CEN vs MRP 'Head to Head' Optimum Gearing
Gearing does vary a bit over the business cycle. Contact has indicated that they are currently in a 'pay down debt' part of the curve. But there was a time this decade, dating back to the 2011 capital raising, that Contact had a chance to optimize it's gearing.
The main stated purpose of the June 2011 Capital raising was to build the planned Te Mihi power station that was due for completion in 'mid 2013'. In fact it was May 2014 before this new geothermal station was finally commissioned. So the project didn't quite go to plan. But Contact management would know all about expected cashflows and make adjustments accordingly. So I think the June 30th 2014 balance sheet position is a fair window into what balance sheet position that Contact management wanted to achieve.
The Contact Group position at FY2014 balance sheet date was as follows:
(Total Liabilities) / (Total Assets) = $2,601m / $6,183m = 42.1%
Meanwhile 'down the road' Mighty River Power (now Mercury) had their own geothermal power station under development. The Ngatimariki power station was completed in September 2013. There was no rights issue. But Mercury were given considerable freedom over previous years in the dividends they were required to pay to the government to make sure their capital position was optimized. The closest balance date to this was June 2013.
The Mercury Group position at FY2013 balance sheet date was as follows:
(Total Liabilities) / (Total Assets) = $2,620m / $5,802m = 45.1%
The two gearing figures are pretty close. Perhaps one could argue that the gearing at Contact should be slightly less due to the higher proportion of thermal generation assets in the portfolio that are 'lesser quality assets' to borrow against? Yet generally the similarity between the two companies is not something that requires much imagination to see.
SNOOPY
CEN vs MRP FY2017 'Head to Head' Generation: 2nd Iteration
Jantar kindly identified some errors in my first version of this table. Time to put in his corrections
Mercury Energy Hydro |
Station Generation Capacity |
Mercury Notes |
Contact Energy Hydro |
Station Generation Capacity |
Aratiatia |
78MW |
Upgrade by FY2020 |
Atiamuri |
74MW |
|
Clyde |
464MW |
Waipapa |
51MW |
|
Roxburgh |
320MW |
Ohakuri |
112MW |
|
Whakamaru |
100MW |
Upgrade to 124MW by FY2020 |
Arapuni |
196MW |
Received 12MW upgrade in FY2011 |
Maraetai 1 & 2 |
352MW |
|
Karapiro |
96MW |
|
Total |
1059MW |
|
Total |
784MW |
Mercury Energy Geothermal |
Station Generation Capacity |
Mercury Notes |
Contact Energy Geothermal |
Station Generation Capacity |
Contact Notes |
Kawerau |
100MW |
|
Ohaaki |
48MW |
Mokai (25% owned) |
112MW |
|
Te Huaka |
28MW |
Completed FY2010 |
Rotokawa |
34MW |
Refurbished FY2015 |
Wairakei |
145MW |
Nga Awa Purua (65% owned) |
138MW |
Completed FY2010 |
Poihipi |
65MW |
Ngatimariki |
82MW |
Completed FY2014 |
Te Mihi |
166MW |
Completed FY2014 |
Total |
466MW |
|
Total |
452MW |
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.
SNOOPY
Thin Air Capital Since EOFY2014 (FY2017 Perspective)
Quote:
Originally Posted by
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:
784/1059 = 0.74
Or if you consider that the Mercury Geothermal power stations have increased in value over time, unlike their Contact counterparts, teh 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.
My post on the Mercury thread, post 1076, gives the background information required for this calculation. Sadly with the balance sheet of Contact 'optimised' at the FY2014 balance date, we probably should only consider the thin air capital created over FY2015, FY2016 and FY2017 when assessing how much hidden value has accumulated within Contact's Generation Portfolio. For comparative purposes, I list the relevant Mercury figures, grabbed from Mercury posts 1003 and 1076, below:
Mercury Energy |
Total Revaluation ($m) |
Pre Tax Revaluation ($m) |
FY2015 |
356 |
497 |
FY2016 |
100 |
137 |
FY2017 |
38 |
52 |
Total |
494 |
686 |
Observant readers will note that in the case of Mercury I subsequently took off all the special dividends paid. This is because I judged the Mercury special dividends were being paid to optimise the capital structure of Mercury. Contact shareholders will remember that they were paid a special dividend of 50cps just before Origin Energy quit its Contact stake. However, that payment was made for quite different reasons, to utilise imputation credits that would otherwise be lost. Since the Contact special dividend was not a capital structure optimization exercise, I propose to make no capital optimisation adjustment for that!
Using the scaling factor I derived in post 1514, we can now work out the 'thin air capital' that should now be 'off the books' at Contact Energy:
$494m x 0.74 = $366m
If we assume 45% gearing then Contact could borrow 0.45 x $366m = $165m against that sum.
This means the the money available to construct a new power station, using Contact's off balance sheet funds, is:
$165m + $366m = $531m
SNOOPY