Neoen reserve some of its output to provide services to help stabilise the electricity grid. The company claims that arrangement saved energy consumers more than $50 million over the battery's first year of operation."

$50m in one year seems an extraordinary amount of money to save for energy consumers when the battery cost just under twice that to purchase. The article talks about saving a similar amount indefinitely for each year into the future. Could what seems a modest investment in the grand scheme of electricity facility building do similar things in NZ? Slide 15 seems to suggest such things, although they are careful not to quantify 'Voltage Support' or 'Frequency Regulation' savings.

SNOOPY

[nztx]

The eyes of the early Jan 2021 CEN Buyers must be watering a fair bit now

(with a large wad of over 10 buckses bits under their belts from that foray)


and now a placement / rights issues etc job tossed into the mix .. ;)

[Snoopy]

Good to see that the next div is to be paid on 30/3/21 instead of an April payment. Saves 6c/$ tax for those over $180k. Just hope the other power companies follow suit.


Last point from the Capital Raising Presentation (at least for now). From Slide 6.

"Contact’s policy is to distribute ordinary dividends targeting a pay-out ratio of between 80 and 100% of the average Operating Free Cash Flow of the preceding four financial years."

³ "This includes Board consideration of the sustainable financial structure of Contact including the targeting of a long-term investment grade credit rating. Dividend payments are expected to be split into an interim dividend paid in March, targeting around 40% of the total expected dividend for the financial year, and a final dividend to be paid in December. It is the intention of the Board to attach imputation credits to dividends to the extent they are available."

This is the first time I have heard of a dividend policy based on the average of the last four years of results. Why four years? There is always a trade off when looking back on results. The latest are usually more representative of the current business environment. But if you consider too few results there may be one or two rogue results in there that can distort any average away from 'normal'. So why did Contact take the last four years of results? Personally I would have looked over the past ten years.

SNOOPY

[see weed]

The way the sp is going, you might get the shares on market cheaper than the placement. Am thinking, would like to pick up more between $6 to $7 for the div next month.

[Jantar]

….

$50m in one year seems an extraordinary amount of money to save for energy consumers when the battery cost just under twice that to purchase. The article talks about saving a similar amount indefinitely for each year into the future. Could what seems a modest investment in the grand scheme of electricity facility building do similar things in NZ? Slide 15 seems to suggest such things, although they are careful not to quantify 'Voltage Support' or 'Frequency Regulation' savings.

SNOOPY Yes, that figure seems about right. It would be similar in NZ right now if we had a battery, except for Transpower's peculiar transmission charges. They would wipe out any profits to the owner straight away. Transpower have said they would treat the battery as a power user, not a generator and Contact estimates that benefit-based and residual charges for a battery that size will run to around $7 million each year under the new TPM.

No doubt Onslow will have a similar argument with Transpower.

[Joshuatree]

The way the sp is going, you might get the shares on market cheaper than the placement. Am thinking, would like to pick up more between $6 to $7 for the div next month.

A$6.58 atm down down 55c re 7.7% on no vol though
NZ$7.08 atm on NZX down 1.7% 3.6 mill through . Black Rock etc still dumping?

[Snoopy]

Snoops ...and a DRIP to add to the denominator in your eps model


Exactly right Winner. But how many shareholders will take up the DRP? I did the last time it was offered between FY2009 and FY2013. My motivation IIRC as to avoid tax as in those days shares issued under a DRP in lieu of dividends were tax free. When the dividends under the plan became taxable in line with the cash dividends the plan was dropped.

Contact has indicated that the new DRP will not apply to the interim March 31st 2021 dividend, But it will apply to dividends after that. I remember shares issued under the old DRP were not cheap: for quite a few years I was underwater with these 'purchases'. That served be right for not paying tax on them! All of those are 'in the money' now. But given CEN shares are not cheap even now, despite descending from a US fund induced binge buying spree into the stratosphere, I wonder how many shareholders will go for the new DRP? The answer is unknown. Perhaps the best we can do is look at what happened with the past DRP, and realize this will probably overestimate the number of participants in the new one.



DateNo. Of Shares On Issue
Incremental %ge DRP Shares
Dividends cpsDRP Share Price


31-03-2008576,633,982


add DRP shares issued during year11,251,746+1.95%
11c$5.66


less Shares bought back during year(2,571,104)


31-03-2009585,514,624


add DRP shares issued during year26,907,379+4.60%
17c, 11c$6.20, $6.10


less Shares bought back during year(1,288,507)


add Employee Redeemed Shares1,480


31-03-2010604,934,976


add DRP shares issued during year26,537,944+4.39%
14c, 11c$5.71, $5.84


less Shares bought back during year(5,942,974)


add Share Cash Issue Entitlement Offer69,538,348


31-03-2011695,068,288


add DRP shares issued during year31,377,916+4.51%
12c, 11c$5.35, $4.95


less Shares bought back during year(8,284,377)


add Employee Redeemed Shares508,480


31-03-2012718,670,367


add DRP shares issued during year17,728,186+2.50%
12c$4.88


less Shares bought back during year(8,096,672)


31-03-2013733,301,321



Given the pipeline of capital initiatives now available to Contact, there is no immediate need to dispose of 'surplus capital' through share buybacks. Yet given the likely more modest rate pf imputation credits available going forwards (interim dividend of 14c with only 9c imputed), it would be more 'capital efficient' to buy back shares rather than pay unimputed portions of dividends. Given the scarcity of dividend income available in this current low interest rate climate, I would bet on a high dividends continuing at the expense of buybacks.

SNOOPY

[turnip]

About the battery project, there was this commentry during the interim results webcast at 0:55:

" ... the biggest benefit of the battery is the reserves it gives you on the North Island, which allows you to run the HVDC harder and make sure all of the Tiwai volumes, or as much of the Tiwai volume as possible, gets across the Cook Strait. It is still a Tiwai mitigation and so we will do it at some point, but by delaying it, with the rapid technology curve reductions for batteries, the economics are getting better every second that we delay it "

Edit: I missed a bit, it continues "But the fact we can leverage a Tiwai mitigation to get build, own and operate experience for the first grid-scale battery in New Zealand is something that we're quite excited about.:"

[dreamcatcher]

Watching SP as still undecided about taking up $7 offer or buy on market.

Morning brief - “It's not a big discount, but I think it’ll be enough to get it across the line. A number of brokers across New Zealand have a $9+ price target on it.”

[calledone]

"Morningstar valuation in ASB was saying reduce, Their valuation was $6.6 yesterday and today it's 6.8". Is this a bait to sell?

[dreamcatcher]

"Morningstar valuation in ASB was saying reduce, Their valuation was $6.6 yesterday and today it's 6.8". Is this a bait to sell?

Morningstar not highly rated among investors who normally do the opposite to their recommendations. Brokers targets differ greatly as do investors opinions but best to use own judgement regarding these valuations.

[calledone]

Morningstar not highly rated among investors who normally do the opposite to their recommendations. Brokers targets differ greatly as do investors opinions but best to use own judgement regarding these valuations.

Good to know. Thanks.

[Lego_Man]

A$6.58 atm down down 55c re 7.7% on no vol though
NZ$7.08 atm on NZX down 1.7% 3.6 mill through . Black Rock etc still dumping?

Blackrock haven't started selling yet. They've just stopped buying (shares owned static since 31 Jan basically).

The runup in SP was them buying into a zero liquidity market, the subsequent massive drop was them stepping back as buyer (but not selling). That should pose some sobering assessments of what's to come.

[FatTed]

Snoopy regarding "I wonder how many shareholders will go for the new DRP?" I thought that if one did not need the income right now from a dividend it was a good idea to take up the DRP. sort of like compound interest, and often offered at a discount and without brokers fees. A little confused

[Snoopy]

Snoopy regarding "I wonder how many shareholders will go for the new DRP?" I thought that if one did not need the income right now from a dividend it was a good idea to take up the DRP. sort of like compound interest, and often offered at a discount and without brokers fees. A little confused


I think it depends on your position FatTed. If a shareholder doesn't need the income and the DRP offers shares at a discount it might be very sensible for that shareholder to enroll. I am not saying there aren't legitimate reasons to join the DRP. I am saying those reasons are overall not as compelling as before for everyone. If you are getting 1% interest for your bank term deposits, for example, when you were budgeting on more, you might be reluctant to forego your Contact dividend income at the present.

Whereas in the old plan the number of shares on issue grew by around 5% per year over two dividend payments, I expect the new DRP will cause the number of shares to grow by less, maybe 2.5% per year.

Personally on a share that is not on a high growth trajectory, I prefer to save my dividends as 'cash' and then use those funds to 'buy on a dip'. Rather than being forced to buy at DRP time, I prefer to chance my own market timing. Those funds may or may not go into more Contact Energy shares, depending on the value in the market that I can see at the time.

SNOOPY

[Snoopy]

Time to look at a ten year scenario analysis. This analysis takes the current dividend policy and looks back to see what level of dividend might have been expected had that policy been in place for all of the last ten years, This involves using actual 'Cashflow from Operational Activity', 'Stay in Business Capital Expenditure' and 'Net Interest Costs'. In my view using as much real data as possible is preferable when investigating these scenarios.



FY2011FY2012FY2013FY2014FY2015FY2016FY2017
FY2018FY2019FY2020


Cashflows from Operating Activities$379m$440m$469m$446m$490m$556m$508m$457m $466m$390m (1)


less Stay in Business CAPEX($180m)($98m)($116m)($46m)($63m)($87m)
($116m)($78m)($60m)($52m)


less Net Interest Costs($62m)($72m)($66m)($77m)($98m)($101m)($92m)($ 84m)($70m)($55m)


equals Operating Free Cashflow$137m$270m$287m$323m$329m$368m
$299m$295m$336m$283m


Operating Free Cashflow (OFC) x 100%$137m$270m$287m$323m$329m$368m
$299m$295m$336m$283m


Modelled Dividend per Share (based on 718m shares on issue)19cps38cps40cps45cps46cps51cps42cps41cps47cp s39cps


Actual Dividend per Share (based on 100% of OFC payout policy)39cps39cps


EBITDAF-DA-I-T (Normalised NPAT)$156m$177m$202m$199m$161m$159m
$134m$131m$175m$127m


Normalised eps (based on 718m shares on issue)21.7cps24.7cps28.1cps27.7cps22.4cps22.1cps18 .7cps18.2cps24.3cps17.7cps



The policy to declare dividends of 100% of operating free cashflow (OFC) was announced in AR2018 in time for the Financial Years of 2019 and beyond. So why was only 82% of OFC paid out for FY2019? As explained in the FY2019 investor briefing from August 11th p8, the plan is to pay out 100% of OFC in a mean hydrological year, further corrected for abnormal plant maintenance requirements and volatile market conditions. So the '100% payout of Operating Free Cashflow' policy is not quite as simple as it sounds. Water inflows over FY2019 were way above average. Water inflows over FY2020 returned nearer to average although not in the way you might expect. From the integrated report for FY2020 p6:

"We also had an unusual hydrology sequence where the Clutha River experienced periods of extremely low inflows and a one in 20 year flood."

So FY2020 is the first year that has produced the dividend payment that the AR2018 announced headline dividend policy promised. If Contact get a year of bad hydrology, will they borrow to make the dividend up to the level previously promised for an average year? That part of the payout 100% of OFC policy is yet to be tested.

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

Another point of note is that I am assuming exactly 718m shares were on issue at the end of each year over the last ten 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 weather events and demand from each of the last ten years over the current dividend policy?"

Effectively we are modelling an array of ten possible demand and generation variability events over today's Contact Energy, to see what kind of dividend variability going forwards we might expect. Yet history cannot model future macroeconomic changes, and Chair Robert McDonald delivered this rather ominous warning to shareholders on p5 of Contacts 'Integrated Report' for FY2020.

"It is particularly pleasing to deliver investors the same 39cps annual dividend this year as last year. However as we look forward to a likely period of disruption in the industry, we will need to reconsider the level of future dividends as the status of Tiwai is cemented and mitigations emerge."

The Tiwai Point aluminum smelter, based in Bluff, uses around 13% of New Zealand's generated power. If it were to close, there is not enough Transpower infrastructure reserved to transfer all the surplus power from Contact's Central Otago located Roxburgh and Clyde dams north. So we could see some surplus power go down the dam spillways after August 2021, if Tiwai does indeed close on that date. And that could lead to a permanent rethink on what constitutes an 'average hydrological year', with a consequential negative effect on future Contact Energy dividends.

(1) If all this wasn't complicated enough, it appears the definition of 'Operating Cashflows' has slightly changed between FY2019 and FY2020. If you look in the respective 'Cashflow Statements' for AR2019 and AR2020, you will see that 'Operating Cashflow' for FY2019 is listed as $466m in the former and $401m in the latter. Why the difference? In FY2020 the FY2019 figure has been reduced by a net interest figure of $69m -$4m = $65m. In AR2019 the 'interest paid' is reported in 'Financing cashflows' and the 'interest earned' is reported under 'Investing cashflows'. For consistency I am using the earlier definition of cashflows in the above table, with no interest charges deducted or added. This explains why 'Operating Cashflows' for FY2020 are listed as $390m in my table, but only $341m in the FY2020 Integrated Report.


Time to rework my calculations to consider the new FY2021 dividend policy of paying 80-100% of cashflows. For modelling purposes I will 'split things down the middle' and assume 90% of free cashflows are paid out. Contact have also said they will base their level on dividend payments around the last four years of results So for the purpose of this exercise I will change my timeframe to incorporate this.



FY2017FY2018FY2019FY2020


Cashflows from Operating Activities (1,2)
$508m + $85m$457m + $85m$466m + $85m$390m+$85m


less Stay in Business CAPEX
($116m)($78m)($60m)($52m)


less Net Interest Costs
($92m)($84m)($70m)($55m)


equals Operating Free Cashflow
$384m$380m$421m$368m


Operating Free Cashflow (OFC) x 90%
$346m$342m$379m$331m


Modelled Dividend per Share (based on 805m shares on issue (3))
43cps42cps47cps41cps


EBITDAF-DA-I-T (Normalised NPAT) (4)
$134m + $45m$131m + $45m$175m +$45m$127m + $45m


Normalised eps (based on 805m shares on issue)
22.2cps21.9cps27.3cps21.4cps



(1) From slide 6 of the presentation: "Projected EBITDAF uplift of ~$85m p.a. at wholesale price of $80/MWh" on commissioning of Tauhara.

(2) The definition of 'Operating Cashflows' has slightly changed between FY2019 and FY2020. If you look in the respective 'Cashflow Statements' for AR2019 and AR2020, you will see that 'Operating Cashflow' for FY2019 is listed as $466m in the former and $401m in the latter. Why the difference? In FY2020 the FY2019 figure has been reduced by a net interest figure of $69m -$4m = $65m. In AR2019 the 'interest paid' is reported in 'Financing cashflows' and the 'interest earned' is reported under 'Investing cashflows'. For consistency I am using the earlier definition of cashflows in the above table, with no interest charges deducted or added. This explains why 'Operating Cashflows' for FY2020 are listed as $390m in my table, but only $341m in the FY2020 Integrated Report.

(3) Following the capital raising, I expect the number of shares on issue to jump to 775,709,995 shares. The DRP will further increase the number of shares on issue, I predict at a rate of 2,5% per year (compounding). This will see the total number of shares after four years to increase as folows:



No.Shares


Year 0775,708.995


Year 1795,101,719


Year 2814,979,263


Year 3835,353,744


Total/4 = Average805,285,930



(4) I shall assume with Tauhara commissioned Depreciation will go up by $14m per year (the same jump in depreciation that occurred when Te Mihi was commissioned). There is $180m of new incremental debt funding associated with the building of Tauhara. At a 4.5% borrowing rate, this will increase the annual interest bill by:

$180m x 0.045 = $8m

The projected NPAT increment as a result or Tauhara coming on stream is therefore:

0.72x ($85m -$14m -$8m) = $45m

(This incremental increase in NPAT must ultimately be discounted back because it will not occur for three years time when Tauhara comes on line. I use a 4.5% discount rate, which equates to the long term Gross Yield I am prepared to accept.

1/(1.045)^3 = 0.8763

$45m x 0.8763 = $40m

SNOOPY

[dreamcatcher]

Vanguard Group 12 Feb "Disclosure of beginning to have substantial holding" 36-Million = 5.011%

Wonder if Cen could enter MSCI index

[Snoopy]

Imputation credits are sometimes a hard thing to pin down as companies can keep them on their books for years, and distort the imputation credits attached to future dividends with those imputation credit reserves. Companies can even front load imputation credits by paying a tax bill to the IRD before it is due. Yet over a longer period of time it becomes harder to distort imputation credits paid if shareholders consider a multi year company overview. In the case of Contact Energy, they cleaned out their stash of imputation credits just before Origin Energy gave up their controlling shareholding by paying a special 50c dividend on 23rd June 2015 that was fully imputed. That means that, post that special dividend payment, Contact Energy started with a 'clean imputation credit slate'. There have been ten dividend payments since that time. So what payments, with what percentage of imputation credits attached, have been made since Origin Energy left the share register?



Dividend Payment DateAmountDividend Imputed to... {A}Imputed to Maximum (B)Dividend Imputation Rate (A)/(B)


25-09-201515cps0%28%0%


23-06-201611cps19.84%28%70.9%


23-09-201615cps15.36%28%54.9%


17-03-201711cps22.04%28%78.7%


19-09-201715cps28.00%28%100.0%


06-04-201813cps28.00%28%100.0%


18-09-201819cps28.00%28%100.0%


09-04-201916cps19.55%28%69.8%


17-09-201923cps20.23%28%72.3%


07-04-202016cps19.55%28%69.8%


Average71.64%



I thought about what would be the best way to calculate the average imputation rate. Each dividend would have been individually considered by the board, and a decision made on what the appropriate imputation rate should be at each dividend payment time. So I have decided to just average the raw figures, exactly as they were presented to shareholders at the time.

By contrast, the dividend imputation rate that I used in my own capitalised dividend model (my post 1795) was somewhat lower.



Scenario Basis Financial Yeareps (A)Scenario dps (B)


Total225.6c(E)369.0c (F)


Business Cycle Imputation Rate (E)/(F)61.1%



So there we have it, three perspectives on what the imputation credit rate should be: 61.1%, 65%, 71.6%

Which to choose?


I want to update Contact Energy's 'Imputation rate' record, based on the statement that dividend payments will now be based on operating cashflows from the previous four years (NZX Release 15/02/2021).

I thought about what would be the best way to calculate the average imputation rate. Each dividend would have been individually considered by the board, and a decision made on what the appropriate imputation rate should be at each dividend payment time. So I have decided to just average the raw figures, exactly as they were presented to shareholders at the time. An alternative method, that I have chosen not to use, would be to take a weighted average imputation rate attached to each dividend in proportion to the size of that dividend.



Dividend Payment DateAmountDividend Imputed to... {A}Imputed to Maximum (B)Dividend Imputation Rate (A)/(B)


09-04-201916cps19.55%28%69.8%


17-09-201923cps20.23%28%72.3%


07-04-202016cps19.55%28%69.8%


15-09-202023cps20.23%28%72.3%


Average71.05%


Proposed 31-03-202114cps22.95%28%82.0%



If we think of the above average already paid dividends as 'predictive', how does such an averaged prediction line up against what is proposed for the dividend to be paid on 30-03-2021? From the half year announcement:

"The Board has approved an interim cash dividend of 14 cents per share which will be imputed up to 9 cents per share for qualifying shareholders, and paid on 30 March 2021."

100% 'Full imputation' means tax is being paid at 28% on the full 14c proposed payout. In fact only 9cps will be fully imputed, with no imputation credits attached to the remaining 5c portion of the proposed dividend. So the gross dividend being paid is:

9/0.72 + 5 = 17.5c

This means the tax paid before shareholders get their dividend is mapped out to be: 17.5c - 14c = 3.5cps

Under an alternative full imputation scenario, the gross dividend would look like: 14c/0.72 = 19.44c. Under this scenario, the tax paid equates to: 19.44c - 14c = 5.44cps

This comparison gives us an imputation rate paid of: 3.5c/5.44c= 64.3%

For a quicker way of doing the same calculation: The imputation rate of the proposed dividend in proportion to full imputation can be calculated straight from the proportion of dividend declared as imputed: 9/14 = 64.3%. That is a little higher than the historical precedent (82% vs 71.05%). This is not surprising, given the next forecast is no longer the 100% 'Operating Free Cashflow' payout that had previously applied to all four dividends since April 2019.

SNOOPY

[Snoopy]

Below I present my corrected earnings picture for the last ten 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 100% of free cash flow being paid into the foreseeable future. However, in the two years this policy has been in existence, only 39cps has been paid out. So where the 100% of operating free cashflow exceeds that figure I have capped the dividend payout to 39cps.
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) difference is positive there is no extra tax bill. That's because in such a year, the dividend is fully imputed.
6/ The final column (Column D) represents the 'effective' dividend per share adjustment for any extra tax obligation from paying tax on unimputed distributions.



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


201121.7c19.0c+2.7c0c0c19.0c


201224.7c38.0c-13.3c13.3c3.7c21.0c


201328.1c39.0c-10.9c10.9c3.1c25.0c


201427.7c39.0c-11.3c11.3c3.2c24.5c


201522.4c39.0c-16.6c16.6c4.6c17.8c


201622.1c39.0c-16.9c16.9c4.7c17.4c


201718.7c39.0c-20.3c20.3c5.7c13.0c


201818.2c39.0c-20.8c20.8c5.8c12.4c


201924.3c39.0c-14.7c14.7c4.1c20.2c


202017.7c39.0c-21.3c21.3c6.0c11.7c


Total225.6c (E)369.0c (F)182c


Business Cycle Imputation Rate (E)/(F)61.14%

.

The expected average dividend per year, net of tax is therefore: 182 / 10 = 18.2cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 18.2cps /(1-0.28) = 25.3c

Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream, albeit not quite a 'bond equivalent'. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the previously unthinkable is happening in that the Tiwai Point aluminium smelter is closing, and the power market is consequently in a state of flux as to how particularly Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh while 'transmission north' is constrained. To balance these competing factors, I have assessed that a gross return of 4.5% iThe bulk of these tax credits came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a write down in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the first quoted post on this thread of 71.64%.s now appropriate for Contact Energy.

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

25.3c /0.045 = $5.62

So $5.62 is therefore 'fair value'.

Readers should note that $5.62 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.

$5.62 x 1.2 = $6.74

Contact Energy is trading at $6.25 as I write this post. This technique would suggest that Contact Energy is now 11% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

But does a 'capitalised dividend valuation' give the full picture?



I have reworked my model based on just the last four years of operations.

1/ The 'Scenario 'Dividend Per Share' and 'Scenario Earnings Per Share' columns (from my post 1978) represent a prediction of an ongoing dividend of 90% of free cash flow being paid into the foreseeable future. The FY2021 forecast, under the same policy of paying out 80-100% of free cashflow, is 35cps. This is somewhat less than my four forecast scenarios where dividends range between 41cps and 47cps. However these scenarios reflect a future where Tauhara is operational which should provide an incremental boost to Contact's profitability. I also note that in the current forecast year, the proposed dividend of 35cps is a figure towards the lower end of the 80-100% cashflow payment range. I therefore do not consider the modelled dividend payout to be unrepresentatively high, once Tauhara is up and running.
2/ 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 (Column (D).
3/ 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.
4/ 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) difference were to be positive then there would be no extra tax bill. That's because in such a year, the dividend would be 'fully imputed'.
5/ The final 'Difference Column' represents the 'effective' dividend per share, adjusted for any extra tax obligation from paying tax on unimputed distributions.



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


201722.2c43.0c-20.8c20.8c5.8c16.4c


201821.9c42.0c-20.1c20.1c5.6c16.3c


201927.3c47.0c-19.7c19.7c5.5c21.3c


202021.4c41.0c-19.6c19.6c5.5c15.9c


Total92.8c (E)173.0c (F)69.9c


Business Cycle Imputation Rate (E)/(F)53.64%

.

The expected average dividend per year, net of tax is therefore: 69.9 / 4 = 17.5cps (net)

Using a tax rate of 28c this is equivalent to a gross income of: 17.5cps /(1-0.28) = 24.3c

Now we come to a critical point in this analysis - the choosing of an indicative interest rate that allows us to value Contact on the basis of being an ongoing income stream. I have previously used a figure of 5.5%. But that was in a climate of investment interest rates of some 3.5%. Interest rates have fallen by at least 200 basis points since then. OTOH the Tiwai Point aluminium smelter is likely on a three year wind down closing path. The power market is consequently in a state of flux as whether an energy intensive replacement industry like hydrogen fuel production, will arrive. If not, there is work to be done, by Transpower, to ensure Contact will be able to extricate the consequential surplus energy from their Clutha River power stations at Clyde and Roxburgh. The 'transmission north' constraints need to be relieved. There is also uncertainty as to how Tauhara will feed into the mix of competitors' new wind farms that are due to come on line within a similar construction timeframe.

To balance these competing factors, I have assessed that a gross return of 4.5% is an acceptable return from a shareholder perspective, investing in Contact Energy's assets.

Dividends can only be imputed to the extent that tax credits are being and have been generated. The bulk of the Contact tax credits on the books came about in FY2016, because of $204m of impairments net of tax relating to the closure of the Otahuhu Power Station, an assessment that the Taheke Geothermal field is unlikely to be developed in the foreseeable future (from a June 2016 perspective) and a 'write down' in the value of inventory gas. I have calculated above that $63m of those tax credits have been used up, which means that $97m - $63m = $34m are yet to materialise. That means there are probably two years worth of 'Superimputed dividends' for Contact Energy shareholders to come. What value of superimputation is appropriate? I am going with the average that I calculated in the early part (post 1799) of this valuation exercise of 71.64% as a figure that is now appropriate for Contact Energy.

If we assume that a business cycle investment 'gross return' of 4.5% is required, then this equates to a CEN share price of:

24.3c /0.045 = $5.39

So $5.39 is therefore 'fair value'. However, this is fair value in the future, three years hence when Tauhara is up and operating. We need to discount this back using an appropriate 'time value of money' factor. This I calculated in post 1978 to be 0.8763.

0.8763 x $5.39 = $4.73

Readers should note that $4.73 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.

$4.73 x 1.2 = $5.67

Contact Energy is trading at $7.49 as I write this post. This technique would suggest that Contact Energy is now 31% overvalued (above fair valuation), not unexpected given the plunge in interest rates of late is probably worrying yield investors, and not out of line with the broad overvaluation of the NZX as a whole.

But does a 'capitalised dividend valuation' give the full picture? Maybe not!

SNOOPY

[Snoopy]

Yesterday's capital raising document was the first I had heard of Contact Energy investigating building their own battery storage unit to become intergrated with their wholesale generation of power. I do wonder if anyone proof read the announcement, because batteries store energy, which means their capacity is measured in MWh (Mega Watt Hours) not MW (MegaWatts), I presume what the announcement was getting at was that the battery had to be able to supply power at the rate of 50MW. But that says nothing about how big the battery installation is proposed to be. For example a 50MWh battery could theoretically supply 50MW of power for one hour. But 50MWh would seem too small to be very useful.

Contact has a couple of very large 'hydro batteries' in the South Island, otherwise known as the Clyde and Roxburgh dams. But these dams are in the wrong island and are constrained in supply capacity by the Cook Strait cable which must be shared with Meridian. So I can see the logic of Contact building their own North Island battery. But it all goes to show how valuable the Waikato River 'hydro battery' system is, And that is owned by the opposition- Mercury Energy.

I remain puzzled by how such a relatively small grid scale battery will fit into Contact's generation asset portfolio. Is it a very expensive replacement for a gas peaker unit?


The video conference recording on the capital raising answered my question. The proposed battery would store power supplied across the cook straight cable when the cable was not fully utilised. It may only store a couple of hours worth of maximum discharge power on current costings. But the way battery costs are going, it might be more than that once the project is finished in around 2025.

Or I could have looked at Turnips post:



About the battery project, there was this commentry during the interim results webcast at 0:55:

" ... the biggest benefit of the battery is the reserves it gives you on the North Island, which allows you to run the HVDC harder and make sure all of the Tiwai volumes, or as much of the Tiwai volume as possible, gets across the Cook Strait. It is still a Tiwai mitigation and so we will do it at some point, but by delaying it, with the rapid technology curve reductions for batteries, the economics are getting better every second that we delay it "

Edit: I missed a bit, it continues "But the fact we can leverage a Tiwai mitigation to get build, own and operate experience for the first grid-scale battery in New Zealand is something that we're quite excited about.:"

That gives the text of what was actually said.

SNOOPY

[Snoopy]

The video conference recording on the capital raising answered my question.


It also clarified the "Long Run Marginal Cost Bar Graph" on slide 10. The first red bar on the left of the graph represent Tauhara. The next three bars are unnamed wind power stations, No doubt one of these is Mercury's Turitea. However Tauhara is better than it looks, because that graph only shows the cost to build per MWh that can be generated. The utilisation rate of a geothermal station is roughly twice that of a wind farm. So it can not only generate power at the lowest cost incremental rate. It can also deliver more of it.

SNOOPY

[FatTed]

Lego Man said:-For those wanting some additional background, S&P just announced a change to their weighting methodology for the underlying index that the Blackrock ETF replicates. MEL are currently around 4-5% weights in this index which has at least 6-7bn of ETF money folowing it. S&P launched a review in response to the clear observation of the effects that their buying was having on a whole lot of underlying stocks in the index.

Now, effectively the MEL and CEN weights are going to be liquidity capped after the next rebalance which will happen at the end of March. Broker estimates are for up to 500m worth of stock to be sold by Blackrock for both to make this rebalance.

The price is tanking because local fund managers and instos are getting out ahead of the ETF selling wave. MEL is getting hit more as there was already less fundamental support (lower dividend yield).

Does this mean that the share offer from CEN at a price of $7 is a little high with the rebalance due at the end of next month?

[winner69]

Does this mean that the share offer from CEN at a price of $7 is a little high with the rebalance due at the end of next month?

Quite possible

If you able to partake in the offering up to you decide whether you want more shares and then take a punt $7 is good (long term) or wait until they cheaper

Decisions

[Poet]

Surely this index rebalancing isn't as simple as it's being made out in the media - I can see a scenario where an ETF fund actually might need to buy more CEN rather than to sell

We need to take account of the actual price of the underlying share when calculating the index weighting of that share and since CEN shareprice has fallen from $10.75 to $7.11 in the last six weeks, any fund holding this share over that period would have seen the value of those CEN shares that they own fall by 35% and hence the relative weighting of CEN in that fund's index would also have fallen by the same 35%. This may mean that CEN's weighting in that ETF has already self-corrected (or even over corrected!).

Or am I misunderstanding the way these ETF make their buy/sell decisions?

[winner69]

Surely this index rebalancing isn't as simple as it's being made out in the media - I can see a scenario where an ETF fund actually might need to buy more CEN rather than to sell

We need to take account of the actual price of the underlying share when calculating the index weighting of that share and since CEN shareprice has fallen from $10.75 to $7.11 in the last six weeks, any fund holding this share over that period would have seen the value of those CEN shares that they own fall by 35% and hence the relative weighting of CEN in that fund's index would also have fallen by the same 35%. This may mean that CEN's weighting in that ETF has already self-corrected (or even over corrected!).

Or am I misunderstanding the way these ETF make their buy/sell decisions?


Might be large inflows into these two funds as well ....more MEL and CEN shares needed.

[iceman]

The reweighting about to take place at the end of March for the clean energy funds is a bit complex but they do have to reduce the weighting of both CEN & MEL. Of course the SP drop has done some of that reduction already !!
But we should not forget that with all the talk about Biden policies favouring clean energy, there could be some significant inflow of funds into these funds and if this is the case, the need to sell CEN & MEL is reduced.

Just to show the inflows, the 2 Blackrock clean energy have grown from a combined US$ 10.05 B on 31/12/20 to US$ 13.06 B on 17/02/21

[Baa_Baa]

On the chart (https://invst.ly/twhkm), CEN daily SP is basing now at a historical support, the 200MA and the 61.% FIB retrace from Covid-low to the insane spike-high recently. It is and remains in a severe short term down-trend. It's concerning that this and the other 'boring' energy shares have gone from steady SP rises and healthy returns over years - to incredible capital volatility.

[Scrunch]

Surely this index rebalancing isn't as simple as it's being made out in the media - I can see a scenario where an ETF fund actually might need to buy more CEN rather than to sell

We need to take account of the actual price of the underlying share when calculating the index weighting of that share and since CEN shareprice has fallen from $10.75 to $7.11 in the last six weeks, any fund holding this share over that period would have seen the value of those CEN shares that they own fall by 35% and hence the relative weighting of CEN in that fund's index would also have fallen by the same 35%. This may mean that CEN's weighting in that ETF has already self-corrected (or even over corrected!).

Or am I misunderstanding the way these ETF make their buy/sell decisions?
I got the impression somewhere that the liquidity weightings are doing most of the adjustment. The base index is however increasing from 30 to 35 stocks. This will decrease the demand for all existing 30 stocks as part of the existing fund value is put into the 5 new index components. The effect of this will depend on how big these next 5 candidates are.

[Beagle]

On the chart (https://invst.ly/twhkm), CEN daily SP is basing now at a historical support, the 200MA and the 61.% FIB retrace from Covid-low to the insane spike-high recently. It is and remains in a severe short term down-trend. It's concerning that this and the other 'boring' energy shares have gone from steady SP rises and healthy returns over years - to incredible capital volatility.

Good warning chart mate. Gentailiers all put on a LOT of weight when interest rates were falling to unprecedented lows and much more when the madness of ESG hype took over all rational analysis. I expect the exact opposite to happen as the 10 year Govt stock rate increases. Definitely a sector to underweight in my opinion for the foreseeable future.

[winner69]

Suppose Snoops covred this off but does the change in dividend policy mean we can see lower dividends in the next few years or so than we have got.

[winner69]

Good warning chart mate. Gentailiers all put on a LOT of weight when interest rates were falling to unprecedented lows and much more when the madness of ESG hype took over all rational analysis. I expect the exact opposite to happen as the 10 year Govt stock rate increases. Definitely a sector to underweight in my opinion for the foreseeable future.

The yield curve is steepening pretty quickly -- the 10/2 is close its highest level since 2014 .....hmmmm

[Snoopy]

Suppose Snoops covred this off but does the change in dividend policy mean we can see lower dividends in the next few years or so than we have got.


My attempt at looking at this was post 1978. That shows both 'dps' and 'eps' to be higher than before once Tauhara is built (the quoted post shows dividends and earnings projections under the old dividend policy, and without Tauhara). But these projections do not include the effects of taking older stations permanently off line (if that occurs), and generally reduced generation from the existing Wairakei power plants. I haven't been able to work out how to quantify those effects.

SNOOPY

[winner69]

My attempt at looking at this was post 1978. That shows both 'dps' and 'eps' to be higher than before once Tuahara is built (the quoted post shows dividends and earnings projections under the old dividend policy, and without Tuahara). But these projections do not include the effects of taking older stations permanently off line (if that occurs), and generally reduced generation from the existing Wairakei power plants. I haven't been able to work out how to quantify those effects.

SNOOPY

Its just that I looked at the average of preceding 4 years cash flows and they are declining which implies lower dividends for 2021 (which we know about) and 2022 ....and on a per share basis that's before the cap raise

[Snoopy]

Its just that I looked at the average of preceding 4 years cash flows and they are declining which implies lower dividends for 2021 (which we know about) and 2022 ....and on a per share basis that's before the cap raise


You could be right Winner. My analysis is assuming 'average' generation over the last four years (not a declining trend) and relates to the period after Tauhara is up and running in 2023 and after that. I believe the decline in cashflow you have observed over the last four years is weather related and not a structural issue within Contact. I have 'looked through' the Tauhara construction phase as well. During construction you are 'spending' cashflow and getting no return. So it follows that over the next couple of years during construction free cashflow is liable to be down.

SNOOPY

[Beagle]

The yield curve is steepening pretty quickly -- the 10/2 is close its highest level since 2014 .....hmmmm

10 year has gone from 1.0% to just over 1.5% in February and look what's happened to the market this month.
CEN building a whole lot more capacity when demand growth for electricity is very modest and on a whole bunch of more shares. Hmmm Not for this dog.

[Beagle]

....................duplicate post deleted(website is running a bit strange).

[Snoopy]

10 year has gone from 1.0% to just over 1.5% in February and look what's happened to the market this month.
CEN building a whole lot more capacity when demand growth for electricity is very modest and on a whole bunch of more shares. Hmmm Not for this dog.


Not an issue for Contact Energy Beagle. Tauhara is the perfect replacement for Unit 5 at Huntly. Only Genesis Energy shareholders need worry.

SNOOPY

[Jiggs]

Thank you for all your recent analysis. I don't understand it all, but I do understand I have made a 54% profit from buying and selling Contact over the past 2 years, but a 4% loss over the past month, and as this cow is no longer giving me any milk (wrong metaphor I know) I have just taken her out of my herd. When it looks like she's come into calf again, I might bring her back in again.