MEL - Meridian Energy

[Hoop]

696765xx for me .. ordered on thursday - cash came out today.

Hmmm interesting..a lot of orders came in on thursday I ordered thursday too.... 6956xxxx

[CJ]

We find out the result of the book build on Wednesday and the allocations on Thursday I think (tough we may be able to work it out on Wednesday if it is formula based like MRP).

Can anyone confirm what the Ticker will be, I have been referring to it as MEL but have seen others call it MED.

[Arbroath]

The NZDX listedbonds trades under MEL so I'd assume the equity will also...

We find out the result of the book build on Wednesday and the allocations on Thursday I think (tough we may be able to work it out on Wednesday if it is formula based like MRP).

Can anyone confirm what the Ticker will be, I have been referring to it as MEL but have seen others call it MED.

[Tony Two Gloves]

If they get heaps of rain maybe it will be MUD....

[MAC]

Update: It looks like the rain gods now favour the MEL float, having been opposed for much of the year;

http://www.electricityinfo.co.nz/com...Page.hydrology

[Snoopy]

I have extended work that I have done on Contact Energy and Mighty River Power previously to try and get an idea of how much it would cost to reproduce Meridians power generation assets on an inflation adjusted basis. Why? Because a potential Labour/Green coalition government has vowed to base the return from power companies around an ‘historical cost plus construction inflation’ formula. I do this to assess the potential downside risk to the MER share price should the government change. Unlike Contact Energy and Mighty River Power, Meridian has wind farms.

To cost the wind farms I have used the publicly available information for ‘Mill Creek’. ‘Mill Creek’ is a 60MW extension to Meridian’s ‘West Wind’ windfarm project in Wellington and was projected to cost $NZ169m to develop. Projected generating capacity is 60MW. This 60MW will be achieved with a series of up to 30 individual wind turbines. So I think it seems reasonable to work out a ‘per Megawatt’ power generation cost, and extrapolate the inflation adjusted cost of rebuilding other windfarms in the Meridian portfolio from that. Since the advent of the 2008 financial crisis, the cost of purchasing wind turbines has come down, even if I suspect the cost of building the foundations and roading access to service them continues to increase.

I have assessed the hydroelectric power stations on the same basis as I did for Mighty River Power. This means a medium sized turbine and associated electrical system, around 80MW,
is valued at $NZ100m with higher capacity turbines and ancillaries scaling up from that basis. Thus a 100MW turbine is valued at $NZ120m, for example. Separate to all of that is the earthworks and concrete construction of the dam itself. These are not generally thought of as working parts subject to wear and tear. An extreme view would be to regard these civil works as ‘sunk costs’, which should be valued at nothing from a power pricing policy perspective. I don’t believe that such an approach is reasonable though, unless you expect the government to bail the generators out and fix these structures up for free should they be damaged by an earthquake.

For civil superstructure associated with power generation, I have assigned a ‘defined cost’. This would certainly be less than replacement in today’s construction dollar terms. Benmore for example I have ‘costed’ at $600m in 2013 dollars. Compare that to the physically smaller 432MW Clyde dam owner by Contact Energy, which had a construction cost of more than $NZ1.6 billion in 1990s dollars. Granted the geology around Clyde construction was more challenging. But Clyde is still the most recent large-scale dam construction in NZ from which we can derive any costing basis.

OK, there is the method I am using. Now, what kind of results am I getting?

SNOOPY

[Snoopy]

My valuation list for the Meridian power generation assets is as follows. Note that for the hydroelectric dams I have split my valuation in two parts.

1/The first part is the dam and associated concrete works.
2/ The second part is for the turbine and the ancillary electrical equipment.

Te Uku (windfarm) 64MW: $NZ180m
West Wind (windfarm) 143MW: $NZ400m
Te Apiti (windfarm) 91MW: $NZ255m

White Hill (windfarm, Australia): $NZ225m
Mt Millar (windfarm, Australia) : $NZ200m

Ohau A (hydroelectric) 264MW: $NZ380m + $NZ300m
Ohau B (hydroelectric) 212MW: $NZ300m + $NZ250m
Ohau C (hydroelectric) 212MW: $NZ300m + $NZ250m
Waitaki (hydroelectric) 90MW: $NZ150m + $NZ100m
Aviemore (hydroelectric) 220MW: $NZ320m + $NZ260m
Benmore (hydroelectric) 540MW: $NZ600m + $NZ600m
Manapouri (hydroelectric) 800MW: $NZ900m + $NZ900m

I get a total of $1,260m for the windfarms and $5,610m for the hydroelectric dams, for a grand total of $6,870m in power generating assets. For ease of calculation I shall assume that all other property plant and equipment balance sheet assets are negligible compared to these operating power generating assets.

Turn to page 136 of the Meridian prospectus and you will see that forecast property plant and equipment assets for FY2014 are $6,954.4m. That is very close to the $6,870m of assets that I have listed above (I didn’t reverse engineer all of this for Meridian, I promise)!

Some would argue that Meridian are sitting on revalued, and grossly overvalued assets that have been inflated in value to justify high power prices. But I have reviewed the likely replacement cost of the working parts of those assets, with a heavily discounted allowance for earthworks and concrete thrown in. This approach shows Meridian’s assets are very much fairly valued. I have previously suggested that Meridian are contributing to the poor health of some NZers, through excessive charging for power. But in light of my systematic calculation I have had to revise that view. It now believe the implication by Labour/Greens that Meridian is overcharging for its power is weak.

SNOOPY

[Xerof]

Snoopdog, did the eureka moment hit you in time to get your application in?

just goes to show what a pair of slippery chaps Cunliffe and Parker are.......

[Snoopy]

I'm really not sure any of us have enough information to second guess the Meridian engineers and management.
Surely they will have done a professional job with a decent understanding of the risks. There are also probably external measurements they can do to be relatively confident that they are still running OK. Sounds like they were a good buy !

Over the weekend someone posted about injecting resin into power station generators stators, as a last end of life fix. That fix has apparently meant these components are now operating twenty years beyond their use by date. These posts may or may not have related directly to Meridian. Nevertheless the tone and detail of those posts suggested that the poster had some inside knowledge of the procedure. These posts have since been removed. That leads me to think that while the offer period was open someone higher up in the hierarchy suggested that such posting was inappropriate. I know who the poster was, and I see no reason to get them into trouble by reidentifying them in on this forum. Nor do I wish to relay any specific possible insider information and so get myself into trouble. However, I see no harm is discussing such a procedure as it relates to power turbines in general.

The subject of depreciation of very long life assets is an interesting one. Industrial componentry can be designed to last for an extremely long time. With purely mechanical components you can do things like inspect the conditions of the bearing surface and measure the wear and tear via float in the components. Electrical systems are a bit more tricky. Often electrical components can work just fine until they suddenly short out. If our NZ maintenance engineers can use their ingenuity to develop a system to extend the life of these components, then that is to be applauded. Resin is usually a non-conductor. So it comes as no surprise to me that it can be used as an electrical fix.

Mighty River Power got some criticism for supplying only an edited version of the engineering report that examined the state of repair of its dams and power stations. Meridian supplied some more information on this subject to their credit. One of the purposes of a prospectus is to outline to investors possible risks for consideration. Some would say if you read through all of the risks in any modern prospectus, then you would never invest! Lawyers do have a habit of wanting to cover themselves, and that is fair enough. Perhaps then I have been too alarmist about some of the disclosed risks in both the Meridian and Mighty River Power float documentation? I do have something to say on the subject of maintenance policy in general though.

To me, it makes no sense to have a maintenance policy where a critical component is listed as still running twenty years past its use by date. I am not questioning the idea of patching up machinery as in the case of Meridian this has clearly worked. What is wrong in this instance seems to be the policy of listing equipment as fully depreciated when there are decades of life left in it.

SNOOPY

[Snoopy]

Snoopdog, did the eureka moment hit you in time to get your application in?

just goes to show what a pair of slippery chaps Cunliffe and Parker are.......

No :-(. However my calculations are really back of the envelope stuff. I was working with ballpark figures and I am sure that Labour/Greens would have to be much more rigorous in setting a policy framework than the sort of thing I have done here. IOW, I may be looking at things the wrong way, and I am sure you could pick holes in my detailing. But you have to start somewhere. From my initial perspective the assets of Meridian are not overvalued.

SNOOPY