Contact Energy - CEN Chart

[Snoopy]

Sorry, when I saw gas turbine I just thought peaking set, my bad.
Otahuhu and similar are more complex beasts designed to achieve a higher efficiency, look up ?combined cycle? gas turbines if you are interested.

Wish I could provide information with regard to construction and operational costs for different types of generation for you.

Best Wishes
Paper Tiger

Disc: In a past life I have been involved with many utility companies including electricity generation, transmission and distribution in both New Zealand & Australia

No problem PT. Good to have someone with some experience in the industry following this thread. If this ol' dog starts to go feral again, please feel free to yank the leash!

No doubt there are analysts in dingy rooms paid by institutional investors only for analyzing NZ energy companies. I don't aim to and can't compete with them. I am more interested in a more lazy kind of analysis where I put in 10% of the effort and get 90% of the result. I don't need to know the exact cost of rebuilding all those power stations for my analysis to have meaning I don't aim to get every detail right. But I do want enough detail correct to know that my own little investment ship is still sailing in the right direction.

SNOOPY

[Snoopy]

Wish I could provide information with regard to construction and operational costs for different types of generation for you.

I went all the way back to my 1999 CEN annual report and saw there was $225m of work in progress on the balance sheet. I should point out that at the 1999 balance date neither Otahuhu B, nor the Te Rapa Co-generation project, a joint venture with a predecessor of Fonterra's were operational. These both came on stream during FY2000. Because of its joint venture status, I am picking that Te Rapa was not on the Contact books as an asset. It may not even be on the books at Contact today (anyone know?).

At any rate I would guess that the $225m of work in progress relates to Otahuhu B. This would be buildings and generation equipment only as Contact already owned the underlying land. What $225m would be today in inflation adjusted dollars is hard to estimate. Our NZD to Euro exchange rate has probably improved (the generation equipment Otahuhu B was supplied by Sieman's in Germany) , but the cost of materials would have gone up substantially as well.

I will stick my finger in the air and say $800m in 2013 dollars. Anyone like to agree or disagree?

SNOOPY

[troyvdh]

Not wishing to appear pedantic....I ask again why would folk sell CEN at low $5....Im not sure about volume etc....but surely those who sold surely "in the money" can celebrate had they purchased below this price but ...honestly call me naïve but what prevents these folk in realising that a utility share that almost broached $10 in the past few years ...whats more ..is that this company has heralded bigger dvs.

[fish]

Not wishing to appear pedantic....I ask again why would folk sell CEN at low $5....Im not sure about volume etc....but surely those who sold surely "in the money" can celebrate had they purchased below this price but ...honestly call me naïve but what prevents these folk in realising that a utility share that almost broached $10 in the past few years ...whats more ..is that this company has heralded bigger dvs.

Instead of buying when others are fearful many are happier to follow the trend.
Fear makes investors run away even when that fear is irrational in its extent eg vector at 190 cents .Fortunately i bought lots at this price
Following the trend makes investors relax their guard eg telecom at 900 cents. Unfortunately i was greedy for more profit and didnt sell .
Cen has been mine best investment ever-i did sell all at 900 plus cents and have been buying at around 500cents .
Unfortunately i put all my profits from cen into the nzo 150 cent offer and have lost nearly 1/2 . Stupid but i am learning.

[Jaa]

Not wishing to appear pedantic....I ask again why would folk sell CEN at low $5....Im not sure about volume etc....but surely those who sold surely "in the money" can celebrate had they purchased below this price but ...honestly call me naïve but what prevents these folk in realising that a utility share that almost broached $10 in the past few years ...whats more ..is that this company has heralded bigger dvs.

Dilution! Cen has been heavily diluted since $10 and those divs.

With no growth on the horizon for 10yrs and thus increasing competition combined with the well covered industry risks I fail to see why you guys are excited??

[Snoopy]

With no growth on the horizon for 10yrs and thus increasing competition combined with the well covered industry risks I fail to see why you guys are excited??

Excited? I prefer my investments to be boring. I get my excitement from other activities. Nevertheless I don't mind telling you why I am keeping a watching brief on CEN shares.

The flat outlook and regulatory threat opens up the opportunity on acquiring energy shares at a discount to fair value. That makes me interested. From the little work I have done so far, it seems that Contact and Genesis may be the two energy companies least affected by whatever regulations a Labour/Green government might put on power companies. In fact as regards Contact, I believe they may be completely unaffected by this policy. So while everybody else is heading for the exits on their power company shares, I sense an excellent opportunity to accumulate Contact shares may be nigh.

SNOOPY

[Snoopy]

The station that has just finished construction is Te Mihi, a new standalone generator site that plugs into the Wairakei geothermal field. Cost all up was $623m, for a power station rated at 166MW.

Have just re-referenced my 28 April 2011 cash issue prospectus. On page 22 of that offer document is the following quote:

"The project is expected to cost $623m, which includes construction of the Te Mihi power station (including two steam turbine generators and associated equipment), electrical switchyard and transmission connection works, incremental steamfield works on the Wairakei geothermal system, including drilling of geothermal wells and other ancilliary works."

Conspicuous by its absence is any mention of buying outright or leasehold the underlying land.

For comparative purposes, the Ngatamariki 82MW geothermal power station, owned by Mighty River Power and under construction at the same time is forecast to cost $475m. On a Megawatt per dollar basis the Contact station is 54% more bang for the buck. I find it hard to reconcile this for two modern geothermal stations being built in the centre of the North Island at the same time. My only plausible explanation is that Ngatamariki is built on leasehold land and perhaps the extra money is related to buying a long term lease on this land?

Whatever the reason for the difference, my view has been strengthened that Te Mihi, built by Contact Energy is a good base figure to work from when estimating the replacement costs of other geothermal power stations excluding land costs.

SNOOPY

[Snoopy]

The Greens/Labour have been trumpeting excessive profits being generated by overvalued assets. But I think there is an argument that says turbines do eventually wear out. So I am of the opinion that the turbine equipment needs to be thought of as carrying it's replacement value on the books for power pricing purposes. This is necessary to ensure that when a replacement is eventually required the capital replacement budget exists that will ensure the power station can keep running.

So I would argue that even if the labour greens form the next government, the book value of Contact Energy assets will be unaffected by the new power policy. Given Contact produced an ROE of under 6% in 2012 based on book value, which translates to an ROA of some 5%.... How can that be regarded as excessive?

OK I am sticking my neck out. I don't believe a labour/green power policy if implemented will have any effect on Contact Energy.

From the Chairman's Review, underlying earnings for Contact were $176m for FY2012.

Go to the balance sheet on page 51 and I see Property Plant and Equipment valued at $5,163.6m and gas storage at $51.5m being the book value of assets that bear any generating capability.

So my ROA calculation for Contact Energy for FY2012 is as follows:

$176m / ($5,163m + $51.5m) = 3.4%

I can't see how any Labour/Green minister of energy could call that return excessive. Unless of course, they believe that those assets on the books are way overvalued. I will now have a second bite at that question.

SNOOPY

[Snoopy]

So my ROA calculation for Contact Energy for FY2012 is as follows:

$176m / ($5,163m + $51.5m) = 3.4%

I can't see how any Labour/Green minister of energy could call that return excessive. Unless of course, they believe that those assets on the books are way overvalued. I will now have a second bite at that question.

OK, here is my second attempt estimate of the replacement value of the working parts of the CEN power stations, made by basing my 'turbine costs' around the figures available for Te Mihi.

Te Mihi 166MW $623m
Wairakei 100MW (residual after Te Mihi is fired up) $400m
Ohaaki 104MW (installed capacity) $400m
Poihipi 55MW $200m
Te Huka 23MW $100m

Otahuhu B 400MW $800m

Clyde Dam 432MW $600m
Roxburgh dam 320MW $400m

Te Rapa Co-generation 44MW $100m
Taranaki Combined Cycle 377MW $600m

I make that a total 'turbine cost' of $4,223m. Total property plant and equipment is listed at $5,164m. So the difference is $941m. The question I ask myself is, how much of a hydro dam would that $941m buy today? $941m less than the $1700m-$600m= $1100m the book value of the Clyde dam itself when it was transferred to Contact from Electricorp, and that $1700m total Clyde dam figure is way less than the actual build cost.

I would make the argument that is you accept my turbine costs, the Clyde dam itself is now on the Contact books at only $650m and Roxburgh at around $300m.

I can't see how any Labour Greens ministry could regard these values as excessive. Hence I can't see them drawing up a plan for Contact to sell their power to a new single power authority buyer at any lesser price than today's market price.

SNOOPY

[Snow Leopard]

...I can't see how any Labour Greens ministry could regard these values as excessive. Hence I can't see them drawing up a plan for Contact to sell their power to a new single power authority buyer at any lesser price than today's market price.

SNOOPY

If it is politically expedient for electricity prices to be excessive then they are and the numbers will prove it and many will happily believe it.

Best Wishes
Paper Tiger