Killed it and welcome to Shed Lunch and the short bonus episode where we unpack some of the ins and outs of Contact Energies proposed takeover of Manua Energy. There's lots to digest with this two point three billion dollar deal, whether you're an investor in the energy sector or a consumer of power or a business hit by recent power hikes. To shed some light on why this is a good idea, I'm joined by Contact Energy CEO Mike Fuje.
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Mike, thanks for coming in to see us today. There's been a lot of media about this proposed deal two point three billion dollars, and it's one of the biggest
things that's happened to the power industry in quite some time. Today, we're going to look at what it means for investors principally, First of all, for listeners and viewers who don't know too much about Contact and Manowa, can we kind of explain for us what assets you have at the moment in generation and how that might change if the steal were to go through.
Yeah, sure, so contact energy.
Probably what we're best known for in generation assets is are geo thermal, and over the last three years we've actually invested a lot into building more geothermal with the Toharer and talk of three projects.
In fact, what we've built to date.
In geo thermal in the last three years is equivalent in generation output as a steal.
And that just give it some perspective.
And then we have the hydro assets, obviously the iconic Clyde and Roxburd dam in the Cluther system, which we'll talk about a bit later, but they.
Were part of the foundation.
And then with that we have thermal assets Taranaky combined cycle plant, the two peakers, and the Foreranaki diesel peaking plant over in the Hawks Bay.
Just on those we're talking oil and gas for those gas when you say thermal gas gas.
Powered apart from Faranaki, which is diesel powered, and that's okay, sort of sits to come on in extreme periods of periods of extreme shortage, okay, Right.
So the idea would be that you would phase those out is that.
Yeah, So we're on a plan to phase out thermal generation and decarbonize our portfolio, and we've been very clear about that. So geothermal is as good, if not better than nuclear power. It has asset utilizations of between ninety five and ninety eight percent. It just runs twenty four by seven.
All year round.
And then we have our hydro schemes, which are incredibly valuable, but they are spring and summer weighted, and just as you get to the end of summer, your water starts to come down. It's a long summer and you start to get a bit short, which is why we had the thermal fleet to kick in at that point and provide fuel, which is also why we have the gas storage facility. Now we want to decarbonize, so you can't decarbonize unless you have a solution to that conundrum.
And that's what this deal is about.
Because Manua has about one point eight to tell what hours of hydro, but that's winter weighted rather than spring summer. So as our water with our existing assets starts to run out, you can look forward to winter with the Manoa assets and their water starts to come in.
And there's a very nice hedge in there.
So is it that hydro is the answer to the decarbonization more so than other renewables wind, solar batteries. You're in those in development stage anyway.
Yeah, So the answer is always I've been very strong on this, it's all of the above. So obviously wind and solar are the lowest costs, but they're intimittent. And yet when they're intimittent, when the sun doesn't shine and the wind doesn't blow, you have to have a way of firming it.
So, and you mean by firming, so when.
There's no electricity, you firm it up so that when we turn on the lights at home, they actually do go on. So the showers are hot and the bear is cold. That's the important part, it sure is.
And so.
You can get a with different locations of wind and solar. You can get what we call a forming, a statistical forming, because they know we'll be there. But actually that's not good enough for the ordinary consumer. It has to be firmed. And so that's where battery. So we're building the battery at Glenbrook, but it's also where hydro has an.
Incredibly important part to play.
And being able to firm in those periods of scarcity when the wind isn't blowing or the sun isn't shining, but also to cover the peaks, so you've got the geo thermal which is always there. And then as the demand goes up and down, you have your wind and solar, but for the gaps you need hydro and batteries.
What about low late levels and the like though, because it's not always the best time for hydro, is it?
No? So, but low late levels.
What happened specifically this year is July was very low rainfall and it also had low wind, and so there are a couple of things going on. What you saw was extreme prices for a period of about two weeks, which was actually Foraranaki being dispatched into the market diesel. But what you saw when there was a lot of rain that came in is that prices went straight down to almost to zero. And that's just supply and demand. So the answer to that is actually, as I said, it's.
A number of solutions.
One, we need to build more wind and solar and more geo thermal, so you raise the base and then when you have that period of shortage it's much less dramatic. You can dispatch maybe intimate and gas, which we've got, we're retaining. You put it in just for those very short periods. You have batteries and you have hydro, which is weighted more towards winter.
How long do you think you will have gas? So I think twenty thirty five was what you were hoping.
We've committed to decarbon net zero by twenty thirty five. I think gas has a part to play for covering those dry year periods. For so even with all the out to about twenty forty, I think gas still has a role to play. You can turn it on, you can store it. It's got much lower carbon intensity than coal, and so for that once in five year, once in
ten year occurrence, it's going to be important as a backup. Meanwhile, things like hydro, extended operation of our hydro assets as they stand today, investment in different options around storage, around batteries, investment in more solar, more wind. The other thing that really was brought into play and during the shortage was demand response. So both the smelter and another other large commercial actually turned down their power demand by over two
hundred megawatts, which is bigger than Tohara. So they turned down the Ty New Zealand Steel, a number of dairy companies. So all it's never one solution. It's always a combination. And that's part of what even in mass market retail we've been talking about. The answer to decarbonization is not just building generation. It's also the way we respond to
periods of scarcity. And if we can delay our shower, if industrials can come off for a short period and get paid for it, then that's all part of the solution.
It's always a bit of a dance, isn't it sounds like you forever balancing.
Yeah, that's energy. I mean that's why I came into energy many years ago. Yeah.
It is a challenge.
It is a challenge. It is fun, it is stimulating. These challenges never go away. Sometimes there are periods of oversupply and sometimes there are periods of undersupply, and responding to those challenges is what gets us up in the morning and gets us coming to work.
Mike.
If we look at this proposed deal in terms of the money with shareholders, I think five ninety five per share is what they will end up with. You've got a payment which is combined shares, debt, and obviously cash in the end, what are they actually getting.
They're getting they're getting a cash consideration of about a dollar sixteen to share, and they're getting they're getting shares issued in Contact Energy, So they continue to participate in the energy transition, they continue to participate in the building of renewable energy assets, they continue to participate in the well they get to participate in mass mark retail, so they become they're still very much part of the energy sector and the renewable energy sector as an investment option,
which I think is a great outcome.
So they'll be eighteen point five percent to your register.
Total, There'll be eighteen point five percent of our register. So obviously their major shareholders, TechEd and Infantil form very much part of that, which we think is a great outcome. Because one of the things about Contact Energy is that we have over seventy thousand investors on our base key
WE investors. We are a KEYWI company, so NOO approval required, and having a cornerstone investor at around ten percent like Infantile of Infantol's quality is a great vote of confidence in our strategic path as well.
What about Contact sheeholders, are we going to see some dividend.
Love there, we have announced the divid and loved we announced an increased dividen in the beginning of July, and we as we said, as part of this deal, we're actually prepared put our money where our mouth is in terms of increased of it in twenty six and twenty seven.
Thinking of them again, when will this steal actually pay? When? When will you know the costs all the things that go around it. There's also a fair bit of approvals, lots of lawyers, fees, regulators, fees, you name it.
So look, we've announced the deal. We've been working on the deal for a considerable period, probably since about December.
Twenty two, that two years nearly.
Yes, these things always take time, but the important thing is is that we expect the Commerce Commission approval to take six to nine months, and then there is the Independent Appraises report that goes to shareholders who then vote, and then there is a day in court and then the deal is done. We expect that the benefits will be fully realized within eighteen months to two years of that.
So we've said, look, Manaua has a normalized debit das say, about one forty million a year at the moment, and we expect to bring that up to about two twenty million, if not more, within a two year period and that's when the benefits start really start to flow. There's also upside in that in terms of the development options that Manoa has, which is fantastic, and in terms of what I call the micro optimizations about how we integrate the assets together.
Because they've got twenty five hydro stations small to medium, I think most of them. I mean, do you see any consolidation there.
Not on the operation The consolidation or the opportunities are at the corporate level where we have duplicate systems. We have a duplicate maintenance system with dupilate finance system. And where there's duplication at the corporate level, what we do see optunity and is the operations are very much clustered in areas we very much clustered in areas we already are. So for instance, Manoa is very strong in the Bay of Plenty, central North Island.
That's where our heart and soul.
Yes, Manua has significant assets in the Taranaki.
We're in the Taranaki.
Manui has significant assets in the Deep South. We have significant assets in the Deep South, so there is opportunity for the teams to work together and be integrated together. But that isn't about cost savings. That's just about working smarter.
Yeah, And in terms of the development project, so they've got at the moment I think around four wind, two solar from memory. Will you be keeping.
Those on absolutely, And that's when you're in development. One of the important things that you need to have is what I call competition for capital. So what those sites will bring is that one of them is already consented. I go in the north of the South Island and then there are two very advanced development options for wind, one in the central North Island and one in the
lower South Island. And having a development portfolio where the teams are working hard to get their project forward, to have that competition for capital to get the best return for shareholders. And what that means is that you either do the best projects first, which means consumers then get
the lowest cost electricity as soon as possible. If we're all operating in different ways and you end up with sometimes subeconomic projects going first, and that just ends up with a bad outcome for shareholder shareholders and a bad outcome for consumers.
Is there some wind expertise that you're hoping to garner from the stealven Absolutely?
Now, remember we have the relationship with Rawing forties and certainly Manua have a natural wind capability already de On Campbell their chair is coming on the board now. Dian and I have intertwined our careers over many years. Dion obviously has some fantastic wind experience from his time with TrustPower and then a CEO of TIM and so having him on the board with that both energy market and development experience and whind will be fantastic.
Okay, So we could see some interesting things happening with wind with contact.
Absolutely, We're already got some sites, but having these sites come in will just add momentum. I talked about bringing our future forward faster is very much the theme of this deal.
One thing you did say on our program not so long ago, back in February with the half year results, was you thought solar was a niche prospect in New Zealand. Have you changed your mind? No?
Absolutely, So we have announced obviously the christ at Chairport Cofi Park, Sola. The opportunity there is that solar can be built quickly. Yeah, solar doesn't get firmed. You need something else to firm solar, so it will have always a niche.
It always look at the weather out there today.
This is Wellington, it's New Zealand. Doesn't have the same resource as say Australia or Chile, but it does have that niche application. The wonderful thing about solar, remember is it's summer weight and one of our major industries, dairy is some are weighted in terms of demand. So there is again a niche application I think for solar, but it won't be providing the same broad base and it doesn't go on at night in.
Terms of what you're paying forty eight percent premium. There's also some red flags with Manawa. I would say at the moment, just a little while ago they had earnings downgrade about twenty five percent. I think there was a bad debt with the retailer involved in that. They've got some low lake levels they talked about at the time
when they did their Q one report. What are you thinking in terms of actually is it turning stuff around or I mean, are the concerns you You've obviously done your due dilidence.
Yeah, no, we did extensive due diligence. So the very reasons for the earnings downgrade are the very reasons why Manu it is better together with us, because that broader portfolio has a order resilience. Now, remember when that high price period, we did the deal with Method X to allow us to burn gas, which immediately stabilized the market along with Genesis and brought back a degree of rational prices. And Manua being part of our portfolio would mean it
is not exposed to that extreme type of event. In terms of the assets themselves twenty five hydro schemes, the important thing is is that people remember eight of those are of a reasonable size and they will fit perfectly within our portfolio and with the remainder with those Runner River small hydros, you've just got to have an appropriate maintenance and risk management strategy in place so you're not over investing, but you're operating them safely and if you
have a common sense approach. We've seen that common sense approach from Manima as we did our due diligence and we have a look where IO fifty five thousand are credited. In terms of our asset management. We have a rigorous approach to risk and investment and stay in business carepex. We don't overspend and we have a strong track record.
Remember why Raki is over sixty years old and we've kept it going for thirty years beyond its design life without a process safety incident, been operating it very safely. And it's that risk management, that rigorous asset management framework that we apply that keeps us all safe.
You talk about looking at the deal over nearly two years. Was it a time when you thought you're going to have to do something else in order to get those renewables, you know, change the portfolio mats.
Oh, look, we always have a plan B. We had a clearly communicated strategy to the whole of market about what we were doing, and this.
Deal just allows us to excelerate that. We always had a plan B.
Okay, Now investors are not just looking at the dollars and cents. They are consumers a lot of the time. Some of them are businesses. We've had the Windstone Mills clothes. I will say, Mercury, was this not you guys? Does that mean with the steal that we will have better competitions? What I've heard you saying in recent reports, can you explain what you mean there?
So look, the problem at the moment is that there is no problem with the electricity market. There is a problem with the upstream gas market. And so in that period of scarcity, what you saw is a scarcity of water, a scarcity of wind. What's the next dispatch gas? There is no gas, you go to diesel. The moment that rainfalls,
prices came straight back down again. And so what this enables it releases just through the combination of portfolios, another two to three hundred gig what hours a year, and then through the ability to exlerate wind and solar options that will bring additional supply to market. And if you've got a supply demand and balance like that leading to diesel, the only way to solve that is to increase supply,
to build more power stations. And I think it's important that people understand that and look on Winston's look, that was tragic when people lose their jobs like that, But there are systemic issues in pulp at the moment. Not many of us are reading a paper newspaper anymore. And so they actually had a reasonable power deal with Mercury, which was in line with international prices, and Mercury came out very strongly on that. The reality is is that
pulp economics globally are challenged. And the other thing I'll say is that other would processes like og Panpak chose early days to hedge and they have a very sharply priced PPA with us through the MUKE which we participated in, and because they were willing to sign up to a ten year deal and support the renewable transition, they're still in operation today. Okay, so it's not as clear cut as a m it's certainly not quite as clear cut as what it was made out.
The Comments Commission has to approve the steel. You're fairly confident that will happen. You talk about more competition, perhaps better fixed term contracts for industrial Yes, commercial operators tell us a little bit more about that.
So our advocacy is we wouldn't have got to this point if we weren't confident of clearing the Commerce Commission. But we have to keep telling our story. Yes, that's really important. We think the increased supply, both through the deal itself and the additional development, will it further increase the downward pressure on prices.
Now.
The thing is for large gal industrials, we are passionate that the decarbonization of New Zealand should not mean the
de industrialization. And that's why we particularly as Contact, have been putting in the place these long term power supply deals at very sharp prices with the smelter with New Zealand steel, with Ogpampak, with food stuffs, where counterparties who are willing to stand up to the mark and invest it there in renewable energy, we're prepared to say, hey, here's a project which will benefit from that long term ppa and do those long term, reasonably priced power deals.
Do you think it's going to mean businesses won't be closing? As you've said, it's not always, you know, it's clear cut.
It all depends on how fast we can build that new generation. If we get lost in the bureaucracy and complication, then those new projects will not get built. If we're able to clear away some of the bureaucratic tangle and get on with building these new renewable energy projects, prices will quite naturally get back to what is a fair and reasonable level.
Do you mean fast? Is it a fast traight legislation helping with.
That, or it's all it's.
Stable market settings, it's Resource Management Act reform, the fast Track reform.
It is being absolutely its counterparties been.
Willing to invest or sign up to long term PPAs. It's all of the above. For our investors, it's the more we can uncomplicate, uncomplicate this whole morass that we're in at the moment. If we can make look a solar project Kofi Park took will take eighteen months to bring online. Preparing for it, even with a very straightforward resource consent took over two years. A wind farm takes two and a half years to build. The resource consent
can take five years. At some point, it's more important that we focus on the people who are pouring the concrete and welding the steel than shuffling the paper. Yes, and that's the challenge for us as a nation.
Where does it put contact? This steal does go ahead. In terms of where you are in the market, you'll share there are other generation retailers.
You know, it doesn't change our retail share of market because Manor has.
No No, it doesn't, I mean, I mean with your but.
In terms of generation, it just puts us on today's numbers just ahead of Mercury, but well behind Meridian.
So number two or three.
Are market and is that what you're hoping for?
I mean, that's that's that's good.
We don't we're not doing the deal just to grow for growth sake. We're doing the deal because we think it will give great returns to shareholders and that it's the right thing to do for the country and that decarbonization journey. If you end up second when you were fourth, yeah, that's an interesting observation, but that's not why we're doing the deal.
What about the political interference or interest? I mean, have you had talks with government about this?
We keep going very well appraised to what we're doing. So obviously we're in constant communication with the Minister of Energy, with the Associate Mister of Energy. We communicate regularly with the opposition. We make sure that we're taking everyone along with us on the journey. Insurance Shane Jones absolutely, Marta Shane.
I have regular conversations with Shane vet And that's a wonderful thing about New Zealand is look, you can disagree, but you can do it in a way that is respectful and you don't have to cross the road when you see them on the streets. That's the wonderful thing about New Zealand. It is a village and the important thing is we can debate and argue vaciferously, but we still respect each other.
That's great. It's nice to end on that, I think. Mike, thanks for coming in today and giving us your insights, and thanks to everyone for tuning in. You can watch shed Lunch on YouTube or follow us on your favorite podcast at Martewa.
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