TRUST POWER

[ananda77]

So TPW wants to be a standalone green energy producer to meet future demand from the electrification and decarbonisation of the NZ economy.
So they sell their green energy producing assets in the form of TILT first?
Then they sell their retail business to have the cash to build up their portfolio of green generating assets?

This does not make any sense to me unless
it is only a matter of time till TPW will also sell their existing green energy assets and cease to exist.

[Snoopy]

So TPW wants to be a standalone green energy producer to meet future demand from the electrification and decarbonisation of the NZ economy.
So they sell their green energy producing assets in the form of TILT first?
Then they sell their retail business to have the cash to build up their portfolio of green generating assets?

This does not make any sense to me unless
it is only a matter of time till TPW will also sell their existing green energy assets and cease to exist.

Good bit of insight. There is certainly long term risk in running a 'generation only' portfolio. With electricity prices spiking higher, we are probably at the opportunity end of that risk right now though. If 'Trustpower Rump' (I think that more accurately describes the company than the old 'Trustpower' monicker) can lock in a long term supply contract at today's prices, my inkling is they will do very well. The problem is 'long term' in power supply terms probably means 10 years, maybe 20 years at the outside. Hydro generation assets may have a life of hundreds of years. I can predict that some time well within the life of those hydro-generation assets, the risk profile will turn and selling power at a multi-year market low price will be the reality. At that point 'Trustpower Rump' is probably dead, and will be taken out by whatever company is on the other side of the long term power purchase contract.

Or we may see an orderly sale of those hydro generation assets much earlier.

SNOOPY

[Davexl]

So TPW wants to be a standalone green energy producer to meet future demand from the electrification and decarbonisation of the NZ economy.
So they sell their green energy producing assets in the form of TILT first?
Then they sell their retail business to have the cash to build up their portfolio of green generating assets?

This does not make any sense to me unless
it is only a matter of time till TPW will also sell their existing green energy assets and cease to exist.

Ouch, share price still tanking...

Based on your insight Ananda77, seems like TPW need to put out a clarification announcement...

[ananda77]

Good bit of insight. There is certainly long term risk in running a 'generation only' portfolio. With electricity prices spiking higher, we are probably at the opportunity end of that risk right now though. If 'Trustpower Rump' (I think that more accurately describes the company than the old 'Trustpower' monicker) can lock in a long term supply contract at today's prices, my inkling is they will do very well. The problem is 'long term' in power supply terms probably means 10 years, maybe 20 years at the outside. Hydro generation assets may have a life of hundreds of years. I can predict that some time well within the life of those hydro-generation assets, the risk profile will turn and selling power at a multi-year market low price will be the reality. At that point 'Trustpower Rump' is probably dead, and will be taken out by whatever company is on the other side of the long term power purchase contract.

Or we may see an orderly sale of those hydro generation assets much earlier.

SNOOPY

Yes. I can not see any company taking the risk of locking in power prices at current levels over the longer term (10 to 20 years), so I think we will see a sale of green generating assets within 2 years

[Snoopy]

Yes. I can not see any company taking the risk of locking in power prices at current levels over the longer term (10 to 20 years), so I think we will see a sale of green generating assets within 2 years

Actually as a generator without a retail arm it is quite normal to lock in a power agreement for the expected life of the generation asset. This is exactly what Tilt Renewables did with Genesis Energy with 130MW Waverley Wind Farm.

https://www.genesisenergy.co.nz/abou...rward-with-the

The agreement is for twenty years with a price reset at ten years. So I see it as highly probable that 'Trustpower Rump' can continue for twenty years as is. But the market as it does may provide a takeover opportunity for a third party over that time.

SNOOPY

[ananda77]

Actually as a generator without a retail arm it is quite normal to lock in a power agreement for the expected life of the generation asset. This is exactly what Tilt Renewables did with Genesis Energy with 130MW Waverley Wind Farm.

https://www.genesisenergy.co.nz/abou...rward-with-the

The agreement is for twenty years with a price reset at ten years. So I see it as highly probable that 'Trustpower Rump' can continue for twenty years as is. But the market as it does may provide a takeover opportunity for a third party over that time.

SNOOPY

Thank You, Snoopy

[ananda77]

Actually as a generator without a retail arm it is quite normal to lock in a power agreement for the expected life of the generation asset. This is exactly what Tilt Renewables did with Genesis Energy with 130MW Waverley Wind Farm.

https://www.genesisenergy.co.nz/abou...rward-with-the

The agreement is for twenty years with a price reset at ten years. So I see it as highly probable that 'Trustpower Rump' can continue for twenty years as is. But the market as it does may provide a takeover opportunity for a third party over that time.

SNOOPY

Thank You, Snoopy

[huxley]

The share price moment could just be holders moving out of a stable dividend business, didn’t the announcement mention they would review the dividend profile later on this year? Maybe more of the cashflow will be invested rather than paid out..

[Davexl]

The share price moment could just be holders moving out of a stable dividend business, didn’t the announcement mention they would review the dividend profile later on this year? Maybe more of the cashflow will be invested rather than paid out..

"Trustpower will consider capital structure, dividend policy and opportunities for re-investment of the proceeds as settlement of the transaction approaches. A further update will be provided at the Annual Shareholder meeting on 22 September 2021."

Unfortunately the announcement increases the uncertainty rather than clarifying things. Waiting until Sept 22 seems an inordinately long time to wait for clarity IMO...

[Davexl]

Ouch, share price still tanking...
Based on your insight Ananda77, seems like TPW need to put out a clarification announcement...

"Media Reports" clarification https://www.nzx.com/announcements/374364

Slight clarification, SP looking oversold at this point also, new Morningstar valuation of $6.70 out...

Excerpt:

...Liquidity in Trustpower shares is affected by the very low free float of near 22%. Trustpower agreed to sell its retail division to Mercury NZ.

Event analysis

Trustpower agreed to sell its retail division to larger peer Mercury NZ for NZD 441 million. Trustpower has secured a good price, representing a relatively lofty enterprise value/fiscal 2022 EBITDA multiple of 8 times. But we don't think Mercury has overpaid as it is likely to strip out significant costs and look for cross sell opportunities. The deal is expected to complete by early 2022, assuming approval by Trustpower shareholders and the Commerce Commission. We will incorporate the transaction into our forecasts when there is further detail but don't expect any material changes to fair value estimates. Mercury and Trustpower's narrow moat ratings, which mainly stem from their low cost and flexible hydroelectric schemes, are unchanged.

The retail industry is highly competitive, and scale is very important to leverage fixed costs across larger customer bases. This is the impetus for both Mercury making the acquisition and for Trustpower selling. Sale proceeds will put Trustpower in a strong financial position with pro forma fiscal 2021 net debt/EBITDA falling from 3.6 times to 1.8 times. Its strong balance sheet will allow reinvestment in its more moaty generation business and, potentially, payment of special dividends.

While Trustpower commands a relatively large retail market share of about 13% in electricity, profit margins are slim. Retail EBITDA was just NZD 47 million in fiscal 2021, compared with Generation EBITDA of NZD 154 million. Following the sale, Trustpower will maintain all generation assets, energy trading capabilities, commercial and industrial electricity customers, and power purchase agreements with Tilt Renewables. We think earnings should be defensive and predictable in the medium term as it will sell all electricity to Mercury under a fixed price, fixed volume contract following completion of the sale. The exact contract price is confidential, but management implied it will be a little above NZD 100 per megawatt hour.