NWF - NZ Windfarms

[blackcap]

I have been doing some thinking around the hedging policy that NWF have and I think they have stuffed it up a bit.

I received an email from the previous CEO who said that hedging was done between 20-40% of average quarterly volume. I took this to mean 30,000MWH per quarter being about average (expected volume).
So for the December quarter I am presuming they were at the upper end of the scale and hedged about 40% of expected volume or about 12,000MWH. Unfortunately only 25,912MWH were delivered by the turbines even though 30,000MWh may have been expected.
Lets say that the average buy price of the hedge was about $75 so a total outlay of $900,000.
The average price for the 3 months was near about $205.48 (taken from Wholesale information trading system) so a shortfall of $130.48 multiplied by 12,000MWh gives us close enough to our loss of $1,565,760 (either NWF got less than $75 on the contract or they hedged more than 12,000MWH which is unfathomable in my opinion).

Unfortunately the price that we received for our electricity was not $205.48 (the average over the 3 months) but a rather lower $173.83.

I believe that NWF is in a hiding to nothing when it come to hedging. When wind resource is low, generally spot prices are slightly higher (due to less supply) and when wind resource is high, spot prices are marginally lower. That makes hedging rather difficult and counter productive.

In addition, in a bad year the spot price might be $50 (hedges taken out at $70-$75) so the upside is limited to $25 per MWH. But in good years when the price is high hedges destroy upside that is more unlimited.

I think NWF should review their hedging policy and if anything cancel it totally or keep it to a bare minimum, I would be comfortable with a maximum of 20% of expected production or a total of 6,000MWH per quarter.

Just a few random thoughts.

To add. After the AGM, directors were talking about capital initiatives and there was the mooting of a potential dividend or buy back of stock to use excess cash from the prior year good cashflow. But after having seen the loss on the hedging, I am pretty confident there would have been no cash left as margin calls, probably as early as late October and ongoing in November would have cleaned up most of the cash that NWF had.

[Arthur]

I'd like to think that is the worst quarter for value destruction with hedging. They will have had contracts in place before the prices went up, new hedging should be at higher prices. This quarter still should have made a profit around $700,000 more than the previous year's comparative. It is still possible the profit will be over $5m this calendar year.

[blackcap]

I'd like to think that is the worst quarter for value destruction with hedging. They will have had contracts in place before the prices went up, new hedging should be at higher prices. This quarter still should have made a profit around $700,000 more than the previous year's comparative. It is still possible the profit will be over $5m this calendar year.

I doubt it. From the annual report...https://www.nzwindfarms.co.nz/invest...june-2018/view

At 30 June 2018 the Company held 149 quarterly sale contracts from Q4 2018 to Q3 2019 ranging in price from $63.20/MWh to $87.00/MWh, recognised as unrealised energy futures derivatives. These futures contracts had a mark to market value at year end of $107k. Interest rate swaps had a mark to market value of -$3k for a mark to market net position of $104k at year end.

[Dassets]

The point of hedging was to ensure in times of low prices the company didnt go bust. It also enabled the company to borrow money which it coud not without the hedging. Hedging when prices go high will always have a negative impact. But the rev was still a third up after hedging. That goes to the bottomline. That is unfortunately how it works.

[blackcap]

The point of hedging was to ensure in times of low prices the company didnt go bust. It also enabled the company to borrow money which it coud not without the hedging. Hedging when prices go high will always have a negative impact. But the rev was still a third up after hedging. That goes to the bottomline. That is unfortunately how it works.

Hi Dassets,

I understand why NWF hedge and that I do not have an issue with. It is the excessive nature of the hedging that worries me. If my math is remotely correct, 12,000 MWh or about 46% of total wind resource for the quarter was hedged. I do not see whey NWF need to hedge that much.
Also the skewed nature of the hedges lead me to believe that in the long term it is a slightly losing strategy, the synergies of guaranteed revenue notwithstanding. I do understand that in times of low prices NWF will benefit but there is more potential upside than downside. I note that futures are looking very strong out to September, I only hope that NWF have not hedged the majority of this away.
I note you use the past tense in your statement, "enabled" etc. Does that mean that future hedging may not be so aggressive in your opinion?

[Arthur]

Blackcap, I appreciate your views on this. It would be a shame if they filled their boots with hedges at 75, instead of taking opportunities to hedge at top prices when the opportunity arose (perfect hindsight I know). If the company is still taking up new hedging agreements, they should be at well north of $100. Revenue of over $10 million a year should be possible in today's environment, eventually they will roll into it. When prices revert to "normal" there will be a buffer of hedges at higher prices. The high wholesale prices have deprived the wolf of an ugly duckling. Will it have time to become a swan while the feeding is good?

[blackcap]

Blackcap, I appreciate your views on this. It would be a shame if they filled their boots with hedges at 75,?

As at 30 June 2018 that is exactly what they did:

"At 30 June 2018 the Company held 149 quarterly sale contracts from Q4 2018 to Q3 2019 ranging in price from $63.20/MWh to $87.00/MWh". Annual Report.

In other words as at 30 June 2018, circa 32,500/MWh was already hedged at between $63.20 and $87.00.

[Arthur]

Two quarters later they may have used 24,000 of those (based on your estimate of 12,000 a quarter). That leaves less than a quarter at the "old rates". They would have to have been really "unlucky" to be hedging at under a hundred now as those rates have been around or over that for many months. I'd have no objection to the hedging half the expected production at 130. They might miss abit of the top, but a healthy profit would be underwritten

[blackcap]

Two quarters later they may have used 24,000 of those (based on your estimate of 12,000 a quarter). That leaves less than a quarter at the "old rates". They would have to have been really "unlucky" to be hedging at under a hundred now as those rates have been around or over that for many months. I'd have no objection to the hedging half the expected production at 130. They might miss abit of the top, but a healthy profit would be underwritten

We shall just have to agree to disagree. I would be happy for hedging but at a reduced level. I doubt they are getting these new prices as they may have already hedged for this and the next quarter a while ago... before the prices rose. But that is conjecture on my part.

[Well Endowed]

any thoughts on Mercury taking an 'interest' in NWFs operations ?

https://www.nzherald.co.nz/business/...ectid=12216660