SA Transmission Debacle and Demerger

We’re getting a valuable insight into the wind generation business and taking the conversation over here will remove it from an unrelated post.

An announcement to the NZ Stock Exchange yesterday by Trustpower began:

Trustpower is pleased to advise that the suspension of the electricity market in South Australia has been lifted and the Spot Market has resumed normal operations. The operating constraints that were placed on Trustpower’s wind farms during the suspension have also been lifted.

These events could reveal the true profitability of what seem to be extremely expensive and low-output “wind farms”.

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19 Thoughts on “SA Transmission Debacle and Demerger

  1. Richard C (NZ) on 19/10/2016 at 12:00 pm said:

    Suspension having been lifted we have to wait now for final court order allowing TrustPower (TPW) to delist and New TrustPower (TPX) and Tilt Renewables (TLT) to list.

    Bringing up some relevant backgound in the meantime:

    ‘SA Blackout: Three towers, six windfarms and 12 seconds to disaster’ – JoNova

    Frequency hell

    To give you some idea of how important frequency is and how fast it falls over, here’s a couple of paragraphs from the AEMO report. At the Heywood interconnector, the extreme frequency limits appear to be 4Hz for a “quarter of a second”:

    Generator performance standards after 2007 require generating units to remain on line for a Rate of Change of Frequency (RoCoF) of 1 Hz/second for 1 second as a minimum, and up to 4 Hz/second for 0.25 seconds. RoCoF must be maintained within this limit to prevent damage to generating units and effective operation of protection relays and emergency control schemes such as the automatic Under Frequency Load Shedding (UFLS) scheme.

    The sudden loss of around 850–900 MW of supply to SA due to the tripping of the Heywood Interconnector resulting in a rapid reduction in the power system frequency.7 AEMO analysis has identified that the RoCoF was between 6 and 7 Hz per second. Consequently, UFLS was not able to arrest the frequency decline and as a result the frequency fell to zero. Note that generating units are unable to operate (and are not required to do so) where frequency is below 47 Hz. With the frequency below 47 Hz, generating units subsequently tripped off line resulting in the SA region Black System.

    This is the real story of dire problems with a wind dominated grid. Even if it was transmission towers that crashed the system, and even if the auto-shut-off stupidity could be managed away, that still leaves the grid very fragile because of the frequency dilemma. A stable grid needs “synchronous inertia” — big reliable turbines that drive at near constant speeds. Coal turbines are 600 tons and spin at 3000 rpm. That’s inertia.

    More on frequency issues:

    How much wind power can a grid handle?
    Could Australia end up with synchronous failure across states?

  2. Richard C (NZ) on 19/10/2016 at 12:19 pm said:

    TPW last close Monday 17th was $7.270. The balance day price was:

    EPS 0.306 * PE 26.7 = $8.17

    From calcs previously:

    Tuesday 18th: High Bid $7.110, Low Offer $7.230 (Say $7.17 for convenience i.e. $1 difference from above).

    That’s a $1 per share loss of wealth to TPW shareholders since balance date and before demerger. Total loss to shareholders since balance date: $315,751,900. But 52 weeks ago $6.936 so a 52 week gain of $0.334 or $105,461,135.

    Market sentiment is more the reason for the sagging price than the demerger I think. Genesis and Contact are similar:

    Trustpower Limited Ordinary Shares (TPW)

    Genesis Energy Limited Ordinary Shares (GNE)

    Contact Energy Limited Ordinary Shares (CEN)

    S&P/NZX All Energy (G10)

    The S&P/NZX All Energy comprises members of the S&P/NZX All Index, considered the total market indicator for the New Zealand equity market, classified within the energy sector of the Global Industry Classification System (GICS®).

    Value 1,297.870 Movement ▼-6.04
    Percentage ▼-0.46%

    S&P/NZX All Energy (G10) 30 day graph

    New Truspower will get 89% of revenue from retail. Only 9% from generation. Only 2% from generation in Australia. New Trustpower would benefit from being rid of Tilt is my guess but until the demerged companies are listed there is no way of knowing. Very weak energy market right now, not good for Tilt to be listing especially given Tilt was not a saleable entity in the first place.Still “resolve” to list according to the TrustPower CEO:

    Update South Australian Transmission Event and Demerger

    10:25am, 17 Oct 2016 | GENERAL NZX Announcement 17 October 2016

    Trustpower is pleased to advise that the suspension of the electricity market in South Australia has been lifted and the Spot Market has resumed normal operations. The operating constraints that were placed on Trustpower’s wind farms during the suspension have also been lifted.

    The Trustpower Board has resolved to resume the demerger process and Trustpower will be seeking final court orders at the earliest opportunity. Once a date for final court orders is known an updated demerger timetable will be published.

    Vince Hawksworth, Chief Executive

    Relative TPX and TLT prices to realize gain or loss from balance date (or current) price follows.

  3. Richard C (NZ) on 19/10/2016 at 12:23 pm said:

    Tilt Renewables – financial summary and capital structure

    TrustPower – Audited Historical Consolidated Financial Information

  4. Richard C (NZ) on 19/10/2016 at 1:48 pm said:

    Relative TPX and TLT prices to realize gain or loss from TPW balance date and current price (near enough).

    Book Value Of Equity Per Share (BVPS):

    Investment Valuation Ratios: Price/Book Value Ratio – By Investopedia

    PBVS = Price per share / Book value of equity per share

    Equity / Shares
    TPW: 1,888,644,000 / 315,751,900 = 5.98 $/share (current multiple 7.42/5.98 = 1.24 times)
    TPX: 1,423,443,000 / 157,875,950 = 9.02 $/share
    TLT: 465,201,000 / 157,875,950 = 2.95 $/share

    Applying the current multiple to both gives some indication of the respective valuations when trading begins:

    TPX: 9.02 * 1.24 = $11.18
    TLT: 2.95 * 1.24 = $3.658

    $11.18 + $3.658 = $14.84 compared to TPW close $7.42. Chances of these prices seem extremely slim, but not impossible.

    Chapter 19 Book Value Multiples – New York University

    Table 19.2, Price to book ratios for integrated oil companies listed in the United States in September 2000
    Pennzoil-Quaker State PZL 0.95
    Exxon Mobil Corp. XOM 4.22

    Price/book value ratios for firms in the trucking industry,
    Xtra Corporation 2.80

    Estimating the PBV ratio for a high growth firm in the two-stage model [Nestle]
    Nestle traded at a price-book value [PBV] ratio of 4.40 in May 2001.

    Valuing TPX and TLT with PBVs from Xtra Corporation 2.80 and Nestle 4.4 respectively:
    TPX: 9.02 * 2.80 = $25.256 (@ Xtra Corporation PBV 2000)
    TLT: 2.95 * 4.40 = $13.024 (@ Nestle PBV 2001 High Growth)

    Chances of these prices seem even slimmer, to say the least.

    The split may realize considerable value for TPW shareholders but seems highly improbable given the $7.42 TPW market valuation, but could be wrong.

    TPW was at a Price/Earnings multiple (PE) of 26.7 at balance date (gives $8.17 below) so it is not as if TPW is extraordinarily priced or unprofitable, on the contrary. There are plenty of companies on the NZX that are at higher PE multiples i.e. the amount that an investor pays per $1 of earnings or how many years worth of profits they are paying for a share. In TPW, about $26 payout to get $1 of TPW profit or 26 years to pay for the share.

    PE is probably how TPX and TLT will be valued but with different PEs for both and not necessarily 26.7. TPX having strong revenue and earnings so maybe a PE of 11 like Genesis Energy GNE. Food supplement firm Oceania Natural, ONL on NZX, is at a PE of 334.78. Zero XRO has no profit therefore no PE.

    For no gain/loss scenario for TPW shareholders except for split costs:

    TPW trading for last 5 months – EPS 0.306 * 26.7 gives $8.17

    Profit After Tax Attributable to Shareholders (Earnings per share at balance date, EPS) x PE:
    EPS x PE = Current Price
    TPW 89,845,000 / 315,751,900 = 0.306 * 24.248 = $7.42
    TPX 58,838,000 / 157,875,950 = 0.373 * 11 = $4.10 (@ Genesis Energy PE)
    TLT 31,007,000 / 157,875,950 = 0.196 * 16.94 = $3.32 (to make residual of $7.42 – $4.10)

    Price and value for no TPW gain/loss from balance price $8.17 and PBV at current TPW multiple 1.24:
    Using apportioning from above (4.1/7.42 = 0.553 x 8.17 and 3.32/7.42 = 0.447 x 8.17)
    TPX $4.51 by PE ($11.18 by PBV)
    TLT $3.66 by PE ($3.66 by PBV)

    Price and value for no TPW gain/loss from current price $7.42 (PBV as for $8.17):
    TPX $4.10 by PE
    TLT $3.32 by PE

    # # #

    TPW has fallen a bit since but above is enough to be indicative. Also, in respect to TPW/TPX, the market is not taking the slightest notice of book value i.e. the current prices are all about earnings. But for TLT at TPW balance price $8.17, price whether by earnings or book value works out exactly the same at $3.66.

  5. Richard C (NZ) on 19/10/2016 at 1:58 pm said:

    ‘Trustpower split frees new entity to chase wind power, independent adviser says’ – August 18, 2016

    Trustpower’s plans to carve out its windfarms and renewable development pipeline into Tilt Renewables will give the new entity freedom to chase opportunities and should outweigh the cost of the transaction, according to an independent adviser’s report on the deal.


    Independent adviser Northington Partners says the two businesses are quite distinct with different growth and risk profiles, and that splitting them up would let different boards and management teams “refine strategies, objectives, and business processes to best suit the current circumstances and future opportunities facing each business,” enhance their ability to raise new capital, and give shareholders clearer investment choices.


    “We suggest a useful way to characterise the proposed demerger is that it puts Trustpower in a much better position to exercise the potentially valuable growth options it currently holds in wind generation developments, particularly in Australia,” the report said. “While there remains considerable uncertainty over the number and scale of the projects that will be developed, we believe the potential value creation from exercising these development options is significant and outweighs the costs of the proposed demerger.”

    Since the plan was first touted in December, Trustpower has confirmed development approval for the Palmer wind farm in South Australia, subject to the appeals process, and received sign-off to expand generation at the Salt Creek wind farm in Victoria. Majority shareholder Infratil has already given its blessing to the split, and its manager, HRL Morrison & Co, would have representation on the boards of both companies.

    Northington Partners said Trustpower’s board decided against selling Tilt Renewables because it was unlikely to attract a price capturing the full value of the development pipeline and chose not to sell the windfarm developments piecemeal as it would “create high transaction uncertainty and considerable periodic management distraction and would also involve significant transaction costs.”

    The adviser’s report estimates transaction and other one-off costs from demerger transaction to be between $75-90 million, an immaterial amount if the split benefits are achieved but representing a loss in shareholder value if they aren’t.

    # # #

    TLT was not a saleable entity.

    >’split frees new entity to chase wind power”

    Yeah right.

    Bank Debt: New TrustPower (104,591,000) vs Tilt Renewables (640,035,000)
    Net Assets: New TrustPower 1,423,443,000 vs Tilt Renewables 465,201,000

    Split frees New TrustPower from a $0.64 billion debt risk over minor assets more like.

  6. Richard C (NZ) on 19/10/2016 at 2:25 pm said:

    TPW $7.150 High Bid $7.110 Low Offer $7.150

    P/E 25.460
    EPS $0.281
    NTA $5.774

  7. Richard C (NZ) on 21/10/2016 at 8:57 pm said:

    MEMO From: NZX Client and Data Services | 5:26pm, 20 Oct 2016

    Subject: Trustpower Demerger – TPX & TLT Initial trading and nominal reference prices

    NZX Market Operations (“NZXO”) advises that, to facilitate the creation of Bay Energy Limited (to be renamed Trustpower Limited) (“TPX”) and Tilt Renewables Limited (“TLT”) as tradeable instruments in NZX’s systems and to enable trading in TPX and TLT from 28 October 2016, NZXO will enter a nominal reference price of $1.00 for those securities, in BaNCS. This reference price will also be visible in NZX’s trading system, the market depth feed and the web data XML price file.

    NZXO notes that this reference price is solely related to NZX system requirements and is not indicative of any underlying valuation, or expected trading valuation, of TPX and TLT by any of NZX, TPX or TLT.

  8. Richard C (NZ) on 21/10/2016 at 9:00 pm said:

    TPW $7.250 High Bid $7.200 Low Offer $7.250 P/E 25.630

  9. Richard C (NZ) on 25/10/2016 at 9:43 am said:

    ‘Victims of the South Australia Statewide Blackout to Sue Wind Farm Operators’

    Eric Worrall / October 22, 2016

    “Whatever happens in this case, one thing seems clear. The financial risk of being a wind farm operator just skyrocketed.”

  10. Richard C (NZ) on 27/10/2016 at 5:51 pm said:

    Last day of TPW trading 27/10. Trading Status: Halted

    TPW $7.110, P/E 25.310,

    TPX and TLT begin trading tomorrow 28/10. Ignore $1.00 reference price at start of trading.

  11. Richard C (NZ) on 27/10/2016 at 9:05 pm said:

    Open Letter to the New Zealand Super Fund – 26 October 2016

    Dear Mr Orr,

    Earlier this year, New Zealanders were shocked to hear that our retirement savings are being invested in cluster bombs and nuclear weapons, things that kill and harm people and our planet. Like armaments, the warming caused by fossil fuels like oil, coal and gas is responsible for causing severe impacts on people’s lives. Through drought, flooding, rising seas and extreme heatwaves, fossil fuels are like cluster bombs for the climate, harming the planet on which we depend on to survive.


    350 Aotearoa, Oxfam New Zealand, The New Zealand Public Service Association, Greenpeace New Zealand, World Wildlife Fund NZ, 1222 members of Action Station, Health Sector Workers Network, Unite Union, Coal Action Network Aotearoa, Auckland Diocesan Climate Change Action Group, Anglican Diocese of Wellington

    # # #

    >”fossil fuels are like cluster bombs for the climate”

    Only “cluster bombs” now? Used to be Hiroshima bombs.

  12. Richard C (NZ) on 28/10/2016 at 11:57 am said:

    Indicatively, TPX up about $1 on estimate but TLT down about $1 (as expected).

    Bay Energy Limited Ordinary Shares (TPX) High Bid $4.810 Low Offer $5.500

    Tilt Renewables Limited Ordinary Shares (TLT) High Bid $2.000 Low Offer $2.500

    # # #

    No trades in either yet, those are still very wide spreads. My estimates given recent trading in TPW were(from upthread):

    Price and value for no TPW gain/loss from balance price $8.17 and PBV at current TPW multiple 1.24:
    Using apportioning from above (4.1/7.42 = 0.553 x 8.17 and 3.32/7.42 = 0.447 x 8.17)
    TPX $4.51 by PE ($11.18 by PBV)
    TLT $3.66 by PE ($3.66 by PBV)

    Price and value for no TPW gain/loss from current price $7.42 (PBV as for $8.17):
    TPX $4.10 by PE
    TLT $3.32 by PE

    Last TPW price at trading halt yesterday was $7.110.

    Clearly the market sees more value in TPX assets (note “assets”, earnings as normal) now that TLT has been ring-fenced and demerged. But the market sees less value in TLT as a separate entity. This was about what I expected although the TLT $2.000 bid is probably a bit more then I expected.

    Too early to work out TPW gain loss but using mid spread values as an indication:

    $5.155 (TPX) + $2.250 (TLT) = $7.405 (TPW)

    This is a gain on yesterday of $0.295 but a loss on balance date of ($0.765).

    $0.765 x 315,751,900 shares = ($241,550,203) loss of wealth to TPW shareholders since balance date.

    Much of that loss is due to market sentiment in the energy sector (see upthread) but the respective indicative prices compared to estimate tell the story – TPX up about $1 on estimate but TLT down about $1.

  13. Richard C (NZ) on 28/10/2016 at 12:25 pm said:

    >”Tilt Renewables Limited Ordinary Shares (TLT) High Bid $2.000 Low Offer $2.500″ [Mid $2.250]

    To put this in context (from upthread), TLT Equity / Shares: 465,201,000 / 157,875,950 = 2.95 $/share

    This is without any market premium/discount applied (e.g. was a premium of 1.24 times for TPW). Obviously the market is DISCOUNTING by about 32% the value of TLT in respect to Equity.

    >”Bay Energy Limited Ordinary Shares (TPX) High Bid $4.810 Low Offer $5.500″ [Mid $5.155]

    TPX Equity / Shares: 1,423,443,000 / 157,875,950 = 9.02 $/share

    The market is also DISCOUNTING by about 43% the the value of TPX in respect to Equity. Previously they were paying a premium of 1.24 times for TPW.

  14. Richard C (NZ) on 28/10/2016 at 6:44 pm said:

    First trades. TPX $4.920, TLT $2.250

    = $7.17 TPW. $0.06 up on Thursday’s close but a $1 loss from balance date, ($315,751,900) total loss.

  15. Richard C (NZ) on 28/10/2016 at 8:32 pm said:


    Buildings use about 40% of global energy, 25% of global water, 40% of global resources, and they emit approximately 1/3 of GHG emissions.

  16. Richard C (NZ) on 29/10/2016 at 11:19 am said:

    Tilt Renewables makes underwhelming arrival on ASX – AFR Oct 28 2016

    A new name in the Australian wind power sector, Tilt Renewables, is poised to pursue more aggressively its plans for new wind and solar power ventures after the Trustpower spin-off made a below-the-radar debut on the ASX.

    ​Shares in dual-listed Tilt, still partly owned by New Zealand’s fourth largest energy retailer Trustpower, were due to begin trading on the ASX at midday but no shares had changed hands by mid-afternoon.

    In New Zealand the stock began trading at $NZ2.25, but only two exchanges of shares took place within the first few hours.

    The listing, which was delayed by about two weeks by the South Australian blackouts which disrupted the company’s two South Australian wind farms, makes Tilt the second Australian-based pure renewable energy player on the ASX, after Infigen Energy.

    When the demerger was conceived earlier this year Infigen shares were soaring, driving expectations by analysts that Tilt could benefit from a re-rating based on the Infigen relative multiple.

    The parent company has made clear that equity raisings are on the cards for Tilt to help fund development of projects that would capture a share of the country’s 2020 renewable energy target. Tilt is aiming to more than double its operating capacity within five years to 1500 megawatts.

    Meanwhile the new Trustpower, involving the retail and New Zealand hydropower business, will have lower growth but should offer investors higher yield.

    “The spin-off splits the company in two, giving one company for shareholders who want yield and another for shareholders who want growth,” said Andrew Mitchell at Ophir Asset Management in Sydney.

    “Tilt shareholders are exposed to a capital hungry growth pipeline. Previously this was at odds to the yield-seeking Trustpower’s shareholder base.”

    Chaired by HRL Morrison executive Bruce Harker, Tilt currently owns 582 megawatts of operating wind power capacity, or about 11 per cent of the installed wind generation capacity in Australasia, including four sites in Australia and three in New Zealand.

    But its pipeline of development projects is more than triple the size of its producing portfolio, involving more than 2000 MW of capacity. The line-up includes planned wind projects in Victoria, NSW and South Australia, and a combined wind and solar project in Western Australia.

    Australia’s end-decade target for renewable energy will acquire about 5000 MW of new capacity to be built within the next four to five years, effectively doubling the amount of large-scale renewable energy being delivered in Australia and opening “a window of opportunity” for Tilt’s development pipeline, the parent company said.

    “Tens of billions [of dollars] will be required to be invested in renewables over the next decade to meet Australia’s RET obligations,” Mr Mitchell said.

    “Tilt and fellow listed renewables player Infigen Energy provide exposure for investors wanting to play this strong thematic.”

    Of Tilt’s project pipeline, some 832 MW of capacity has already secured key environmental approvals in Australia, although its biggest project, the controversial Palmer project in South Australia, is subject to appeal and looks likely to be scaled back.

    The projects closest to going ahead include the 52 MW Salt Creek and 300 MW Dundonnell ventures in Victoria and the Waddi project in WA, with at least one targeted for financial close by the end of June 2017.

    >”When the demerger was conceived earlier this year Infigen shares were soaring, driving expectations by analysts that Tilt could benefit from a re-rating based on the Infigen relative multiple.”

    Infigen Energy Ltd (ASX:IFN) Oct 28 – Close $AU0.980

    Range 0.94 – 0.99
    52 week 0.34 – 1.24
    Mkt cap 764.97M
    P/E 109.50 [“relative multiple”]
    EPS 0.01
    Shares 772.47M

    # # #

    IFN P/E 109.50
    TLT P/E $2.25/0.196 = 11.48

    Well, that plan didn’t work. TLT P/E is only fractionally more than Genesis Energy P/E 11.0. At IFN P/E of 109.50, TLT shares would be priced at $558.67.

    So much for those analysts expectations.

  17. Richard C (NZ) on 29/10/2016 at 12:06 pm said:

    >“Tens of billions [of dollars] will be required to be invested in renewables over the next decade to meet Australia’s RET obligations”

    SA’s Wind Power Debacle Escalates as Australian Wind Power Subsidies Hit $3 Billion a Year – August 2, 2016


    Wind farm subsidies rise, hitting consumers’ power bills – August 23, 2016


    Australia’s Federal RET Blown Away by South Australia’s Wind Power Disaster – October 11, 2016


  18. Richard C (NZ) on 30/10/2016 at 11:55 am said:


    “At IFN P/E of 109.50, TLT shares would be priced at [$21.46]”

  19. Richard C (NZ) on 02/11/2016 at 10:05 pm said:

    TLT $2.100 -$0.100 / -4.55%

    Going down. List price was $2.250

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