Contact Energy - CEN Chart

[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-...igger/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.

Date	No. Of Shares On Issue	Incremental %ge DRP Shares	Dividends cps	DRP Share Price
31-03-2008	576,633,982
add DRP shares issued during year	11,251,746	+1.95%	11c	$5.66
less Shares bought back during year	(2,571,104)
31-03-2009	585,514,624
add DRP shares issued during year	26,907,379	+4.60%	17c, 11c	$6.20, $6.10
less Shares bought back during year	(1,288,507)
add Employee Redeemed Shares	1,480
31-03-2010	604,934,976
add DRP shares issued during year	26,537,944	+4.39%	14c, 11c	$5.71, $5.84
less Shares bought back during year	(5,942,974)
add Share Cash Issue Entitlement Offer	69,538,348
31-03-2011	695,068,288
add DRP shares issued during year	31,377,916	+4.51%	12c, 11c	$5.35, $4.95
less Shares bought back during year	(8,284,377)
add Employee Redeemed Shares	508,480
31-03-2012	718,670,367
add DRP shares issued during year	17,728,186	+2.50%	12c	$4.88
less Shares bought back during year	(8,096,672)
31-03-2013	733,301,321

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.:"