Contact Energy - CEN Chart

[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 Hydro	Station Generation Capacity	Notes	Contact Energy Geothermal	Station Generation Capacity	Notes
Clyde	464MW	Commissioned FY1992	Ohaaki	48MW	Commissioned FY1989
Roxburgh	320MW	Commissioned 1956	Te Huka (Tauhara 1)	28MW	Commissioned FY2010
			Wairakei	145MW	Commissioned 1958, Modified FY2005
			Poihipi	65MW	Commissioned FY1997
			Te Mihi	166MW	Commissioned FY2014
Total	784MW		Total	452MW
Effective Capacity Factor	0.514		Effective Capacity Factor	0.840
Total Operationally Adjusted	403MW		Total Operationally Adjusted	380MW

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 , 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 , 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-co...tery-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