Contact Energy - CEN Chart

[fish]

Narrow-moat-rated Mercury NZ posted record first-half EBITDA of NZD 301 million, up 11% on the same period last year. The firm benefited from ideal weather conditions, with plenty of rain in the North Island boosting its hydroelectric production, while low South Island rain kept the wholesale price high. Full-year guidance for EBITDA of NZD 530 million is unchanged, and we think the firm can do a little better. We make minor adjustments to our earnings forecasts but maintain our NZD 3.60 fair value estimate. We also adjust our historic and forecast dividend numbers to now include special dividends as well as ordinary dividends.

[Snoopy]

Snoopy my 2 biggest holdings are mercury first then contact so obviously I admit bias towards mercury.
You have analysed the past but I look more to what is happening now and the future.
CEN losing customers,mercury gaining.

I would guess a large part of this relates to just who has excess electricity available. If Contact have to fire up their thermal generation to attract new customers, it may not pay them to do so. With Mercury having strong power inflows, they can probably afford to offer new customers a sweeter contract.

SI prices for power much lower than NI.

I prefer to check the EMI website at both Huntly

https://www.emi.ea.govt.nz/Wholesale...ES&_si=p|0,v|3

and Benmore

https://www.emi.ea.govt.nz/Wholesale...ES&_si=p|0,v|3

to get clarification of that. Let's look at an assortment of dates and times over the last week.

	Benmore Node 2201	Huntly Node 2201	Difference	%ge Difference
Wholesale Price 5pm 14-03-2018	$52.34/MWh	$64.26/MWh	+$11.92/MWh	+22.8%
Wholesale Price 6pm 14-03-2018	$49.36/MWh	$61.92/MWh	+$12.56/MWh	+25.4%
Wholesale Price 7pm 14-03-2018	$23.78/MWh	$28.77/MWh	+$4.99/MWh	+21.0%
Wholesale Price 8pm 14-03-2018	$71.20/MWh	$83.34/MWh	+$12.14/MWh	+21.0%
Wholesale Price 9pm 14-03-2018	$71.48/MWh	$81.96/MWh	+$10.48/MWh	+17.0%
Wholesale Price 10pm 14-03-2018	$41.73/MWh	$46.22/MWh	+$4.49/MWh	+10.8%
Wholesale Price 11pm 14-03-2018	$69.63/MWh	$73.51/MWh	+$3.88/MWh	+5.6%

Looks like you are right fish.

Mercury is having a bumper year and they are very green with very cheap to produce hydro near to Auckland.
A valuation should mention all the factors

The problem is a bumper year this year does not necessarily translate to a bumper year next year. Much better I think to look over the weather cycle and consider what might happen over a period of years. This is what I have done using my 'Business Cycle Earnings Yield' figures.

The fact that MCY are very green (hence low carbon credit costs) and can produce power they can feed near the Huntly node have all been considered, because the profit figures produced are a calculated result of all these inputs.

SNOOPY

[Snoopy]

I think it is worth noting the similarities that exist in portfolio capacity between the MCY and CEN hydroelectric and geothermal power stations.

Mercury Energy Hydro	Station Generation Capacity	Mercury Notes	Contact Energy Hydro	Station Generation Capacity
Aratiatia	78MW	Upgrade by FY2020	Hawea Gates	17MW
Atiamuri	74MW		Clyde	432MW
Waipapa	54MW		Roxburgh	320MW
Ohakuri	106MW
Whakamaru	100MW	Upgrade to 124MW by FY2020
Arapuni	196MW	Received 12MW upgrade in FY2011
Maraetai 1 & 2	352MW
Karapiro	96MW
Total	1056MW		Total	769MW

Mercury Energy Geothermal	Station Generation Capacity	Mercury Notes	Contact Energy Geothermal	Station Generation Capacity	Contact Notes
Kawerau	100MW		Ohaaki	60MW
Mokai (25% owned)	112MW		Te Huaka	28MW	Completed FY2010
Rotokawa	34MW	Refurbished FY2015	Wairakei	132MW
Nga Awa Purua (65% owned)	138MW	Completed FY2010	Poihipi	65MW
Ngatimariki	82MW	Completed FY2014	Te Mihi	166MW	Completed FY2014
Total	466MW		Total	451MW

Note that I have left out Contact's gas fired power generation capacity in this comparison. I did this becasue the reason for this comparison is to estimate the 'hidden value' that might be on Contact's balance sheet. Thermal stations usually do not have hidden value as in the medium/longer term they are likely to be phased out of the power supply picture.

A substantial difference between the two companies is that Mercury makes regular adjustments to the value of its generation assets whereas Contact Energy does not. These adjustments have strengthened the balance sheet to the extent that Mercury has build new power stations (e.g. Ngatimariki) without raising new capital. I think Contact could do the same. Given the similarity of the renewable generation portfolio, it seems likely that Contact is sitting on a substantial 'hidden asset' (a potential revaluation of the renewable power portfolio), should management ever decide to take advantage of it, as Mercury management has done. But how much hidden value is there? That is the question I want to answer next.

The weakness in the analogy is that Mercury have upgraded their hydro stations in recent years and have an ongoing program to do more. This will result in a real increase in generation capacity. It is questionable, given Contact's hydro stations are much newer that they can do the same.

SNOOPY

[Jantar]

Mercury Energy Hydro	Station Generation Capacity	Mercury Notes	Contact Energy Hydro	Station Generation Capacity
Aratiatia	78MW	Upgrade by FY2020	Hawea Gates	17MW
Atiamuri	74MW		Clyde	432MW
Waipapa	54MW		Roxburgh	320MW
Ohakuri	106MW
Whakamaru	100MW	Upgrade to 124MW by FY2020
Arapuni	196MW	Received 12MW upgrade in FY2011
Maraetai 1 & 2	352MW
Karapiro	96MW
Total	1056MW		Total	769MW

Mercury Energy Geothermal	Station Generation Capacity	Mercury Notes	Contact Energy Geothermal	Station Generation Capacity	Contact Notes
Kawerau	100MW		Ohaaki	60MW
Mokai (25% owned)	112MW		Te Huaka	28MW	Completed FY2010
Rotokawa	34MW	Refurbished FY2015	Wairakei	132MW
Nga Awa Purua (65% owned)	138MW	Completed FY2010	Poihipi	65MW
Ngatimariki	82MW	Completed FY2014	Te Mihi	166MW	Completed FY2014
Total	466MW		Total	451MW

...

SNOOPY

A few errors in some of that station capability data.

For Mercury: Ohakuri is 112 MW, and I have seen 116 out of it with a high lake level first thing in the morning.
Waipapa is 51 MW, but again 54 is possible under perfect conditions

For Contact: The Hawea Gates project was consented, but is not progressing at this time.
Clyde is 464 MW. The 432 MW figure was due to a resource consent limit that was lifted in 2007.
Ohaaki was commissioned as a 100 MW station, but due to steamfield depletion is now only capable of 48 MW.
Wairakei is able to manage 145 MW as a steady state generation value.

[fish]

Thanks snoopy and jantar.
so mercury has a lot more hydro and a little more geo.
Do we have to allow for transmission loss to get contacts hydro to the North?

[Baa_Baa]

Could I ask a question not shareholder related, probably of Jantar who seems well informed?

Specifically for lake Ohakuri, it has been noticed that lake levels recently over the past 6-12 months have been consistently allowed to rise to extraordinarily high levels, sometimes say 30+cm above what has in the past been 'normal' high levels, flooding fixed jetty's and low lying plains at lake edge rendering them useless for long standing infrastructure and some recreational facilities.

Do you know whether there is a deliberate policy to 'overfill' Ohakuri, perhaps to eek out a longer daily period of generation than has been in past times? It seems that the norm has changed to higher highs and higher lows, though it's not clear whether it is deliberate (as the levels are carefully controlled), or long term.

TIA
BAA

[Jantar]

....
Do you know whether there is a deliberate policy to 'overfill' Ohakuri, perhaps to eek out a longer daily period of generation than has been in past times? It seems that the norm has changed to higher highs and higher lows, though it's not clear whether it is deliberate (as the levels are carefully controlled), or long term.

TIA
BAA

I would be pretty sure that Mercury would not overfill any of their lakes. The max and min levels are controlled by resource consent limits, and it is possible that they are simply operating closer to those limits. In the late 1970s all Waikato lakes were lowered due to dam safety concerns, and dam safety permission was granted to raise them back to their original levels in the mid 1990s. Possibly the consent conditions have been changed to finally allow that to happen. You could ring the Mercury Control Room in Hamilton and ask to talk to their Hydrologist for up to date information

[horus1]

The Govt has announced a review of the electricity industry.It may affect things.

[Snoopy]

Wairakei is able to manage 145 MW as a steady state generation value.

Jantar, I wonder if you would clarify something on 'Wairakei' for me, if you can help!

'Wairakei' I think has two meanings in this context. Firstly there is the Wairakei 'power station'. Secondly there is the Wairakei 'steam field'. The Wairakei steam field actually powers three of Contact's power stations: Wairakei, Poihipi and Te Mihi. The newest of those. Te Mihi was commissioned principally because Contact has permission to take more steam from the Wairakei steam field then they were using. Te Mihi was a neat way to take up all of their consented steam. However the net gain was not expected to be 116MW. The trade off was that some of the steam that used to go into the old Wairakei power station was to be shuffled off to operate the new more efficient Te Mihi. However, once Te Mihi was commissioned, the capacity the original Wairakei power station apparently was not reduced.

Is it possible to run all three stations that feed on the Wairakei steam field (Wairakei, Poihipi and Te Mihi) together generating a combined 132MW +65MW + 166MW= 363MW? Or is the combined generating capacity of all three rather less than this?

TIA

SNOOPY

[Snoopy]

A few errors in some of that station capability data.

<snip>

For Contact: The Hawea Gates project was consented, but is not progressing at this time.

Thanks for that. Although small in absolute terms, it seemed to me like a no brainier, when mentioned in the 2011 capital raising prospectus, that it would go ahead. It is part of the feeder system that ultimately ends up in the Clyde dam after all. Since the Hawea dam already exists, I woudl have thought there would be little extra incremental cost to sticking a turbine in there. Can you offer any insight as to why the project was put on ice?

Clyde is 464 MW. The 432 MW figure was due to a resource consent limit that was lifted in 2007.

Thanks for that. I notice on the Contact website:

https://contact.co.nz/aboutus/our-st...-powerstations

that Clyde is still listed as having a generation capacity of 432MW. If what you say is correct, it is very poor that the website has not been updated when Contact have had ten years to do so! There is possibly more hidden value here than I suspected!

Ohaaki was commissioned as a 100 MW station, but due to steamfield depletion is now only capable of 48 MW.

I notice on the Contact website link above, the capacity of Ohaaki has been omitted!

On page 23 of the international presentation dated April 2017,

https://contact.co.nz/-/media/contac...53870CBBC16D06

the capacity of Ohaaki was listed as 50MW. That was a year ago, so has Ohaaki declined even further? Is three no drilling program that can hope to restore generation capacity to close to the 100MW design capacity?

SNOOPY