MCY Mercury NZ ( MRP Mighty River Power)

[Sideshow Bob]

NPAT circa 20% down.

Mercury - HY2020 Results and Interim Report
25/2/2020, 8:31 amHALFYR [See table in News Release]
25 February 2020 – Below average generation and the divestment of smart metering business Metrix impacted Mercury’s earnings for the financial half-year to 31 December 2019, Chief Executive Fraser Whineray says.
Mr Whineray said that while earnings (EBITDAF) of $258 million ($302 million HY2019), and net profit after tax (NPAT) of $83 million ($104 million HY2019), were down on the near-record prior corresponding period, when adjusted for lower generation and the sale of Metrix the result reflected strong execution across Mercury’s business.
Highlights included:
• committing to complete the construction of NZ’s largest windfarm at Turitea by building the remaining 27 consented turbines, adding to the 33-turbine project announced earlier in 2019
• effective portfolio management to capture opportunities in a dynamic wholesale and retail market
• investment in data science and analytics capability to better inform our customer strategy
• configuration of Rotorua and Maraetai workspaces to support a more collaborative and high-performance team environment
• completion of an upgrade to our Maximo asset management system
• management of planned geothermal maintenance shuts
Generation during the period reduced by 377GWh to 3,428GWh due to drier conditions in the Waikato and important scheduled maintenance on several geothermal stations as part of Mercury’s long-term asset management plan.
Hydro generation was down 306GWh to 2,142GWh (2,448GWh HY2019) while geothermal generation was down 71GWh to 1,286GWh (1,357GWh HY2019).
“While hydro generation was below the mid-point forecast we had at the start of the financial year, our portfolio strategy has captured opportunities in this dynamic environment,” Mr Whineray said.
“A deliberate portfolio strategy to maintain a longer net-generation position, particularly from October, has been positive for earnings and risk management.
“Applying our expanded analytics capability helped enhance integration of our portfolio approach with our customer strategy. We have been able to better apply insights to digital initiatives that reward loyalty and value. Mercury’s focus on customer value rather than growing customer numbers at all costs saw mass market customer numbers down 16,000, however we achieved a 1.8% uplift in yield across our mass market segment through disciplined portfolio management,” Mr Whineray said.
Operating expenditure was $94 million ($99 million HY2019). Mercury’s stay-in-business capital expenditure (SIB capex) was $53 million, up $8 million on the prior corresponding period due to scheduled geothermal well drilling costs.
Free cash flow at $127 million ($126 million HY2019) was slightly up due to lower interest costs, tax paid and elevated working capital requirements in the prior corresponding period.
INTERIM DIVIDEND
Mercury’s Chair Prue Flacks said the Board had approved a fully-imputed interim dividend of 6.4 cents per share, an increase of 3.2% on HY2019, to be paid on 1 April 2020. This represents approximately 40% of the full-year ordinary dividend guidance of 15.8 cents per share.
Total shareholder return (TSR) across the 12-month period to 31 December 2019 was 43%.
Ms Flacks noted that this interim report was Fraser’s last as Chief Executive, before he leaves in March for a role at Fonterra.
“Fraser has been an inspiring leader for Mercury, and a pleasure to work with,” Ms Flacks said.
Mercury has appointed former Trustpower Chief Executive Vince Hawksworth to succeed Mr Whineray, with Mr Hawksworth joining in late April.
FULL YEAR OUTLOOK
Mr Whineray said Mercury expects to see ongoing challenging wholesale conditions due to national thermal fuel and transmission constraints, however the company’s portfolio is well positioned.
“Intense competition in retail and strained retail margins will continue to be a feature. I also anticipate further competitor decisions on new generation development and retirement,” Mr Whineray said.
“Mercury is well positioned for the full year as a result of our portfolio and channel management, reinvestment activities in generation, digital and our people, and new investment decisions.”
GUIDANCE
Mercury’s FY2020 EBITDAF guidance has been revised to $500 million, subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions. Guidance at the time of this report assumes 3,900GWh of hydro production. FY2020 SIB capex guidance is $120 million, up $15 million from initial guidance due to costs related to bringing forward the drilling of a geothermal well at Rotokawa.
FY2020 ordinary dividend guidance remains at 15.8 cents per share, fully imputed, representing a 2% increase on FY2019 and the 12th year of progressive ordinary dividends.
ENDS

[Waltzing]

MCY is UP today? No impact from smelter close down due to its customer base? And its a central north island story...

[macduffy]

MCY is UP today? No impact from smelter close down due to its customer base? And its a central north island story...

No, it's down, but not as badly down as others. I bought a few this morning on the strength of their N.I. generation and mainly Auckland customer base. SP has recovered most of the loss since.

[Waltzing]

Well Done mcduffy!!!! you obviously know this stock well. Very impressive buy! yes down from 4.80 but i was expecting a 4.n handle . Sector seems to have taken the new well actually.

[fish]

I have been accumulating these again and could not believe my luck when a buy order I had in for sometime was filled at the very low opening price(4.40).
Will keep on buying on the lows(I hope)

[bull....]

negoiating over tewai smelter still ardern saying in stuff for extension to closure

[Waltzing]

see if the belt and road wants it....that man at 4.40 is a steally eyed trader..

[King1212]

Yes..only GNE and MCY are in the better position as their assests all on the north n not heavy reliance on the smelter like CEN and MEL

[Snow Leopard]

Yes..only GNE and MCY are in the better position as their assests all on the north n not heavy reliance on the smelter like CEN and MEL

Genesis have Tekapo which is South Island.

I have been a Mighty River/Mercury shareholder since their SP hit it's all-time low a while after listing primarily because of their NI assets.

[bull....]

potential bullish flag pattern from the lows at march 2020. bullish flags are normally continuation patterns of the uptrend after a period of consolidation.

[bull....]

heres some reading if you dont know what a bullish flag is

https://school.stockcharts.com/doku.php?id=chart_analysis:chart_patterns:flag_pen nant_continuation

[Snow Leopard]

I, after many years of experience, have distilled share price patterns down to three:
1/ The going up pattern;
2/ The going down pattern;
3/ The other pattern.

Each has three sub patterns for the volume:
A/ The going up pattern;
B/ The going down pattern;
C/ The other pattern.

Pattern 1A is your best friend.

[Snow Leopard]

I also hope to hold MCY until the Waikato runs dry.

[peat]

I also hope to hold MCY until the Waikato runs dry.

Auckland can help with that ;+)

[bull....]

I, after many years of experience, have distilled share price patterns down to three:
1/ The going up pattern;
2/ The going down pattern;
3/ The other pattern.

Each has three sub patterns for the volume:
A/ The going up pattern;
B/ The going down pattern;
C/ The other pattern.

Pattern 1A is your best friend.

but its knowing how far pattern 1a will go is the key

[Snow Leopard]

but its knowing how far pattern 1a will go is the key

That is a foolish statement.
You can never reliably predict the future and know how far it will go.
You can reach a point in time where you decide that it has ended.

Most TA predictions of the future trend distill down to it will continue to carry on as is, unless it doesn't.
Most TA commentaries of the past distill down to it was obvious that...

Anyway enough of this, is the Waikato still flowing?

[bull....]

That is a foolish statement.
You can never reliably predict the future and know how far it will go.
You can reach a point in time where you decide that it has ended.

Most TA predictions of the future trend distill down to it will continue to carry on as is, unless it doesn't.
Most TA commentaries of the past distill down to it was obvious that...

Anyway enough of this, is the Waikato still flowing?

river must be mcy was up 10c today ( or was it that ascending triangle lol )

[bull....]

bull flag still in play

[bull....]

Operating earnings, (EBITDAF) of $494 million were down $12 million on the prior year – a strong result given the 2020 financial year was the first full year without earnings from the Metrix smart metering business which was sold in FY2019.

stronger than there update a while ago suggested and increasing the dividend again.

lets see if the bullish flag gets a boost today from this strong report and guidance for next year of stable earnings and increasing dividends

bullish flag has targets over 5

[bull....]

I forgot to mention the fact they spent more on capex this last year ( reduced there profits this time) for future earnings bodes well. also low lake levels if reversed in the current year is also a positive. So there could be the chance of profit upgrades during the year.

[Norwest]

Operating earnings, (EBITDAF) of $494 million were down $12 million on the prior year – a strong result given the 2020 financial year was the first full year without earnings from the Metrix smart metering business which was sold in FY2019.

MCY previously announced that the annualised reduction to EBITDAF from the sale of Metrix was forecast to be $28m. Thus if we extrapolate this previously announced reduction, we can assume that same year on year EFBITDAF is actually up $16 million - is there anything else material that would have affected EBITDAF ?

I still think it's well overpriced at present, especially now its $5.09 at time of me posting this.

[bull....]

MCY previously announced that the annualised reduction to EBITDAF from the sale of Metrix was forecast to be $28m. Thus if we extrapolate this previously announced reduction, we can assume that same year on year EFBITDAF is actually up $16 million - is there anything else material that would have affected EBITDAF ?

I still think it's well overpriced at present, especially now its $5.09 at time of me posting this.

in your valuation you need to factor in that rates are going even lower next year ( the risk free rate) , also mcy has just proved they have stable earnings in a bad year which even looks like next year could be better.
Even if you find them overvalued just remember as rates go even lower there are not many places to park money with stable dividend returns at the moment.
dyor

[King1212]

MCY previously announced that the annualised reduction to EBITDAF from the sale of Metrix was forecast to be $28m. Thus if we extrapolate this previously announced reduction, we can assume that same year on year EFBITDAF is actually up $16 million - is there anything else material that would have affected EBITDAF ?

I still think it's well overpriced at present, especially now its $5.09 at time of me posting this.


If u are looking for yield,,,,it is better off with GNE...with recent Kupe upgrade...yield at 6-7 persen.

[bull....]

If u are looking for yield,,,,it is better off with GNE...with recent Kupe upgrade...yield at 6-7 persen.

gne will be adversly affected by smelter closure more than mcy. also some huntly units are nearing there end of life. mcy is much better proposition for ongoing div

[King1212]

Near end of life..mmmm like tomorrow?

[tango]

I can’t work out how to ask questions on the webcast of the AGM. I wanted to ask about the proposed pumped hydro at Lake Onslow and get Mercury’s take on the feasibility of it and the impact on their business.
Is anyone on the call able to propose this question???
TIA

[tango]

Did anyone else listen to the analyst briefing that mercury put on this morning? It was very interesting. I just wish I had been able to ask that question. I didn’t have a phone number to call to do the *1 to ask about Lake Onslow

[Norwest]

Tango you had to be on the Teleconference to ask questions, not on the webinar. Sorry I didn't your question until after it ended.
It was however talked about "pumped storage either in South Island or the North Island" i.e. maybe they think there are options, not just Lake Onslow.

Slides from Teleconference:
https://issuu.com/mercurynz/docs/mercury_fy2020_results_presentation_final?fr=sMWQ4 Mjk3MDI

$55M capital return from Tilt in July 2020
Potential for further de-industrialization e.g. NZ Steel/NZ Refining. note: no mention of Tiwai as a potential, implying a done deal?

My notes I took:

Vince:
Company transitioned well as part of Covid-19, challenges regarding wind farm construction and drilling at geothermal's, all back up and running as per normal now.
Really Strong Result in Challenging conditions.
Utilize Waikato River as NZ's best peaking station - he said this twice.
Judicious use of the Lake Taupo Battery.
In the post Tiwai world, we have to be careful that we (assuming NZ inc.) don't end up a series of major investments to shift generation around that doesn't benefit the common user. (Answer to question from Jarden) - Obvious benefits MCY for this to not happen or be delayed, so no surprise with this comment.

William:
"... as we deal with the exit of Tiwai" - Even though William has a dulcet tone, that comment just rolled off his Tounge, to me that implies MCY think its a done deal.
Lake Taupo is only 600GWH storage which is quite small compared to some of the South Island Lakes.
8,000 Farm Source customer loss was a deliberate decision.
Electricity Market Supply/Balance back in place by FY25 (Answer to Question from Forsyth Barr)

[bull....]

Tango you had to be on the Teleconference to ask questions, not on the webinar. Sorry I didn't your question until after it ended.
It was however talked about "pumped storage either in South Island or the North Island" i.e. maybe they think there are options, not just Lake Onslow.

Slides from Teleconference:
https://issuu.com/mercurynz/docs/mercury_fy2020_results_presentation_final?fr=sMWQ4 Mjk3MDI

$55M capital return from Tilt in July 2020
Potential for further de-industrialization e.g. NZ Steel/NZ Refining. note: no mention of Tiwai as a potential, implying a done deal?

My notes I took:

Vince:
Company transitioned well as part of Covid-19, challenges regarding wind farm construction and drilling at geothermal's, all back up and running as per normal now.
Really Strong Result in Challenging conditions.
Utilize Waikato River as NZ's best peaking station - he said this twice.
Judicious use of the Lake Taupo Battery.
In the post Tiwai world, we have to be careful that we (assuming NZ inc.) don't end up a series of major investments to shift generation around that doesn't benefit the common user. (Answer to question from Jarden) - Obvious benefits MCY for this to not happen or be delayed, so no surprise with this comment.

William:
"... as we deal with the exit of Tiwai" - Even though William has a dulcet tone, that comment just rolled off his Tounge, to me that implies MCY think its a done deal.
Lake Taupo is only 600GWH storage which is quite small compared to some of the South Island Lakes.
8,000 Farm Source customer loss was a deliberate decision.
Electricity Market Supply/Balance back in place by FY25 (Answer to Question from Forsyth Barr)

that was my thinking no material affect even if smelter closes to long term supply/balance in the market. interesting about your smelter comments gne head didnt think smelter would close either

[tango]

Tango you had to be on the Teleconference to ask questions, not on the webinar. Sorry I didn't your question until after it ended.
It was however talked about "pumped storage either in South Island or the North Island" i.e. maybe they think there are options, not just Lake Onslow.

Slides from Teleconference:
https://issuu.com/mercurynz/docs/mercury_fy2020_results_presentation_final?fr=sMWQ4 Mjk3MDI

$55M capital return from Tilt in July 2020
Potential for further de-industrialization e.g. NZ Steel/NZ Refining. note: no mention of Tiwai as a potential, implying a done deal?

My notes I took:

Vince:
Company transitioned well as part of Covid-19, challenges regarding wind farm construction and drilling at geothermal's, all back up and running as per normal now.
Really Strong Result in Challenging conditions.
Utilize Waikato River as NZ's best peaking station - he said this twice.
Judicious use of the Lake Taupo Battery.
In the post Tiwai world, we have to be careful that we (assuming NZ inc.) don't end up a series of major investments to shift generation around that doesn't benefit the common user. (Answer to question from Jarden) - Obvious benefits MCY for this to not happen or be delayed, so no surprise with this comment.

William:
"... as we deal with the exit of Tiwai" - Even though William has a dulcet tone, that comment just rolled off his Tounge, to me that implies MCY think its a done deal.
Lake Taupo is only 600GWH storage which is quite small compared to some of the South Island Lakes.
8,000 Farm Source customer loss was a deliberate decision.
Electricity Market Supply/Balance back in place by FY25 (Answer to Question from Forsyth Barr)

Thank you so much for the notes. I did miss part of the webcast so it may have been discussed when I was out of the room. I love having access to these updates. I learned a lot.

Yes, I got the same impression about the NZAS being a done deal. Also, the fact that they aren’t part of the discussion and that they didn’t see any value in being part of it. Obviously, they are less affected, but still…

It was interesting to see the breakdown of users and to see how big a user the dairy industry is, particularly as there is a possibility that Fonterra could switch to electricity for their milk drying plants. That could increase electricity usage considerably and be a partial replacement for Tiwai. That would appear to be a much better use of their time and resources then chasing an extension to the Tiiwai point contract.

I was pleased to hear mercury being so positive about tilt technology, as I hold shares in that company too. Unfortunately tilt technology and Serko are both holding their meetings at the same time so I can’t watch both web casts!

[tango]

I was wondering if Lake Onslow proved to be suitable for pumped hydro who would own it and would it be a competitor to the existing electricity generators

[bull....]

I was wondering if Lake Onslow proved to be suitable for pumped hydro who would own it and would it be a competitor to the existing electricity generators

even if they do do it it would be years away and under a labour govt it may not get done at all going on past big headlines but no action.

[tango]

even if they do do it it would be years away and under a labour govt it may not get done at all going on past big headlines but no action.

:D good point. And Winston the handbrake is volunteering to help if Labour ever show signs of getting their act together and completing a project.

[peat]

11861

and what happens if they get two dry years in a row , say next year and who knows even the year after..... how long before they cant generate from hydro at all.

[King1212]

That's is a good observation Peat....might get bull to piss at the lake.lol

That is why GNE is better option...as even dry or wet...GNE is able to produce electricity

[bull....]

some rain at the moment , be good for the best gentailer

[peat]

Craigs put this one at the top on the 6th.

Sector preferences

Our new preference order is MCY, CEN, GNE, MEL, TPW.
This assumes a hard exit (Tiwai) with MCY the least affected in our view

[bull....]

Craigs put this one at the top on the 6th.

Sector preferences
Our new preference order is MCY, CEN, GNE, MEL, TPW.
This assumes a hard exit (Tiwai) with MCY the least affected in our view





thx for the info you should tell king he needs to to know the truth

[King1212]

Well bull...make sure u drink plenty of fluids during the dry season so u can top up the lake water level ... meanwhile...I am a happy chappy chap with 7% yield on GNE

[bull....]

good rain in karapiro recently , your rain wish is working

[bull....]

was listening to the conference call of meridian today , while they are very positive on the future one couldnt help but knowing MCY was the best of the breed at the moment​

[bull....]

mercury might be heading for all time highs

[bull....]

dividend ex monday , only couple days left to get your juicy dividend from the blue chip of the power companies

[bull....]

holding up very nicely after dividend

[Waltzing]

"karapiro " lake levels have been down recently for several weeks prehaps waiting for the flow. Banks were meters low which was rather fortunate for some vet scullers who though they knew the lake only to be hit by westerlies coming out of no where. Nothing like whatching those in experienced wealthy masters being smashed up with modern carbon blades by westerly blasts and being forced to beach and walk it... Nothing like heavy wood to stabilise yourself in heavy weather..wood still used in europe of course on water ways.

[winner69]

Is this bad or just run of the mill for power companies

Doesn’t seem much but spose material

https://www.nzx.com/announcements/360293

[trader_jackson]

Is this bad or just run of the mill for power companies

Doesn’t seem much but spose material

https://www.nzx.com/announcements/360293

And so the downgrades begin... didn't last year they also give a target with FY19 results then downgrade them 3 or 4 times?

[winner69]

And so the downgrades begin... didn't last year they also give a target with FY19 results then downgrade them 3 or 4 times?

seemed to be 3 revisions down last year

don't know much about them (squat allin fact) but couldn't help notie that ebitaf (whatever that is) is always about $500m

Suppose punters in MCY for the divie and hope they don't lose any capital

[Norwest]

Is anyone else on this call?

There is absolutely zero positivity from Vince or Prue... they are just reading from a script, almost like they don't want to be there.

[peat]

Is anyone else on this call?

There is absolutely zero positivity from Vince or Prue... they are just reading from a script, almost like they don't want to be there.

it felt the same yesterday at Turners AGM webcast. But perhaps we shouldn't judge these people on their performance/acting skills...

Pretty sure I raised the issue of dry years back to back as a risk for MCY in the Power companies thread.... this isnt it exactly, but increases the possibility of it.

[Norwest]

Nice to have the dividend in the bank this morning, good reliable payer in a sea of cancelled and reduced dividends.

Personally, I'm a wee bit sad it jumped up after Tiwai announcement as it was shaping to come back to a more realistic price to top up, I'm happy to stay on the sidelines at the current price.

[bull....]

Nice to have the dividend in the bank this morning, good reliable payer in a sea of cancelled and reduced dividends.

Personally, I'm a wee bit sad it jumped up after Tiwai announcement as it was shaping to come back to a more realistic price to top up, I'm happy to stay on the sidelines at the current price.

nearly at all time highs now , maybe you should have just done it

[Raz]

Look at the SP now...

[Norwest]

Yes its definitely shot up a lot since I last posted several weeks ago - I believe it has overshot in my opinion and I'm posting this as a happy holder.

I still stand by my conviction that there will be better opportunities for me to continue to accumulate more of this stock at better prices in the next 12 months.

[bull....]

Look at the SP now...

truely wonderful sight it is

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.



Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2013$3,182m$5,802m0.5484


FY2014$3,219m$5,689m0.5658


FY2015$3,337m$6,058m0.5508


FY2016$3,315m$6,085m0.5448


FY2017$3,308m$5,997m0.5516


FY2018$3,286m$6,091m0.5395


FY2019$3,537m$6,484m0.5455


FY2020$3,739m$6,885m0.5431




SNOOPY

[Snoopy]

They say you can't get something out of nothing. But with the NZ electricity market, I am not sure that holds. Here is how the 'something out of nothing' method works:

1/ Revalue assets to market.
2/ Note that after revaluation your return on assets in not acceptable.
3/ Put up prices to get an acceptable return on assets.
4/ Price increases now increase underlying value of assets
5/ Go back to step 1

The power companies are very keen on using EBITDAF as a measure of their operating performance. But MCY/MRP has another profit stream, generated according to steps 1 to 5 above, not included in EDITDAF. These revaluations are based on future earnings projections. That means they might go down, although in practice I have never seen this.

When the need for more electricity generation does become apparent, value will once again arise out of thin air based on increasing energy use projections. So Mercury (MRP now MCY) may never need to raise capital again to build new power stations!


'Thin Air Capital' is not a concept I have discussed for a while. So it might be worth going over it again 'for those who came in late'. It is important because it provides one way of understanding why gentailers like Mercury, can trade on what look like 'ridiculous multiples' for a utility (Mercury I calculate is on a normalised historic PE of 44) and yet still be a worthwhile investment.

Conventionally there are two ways to fund new projects:

1/ Raise money from shareholders (shareholder equity)
2/ Borrow money from the bank (bank debt)

Yet in the New Zealand electricity market there is a third way. Look at your long lived generation assets. Decide they are worth a lot more than their 'book value'. Increase 'book value' to 'market value' by imagining new capital that you 'create out of thin air'.

This somewhat unconventional way of raising capital is only possible because:

1/ Over time the wholesale price of power increases
2/ The cost of producing power from the long lived hydro assets and geothermal power stations remains largely fixed.

So with power becoming more and more expensive on the market , and production cost not rising in tandem, these long lived generation assets become more and more valuable over time. In fact they become so valuable that building a brand new power station at today's prices can be done without raising any new money from shareholders. The way the electricity market is structured in NZ means that this practice can continue in perpetuity. Not all power companies use this method of funding new power stations (Contact Energy doesn't). But Mercury Energy certainly does. Mercury shareholders might consider 'thin air capital' a 'secret source of value' that conventional valuation metrics overlook. The obvious question is, how much 'thin air capital' has Mercury Energy accumulated? And can we take this as an indication of how much more thin air capital might be accumulated in the future?

SNOOPY

[Snoopy]

Time to update my table



Reval. Hydro & Thermal Assets ($m)Reval. Other Generation Assets ($m)Total Revaluation ($m)Post tax New Capital Per Share ($m)Pre Tax Revaluation ($m)Pre Tax New Capital Per Share (c)


20090170.987170.98712.224417.4


2010200.90060.250261.15018.737326.6


2011153.300135.275288.57520.641229.4


2012119.5202.880122.2408.717012.1


201330.96026574.9795.6


2014425292.1402.9


2015??35625.549735.5


2016??=79+217.11379.8


2017??382.7523.7


Total102.2


less Special Dividends Declared (per share)-10.4


Residual Thin Air capital91.8



Note:

1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased.
4/ In FY2016 I have added back the tax effect of the Southdown write down, to get the residual tax effect of the remaining generation assets.
5/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
6/ I have removed the special dividends declared over time , as these may been seen as a method of paying back excess 'thin air capital'.
7/ For the calculation of the 10.4cps special dividends paid, see my post 1003 on this thread.

91.8cps x 1,400m shares = $1,285m of retained 'hidden value' 'Thin air capital' over the years. Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years. These power stations were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.


Time to update my table



Reval. Hydro & Thermal Assets ($m)Reval. Geothermal & Other Generation Assets ($m)Total Revaluation ($m)Post tax New Capital Per Share ($m)Pre Tax Revaluation ($m)Pre Tax New Capital Per Share (c)


20090170.987170.98712.224417.4


2010200.90060.250261.15018.737326.6


2011153.300135.275288.57520.641229.4


2012119.5202.880122.2408.717012.1


201330.96026574.9795.6


2014425292.1402.9


2015356035625.449735.5


2016??997.11379.9


2017038382.7523.7


2018040402.9553.9


20191097118012.925017.9


20201823121315.229621.1


Total1,855133.4185


less Special Dividends Declared (per share)-15.4


Residual Thin Air capital118.0



Notes:

1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time , as these may been seen as a method of balance sheet optimisation by paying back excess 'thin air capital'.
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.

118.0cps x 1,400m shares = $1,652m of retained 'hidden value' 'Thin air capital' over the years.

Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years. These power stations were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.

SNOOPY

[Ferg]

Hello Snoopy

Would a quicker way of getting this value be to look at the balance in the Asset Revaluation Reserve? The 2020AR has a balance of $3.28b. I also noticed the current year movement is "net of taxation". This balance would represent the accumulation of "thin air assets" or "thin air equity" since inception.

[Waltzing]

every time MR SP posts - a change of name required i think i have to start actually thinking...what we missed out on here was realising that the EV revolution is coming and these companies will benefit big.. or everyone will get some solar panels.. that wall of money went to EV.

[Snoopy]

Hello Snoopy

Would a quicker way of getting this value be to look at the balance in the Asset Revaluation Reserve? The 2020AR has a balance of $3.28b. I also noticed the current year movement is "net of taxation". This balance would represent the accumulation of "thin air assets" or "thin air equity" since inception.


Ah I see the figure you refer to in AR2020 on p51.

Balance of 'Asset Revaluation Reserve': $3,281m

However I see they arrived at that figure by adding in a 'net of tax' Asset Revaluation of $205m for the year. My calculated figure was $213m using the current NZ company tax rate of 28%. How did I work that out?

From p58 AR2020: $253m (hydro) + $43m (geothermal) = $296m (total asset revaluation)

$296m x (1-0.28) = $213m

So I take it whoever compiled the annual 'Consolidated Statement of Change in Equity' must have used a higher tax rate?

Just to expand on this matter a bit more (from where I see it, I in no way class myself as a tax expert)....

--------

It seems if you bring a new asset onto your books it comes with a partially offsetting 'deferred tax' entry on the liability side of the balance sheet. The implication here being that should this asset ever be sold for a profit, an accompanying tax bill will be generated (the deferred tax liability becomes an actual tax liability?). I don't really understand this, because I thought that profits on capital assets are not taxable in New Zealand. In the case of Mercury these 're-valued assets' are core company assets, being long lived hydro stations and geothermal power stations. They will never be sold. So I guess the deferred tax liability will never be crystallised?

I am all ears if anyone can better explain this topic!

--------

The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you have requoted Ferg!

SNOOPY

[Ferg]

So I guess the deferred tax liability will never be crystallised?

[snip]

The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you quote Ferg!

Hi Snoopy

Apologies in advance for the long post but this got away on me, the more I dug into it.

It could be your figure is lower due to older revaluations not being included in your analysis. My interpretation of your analysis is that it is showing the amounts created out of thin air since 2009. I reckon the other $2b would have been created prior to 2009.

Regarding deferred tax. I'm not an expert on this and my knowledge is sketchy at best but the DTL on revaluations won't crystallise. There is a worked example here https://auditnz.parliament.nz/good-practice/tax/tax-calculation-and-disclosure-examples

Click the first link of the link above for the TMCL excel example. This suggests that if you take the revaluation through the P&L under comprehensive income, then there is a partially offsetting entry into deferred tax. Using the MCY 2020AR I believe this looks like:
Dr Assets $285m (page 57 is showing $296m - see *note below)

Cr Asset Reval Reserve/Equity $285m (per p49 - disclosed under comprehensive income)


Dr Asset Reval Reserve/Equity $80m (the nett of this line and the one above is $205m per p51 under ARR, note the amount on p49 of comprehensive income shows $91m due to the presence of other transactions)


Cr Deferred Tax Liability $80m (the note on p57 has $83m, so there is another PP&E deferred tax transaction, interesting that this is not far from 28% of the fixed asset difference of $13m)

NB: $80m is 28% of $285m so the values make sense.

From the notes on p56:
"Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax and accounting bases of the Group’s assets and liabilities. A deferred tax asset is only recognised to the extent that there will be future taxable profit to utilise the temporary difference.

Property, plant and equipment is held on capital account for income tax purposes. Where assets are revalued, with no similar
adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax liability
on these revaluations is unlikely to crystallise in the foreseeable future under existing income tax legislation."

FYI "capital account" refers to capital vs revenue account. In IRD terminology capital accounts are non-taxable, whereas revenue accounts are taxable.

So it is confirmed these book adjustments for revaluations create a deferred tax liability that does not crystallise. Accordingly, I remove any deferred tax assets or liability from any NTA calculations along with any other IFRS adjustments I don't think represent tangible assets or liabilities (such as leased assets & liabilities under IFRS16), but I digress....

The nett ARR balance is $3,281m (p 51) - which grossed up for tax at 28% would be $4,557m gross before DTL adjustments. 28% of $4,557 is $1,276m. The current balance in the deferred tax liability account under the heading PP&E on p57 is $1,263m. A difference of $13m which is pretty close (this is completely different from the $13m difference I tagged in the journal above which I explore below and not to be confused).

*Note: regarding the $13m difference in the asset journal entry of $285 and the $296m per p57. This note from p58 might explain some of the difference:
"Any surplus on revaluation of an individual item of property, plant and equipment is transferred directly to the asset revaluation reserve unless it offsets a previous decrease in value recognised in the income statement, in which case it is recognised in the income statement."



This sounds to me like the P&L received a credit of $13m in the fiscal year, based on a revaluation of an asset that was previously written down in the P&L. That probably explains why the assets are showing revaluations of $296m but the statement of comprehensive income has $285m. What is interesting is that this "credit" has been buried somewhere else in the P&L given the disclosed value for depreciation and amortisation per the P&L ties directly into the PP&E and intangible asset reconciliations ($186m + $28m = $214m per the P&L). So where is this $13m credit? I think it has been deducted from operating costs. Hmmm.....

Back to carrying values, this note from page 58 (half way down right hand side):
"The carrying amount of revalued generation assets, had they been recognised at cost, would have been $1,959 million".


That is an interesting statement in light of this statement from bottom left of p58:
"As a consequence of the revaluation, accumulated depreciation on these hydro and geothermal assets has been reset to nil."


So it appears that the actual cost of the generation assets is $1,959m, despite there being $170m of depreciation on generation assets (p57).

This means that $170m goes into the P&L as an expense and is (partly?) deductible for tax purposes but that is reversed, plus some, using a revaluation to give a gain in the statement of comprehensive income, which is not taxable. Interesting - I learned something today.

Lastly, the NBV of generation assets per p57 is $5,575m. The historical cost of $1,959m. The difference is $3,616m, which appears to be all revaluations given there is no accumulated depreciation. The "revaluation difference" of $3,616m is considerably less than the gross revaluation from my calc above of $4,557 - a difference of $941m. Why does this not work?

[Snoopy]

Management of utility type companies hate cutting dividends. The best way not to cut 'ordinary dividends' is to declare the odd 'special dividend' so that if the next year is not so favourable you can cut the special dividend, yet still claim an unbroken record of flat to rising dividends because the 'ordinary dividend' has not been cut. The fact that a dividend declared is 'special' is enough reason in itself to believe that you should not rely on it in the future to be repeated. I am not saying there won't be a special dividend next year. I just don't think you should rely on that assumption for valuation purposes.


From p10 of AR2020

"This brings the full-year ordinary dividend to 15.8cps, up 2%, marking our 12th successive year of ordinary dividend growth."

What about actual dividend growth though? Remember those special dividends that some analysts were keen to normalise only a few years ago?



Financial YearDividends Paid (cps)


FY20093.96 + 0.00 = 3.96


FY20104.02 + 5.70 + 10.72(s) = 20.44


FY20112.17 + 4.62 = 6.79


FY20123.26 + 5.34 = 8.60


FY20133.21 + 4.80 = 8.01 (1)


FY20147.2 + 5.2 = 12.4


FY20158.3 + 5.0(s) + 5.6 = 16.9


FY20168.4 + 2.5(s) + 5.7 = 16.6


FY20178.6 + 4.0(s) + 5.8 = 18.4


FY20188.8 + 5.0(s) + 6.0 = 19.8


FY20199.1 + 6.2 = 15.3


FY20209.3 + 6.4 = 15.7



Notes

1/ This breaking of the upward dividend trend at an earlier date is because I have grouped the dividends in the years they are actually paid whereas Mercury groups their dividends relating to the earnings period in which they were generated.
2/ Pre FY2014, the number of shares in my calculation have been adjusted so that the shares on issue pre-float equal the shares on issue post float.

This means the real picture is that dividend growth has effectively stalled over the last six years.

SNOOPY

[Snoopy]

Snoopy wrote:
"The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you quote Ferg!"

It could be your figure is lower due to older revaluations not being included in your analysis. My interpretation of your analysis is that it is showing the amounts created out of thin air since 2009. I reckon the other $2b would have been created prior to 2009.


Yes that might be the answer. But I am sticking to the $1,856m figure. Why? Because 'thin air capital' is not only used to build new power stations. The older 'thin air capital' may be being used to support the balance sheet in historic ways. And we have to assume that at the point that Mercury (or Mighty River Power as it was then) was restructured prior to being floated, then the shares were 'prepared for the market' with an optimised capital structure, given:

1/ All the construction projects on the books at the time.
2/ The expected operating performance of the company.

The new power station construction projects (both geothermal) 'in the planning' around float time were:

A/ Nga Awa Purua, commissioned in FY2010. Total cost $430m or 30.7cps
B/ Ngatamariki, commissioned in FY2014. Total cost $475m or 33.9cps

I think it is reasonable to assume that the 'optimised capital structure' would have been in place before the construction of the first of these - in FY2009. And if we consider the asset revaluations from that point only, we are comparing the 'incremental gain of revaluation' from a date with the 'incremental cost of building new power stations' from that same date. And that is the exercise we want to achieve.

SNOOPY

[Lion_graf]

Yes that might be the answer. But I am sticking to the $1,856m figure. Why? Because 'thin air capital' is not only used to build new power stations. The older 'thin air capital' may be being used to support the balance sheet in historic ways. And we have to assume that at the point that Mercury (or Mighty River Power as it was then) was restructured prior to being floated, then the shares were 'prepared for the market' with an optimised capital structure, given:

1/ All the construction projects on the books at the time.
2/ The expected operating performance of the company.

The new power station construction projects (both geothermal) 'in the planning' around float time were:

A/ Nga Awa Purua, commissioned in FY2010. Total cost $430m or 30.7cps
B/ Ngatamariki, commissioned in FY2014. Total cost $475m or 33.9cps

I think it is reasonable to assume that the 'optimised capital structure' would have been in place before the construction of the first of these - in FY2009. And if we consider the asset revaluations from that point only, we are comparing the 'incremental gain of revaluation' from a date with the 'incremental cost of building new power stations' from that same date. And that is the exercise we want to achieve.

SNOOPY

I worked at Nga Awa Purua the last couple of months. Rotokawa is I think made from vinylester resin (fibre glass) Less susceptible to corrosion from acid building up in columns.

In Nga Awa Purua we replaced most of the top half of the cooling tower as for some reason it was made out of polyester resin not vinylester. Would have been a fair bit of money spent and more work to be done next year starting feb/march.

The reason we stopped work was because in the summertime they need each cell of the cooling tower running at full capacity to avoid huge fines from the govt. The govt will fine them if they arent producing enough power.

Every Mercury work vehicle I saw there was an EV and charged on site at the geothermal plant.

[bull....]

in the race to buy tilt from infratil?

[Norwest]

in the race to buy tilt from infratil?

They will certainly be talking about it... would be a good fit for us.

[Snoopy]

I am going to modify my 'thin air capital' table by removing the respective special dividends paid over the period of consideration. This is one way to test fish's theory that the special dividends can be considered as capital optimisation adjustments. I am going to start from the year FY2014. This is based on the assumption that at the end of FY2013 the capital structure of the company was optimised. So it is only the thin air capital generated after that time, less any capital optimizing special dividends, that count as possible future power station development or alternative investment capital.



YearNew Thin Air CapitalPost Tax Effect MultiplierEffective New Thin Air CapitalSpecial DividendPost Tax Effect MultiplierSurplus Capital ReturnedSurplus Capital Returned per Share


FY2014$40m0.72$28.8m$0m1$0m0c


FY2015$421m0.72$303.1m$70m1$70m5.0c


FY2016$136m0.72$97.9m$35m1$35m2.5c


FY2017$48m0.72$34.6m$56m0.72$40m2.9c


Total$464m$145m10.4c



Note:

1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 indicates that the dividend was not imputed and 28% tax needs to be paid.
3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.

--------------------------


The remaining thin air capital on the balance sheet is therefore: $464m - $145m = $319m

The net total of this 'thin air capital' that has been accumulated could theoretically support extra debt 'd' according to the company's optimised gearing ratio.

'd' / $319m = 45% => d=$144m

We thus have a total of amount of: $319m (equity) + $144m (debt) = $463m investable available to build a new geothermal power plant. Compare this to the $475m cost of building the Ngatamariki 85MW thermal plant in FY2013. This is really spooky. The difference between those figures is only 3%, well within the margin of error! It does look like your suggestion that the special dividends are part of a wider capital optimization strategy, fish, are credible!

Readers may be wondering why I didn't include special dividends in my dividend valuation before. I hope you can now see that to do so would have been 'double counting'. You should only account for the effect of these special dividends once in any valuation. In my instance the effect of the 'thin air capital' less 'special dividends' is taken as a capital adjustment that allows a new power station to be constructed. The value can then be attributed to the new power station alone.

Nevertheless there is still enough 'thin air capital' available to build that new power station if required. This is the important point and the reasoning behind my upping the calculated valuations by 10% during the valuation process. So none of this affects my valuation of the company.


The quest top explain why supposedly sensible investors are prepared to pay a phenomenal multiple for what seems on the surface to be a utility share continues....

I am continuing with the 'fish theory' that special dividends are Mercury management's way of optimising the capital structure of the company.

I am going to use the assumption that, following the completion of the most recently commissioned all new power station, the Ngatamariki geothermal station in FY2013, Mercury considered itself 'capital optimised'. Using the balance sheet from that year, we can therefore calculate an optimised gearing ratio for the company:

Optimised Gearing ratio: (Total Liabilities)/Total Assets): $2,620m / $5,802m = 45%

That means I must modify my 'thin air capital' table by removing the respective special dividends paid over the period of consideration. I am going to start from the year FY2014. This is based on the assumption that at the end of FY2013 the capital structure of the company was optimised. So it is only the thin air capital generated after that time, less any capital optimizing special dividends, that count as possible future power station development capital.



YearNew Thin Air CapitalPost Tax Effect MultiplierEffective New Thin Air CapitalSpecial DividendPost Tax Effect MultiplierSurplus Capital ReturnedSurplus Capital Returned per Share


FY2014$40m0.72$28.8m$0mN/A$0m0c


FY2015$421m0.72$303.1m$70m1$70m5.0c


FY2016$136m0.72$97.9m$35m1$35m2.5c


FY2017$48m0.72$34.6m$56m0.72$40m2.9c


FY2018$55m0.72$39.6m$70m1.0$70m5.0c


FY2019$250m0.72$180m$0mN/A$0m0c


FY2020$296m0.72$213.1m$0mN/A$0m0c


Total$897m$215m15.4c



Notes:

1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 on the dividend indicates that the dividend was not imputed and 28% tax needs to be paid.
3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.
4/ Surplus capital returned per share assumes 1,400m shares on issue.

----------------------

The remaining thin air capital on the balance sheet is therefore: $897m - $215m = $682m

The net total of this 'thin air capital' that has been accumulated could theoretically support extra debt 'd' according to the company's optimised gearing ratio.

'd' / $682m = 45% => d=$307m

We thus have a total available for investment amount of: $682m (equity) + $307m (debt) = $989m dollars, while still staying within Mercury's own optimised balance sheet guidelines.

From this 'available for investment total', we can subtract the $144m paid to acquire a 19.9% stake in Tilt Renewables in FY2018. We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines. By my calculations that still leaves:

$989m - $464m - $144m = $381m

We can add to this the $272m proceeds from the sale of the Metrix metering business in FY2019.

That makes total capital of $381m + $272m = $653m still available for investment. I wonder what other investment direction MCY might 'Tilt' those funds towards ;-)?

And now for a confession....

I consider that I may have made a conceptual mistake the previous times that I have used this method to incrementally increase my valuation of this company. I said that I didn't want to count special dividends twice. But by removing the special dividend total from the incremental 'thin air capital' I am reducing the amount of capital by the amount paid as a special dividend. So I am allowed to count that special dividend as dividend income, because it is in effect discarded money that has already reduced the thin air capital to below what it otherwise would have been. That means I can count the special dividend as a bonus dividend because it no longer forms part of the thin air capital.

SNOOPY

[Snoopy]

We thus have a total available for investment amount of: $682m (equity) + $307m (debt) = $989m dollars, while still staying within Mercury's own optimised balance sheet guidelines.

From this 'available for investment total', we can subtract the $144m paid to acquire a 19.9% stake in Tilt Renewables in FY2018. We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines. By my calculations that still leaves:

$989m - $464m - $144m = $381m

We can add to this the $272m proceeds from the sale of the Metrix metering business in FY2019.

That makes total capital of $381m + $272m = $653m still available for investment. I wonder what other investment direction MCY might 'Tilt' those funds towards ;-)?


A back of the envelope summary of the situation between Mercury and Tilt.

1/ 20% of the business cost Mercury $144m. On that basis Tilt was valued at $144m/0.2 = $720m. So the remaining 80% of the company had an implied value of $720m - $144m = $576m.

2/ Right now, Mercury has $653m of investable capital available. So they have enough surplus investable capital on the balance sheet now available to take out all of Tilt, except for one thing. The price of TLT shares is now rather higher than it was when Mercury bought their 20% stake.

3/ Mercury offered $2.30 for their 20% stake. TLT is trading on the market today at near double that price. So the amount that Mercury would have to pay to take out the remainder of the company would be at least:

$576m x 2 = $1,152m

4/ $1,152m would be getting near the upper limit of what Mercury could cope with without a capital raising. Would Grant Robertson support a capital raising for such a 'frivolous' investment?

5/ I am tending think that Mercury will hold their 20% stake if the balance of the company gets a new owner. Alternatively, if they sold their stake that would be $144m of profit. And maybe a nice bonus dividend for shareholders?

$144m/1400m = 10cps

Grant might like that. It would make him look 'responsible' after all the Covid-19 bail out expenditure he has been doing.

SNOOPY

[Waltzing]

Or Is this or some part now available for the resumption of special dividends. Really not happy we missed this last move up. Were Busy buying offshore travel.. Not over valued then? Safe place for more bank deposit money to flow into.. Did not go to OCA. Will sell off when interest rate move up... if they ever do.

Surely buying into more free energy is the best plan. As the petrol engine may simple be a social no no before long as the kiwi driving public start to wake up to pollution... green kiwi land ...tourists ....

[Snoopy]

We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines.


The new Turitea windfarm is scheduled to be built in two stages. There is the 33 turbine northern section timetables to be completed by the end of Q1 FY2021. The second 27 turbine southern section is set to be completed by the end of Q2 in FY2022. When finished this windfarm will consist of 60 turbines, and is budgeted to cost $465m including capitalised interest (AR2020 p40).

The Turitea wind farm will be New Zealand's wind farm with a total capacity of 222MW. Once operating the average projected energy to be produced each year is projected at 840GWh/year. If the wind farm were to operate 24/7 then the total energy generated would be:

222MW x 24 hr/day x 365 day/year = 1944720 MWh/year = 1945 GWh/year

This would suggest the windfarm will operate at: 840/1945 = 43.2%

It is interesting to compare this with Trustpower's Tararua wind farm.

http://www.windenergy.org.nz/tararua-wind-farm

This has a combined capacity of 161MW with average annual generation of 620GWh. The maximum energy that can be generated in any year is:

161MW x 24 hr/day x 365 day/year = 1410360 MWh/year = 1410 GWh/year

This would suggest the Trustpower Tararua windfarm will operate at: 620/1410 = 44.0%

Both of those operating yields seem high for a wind farm. Nevertheless they are in close agreement. That would suggest the wind farm Capacity Factors that I have calculated are correct.

SNOOPY

[Jantar]

…..

Both of those operating yields seem high for a wind farm. Nevertheless they are in close agreement. That would suggest the wind farm operating yields that I have calculated are correct.

SNOOPY What you have calculated is known as the capacity (or load) factor. The international average is 35% with a variation of 25% to 52%. Most NZ wind farms are in the upper end of the scale at better than 40%, so your calculated numbers are in the right ball park.

I haven't looked at actual numbers for the last year, but I do recall that Meridian's Mill Creek was getting better than 43%.

[Snoopy]

A couple of interesting statistics from FY2012, a year without an unusual river inflow. Mighty River Power had a 51.4% capacity utilisation from their hydro stations and a very impressive 94% capacity utilisation from their geothermal stations. This gives an idea of the relative importance of the two kinds of generation in relation to total energy generated by MRP. Since the commissioning of the latest geothermal station (Ngatamariki) in 2013/2014, MRP have enough revalued capital on the books to build yet another 'free' geothermal power station if they so choose. Let's say this potential new station could deliver 100MW. By how much would that increase the base generating capacity of MRPs portfolio?

1044MW Hydro (existing) x 0.514 = 537MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)

100MW Geothermal (new) x 0.940 = 94MW (effective)

Hence the effective new capacity increase is:

94 / (537+435) = 10%

OK that new power station is not yet built, or even hinted that it will be started. But I would argue that MRP already has this new hidden value built into the company. The company is effectively 10% bigger than its current production capacity, and could up size by 10% seemlessly if management so chose to do it.


Now we are getting to the nub of why I believe Mercury is priced so highly by the market.

The above quote is from six years ago. That new 100MW Geothermal power station that I mooted was never built. But the capital that could have built that power station is still within Mercury. And now Mercury is moving in a new direction with the new Turitea Wind Farm near Palmerston North already under construction. And they have consent for another wind farm, Pukeito, to the east as well.



The remaining thin air capital on the balance sheet is therefore: $897m - $215m = $682m

The net total of this 'thin air capital' that has been accumulated could theoretically support extra debt 'd' according to the company's optimised gearing ratio.

'd' / $682m = 45% => d=$307m

We thus have a total available for investment amount of: $682m (equity) + $307m (debt) = $989m dollars, while still staying within Mercury's own optimised balance sheet guidelines.

From this 'available for investment total', we can subtract the $144m paid to acquire a 19.9% stake in Tilt Renewables in FY2018. We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines. By my calculations that still leaves:

$989m - $464m - $144m = $381m

We can add to this the $272m proceeds from the sale of the Metrix metering business in FY2019.

That makes total capital of $381m + $272m = $653m still available for investment.


With Turitea already budgeted for, the balance sheet suggests there is also enough investment capital available to build Pukeito as well. And Pukeito could be 40% larger than Turitea with the amount of investment capital available. So how much would these two wind farms boost Mercury's operational generating capacity?

1063MW Hydro (existing) x 0.514 = 546MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)

222MW Turitea Wind (new) x 0.432 = 96MW (effective)
310MW Pukeito Wind (new) x 0.432 = 134MW (effective)

Hence the effective new capacity increase from the fully funded but as yet not switched on power stations is:

(96+134) / (546+435) = 23.4%

I realise this is a strange concept for some. That is, giving value to a couple of Mercury consented power stations that are not yet in service. But as you will see it does appear the market is doing just that. Because the current MCY share price is very difficult to justify on Mercury's earnings today.

SNOOPY

[bull....]

good analysis there snoopy , to be smug now you know why i said get your income why you can all the time mainly in relation to mcy, mel they was cheap at the time. i probably wouldnt be saying this now for most of the gentailers going forward as cheap has gone but doesnt mean all gentailers still cant keep going up such is the market.

[Snoopy]

good analysis there snoopy , to be smug now you know why i said get your income while you can all the time mainly in relation to mcy, mel they was cheap at the time. i probably wouldnt be saying this now for most of the gentailers going forward as cheap has gone but doesnt mean all gentailers still cant keep going up such is the market.


Looked at through the snapshot of today you were right Bull. However, we need to remember that as of today Rio Tinto are still shutting down the Tiwai Point smelter in eight months time. The market is pricing in Tiwai remaining in the medium term as a done deal. Yes the pre-election political will was there to save it. But the gentailers have already put up their best hands to keep Tiwai open. And if the government sees that with NZ First, the main pre-election supporter of Tiwai now off the political scene for three years if not forever, the political auction that 'saved' Tiwai has lost its strongest bidder. So it is really up to Labour to order Transpower to cut their line costs to Tiwai. And when the full cost of doing that becomes apparent - increased line charges for the rest of us - , there may yet be no deal.

The other factor to consider is the Australian Super Fund bid for Infratil excluding Trustpower. Presumably if they thought there was money to be made, the bid for control of Infratil would have included Trustpower. The way the bid is structured would suggest that the Australian Super Fund sees Trustpower, and by implication the other NZ gentailers prices as maxed out. No money to be made from holding NZ gentailer shares in the medium term.

SNOOPY

[Snoopy]

Financial YearepsDividend Paid (per share)Ordinary Dividend Paid (per share)


201413.3c7.2c + 5.2c = 12.4c7.2c + 5.2c = 12.4c


20159.7c8.3c + 5.0c + 5.6c = 18.9c8.3c + 5.6c = 13.9c


201610.1c8.4c + 2.5c + 5.7c = 16.6c8.4c + 5.7c = 14.1c


201712.0c8.6c + 4.0c(NI) + 5.8c = 14.4c +4.0c (NI)8.6c + 5.8c = 14.4c


20188.8c + 5.0c(NI) + ?c = ? 8.8c + ?c = ?


Total FY2014 to FY201762.3c + 4.0c (NI)55.1c



Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed'

For valuation purposes I intend to work with the ordinary dividend. I do this because doing so incorporates a 'management judgement' of what management thinks normal earnings are. The special dividends that I haven't counted I consider 'capital adjustments' to restore the company to management's desired equity ratio. I do not think that these special; dividends will be indicative of future payments.

From the table, the average annual normalised dividend payment has been: 55.1c/4 = 13.8c. However, I prefer to use the latest available data. In this instance this means I drop the final dividend payment for FY2013 (which was paid in FY2014) of 7.2c, and replace it with the final dividend paid for FY2017 (paid in FY2018) of 8.8c. So my four year tax paid normalized dividend average becomes:

( 5.2c +(8.3c + 5.6c) + (8.4c + 5.7c) + (8.6c + 5.8c) + 8.8c) /4 = 14.1c





Financial YearNormalised 'eps'Net Dividend Paid (per share)Gross Dividend Paid (per share)


201610.3c8.4c + 2.5c(S) + 5.7c 11.67c + 3.47c + 7.92c = 23.06c


201712.1c8.6c + 2.88c(NI,S) + 5.8c11.94c + 4.0c + 8.06c = 24.00c


201814.0c8.8c + 5.0c(S) + 6.0c12.22c + 6.94c +8.33c = 27.49c


201911.7c9.1c + 6.2c12.64c + 8.61c = 21.25c


202011.7c9.3c + 6.4c12.92c + 8.89c = 21.81c


2021?c9.4c + ?c13.06c + ?c = ?c


Total FY2016 to FY202059.8c84.68c117.61c




Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.

In a change of policy I have decided to work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

From the table, the average annual normalised gross dividend payment over the last five years has been:

(23.06c+24.00c+27.49c+21.25c+21.81c)/5 = 23.52c

Nevertheless time has moved on and I have decided to include the first dividend for FY2021 (13.06c gross) -that has already been paid- and remove the equivalent dividend from five years previously (11.67c + 3.47c gross).

(7.92c+(24.00c+27.49c+21.25c+21.81c)+13.06c)/5 = 23.11c

SNOOPY

[Snoopy]

Nevertheless time has moved on and I have decided to include the first dividend for FY2021 (13.06c gross) -that has already been paid- and remove the equivalent dividend from five years previously (11.67c + 3.47c gross).

(7.92c+(24.00c+27.49c+21.25c+21.81c)+13.06c)/5 = 23.11c



Based on a 4.5% gross yield that I now used for utilities in this ultra low interest rate environment, I can calculate a capitalised earnings valuations for MCY.

23.11c / (0.045) = $5.14 (based on averaged, dps)

However, this valuation does not take into account the two hidden not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1323) my fair value for MCY today is:

$5.14 x 1.234 = $6.34

As I write this MCY is trading at $6.81. That means I see it as overvalued, although not by as much as some might think ( +7.4% ).

SNOOPY

[Snoopy]

Negative attitudes probably don't drive consumer electricity choices.


I don't think Mercury would agree with you Biscuit as they seem very concerned at getting their 'Net Promotor Score' up. Why have I brought up this topic? Because Mercury thinks it is important!

So what is NPS?

According to:

https://exerciseindustryawards.co.nz/aboutheawards/facilityentry/nps/

it will involve one simple question:

------------------------------

”On a scale of 1-10 how likely are to recommend your (power retailer) to a friend or colleague?”.

Depending on the score that is given the respondents can be categorised into one of three groups:

Promoters – giving a score of 9 or 10, Passives – giving a score of 7 or 8, Detractors – giving a score of 0-6.

The Net Promoter Score is then calculated as the difference between the percentage of Promoters and Detractors.

For example: If 100 responses come back – 45 of them giving a score of 9 or 10, 30 of them a 7 or 8 and 25 of them 0-6, the calculation would be 45-25 (45% Promoters, 25% Detractors) leaving a score of 20.

-------------------

According to AR2020 p7, the NPS for Mercury Energy is 13.7

For comparison:

1/ Trustpower Net Promoter Score is 40 (Infratil March 2017 Presentation)
2/ The Contact Energy 'Net Promoter Score' is 36 ( CEN AR2020 p12)
3/ The Meridian Energy 'Net Promoter Score' is 6 ( MEL PR2019 p11)
4/ The Genesis Energy Net Promoter Score is -4 ( https://customer.guru/net-promoter-score/genesis-energy)


SNOOPY

[Ferg]

In a growth environment the valuation formula is D/(r-g) where D is the annual dividend, r is the required rate of return and g is the rate of growth in perpetuity of the dividend stream.

Your own calculations of growth imply quite a high growth rate. If we assume annual growth in dividends at a lower rate of say 1% p.a. then the valuation is:

23.11c / (0.045 -.01) = $6.60.

This is not too far off the current price so I suspect some players are pricing growth into their dividend valuation as per your earlier post on generation capacity.


Based on a 4.5% gross yield that I now used for utilities in this ultra low interest rate environment, I can calculate a capitalised earnings valuations for MCY.

23.11c / (0.045) = $5.14 (based on averaged, dps)

However, this valuation does not take into account the two hidden not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1323) my fair value for MCY today is:

$5.14 x 1.23 = $6.32

As I write this MCY is trading at $6.81. That means I see it as overvalued, although not by as much as some might think ( +7.7% ).

SNOOPY

[Snoopy]

In a growth environment the valuation formula is D/(r-g) where D is the annual dividend, r is the required rate of return and g is the rate of growth in perpetuity of the dividend stream.

Your own calculations of growth imply quite a high growth rate. If we assume annual growth in dividends at a lower rate of say 1% p.a. then the valuation is:

23.11c / (0.045 -.01) = $6.60.

This is not too far off the current price so I suspect some players are pricing growth into their dividend valuation as per your earlier post on generation capacity.


There are various ways of modelling growth when evaluating investment prospects Ferg. Many of my investments are for income. For these I generally model 'no growth'. Then if my valuation comes in below the market valuation, the difference between the two numbers becomes the 'growth premium'. I then have to assess whether the growth premium is fair or whether the market is being a little too optimistic on growth prospects.

There are a couple of reasons why I tend to model 'no growth'.

1/ It is easier. I don't have to assess what I think the growth rate should be.
2/ It is conservative. If I model 'no growth' yet get growth, that growth is a bonus. If an investment makes sense under 'no growth' assumptions it also makes sense if there does end up being growth.

The 'Capitalised Dividend' model assumes 'no growth'. By implication that means historical earnings assume extra importance. That is because if there is indeed 'no growth' those historical results are good predictors of future results. That in turn means my forecasting is based on real historical results over a business cycle. I am much more comfortable with this than the alternative: Appointing myself as a 'pointy head' and trying to arbitrarily assess future prospects in an industry where I really have no expertise.

If you look at MCY dividend income that I have summarised in my post 1326, the sad truth is that MCY is a 'no growth' company. I think this is a fair assessment. There is the spurious claim that ordinary dividends have been increasing for a decade or more that carefully leaves out the fact that special dividends of recent years that have been dropped. There are the excuses of unusual water inflows (both less and greater than average) that has disrupted earnings patterns. Recent history shows that most years have had unusual water inflows. That means the 'hypothetical average' is a by product of feast and famine years. The chance of any given year being average is actually very low.

Going back to my calculated valuation figures this means the growth premium for MCY is very high. At yesterday's market closing price of $6.81 the 'growth premium' is:

$6.81 - $5.14 = $1.67 ( +32%)

At first glance that seems crazy for 'no growth' share.

However, what this doesn't take into account is that real growth for Mercury comes in lumps. Mercury currently have the capacity to build two giant new wind farms from existing resources (one Turitea is already under construction) , with no capital raising required. The fuel costs for these wind farms is zero. So what we have here is the capacity to earn a significant increment in revenue with all construction costs already built into the balance sheet. Furthermore power is a 'must have' in the modern world. So demand is not cyclical, and that in turn makes the cashflow from those future power plants more valuable.

My calculations show that even accounting for this 'hidden power station effect' (my post 1327) the share price for MCY is too high. But you can say the same for most NZX shares right now. So by selling MCY and investing in another overvalued NZX share you are no better off. And you are certainly better off holding MCY for income purposes than putting your money in the bank! This is why I am not selling MCY. And no doubt many MCY investors feel the same way.

Because the growth of MCY is by construct very lumpy, my own view is that trying to model a long term growth rate for MCY doesn't make sense. It is true that modelling a 1% growth rate compounding for 10 years.

(1+0.01)^10 = 1.105

is equivalent to a zero growth model with a one off growth increase of 10.5%. But since the actual growth rate is not 1% per year compounding, I don't see any point in modelling the growth this way.

SNOOPY

[Jantar]

In a growth environment the valuation formula is D/(r-g) where D is the annual dividend, r is the required rate of return and g is the rate of growth in perpetuity of the dividend stream.

Your own calculations of growth imply quite a high growth rate. If we assume annual growth in dividends at a lower rate of say 1% p.a. then the valuation is:

23.11c / (0.045 -.01) = $6.60.

This is not too far off the current price so I suspect some players are pricing growth into their dividend valuation as per your earlier post on generation capacity. Ferg, I have a problem with this method of valuation that perhaps you can explain. Using that formula, if the expected return is low, say 2%, and the sustained growth is equal to the required return, wouldn't that make the value of shares infinite? Or if the growth exceeds this, then the share value would actually be negative.

[Ferg]

But since the actual growth rate is not 1% per year compounding, I don't see any point in modelling the growth this way.
Hi Snoopy

I understand it is easier and more conservative to not model growth in dividends but we do have evidence of growth. I'm not saying you are incorrect in your method, but some people will be factoring in growth which justifies a higher SP, whilst your approach will be more conservative. By the way (D * ((1+g)^10)/r does not equal D/(r-g) - they give differing results depending on the the values of r and g. I know you said 'equivalent' but mathematically they are different.

Per your post above these are the interim and final dividends since 2014:



Year
Nett






Interim
Final
Total
Gross @ 28%


2014
$0.072
$0.052
$0.124
$0.172


2015
$0.083
$0.056
$0.139
$0.193


2016
$0.084
$0.057
$0.141
$0.196


2017
$0.086
$0.058
$0.144
$0.200


2018
$0.088
$0.060
$0.148
$0.206


2019
$0.091
$0.062
$0.153
$0.213


2020
$0.093
$0.064
$0.157
$0.218


2021
$0.094






I have removed special dividends given they are one off in nature and not part of forward growth.

The CAGR for the gross dividend from 2014-2020 is 4%; $0.172 x (1.04^6) = $$0.218. If we look at a shorter time slice of 4 years, the growth rate is still 2.7% compounding. It is harder to maintain historic growth rates that are based on a low starting value, so 1% does not seem unreasonable.

Also, there is a pattern to the interim and final dividends where each year is slightly higher than the previous. This confirms to me the Board understand the benefit of slow & controlled growth on dividends - there are numerous examples in the USA where dividends have increased every year for decades without skipping a single year. It helps the SP by lowering the dividend valuation denominator for those who use that method. The share prices for such USA companies that have increased dividends annually are eye watering high and the yields are low. But given the "proof of the pudding" in decades of delivery, some investors would view such investments as money in the bank with no regard for the daily or annual SP movements. Different strokes for different folks I guess.

Regards

[Ferg]

Ferg, I have a problem with this method of valuation that perhaps you can explain. Using that formula, if the expected return is low, say 2%, and the sustained growth is equal to the required return, wouldn't that make the value of shares infinite? Or if the growth exceeds this, then the share value would actually be negative.
A fair question.

The model breaks down at the boundaries - but that is assuming the values of r and g are correct, and that this is the correct method to use.

Low rates of r are likely not pricing in sufficient risk when using CAPM methods given r should not be less than the risk free rate (ie return on Government bonds). Also, g is compounding, so compounding growth rates well above the risk free rate would not be common (they would exist but at the margins, given it is hard to grow something FOREVER). But you are correct in that if the required return was low and the growth rate was high, then the price would be infinite. That said, compound growth rates result in very large numbers very quickly. Have a play with a few values of g over differing time periods and you will likely find high values of g do not exist in practice.

Also, compounding growth ad infinitum is rare. Take the example of ATM - very high growth initially but it will slow at some point in the future so pricing should be based on future dividends at a lower growth rate, rather than the high growth rates of today (assuming it was paying a dividend now). Per my post to Snoopy (D * ((1+g)^10)/r does not equal D/(r-g). So in the scenario of high growth you would look past the growth of today at a future dividend and apply the method (D * ((1+g)^x)/r. Whereas something more stable with controlled and managed growth (i.e. a cash cow like a gentailer) would justify using the method D/(r-g).

[Snoopy]

Why have I brought up this topic? Because Mercury thinks it is important!

According to AR2020 p7, the NPS for Mercury Energy is 13.7

For comparison:

1/ The Contact Energy 'Net Promoter Score' is 36 ( CEN AR2020 p12)
2/ The Meridian Energy 'Net Promoter Score' is 6 ( MEL PR2019 p11)
3/ The Genesis Energy Net Promoter Score is -4 ( https://customer.guru/net-promoter-score/genesis-energy)
4/ Trustpower Net Promoter Score is 40 (Infratil March 2017 Presentation)


A second key metric for Mercury Energy management is customer churn. Customer churn is the percentage of customers signing over to another electricity retailer over the financial year.

According to AR2020 p7, the 'trader churn' rate for Mercury Energy is 5.9%.

ADDED: The last customer churn rate I can find is from PR2017 p20. It is 15%

For comparison:

1/ Customer Churn rate at Meridian Energy is 14.2% ( MEL AR2020 p92)

2/ Customer churn rate at Genesis Energy is 15.8%
(https://www.genesisenergy.co.nz/about/media/news/genesis-delivers-earnings-of-$167-million)

3/ Customer Churn rate at Contact Energy is 16.4% (CEN AR2020 p23)

4/ Customer churn rate at Trustpower is 17% (TPW AR2020 p27)

SNOOPY

[Jay]

Which leads us to presume, most stay with Mercury (is this because they were the "original" especially in the wider Auckland region) and of all the others a fair number swap between them on a regular basis
I myself went from Mercury to Contact to Meridian and back the Mecury again - for me the latter have been the best pricing wise, stayed the same deal for a number of years now, where as the other two was a specila deal fixed for a year ot two then they were not cheaper than anyone else.
Ended up back at Mecury as they rang me up and offered me a good deal, so I took it, and when others have rang/come to the door, they go ".. oh that is a good deal, we can't beat it maybe match it..." so no point in changing

[Zaphod]

One of the reasons electricity retailers adopted bundling, was to decrease churn. When you've committed your power, gas, broadband etc. to one supplier it becomes less likely you'll shift to another provider, or so the theory goes.

Looking at the statistics above, that theory doesn't appear to be borne out. Unless Mercury energy customers are predominantly signing up for the expensive electrically powered vehicles and are thereby married to the company for the foreseeable future?

[Snoopy]

One of the reasons electricity retailers adopted bundling, was to decrease churn. When you've committed your power, gas, broadband etc. to one supplier it becomes less likely you'll shift to another provider, or so the theory goes.

Looking at the statistics above, that theory doesn't appear to be borne out. Unless Mercury energy customers are predominantly signing up for the expensive electrically powered vehicles and are thereby married to the company for the foreseeable future?


I have a confession to make. It appears I have been taken in by the old 'massage the statistic' trick. It would seem that Mercury no longer discloses their 'churn rate'. What they have published in AR2020 is 'trader churn'. This is the churn rate for a subset of customers who do not move address. Naturally if you move address you are forced to reset all of your utilities which gives you a good reason to look around at all the options. It is not surprising to me that people who move house change power suppliers more than those who don't. But not publishing customer churn figures does make comparison's difficult. I did find an old Mercury 'customer churn' figure from FY2017. Post 1334 has been updated. Trader churn looks to be near to 5% for FY2017. That would indicate the customer churn figure for FY2020 might be a bit higher than the FY2017 figure of 15%.

SNOOPY

[Snoopy]

A second key metric for Mercury Energy management is customer churn. Customer churn is the percentage of customers signing over to another electricity retailer over the financial year.


The third key metric for Mercury is 'Brand Strength'. According to the Glossary in AR2020 p96

"This measures a brands equity and perception in the market based on a monthly survey. It is a constructed score derived from 5 pillars that are weighted to reflect their impact on the overall Brand Strength. It is reported on a 3 month rolling average and reflects Mercury's Brand Strength amongst customers and non-customers."

Now I would love to tell you what all that means, but I have no idea. And if Mercury aren't going to tell us then I guess we will never know. Anyone out there ever taken part in one of these monthly surveys?

SNOOPY

[Snoopy]

I have removed special dividends given they are one off in nature and not part of forward growth.


I firstly took the same view as Ferg regarding 'special dividends'. However, more recently I took the opposite view and decided to include the historical special dividends in my future dividend payment forecasting. Not saying Ferg is wrong as I can see the case for both opinions. But right now I am in the 'include special dividends' group.

Out of curiosity I went back to investigate what management said about each special dividend that has already been paid to share holders at the time,

11th December 2014: Special Dividend 5cps ($69m). A successful $300m Capital Bond Offer made the dividend 'part of the capital management plan'.
(from https://stocknessmonster.com/announcements/mcy.nzx-257282/) (also AR2015 p15).

During this year (FY2015), the closure of the Southdown gas fired power station was announced and a write down of $44m was taken

30th September 2015 Special Dividend 2.5cps ($34m). "part of an ongoing focus on capital management while retaining some balance sheet flexibility. (AR2015 p15)

30th September 2016 Special Dividend 4.0cps ($56m). "Continuing focus on active capital management and limited requirement for growth capital". (AR2016 p8).
During the year, $13m was received from disposals of land, including parcels around the site of the former Marsden Point power station to the office of treaty settlements.

29th September 2017 Special Dividend 5.0cps ($70m). "No value enhancing investments were found and the proceeds of (surplus) carbon credit sales were received" (AR2017 p14) (cash proceeds of $26m and profit of $5m). The surplus carbon credits were no longer needed due to the shutting down of Southdown.

One thread that goes through the whole time that special dividends were being paid was Southdown. Nevertheless if we consider in FY2014, the initial write-down of Southdown, that loss more than wipes out any downstream subsequent profits to EOFY2017. So it seems the more likely explanation for 'surplus capital' is the acquisition of the alternative funding mechanism of debt on favourable terms.

Given that $300m of Capital Bonds at 3.6% funding have replaced the $300m of July 2019 bonds funded at 6.9% and a smaller $31m of Wholesale Bonds at 8.21% have also rolled off during this financial year, my opinion is that once Turitea is up and running, the special dividends could resume. There is also a speculative special dividend of some 10cps awaiting if MCY were to sell their Tilt Renewables stake. So is it wrong to leave the special dividends out when MCY has an historical precedent for paying them as 'capital management' is adjusted?

SNOOPY

[Snoopy]

'Mercury Energy', the former 'Mighty River Power' have a goal to be "New Zealand's leading Energy Brand". Mercury reported they gained a net 16,000 customers over FY2017. Mercury generated 19% of NZs power over FY2017 and supplied power to 14% of all retail customers.

End of financial year 2017 figures:

https://www.emi.ea.govt.nz/Retail/Reports/R_MST_C?DateFrom=20040101&DateTo=20170630&Percent=Y&_si=tg|market-structure,p|1,v|3

shows that Mercury's sold 19.0% of power generated, only behind Contact Energy (20.4%) and Genesis Energy (24.5%), well clear of Meridian Energy in fourth place.

The tangible expressions of the 'leading energy brand' aim, can be covered in three 'foundation principles'.

1/ Well being of Mercury Energy people (measured engagement is now 81%, up from 79% the previous year) and customers (level of switching to other retailers is 17.8%, claimed to be the lowest of the big players). Perhaps some of the secrets of keeping customer engaged are 'Airpoints', 'Free Power days' (offered over the phone as part of the 'personal touch') and 'Fixed Price Contracts' to provide certainty. 34% of residential and 63% of commercial customers are signed up for those! Mercury have financially supported the development of the walking/cycling recreational trail along the Waikato River.

2/ Respect for "kaitiakitanga' (custodianship of equal resources). The Waikato river catchment, which houses all of Mercury's hydro dams, is ecologically monitored by Mercury. This includes monitoring of riverbed sediment and the riverbanks including downstream of Karapiro the 'last in line' hydro dam. Mercury keeps compliance with 121 hydro related consents and can mitigate the effects of flooding and droughts by controlling water release from the Waikato dam system.

"Kaitiakitanga' also covers working with the 'Waikato Tainui', 'Raukawa', 'Ngati Tahu - Ngati Wharoa' and 'Ngati Tawharetoa' iwi. These iwi relationships also cover the tribal geothermal resources harnessed by Mercury Energy in geothermal plant joint ventures.

3/ Making commercially astute decisions: Mercury have an integrated management approach to the operation of their hydro and geothermal stations.

Conclusion: Pass Test


Mercury Energy is one of the top four gentailers servicing the New Zealand energy market. It is number three in terms of customers but it is not in the top three in terms of energy generation. However, Mercury's mission, "To be New Zealand's leading energy brand" is not just dependent on sales and generation numbers.



No. NZ Customers EOFY2020NZ Power Station Electricity Generation (TWh)


Contact Energy510k8.5


Genesis Energy435k6.8


Mercury Energy348k6.3


Meridian Energy324k14.2



From a customer perspective, the three primary goals are to have low 'customer churn', a high 'net promoter score' and good 'brand strength'. The comparisons I make are with the other NZ gentailers.

Customer Churn (refer my post 1334)

With a probable figure in the low to mid 15 percent range (the actual figure has not been released for a few years), Mercury is likely in second place, behind Meridian at 14.2% but ahead of Genesis at 15.8%.

Net Promoter Score (refer my post 1328)

Mercury is in third place with a score of 13.7, behind Trustpower on 40 and Contact Energy on 36

Brand Strength (refer my post 1338)

Mercury have not revealed the five key pillars they use to measure this. However, I do believe their bright yellow branding gets attention. And the 'kiss oil goodbye' campaign, along with Mercury Energy's poster car for electric transport Evie (A 1957 Ford Fairlane Convertible converted to electric power) certainly sticks in my memory.

CONCLUSION: Pass Test

SNOOPY

[Snoopy]

Financial YearEBITDAFless Adjustmentless DAless Itimes 0.72= Normalised NPATeps


2013$391m-($16.4m + $4.2m)$150m$57m$147.1m10.5cps


2014$504m$161m$84m$186.5m13.3cps


2015$482m$17m/0.72$170m$99m$136.4m9.7cps


2016$493m$13m/0.72$182m$97m$141.1m10.1cps


2017$523m$5m$189m$95m$168.5m12.0cps



Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

Conclusion: Pass Test

Further Note: I have put up these results in tabular form so that you can see the working, and an interesting point that is evident from it. If you take the best year (FY2014) and the last reported year (FY2017), then the $18m fall in profit should be read in context with the $28m increase in depreciation charge over the two years. IOW leave out the depreciation (which is dubious in these power generating assets anyway) and the FY2017 result was actually the best of the lot ( I guess this is why management like to use EBITDAF when reporting their results?). Quite impressive nevertheless.

SNOOPY

PS Eagle eyed readers will notice that some earnings figures have changed from when I did them two years ago.

1/ I previously made a different adjustment in FY2013 to reflect an impairment charge that was never included in EBITDAF to start with. I also did not adjust for the two factors that I did adjust for in this year's analysis. (my mistake)
2/ In FY2015 I assumed that the profits on the property sale I adjusted for was taxable. I have now changed my mind and decided it was probably not taxable.




Financial YearEBITDAFless Adjustmentless DAless Itimes 0.72= Normalised NPATeps


2016$493m($13m/0.72 - $2m)$182m$97m$142.5m10.2cps


2017$523m($5m-$2m)$189m$95m$169.9m12.1cps


2018$561m$2m$197m$91m$195.1m13.9cps


2019$505m-$1m$204m$75m$163.4m11.7cps


2020$494m-$1m$214m$54m$162.7m11.6cps



Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ Underlying FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable). (AR2016 p10,54) and increased by Property Plant and Equipment sale losses (AR2016 p71).
3/ Underlying FY2017 result adjusted to remove profit on carbon credit sales (p60 AR2017) and increased by Property Plant and Equipment sale losses (AR2017 p31).
4/ Underlying FY2018 result reduced by a $2m Property Plant and Equipment sale gain (AR2018 p29).
5/ Underlying FY2019 result increased by a $1m Property Plant and Equipment sale loss (AR2019 p90).
6/ Underlying FY2020 result increased by a $1m Property Plant and Equipment sale loss (AR2020 p67).

CONCLUSION: There is only one underlying profit drop here, from FY2018 to FY2019 (The 2019 to 2020 profit drop is within the error bounds of a rounding error) => Pass Test

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.



Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2013$3,182m$5,802m0.5484


FY2014$3,219m$5,689m0.5658


FY2015$3,337m$6,058m0.5508


FY2016$3,315m$6,085m0.5448


FY2017$3,308m$5,997m0.5516


FY2018$3,286m$6,091m0.5395


FY2019$3,537m$6,484m0.5455


FY2020$3,739m$6,885m0.5431





In order to work out the capital efficiency of Mercury, it is first necessary to determine the net equity within Mercury, less all the generation asset revaluations. Assets are funded by both equity and debt. This means we must back out the equity funded component of the generation asset revaluations only, by taking it off the quoted 'net asset backing'.




Generation Assets Book Value {A} (AR Note P,P&E)
Generation Assets At Cost {B} (Calculated)
Generation Assets Revaluation {A}-{B}
Equity Ratio EOFY {C}
Total Net Assets {D} (from Balance Sheet)
Total Net Assets Revaluation Adjusted {D}-{C}x{{A}-{B}}


FY2016
$5,269m
$2,158m
$3,111m
0.5448
$3,315m
$1,620m


FY2017
$5,241m
$2,236m
$3,005m
0.5516
$3,308m
$1,650m


FY2018
$5,215m
$2,313m
$2,902m
0.5395
$3,286m
$1,720m


FY2019
$5,347m
$2,358m
$2,989m
0.5455
$3,537m
$1,907m


FY2020
$5,575m
$2,460m
$3,115m
0.5431
$3,739m
$2,047m



This information is needed for 'Buffett Test 3'.

SNOOPY

[Snoopy]

The information in this post is for the consumption of shareholders only. If anyone in the Green Party found out about the real return that Mercury Energy are earning on their assets they would go bezerk. And, now being part of the government, the Greens could subject this company to punitive windfall taxes once the true picture of how much Mercury is making out of taxpayer assets emerges. Actually I think the departed leader of the greens, Russell Norman, did know all about this, and it caused some ructions leading up to the 2014 elections. But as shareholders will see the issue hasn't gone away.

The following figures you will not find in the annual report. This is because my return on assets (and hence return on equity) is based on 'cost value' not 'book value'. Cost value, or contributed value, is what the shareholders have put in. Book value is what the assets are worth now. Using 'book value' the return on assets is modest. But book value is principally made up from previous years asset revaluations These Asset valuations were effectively 'new capital' that goes onto the balance sheet out of thin air, with no contribution from shareholders! This is a good thing for shareholders, but makes for unrepresentative return on shareholder contributions. You will artificially (in my view) decrease the ROE figures if you calculate ROE at declared asset value. So what are the representative return on equity figures?

Net Profit Margin = Normalised Net profit / Contributed Equity


FY2013: $147.1m/ ($3,181.7m -$2,831.4) = 42.0%
FY2014: $186.5m/ ($3,219m -$2,844m) = 49.7%
FY2015: $136.4m/ ($3,337m -$3,119m) = 62.5%
FY2016: $141.1m/ ($3,315m -$3,110m) = 70.9%
FY2017: $168.5m/ ($3,308m -$3,005m) = 55.6%

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

Conclusion: Pass Test (rather magnificently)


The following figures you will not find in the annual report. This is because my return on assets (and hence return on equity) is based on 'cost value' not 'book value'. Cost value, or contributed value, is what the shareholders have put in. Book value is what the assets are worth now. Using 'book value' the return on assets is modest. But book value is significantly made up from previous years asset revaluations The asset revaluations were effectively 'new capital' that went onto the balance sheet out of thin air, with no contribution from shareholders! This is a good thing for shareholders, but makes for unrepresentative return on equity and/or assets. You will artificially (in my view) decrease the ROE figures if you calculate ROE at declared asset value. So what are the representative return on equity figures?

In a change from FY2017, when I last did this exercise, I have recognised that all assets on the balance sheet are supported by a combination of equity and debt. This means I must subtract from the declared net equity, only the equity funded component of the generation asset revaluation (see my post 1342).

Net Profit Margin = Normalised Net profit / Contributed Equity

FY2016: $142.5m/ ($3,315m - 0.5448x $3,111m) = 8.8%
FY2017: $169.9m/ ($3,308m - 0.5516x $3,005m) = 10.3%
FY2018: $195.1m/ ($3,286m - 0.5395x $2,902m) = 11.3%
FY2019: $163.4m/ ($3,537m - 0.5455x $2,989m) = 8.7%
FY2020: $162.7m/ ($3,739m - 0.5431x $3,115m) = 7.9%

CONCLUSION: Fail Test

SNOOPY

[Snoopy]

Margin = Normalised Net profit / Normalised Revenue

Note: all revenue figures are exclusive of line charges

FY2013: $147.1m/ $1,382.4m = 10.6%
FY2014: $186.5m/ $1,274m = 14.6%
FY2015: $136.4m/ $1,256m = 10.9%
FY2016: $141.1m/ $1,145m = 12.3%
FY2017: $168.5m/ $1,181m= 14.9%

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

There was a hiccup after 2014, but the ability to generate a recovering trend has been demonstrated in the three years afterwards.

Conclusion: Pass Test


Margin = Normalised Net profit / Normalised Revenue

Note: all revenue figures are exclusive of line charges

FY2016: $142.5m/ ($1,564m - $419m) = 12.4%
FY2017: $169.9m/ ($1,597m - $440m - $26m) = 15.0%
FY2018: $195.1m/ ($1,803m - $437m) = 14.3%
FY2019: $163.4m/ ($2,000m - $422m) = 10.4%
FY2020: $162.7m/ ($1,768m - $385m) = 11.8%


Notes:

1/ FY2017 result adjusted to remove profit and $26m revenue of carbon credit sales (p60 AR2017).

As soon as margins rose, they immediately fell back and ended the five year period lower than where they started. There is no evidence here that Mercury has any power to increase margins on a sustainable basis.

CONCLUSION: Fail Test

SNOOPY

[Snoopy]

Everything is 'back on track' after FY2017, with a solid pass in all four tests. A great recovery from the abnormal inflows of FY2105 that upset the five year result pattern. Or is it something to do with the fact that for the first time, all results are in the post listing period, subject to the scrutiny of independent investor gaze? Whatever the reason, we can now proceed to the next level of analysis.


I have to give myself a retrospective 'slap on the wrist' for what I wrote above three years ago. On second thoughts I do not believe my treatment of generator revaluations was satisfactory. I simply took these revaluations off net equity. What I should have done is taken the generation asset revaluations off total assets and apportioned that subtraction to net equity. Anyway, what was done then was done then. And although not definitively wrong, it is not the way I choose to look at things today.

Retrospectively MCY fails the Buffett tests from an FY2017 perspective, but also from a FY2020 view. This is no surprise from what is fundamentally a capital intensive company with a valuable asset base. (Company's with unique IP and a capital light business model tend to do better in the ROE test).

What has changed over the last three years is the pressure on net profit margins. Below average hydrological inflows into the crucial North Island catchment may have something to do with that. But also the government campaigns to get more people to consider switching their power supplier has helped an already competitive power supply market become more competitive. Nevertheless in absolute terms profit margins are still healthy.

To reiterate what I say in most of these Buffett test summaries: Failure to clear all four hurdles does not make MCY a poor investment. And even if an potential investment does pass all four tests, there is still the thorny topic of 'value' to consider. In this instance, I have already looked at MCY from a different 'Capitalised Dividend Yield' perspective (My posts 1326 & 1327.) Notwithstanding even for the business investment prospects that don't pass the Buffett tests (over 90% of them), sometimes the tests throw up comparative insights that are of interest to investors nevertheless. Mercury has slightly better profit margins and a better profit growth record than Contact, for example. And that might explain why the market generally prices Mercury a little higher on a PE basis and with a lesser yield than Contact, despite both companies being broadly comparable. As a business Mercury is a little smaller than Contact. But sometimes just going for market share is not the way to best reward investors. I will close with a quote from recently departed CEO Fraser Whineray (p6 IR2020) to show you what I mean. Here Fraser talks about not pursuing the 'Farm Source' (farming sector) contract ('Farm Source is the Fonterra owned farm supplies chain).

"Dairy farmers have a refrigeration load correlated through spring and summer linked to grass growth (IOW farmers want to pull water out of the Waikato River) , which is when Mercury was seeking to reduce the risk of the portfolio impacts of drought in the Taupo catchment (Mercury wanted to hold back that Waikato river water for future hydro generation). "

There are reasons not to pursue growth at all costs.

SNOOPY

[Snoopy]

If power can be brought to the home in the future at much reduced price, then the value of existing power stations will decrease. But, as tautological as this sounds, the cost of power is not just determined by the cost of producing power. The factors that Mercury look at when valuing their assets can be found in the footnotes of the property plant and equipment pages, specifically p17 of AR2017 (for example), I have tabulated these for the last few years, where available, so that investors can see how these valuation assumptions have changed over time



Financial YearAverage Operational ExpenditureWholesale Energy PriceNet Average Production VolumesPost Tax Discount RateNet Revaluation Movement


FY2017$158m /p.a.$70 to $104 /MWh6567 GWh/year7.5% to 7.9%$52m - $4m = $49m


FY2016$174m /p.a.$66 to $102 /MWh6556 GWh/year7.4% to 7.9%$137m - $1m = $136m


FY2015$168m /p.a.$63 to $97 /MWh7131 GWh/year7.5% to 7.9%$497m - $76m = $421m


FY2014$188m /p.a.$70 to $95 /MWh7107 GWh/yearUnknown$40m - $0m = $40m


FY2013Unknown.UnknownUnknownUnknown$80m - $5m = $75m



So what does all the above mean?

1/ The first thing to recognize is that the above table is looking at long run average prices and costs. In FY2017, the actual power produced by Mercury was 7533 GWh. That was 14.7% above long term projections. Mercury are not valuing their assets based on 'one good year'.

2/ The post tax discount rate looks surprisingly stable, and in absolute terms quite high. It is a pity we shareholders are not privy to the discount rate used in earlier years. But I feel that modest interest rises from current near term lows may not affect the value of generation assets on the books much, if at all.

3/ The modelled wholesale energy price is expressed as a range. This suggests to me that a range of possible future scenarios have been used for valuation purposes and probabilities applied to the respective scenarios evaluated. The higher priced scenarios have a rising maximum price over time, yet the minimum price scenarios look flat. I am not surprised by this. In times of plenty, the price of power generated should trend towards the 'backbone price' of hydro and geothermal generation. In times of shortage, the on market price is likely to be not only higher but more volatile, particularly as 'surplus' thermal power generation stations have been closing.

4/ After a difficult three years (low Waikato inflow over FY2013, FY2014 and FY2015) , the long term projected electricity to be generated per year has dropped by around 8%. Yet the value of the power generating assets has not dropped (they are modestly up in value) over this time.

5/ Average projected Operational Expenditure has declined by 16% over the four years disclosed. This will have an after tax profit effect (based on a 28% tax rate) of 0,72x the 'Operational Expenditure' on an after tax profit basis (for FY2017 $158m x 0.72 = $114m). Net profit for the year FY2017 was $184m. So cutting projected expenditure looks to be having a large effect on the net profit and hence the underlying value of the generation assets that Mercury owns. I note that the largest increase in 'asset generation value' occurred after projected operational expenditure was cut the largest from $188m p.a. to $168m p.a. (co-incidence or not?)

6/ It is a pity that I can't fill the unknown gaps in my table, as this would provide a much better medium term overview of how the revaluation process works in practice.

Summary

Provided:

1/ the projected operational expenditure cuts are sustainable, AND
2/ interest rates do not rise that much AND
3/ 'maybe' generation increases back towards the average projected up to FY2015

I do not see the slashing in value of generation assets that horus is predicting will come to fruition. I feel comfortable as an MCY shareholder that things will be able to continue 'as normal' for a few years yet. Beyond that I should add that Mercury are quite capable of putting up their own solar panels and compete toe to toe with any new generation start ups (including the horus solar co-operative).


If power can be brought to the home in the future at much reduced price, then the value of existing power stations will decrease. But, as tautological as this sounds, the cost of power is not just determined by the cost of producing power. The factors that Mercury look at when valuing their assets can be found in the footnotes of the property plant and equipment pages, specifically p17 of AR2017 (for example), I have tabulated these for the last few years, where available, so that investors can see how these valuation assumfour yearsptions have changed over time



Financial YearForecast Average Operational ExpenditureForecast Wholesale Energy PriceForecast Net Average Production VolumesPost Tax Discount RateResultant Net Revaluation Movement (Thin Air Capital created)


FY2020$161m /p.a.$75 to $93 /MWh6708 GWh/year6.5% to 6.9%$296m


FY2019$158m /p.a.$75 to $106 /MWh6703 GWh/year7.2% to 7.6%$250m


FY2018$160m /p.a.$63 to $105 /MWh6620 GWh/year7.5% to 7.9%$55m


FY2017$158m /p.a.$70 to $104 /MWh6567 GWh/year7.5% to 7.9%$52m - $4m = $49m


FY2016$174m /p.a.$66 to $102 /MWh6556 GWh/year7.4% to 7.9%$137m - $1m = $136m


FY2015$168m /p.a.$63 to $97 /MWh7131 GWh/year7.5% to 7.9%$497m - $76m = $421m


FY2014$188m /p.a.$70 to $95 /MWh7107 GWh/yearUnknown$40m - $0m = $40m


FY2013Unknown.UnknownUnknownUnknown$80m - $5m = $75m



So what does all the above mean?

1/ The first thing to recognize is that the above table is looking at long run average prices and costs. In FY2017, the actual power produced by Mercury was 7533 GWh (AR2017 p2). That was 14.7% above forecast projections. Mercury are not valuing their assets based on 'one good year'.

2/ The post tax discount rate looks surprisingly stable, and in absolute terms quite high. As a rule of thumb I have often associated a suitable discount rate with the yield that investment generates. Consequently, I feel that modest interest rises from current all time lows may not affect the value of generation assets on the books much, if at all.

3/ The modelled wholesale energy price is expressed as a range. This suggests to me that a range of possible future scenarios have been used for valuation purposes and probabilities applied to the respective scenarios evaluated. The higher priced scenarios have a rising maximum price over time, right up until FY2020. At that point the maximum projected price has reverted to below FY2014 levels.
By comparison the minimum price scenarios have held up. This could be a natural result of high fuel cost thermal power stations being less economic to run, so that renewables - with a more easily forecastable low fixed cost- now effectively set the lower bound cost base.
In times of shortage (high wholesale electricity prices), the on market price electricity price is likely to be not only higher but more volatile, particularly as 'surplus' thermal power generation stations have been closing. Is Mercury's lower forecast 'high bound price' an admission that 'hydro-stations as the storage batteries of the power grid' have now replaced gas turbines as the back up power source of the future?

4/ After a difficult three years (low Waikato inflow over FY2013, FY2014 and FY2015) , the long term projected electricity to be generated per year has dropped by around 8%. HY2016 saw a continuation of low catchment inflows followed by a recovery in the second half. Nevertheless hydro-generation of electricity was still below the long term average. FY2017 saw a 96% percentile water flow into the Waikato catchment and this increased again to record levels over FY2018. This was very favourable for Mercury because it co-incided with a shortage in the South Island catchments of competitors, Yet FY2019 ended with a five month period of extremely low (second percentile) water inflows into Mercury's North Island catchment. Drought returned to the catchment over FY2020. Of the seven years from FY2013 to FY2020 inclusive, five were noticeably below the long term average.

Yet despite the lower amount of energy forecast to be generated,, the value of the power generating assets has not dropped. They are up in value by ($955m /($3,435m+$1,189m)=) 21% over this time (EOFY2013 to EOFY2020). (see post 1308 to derive the $955m figure, AR2013 p28 for period generation asset valuations)

5/ Average projected Operational Expenditure has declined by nearly $30m over the seven years disclosed. FY2017 was the first year this lower rate of operational expenditure was bedded in. This will have an after tax profit effect (based on a 28% tax rate) of 0,72x the 'Operational Expenditure' on an after tax profit basis (for FY2017 $158m x 0.72 = $114m). Net profit for the year FY2017 was $184m. So cutting projected expenditure looks to be having a large effect on the net profit and hence the underlying value of the generation assets that Mercury owns. I note that the largest increase in 'asset generation value' (over FY2015) occurred after projected operational expenditure was cut the largest from $188m p.a. to $168m p.a. Co-incidence or not?


Summary

Provided:

1/ the projected operational expenditure cuts are sustainable, (this appears to be having lasted for four years so far) AND
2/ interest rates do not rise that much (no sign of any rise happening) AND
3/ 'maybe' generation increases back towards the average projected up to FY2015 (the new Turitea wind farm should ensure that)

I do not see the slashing in value of generation assets in the future. I feel comfortable as an MCY shareholder that things will be able to continue 'as normal', without disruption from new industry players and trends, for a few years yet.

SNOOPY

[Snoopy]

The following table will be useful in apportioning power station revaluations based on expected future cashflows.

------------------------



Mercury Energy HydroStation Generation CapacityNotesMercury Energy GeothermalStation Generation CapacityNotes


Aratiatia78MWUpgrade by FY2020Rotokawa34MWRefurbished FY2015


Atiamuri74MWNgatimariki82MWCompleted FY2014

[/TR]

Waipapa51MWKawerau100MW

[/TR]

Ohakuri112MWMokai (25% owned)112MW


Whakamaru124MWUpgraded 24MW in FY2020Nga Awa Purua (65% owned)138MWCompleted FY2010


Arapuni196MWUpgraded 12MW in FY2011


Maraetai 1 & 2352MW


Karapiro96MW


Total1059MWTotal466MW


Effective Capacity Factor0.514Effective Capacity Factor0.940


Total Operationally Adjusted544MWTotal Operationally Adjusted438MW



-----------------------------

One might expect the increase in asset values in any particular power station, might be proportional to operational use. We can test this theory by looking at the power station revaluations declared in FY2020. These amounted to $253m for the Hydro stations and $43m for the geothermal stations. That is approximately a ratio of 5:1 in favour of the hydro stations, whereas based on an operationally adjusted capacity, we might expect the ratio to be closer to 1:1. So how to explain this difference?

I would expect any revaluation to be proportional to the difference between the cost of generation and the price the energy is sold at on the wholesale market. I would expect the cost of generation to be lower at the hydro plants, because most of the capital spending was done much earlier (decades earlier). That generation cost difference is unlikely to be the case if both forms of generation were built 'today'. But we are comparing an asset built in the middle of last century with one built 60 years later. The other issue is that I would doubt a high temperature geothermal turbine has a 100 year life (as a dam structure might). Quite apart from the material technology involved, extra bores may need to be drilled to keep the hot geothermal gases flowing (higher running expenses). With geothermal power there is also a small carbon cost that needs to be paid. The whole power plant may even need to be relocated to somewhere else on the geothermal field some decades down the track. That means any such extended profitability benefits may have to be amortised over a shorter time-frame. And that in effect reduces the quantum of any revaluation of geothermal assets.

If we now move back to FY2019 the respective gains from hydro assets were $151m and $99m for geothermal assets. That is a ratio of 3:2, which does not tie in with the 5:1 revaluation relativity balance from a year later. The main difference I can see in the input data for the forecast future scenarios (post 1346) is the post tax discount factor dropping by about three quarters of a percentage point. Could this be a defining point of difference?

A smaller discount factor increases the present day value of any future financial benefit. That is why a drop in discount rate can increase asset values where the value of those assets depend on future cashflows. Suppose we compare 'example 1', a hydro dam being depreciated over one hundred years, verses 'example 2' a geothermal station that is depreciated over twenty years. A three quarter basis point change in a discount factor, from 7.2% to 6.5%, may not sound much. But IF such a discount factor is applied over 100 years of future benefits.....

Example 1

$151m / (1.065)^100 = $151m /543 = $0.278m

$151m / (1.072)^100 = $151m/1046 = $0.144m

.....THEN comparing both the:

a/ higher and
b/ lower

interest rate case of the respective 'discounted present day value of the revaluation of those '100 year life hydro assets', this means the present day value of those benefits nearly doubles ( 0.278/0.144 = +93%). Furthermore if the present day value of those benefits increases by 93%, that means the underlying value of the asset also increases by 93%. This is how valuation of assets based on projected discounted cashflow income works.

By contrast, look at what happens with the same discount rate change over 20 years

Example 2

$99m / (1.065)^20 = $99m /3.52 = $28.1m

$99m / (1.072)^20 = $99m /4.02 = $24.6m

In this case, the increase in present day benefits of a more modest ( 28.1/24.6= ) +14%.

Could this be the explanation for the rather startling difference in the relative hydro verses geothermal power station valuation changes between FY2019 and FY2020 (Refer my post 1308)?

SNOOPY

[Waltzing]

Thank you Mr S. Very interesting reading as im on those lakes and rivers often. Production figures and comments on valuation are interesting to read. NZ being very volcanic one wonders if there is yet more un tapped geo thermal potential ? Engineering for power generation is im sure a specialist area of investment but recent carbon emissions target might mean these assets are ones we are under invested in.

[Snoopy]

The main difference I can see in the input data for the forecast future scenarios (post 1346) is the post tax discount factor dropping by about three quarters of a percentage point. Could this be a defining point of difference?

A larger discount factor reduces the present value of any future benefit. Suppose the geothermal station is depreciated over twenty years, verses one hundred years for a hydro dam. A three quarter point change in a discount factor may not sound much. But when such a factor is is applied to 100 years of future benefits, then the respective revaluation of those 100 year life hydro assets doubles (+100%). By contrast the same discount rate change over 20 years means an increase in present day benefits of a more modest 14%.

Could this be the explanation for the rather startling difference in the relative hydro verses geothermal power station valuation changes between FY2019 and FY2020 (Refer my post 1308)?


At this point anyone still following this thread (maybe only the waltzingman?) may be wondering what sort of techno-mumbo-jumbo hole I have fallen into. Especially as I have have already published my valuation of MCY which I am quite happy with. My end goal is actually an updated valuation on Contact Energy. To complete that I need to work out the thin air capital on the books at Contact, which is something that Contact management do not do. However, in order to do this I have to do the parallel exercise at Mercury. That way I can use the same methodology to value both shares, which is my goal. The interim step is to find the thin air capital attached to Mercury's hydro stations only. So let's carry on with that.

There are two gaps in the Mercury record where the division between revaluation gains of hydro stations and geothermal stations is not broken down: FY2015 and FY2016. If you look at the underlying valuation assumptions for those years (my post 1346).

FY2016 shows only a small adjustment to the discount factor from FY2015, with a higher forecast power price offsetting lower production volumes. I am tempted to call those circumstances similar to what happened in FY2019. So I am going to split the power station generation asset revaluation of $137m to same way 3:2: or $82m (hydro) $55m (geothermal) for FY2015.

Unfortunately we can't do the same prior year comparison for FY2015, as Mercury did not publish the modelling inputs for FY2014. According to my notes of the time indicative interest rates dropped about 0.3 percentage point over the year verses no drop in the subsequent year. If I rerun that kind of interest rate drop on my FY2020 sample year

$151m / (1.065)^100 = $151m /543 = $0,278m (0.7% interest rate drop)

$151m / (1.069)^100 = $151m /790 = $0,191m (0.3% interest rate drop)

$151m / (1.072)^100 = $151m/1046 = $0.144m (base case)

then we are looking at a 0.191/0.144= a 35% revaluation of hydro assets. Compare that with what happens to the geothermal assets with a similar interest rate drop.

$99m / (1.065)^20 = $99m /3.52 = $28.1m (0.7% interest rate drop)

$99m / (1.069)^20 = $99m /3.80 = $26.1m (0.3% interest rate drop)

$99m / (1.072)^20 = $99m /4.02 = $24.6m (base case)

This shows geothermal assets revaluing by 10% and hydro assets revaluing by 50%. Given roughly equal installed operational generational capacity, I am going to split the $497m increase in station value by 2.5:1 (or half the 5:1 from FY2020). That gives the increase an hydro station value of $355m and an increase in geothermal station value of $142m for FY2015.

SNOOPY

[Waltzing]

Perhaps the lack of interest in the thread is simply that hydro and geo thermal are considered a GIVEN. I cant comment on these valuations as they are perhaps the most complex of any business operation in New Zealand. Emissions targets for NZ are the elephant in the room as i believe the average NZ council and business simply arnt ready for the change coming over the horizon at speed.

The planning for NZ towns and communities that started in some european countries 5 decades ago is only just starting here.

Anyone who has lived in the bike friendly towns and cities in some parts of europe will understand that street planning is critical. NZ towns were run by farmers in the 50's and they dont ride bikes. Today many towns are going to face a problem and many have even recently failed to create the environment for lower targets, Greta even took a swipe at this place this week.

You can see it in town planning and street development. NZ has a problem in that its dispersion means the EV is the only solution which means a complete fleet replacement.

Power generation is there fore undervalued or rather WAS until recently.

Local power generation through solar and wind for the individual business and property could be the only solution for NZ.

Recent case in the UK listed air pollution contributing to a death by respiratory failure. It going to become a big big drum being banged and its only just starting..

Back to normal ? I dont think that is going to work.

Local site solutions to power are the only options going forward?

Estimated valuation models for power are a big job and anyone attempting this makes for interesting reading. Perhaps there is some work being done on this by economists somewhere?

This from the UK this week.

"A UK government spokesperson said: "Our thoughts remain with Ella's family and friends."The spokesperson said the government was delivering a £3.8 billion plan to clean up transport, tackle NO2 (nitrogen dioxide) pollution and go further in protecting communities from air pollution, as well as setting "ambitious new air quality targets."

[ratkin]

Anyone who has lived in the bike friendly towns and cities in some parts of europe will understand that street planning is critical. NZ towns were run by farmers in the 50's and they dont ride bikes. Today many towns are going to face a problem and many have even recently failed to create the environment for lower targets, Greta even took a swipe at this place this week.

You can see it in town planning and street development. NZ has a problem in that its dispersion means the EV is the only solution which means a complete fleet replacement.


EV has to be high priority. NZ will never ditch the car, and Govts time and again fail to provide alternatives. After the chch earthquakes, council spent millions consulting with top European planners from the Netherlands etc, then promptly ignored everything they said. A great opportunity to restructure the city was wasted.

We need to see massive subsidies, to encourage EV use and gas guzzling 4x4s need to be hit hard with extra taxes. Because if the govt will not bring in trams etc, then that is the only alternative.

[Waltzing]

"A great opportunity to restructure the city was wasted."

oh dear that makes for very depressing reading... your kidding me! Have none of these people lived in holland or denmark, sweden. It should be mandatory for all planners to live in holland.

Off topic , in sweden people often ask me where should they go in NZ.

I have to tell them... NO electric trains to whisk them off into the countryside ... As some of you will know you can stand of the station and here that sound as the electric system starts to wind up... i must research what part of the drive train creates that sound... and then your off! As one engineer said to me... It will sweep you round the coast and up to stockholm... book first class you will love... and i DO!

[Snoopy]

EV has to be high priority. NZ will never ditch the car, and Govts time and again fail to provide alternatives. After the chch earthquakes, council spent millions consulting with top European planners from the Netherlands etc, then promptly ignored everything they said. A great opportunity to restructure the city was wasted.

We need to see massive subsidies, to encourage EV use and gas guzzling 4x4s need to be hit hard with extra taxes. Because if the govt will not bring in trams etc, then that is the only alternative.


News yesterday on Mercury scaling up their EV subscription service.

https://www.mercury.co.nz/news/20201216-multi-million-dollar-expansion-of-ev-subs

A two year trial based around 60 vehicles will now expand by 50 vehicles per month, until 450 Mercury owned and leased Nissan Leafs are on the road in Auckland. However from a point of view of immediately boosting profits at Mercury, I think expectations should be muted. The reason for this is covered in my 'Fraser's Fantasy' series of three posts on this thread from 2018. (My posts 1004, 1005 and 1016). Worth a read for those that haven't seen them. Do a thread search for the word " Fraser's " and the three posts will come up for a 'quick link'.

SNOOPY

[Waltzing]

" four wheel drive taxes" yes but is the government bold enough to do it and when. Prehaps in 2025 but its a bit like brexit... talk , talk and more talk and then over the clif we go..

What does MR S think about local power generation as seems to have a large depth of research to draw on.

[Snoopy]

What does MR S think about local power generation as seems to have a large depth of research to draw on.


I think you need to keep in mind Jantar's post on the cost structure of the industry below:



The energy component from the retailer is around 8 cents. The remainder is network charges from the lines company, Grid charges from Transpower, and the EA security charge. The actual energy charge can be easily seen from each company's monthly operations report. It is the Netback value: $85 netback is exactly equivalent to 8.5 c per unit.

Edit: To be fair I should add that the actual cost of energy is also shown on the monthly operations reports as just that: Cost of energy. A cost of Energy of $45 means that it costs the company 4.5 c per unit that it supplies. The difference between Netback and CoE is the equivalent of the gross margin.


IMO the way the cost structure is set up in the industry, people who attempt to generate their own power are effectively screwed. The problem is, no matter how much a consumer can save in energy costs, the power providers must still cover their network charges. Those network charges on your bill are not necessarily indicative of the network contribution your energy retailer must pay. And if your energy charges get too low, your retailer will put up their fixed charges to ensure you are fully contributing your share of network costs. You are effectively punished for generating your own electricity.

Networks are based on the old power station to consumer energy model. Effectively the electricity comes down big pipes into smaller and smaller pipes. No consideration is given to the idea that if many households generated their own energy, then those big pipes that are needed to supply the network might not need to be so big. And if the system input is not from one concentrated source, then some of the downstream transformers and switching components might not have to be as high spec either. There are potential network cost savings with a distributed energy network model. But there is no incentive for the network owners to restructure their networks for distributed energy generation. So we are effectively stuck with an historical high cost network model which cannot be challenged. The monopoly network providers simply bill your retailer their old style network costs and that is that.

The other problem is that the most common form of local generation, solar energy, does not generate maximum power when there is maximum demand. From a network provider perspective, you generating maximum power at 3pm is no use when maximum network demand is at 6-7pm when the sun has gone down. Thus solar users need a battery. A hot water tank is one kind of battery. More recently it has been suggested that certain electric cars could be used as power storage reservoirs. It wouldn't be too difficult for Nissan Leaf owners to use their car's battery power to cook their dinner. That is, I think, a more likely path for NZ power consumers to go in the future: Local storage rather than local generation. But are there any local energy retailers willing to reward consumers for alleviating their power demand peaks?

There is one exception to all of this. If you can go totally off grid then you can save all the network supply charges. And that changes the economics of generating your own energy completely.

SNOOPY

[Zaphod]

EV has to be high priority. NZ will never ditch the car, and Govts time and again fail to provide alternatives. After the chch earthquakes, council spent millions consulting with top European planners from the Netherlands etc, then promptly ignored everything they said. A great opportunity to restructure the city was wasted.

We need to see massive subsidies, to encourage EV use and gas guzzling 4x4s need to be hit hard with extra taxes. Because if the govt will not bring in trams etc, then that is the only alternative.

From an environmental perspective, IMO the best thing we can do is reduce consumption. That includes our additional to personal transport. Changing our fleet from ICE to EV will provide significant benefits, but if we're going to continue having a 1:1.3 ration of MV's to population we still have a significant problem in resource utilisation and pollution.

Although I suppose I should look on the positive side: that's a great opportunity for MCY!

[Waltzing]

The question is perhaps for an engineer or economist is what load will the EV fleet place on production capacity of NZ electricity generation?

Thats why i asked about local generation which it appears is not encouraged by the existing system and perhaps needs changes to regulations to allow it.

[Snoopy]

The question is perhaps for an engineer or economist is what load will the EV fleet place on production capacity of NZ electricity generation?


If I may quote myself from the 'Fraser's Fantasy' series



Mercury lists the Nissan Leaf's (by far the most popular electric car) EV commute efficiency as 17 kWh/100km. Let's say our typical Auckland EV commuter owner travelled 150km per week. This means the annual energy used would be:

52 x 17kWh x 1.5 = 1326 kWh


So if the above is what 1 EV is using, let's scale the number of EVs up to one million.

1.326MWh x 1,000,000 = 1.326 x 10^6 MWh

Now how much energy could MRP generate from their Geothermal stations in a year?

(466MW x 0.94) x 24hrs/day x 365 days/year = 3.837 x 10^6 MWh

You would have to factor in some line losses of course, say 10%. But it does look like Mercury's geothermal stations alone could power

1m x 0.9x(3.837 x 10^6 MWh) /( 1.326 x 10^6 MWh) = 2.6 million electric cars

Nga Awa Purua, at 138MW, the largest of Mercury's geothermal stations, could produce.

(138MW x 0.94) x 24hrs/day x 365 days/year = 1.136 x 10^6 MWh of energy.

That alone could power 0.9 x1.136/1.326 x 1m = 771,000 cars

That seems a lot. But I guess it goes to show how large these geothermal power stations are.



Thats why i asked about local generation which it appears is not encouraged by the existing system and perhaps needs changes to regulations to allow it.


Local generation does make sense for cars parked during the day, as electric cars can store energy to be used later. Maybe there should be an incentive for employers to put on solar panels so their employees can charge their cars while the sun shines at work?

SNOOPY

[Waltzing]

Im snowed under with the research MR S is publishing, be it the banks, SKL or now the generators...

Harping on about bikes as the Kiwi saviour... probably not well received by SUV loving Kiwis who have been brain washed by AUSSI car adverts for decades... imagine a big tax on car racing in AUS.

But its making the head lines here at last but im afraid look no farther than your local council and ask them if they have a bike in the car port... Perhaps if they cant pedal an e Bike might get them out and about. Im constantly passed up hills by old fatties on their E BIKES!

https://www.stuff.co.nz/environment/123737532/transforming-transport-for-climate-is-key-to-reducing-emissions-in-auckland

[Waltzing]

"That seems a lot. But I guess it goes to show how large these geothermal power stations are."

if only i had know that this figure may be in the ball park and if correct our trading of MCY should have been A HOLD!

What are the geo thermal stats producing at the moment?

[fish]

[QUOTE=Snoopy;862848]I think you need to keep in mind Jantar's post on the cost structure of the industry below:



IMO the way the cost structure is set up in the industry, people who attempt to generate their own power are effectively screwed.

The gentailers will screw you because they can and want to
Both my houses have had solar installed .
My gentailer -contact energy -after months have still not installed the import/export meter .
So I am looking at changing to Flick who pay the wholesale price-Jantars post is very helpful in calculating the current wholesale price I would receive-or Genesis-who pay more than contact.
What I am enjoying is 5kw of free power during the day with aircondtioning,pumps,swimming pool etc operating-a lot more fun than exporting to our miserly gentailers !
I might sell my contact shares as well (definitely keeping Mercury)

[Snoopy]

What are the geo thermal stats producing at the moment?


You can get the latest quarterly operating report for Mercury, which covers the quarter ended 30th September 2020 here:

https://www.mercury.co.nz/documents/quarterly-operational-update-fy21-q1-final.aspx

On page 2 titled 'Operating Statistics', 'Consolidated Geothermal Generation' for the three month period is listed as 687GWh = 687,000MWh/quarter

The geothermal generation capacity at Mercury is 466MW (My post 1347). If run at 100% capacity for three months those five geothermal stations can generate:

466MW x 24 hrs/day x 92 days/quarter = 1,028,928 MWh/quarter

So currently the Mercury geothermal stations are operating at: 687,000 / 1,028,928 = 66.8% capacity

That does seem low to me., if the long term average that Mercury is seeking to maintain is nearer to 94% capacity utilisation.

SNOOPY

[Snoopy]

That does seem low to me., if the long term average that Mercury is seeking to maintain is nearer to 94% capacity utilisation.



By going back to the previous quarterly report, I am able to calculate the geothermal plant utilisation for the previous 12 months (FY2020)

https://www.mercury.co.nz/documents/quarterly-operational-update-fy20-q4-final.aspx

On page 2 titled 'Operating Statistics', 'Consolidated Geothermal Generation' for the three month period is listed as 2,615GWh = 2,615,000 MWh/quarter

The geothermal generation capacity at Mercury is 466MW (My post 1347). If run at 100% capacity for twelve months those five geothermal stations can generate:

466MW x 24 hrs/day x 365 days/quarter = 4,082,160 MWh/year

So the Mercury geothermal stations, over FY2020, operated at: 2,615,000 / 4,082,160 = 53.0% capacity

What??!!!?

Now I have to question my assumptions about the utilisation of these Geothermal stations. Where did I get my 94% figure from? I go back to the original MRP Prospectus p49

"Geothermal energy generation provides steady base load supply that is not subject to climatic conditions that typically influence other renewable electricity supply. Geothermal power stations in New Zealand run at full generation output approximately 95% of the time."

Yes, I double checked. That is what the MRP (now MCY) prospectus said. Why is the actual Geothermal capacity utilisation at Mercury so far below what the prospectus suggested? Normally in this situation with the figures so far out, I would think that I have made a mistake in my calculations. But considering I have just got a similar result on two separate calculation occasions, I fear I am correct ;-(. Can anyone explain?

SNOOPY

[Waltzing]

Thank you MR S we shall enjoy reading your post perhaps later today. Production of energy in NZ is im afraid something we have not paid enough attention too. Busy morning with a lot of software to test and connect to market data and platforms.

It may be that the number of statistical number crunchers in NZ is limited and that is why MR S you might be one of the few outside institution source of research.

Its not like research papers are going to be released if they dont have to.

If MR S modelling is correct an EV fleet can be powered NOW. Which mean surely the government knows this and simply does not want to deflate certain sectors of the economy over night.

Pretty damning really that NZ is stuck with an old polluting fleet because the status quo is jobs. Its understandable if you want to stay in government.

Interesting that Deep Mind AI Platform in the UK for energy has been disbanded and the national grid plans to use it for helping with energy use was never implemented. So much for AI in the real world....also the prices being charged were not real world, rather out of this world and UK balked ... whole energy unit at deep mind was canned...

[Snoopy]

By going back to the previous quarterly report, I am able to calculate the geothermal plant utilisation for the previous 12 months (FY2020)

https://www.mercury.co.nz/documents/quarterly-operational-update-fy20-q4-final.aspx

On page 2 titled 'Operating Statistics', 'Consolidated Geothermal Generation' for the three month period is listed as 2,615GWh = 2,615,000 MWh/quarter

The geothermal generation capacity at Mercury is 466MW (My post 1347). If run at 100% capacity for twelve months those five geothermal stations can generate:

466MW x 24 hrs/day x 365 days/quarter = 4,082,160 MWh/year

So the Mercury geothermal stations, over FY2020, operated at: 2,615,000 / 4,082,160 = 53.0% capacity

What??!!!?

Now I have to question my assumptions about the utilisation of these Geothermal stations. Where did I get my 94% figure from? I go back to the original MRP Prospectus p49

"Geothermal energy generation provides steady base load supply that is not subject to climatic conditions that typically influence other renewable electricity supply. Geothermal power stations in New Zealand run at full generation output approximately 95% of the time."

Yes, I double checked. That is what the MRP (now MCY) prospectus said. Why is the actual Geothermal capacity utilisation at Mercury so far below what the prospectus suggested? Normally in this situation with the figures so far out, I would think that I have made a mistake in my calculations. But considering I have just got a similar result on two separate calculation occasions, I fear I am correct ;-(. Can anyone explain?


I have gone back in time to FY2016. This is the first twelve month time period with the geothermal power station line up at Mercury exactly as it is now.

https://issuu.com/mercurynz/docs/quarterly-operational-update-for-th_3f3e3b1d60ac85?e=25554184/37453359

On page 2 titled 'Operating Statistics', 'Consolidated Geothermal Generation' for the three month period is listed as (2,596 + 234) GWh = 2,830,000 MWh/quarter

The geothermal generation capacity at Mercury is 466MW (My post 1347). If run at 100% capacity for twelve months those five geothermal stations can generate:

466MW x 24 hrs/day x 365 days/quarter = 4,082,160 MWh/year

So the Mercury geothermal stations, over FY2016, operated at: 2,830,000 / 4,082,160 = 69.3% capacity

That is better but still not near 94%. The following statement is on p1of the report

--------------------

HIGHEST ANNUAL GEOTHERMAL PRODUCTION IN COMPANY HISTORY: Geothermal generation for FY16 was the Company’s highest ever at 2,830GWh (up 2% on FY15) due to availability of 95.5% over the year and the impact of the turbine replacement at Nga Awa Purua. For the quarter, geothermal generation was down slightly on pcp to 702GWh, due to maintenance activity at Ngatamariki.

---------------------

Right so it seems Mercury had a record generation year with 69.3% of geothermal capacity used. Yet availability was 95.5%. I don't understand. If the geothermal power plants were available for 95.5% of the time, why were they not used that much?

SNOOPY

[mondograss]

Possibly the cost of generation is higher than other sources so why run your Geo plant if you can make more profit by supplying from a different source. Also presumably at times it’s not needed. So available to generate but not required.

[Jantar]

….. and the impact of the turbine replacement at Nga Awa Purua. For the quarter, geothermal generation was down slightly on pcp to 702GWh, due to maintenance activity at Ngatamariki. ….

SNOOPY
Here are two reasons why availability of 94% was not possible. Turbine replacements take quite a bit of time, and NAP is a very large machine. I cannot see anyway that MCY could claim 94% availability.

[Waltzing]

This is the most interest thread to read and im really rather P.SS.D that we dont trade this stock the last few months... We are thinking of investing in some off shore battery raw material instead... The rest of the world may not be as well supplied with natural energy resources as NZ. AUS has some interesting plays on this sector investing in Mines for battery raw materials.

Our understanding is that there is a polluting lubricant in the actual turbine and research is underway in europe to reduce or replace this lubricant that can cause pollution from wind turbine operations in some cases.

[Snoopy]

Possibly the cost of generation is higher than other sources so why run your Geo plant if you can make more profit by supplying from a different source. Also presumably at times it’s not needed. So available to generate but not required.


Thanks for the responses. The image I had was of these geothermal stations grinding away 24/7 (except for the servicing requirements of course) and everything else would be switched off first to deal with any surplus power generation. Part of my reasoning for thinking that way was to avoid the thermal stress (not to mention the mechanical stress) of turning the geothermal turbines and the associated hot liquid piping systems on and off. But I am not really sure how much the power load does drop off at night. Maybe turning off the hydro is not sufficient? There is still too much power being generated? Anyone know?

Hydro generation is definitely cheaper than geothermal generation on an incremental unit power basis. But that isn't the whole picture. At peak times the generation capacity of hydro is not sufficient to meet power needs. So turning a geothermal turbine off at low load times might make instantaneous economic sense. But by doing so you have the extra wear and tear of turning such a system off and on every day. Over a whole year that might be more expensive that just keeping the geothermal turbine running 24/7. There would also be mechanical wear and tear on the hydro turbines turning those on and off, that is true. But there wouldn't be any thermal stress in doing that. So by my way of thinking, if the load varies it is the hydro turbines you want to turn on and off, not the geothermal turbines.



Here are two reasons why availability of 94% was not possible. Turbine replacements take quite a bit of time, and NAP is a very large machine.


Yes, Nga Awa Purua is the largest of Mercury's geothermal stations. I would imagine the turbine replacement would have required significant downtime. The only problem with that theory is that in the subsequent year, when no such major overhaul project was done, total geothermal energy produced was less (Down from 2830GWh to 2809GWh).



I cannot see anyway that MCY could claim 94% availability.


I gave you the reference

https://issuu.com/mercurynz/docs/quarterly-operational-update-for-th_3f3e3b1d60ac85?e=25554184/37453359

The claim is 95.5% availability

Another factor crossed my mind after reading footnote 3 p2 of the operational report for Q4 FY2019

https://issuu.com/mercurynz/docs/mercury_q4_2018_quarterly_operation?e=25554184/63216371

"Geothermal Consolidated: Includes Mercury's 65% share of Nga Awa Purua"

By omission then, that total of 2564GWh doesn't include the 35% share of Nga Awa Purua not owned by Mercury. If Mercury is not counting the share of geothermal generating capacity it doesn't own, then the figure I am using as my base for 100% generation is wrong and too high

------------------------------



Mercury Energy GeothermalStation Generation CapacityNotes
Mercury Energy Geothermal (Equity Accounted)Station Generation Capacity (Equity Accounted)Notes


Rotokawa34MWRefurbished FY2015Rotokawa34MWRefurbished FY2015


Ngatimariki82MWCompleted FY2014Ngatimariki82MWCompleted FY2014

[/TR]

Kawerau100MWKawerau100MW

[/TR]

Mokai (25% owned)112MWMokai (25% owned)28MW


Nga Awa Purua (65% owned)138MWCompleted FY2010Nga Awa Purua (65% owned)90MWCompleted FY2010


Total466MWTotal334MW


Effective Capacity Factor0.940Effective Capacity Factor0.940


Total Operationally Adjusted438MWTotal Operationally Adjusted314MW



---------------------------

Let's rerun the calculation for FY2016 using the new lower equity accounted generation base

The geothermal generation capacity at Mercury is 334MW (table above). If run at 100% capacity for twelve months those five geothermal stations can generate

334MW x 24 hrs/day x 365 days/quarter = 2,925,840 MWh/year

So the Mercury geothermal stations, over FY2016, operated at: 2,830,000 / 2,925,840 = 96.7% capacity

What do you think? Could I be onto something? The only problem is that this 96.7% figure is even higher than the 95.5% figure that Mercury claim. Hmmmm

SNOOPY

[mondograss]

I think you’re on to something. 2016 was a leap year so 366 days not 365, which brings you down to 96.4% I think.

I also wonder if it’s as simple as on or off though. Perhaps more likely there’s a low, slow idle state that minimizes both stress and costs but doesn’t produce much output either.

[turnip]

Let's rerun the calculation for FY2016 using the new lower equity accounted generation base

The geothermal generation capacity at Mercury is 334MW (table above). If run at 100% capacity for twelve months those five geothermal stations can generate

334MW x 24 hrs/day x 365 days/quarter = 2,925,840 MWh/year

So the Mercury geothermal stations, over FY2016, operated at: 2,830,000 / 2,925,840 = 96.7% capacity

What do you think? Could I be onto something? The only problem is that this 96.7% figure is even higher than the 95.5% figure that Mercury claim. Hmmmm


Would the Mercury availability figure be calculated that way, or is that just how you are estimating it because you don't have access to the actual data on how long each geothermal station was offline during the year?

I think geothermal generation is slightly seasonal: higher production in cold winter months than in hot summer months. If you calculated availability just by how long the station is offline in a year then that would not be affected by when in the year it was offline. But if you calculate from the total GWh output for the year as you are doing then you might get different results depending on whether the outage was in winter or summer. I don't know if that would be enough to account for the discrepancy though.

Edit: OK I see in the 2016 FY results presentation Mercury claim 95.5% availability, which is equivalent to downtime of 16.5 days out of 366 maximum. But your calculation is in terms of energy, i.e. a loss of 95.84 GWh out of 2925.84 GWh maximum. So to convert the energy figure to days of downtime would depend on whether the downtime was in winter or summer. A shorter winter outage might lose the same amount of power as a longer summer outage. (Due to the lower thermal efficiency during summer.)

And to complete the process, although there will likely be a large error due to rounding: 95.84 GWh / 16.47 days = 242 MW, so it seems to be in the realm of possibility that your calculation of 96.7% on a lost energy basis does work out equivalent to Mercury's 95.5% availability on a downtime basis, with the downtime occuring mainly during the summer months.

[Mr Slothbear]

[QUOTE=Snoopy;862848]I think you need to keep in mind Jantar's post on the cost structure of the industry below:



IMO the way the cost structure is set up in the industry, people who attempt to generate their own power are effectively screwed.

The gentailers will screw you because they can and want to
Both my houses have had solar installed .
My gentailer -contact energy -after months have still not installed the import/export meter .
So I am looking at changing to Flick who pay the wholesale price-Jantars post is very helpful in calculating the current wholesale price I would receive-or Genesis-who pay more than contact.
What I am enjoying is 5kw of free power during the day with aircondtioning,pumps,swimming pool etc operating-a lot more fun than exporting to our miserly gentailers !
I might sell my contact shares as well (definitely keeping Mercury)


i can highly recommend ecotricity.

i have been using them for quite some time and significantly better both as a consumer or for exporting as with solar than any of the gentailers.

https://ecotricity.co.nz/

[Jantar]

I think you’re on to something. 2016 was a leap year so 366 days not 365, which brings you down to 96.4% I think.

I also wonder if it’s as simple as on or off though. Perhaps more likely there’s a low, slow idle state that minimizes both stress and costs but doesn’t produce much output either. Geothermal is either on or off. There is not really an between setting. When a geothermal machine is reduced in load the steam field is still trying to produce steam. That steam either has to be vented with noise and pollution issues, or one or more steam bores have to be shut down. When a bore is shut down, the pores fill with silica which precipitates out of the geothermal fluid and they block up. Once the bore is opened again it never gets back up to full production.

When I was a system controller, 30 odd years ago, we were told that any controller who instructed geothermal to reduce load, other than for an outage, would be sacked.

[turnip]

It was mentioned in the Infratil thread (https://www.sharetrader.co.nz/showthread.php?1360-IFT-Infratil&p=868529&viewfull=1#post868529) that Mercury could be one of the bidders for Infratil's stake in Tilt Renewables. I wondered if anyone knew anything more, such as whether Mercury would be bidding in its own right or as part of a joint venture?

Edit: I really hope Tilt won't be delisted, but if it is then perhaps better Mercury take it over than one of the big pension funds. Could make Mercury a more interesting company to own anyway. (MCY is my #2 holding, TLT #3.)

[Aaron]

Probably not an issue and I am unsure if there are any fault lines along the Waikato but I wonder what a major earthquake could do to Mercury? Potentially one broken dam taking out the others downstream. Suddenly the company is washed away, do the shareholders come up with the funds to rebuild?

The stuff of fiction and I guess no one could predict it, unless it happened, although engineers must have had a crack at some stage. Wild speculation on my part.

Just popped into my head this morning when reading about all the earthquakes going on in the North Island.

[Jantar]

Probably not an issue and I am unsure if there are any fault lines along the Waikato but I wonder what a major earthquake could do to Mercury? Potentially one broken dam taking out the others downstream. Suddenly the company is washed away, do the shareholders come up with the funds to rebuild?

The stuff of fiction and I guess no one could predict it, unless it happened, although engineers must have had a crack at some stage. Wild speculation on my part.

Just popped into my head this morning when reading about all the earthquakes going on in the North Island.
After the discovery of a fault line under the Clyde dam during construction, it was found that most rivers follow fault lines for at least part of their course. It would be extremely likely that some of mercury's dams do have fault lines under them. However the good news is that an earthquake under a dam is not likely to destroy that dam, and anything less than a magnitude 6 probably wouldn't even cause damage to the structure.

A large enough quake could cause damage, as shown in the Shih-Kang Dam failure due to an earthquake directly underneath. The good news is that in the event of such a failure it doesn't release all the water at once, and not enough to destroy all the downstream dams.

On the Waikato river, the ones most at risk would be Whakamaru and Waipapa, as they are earth dams rather than concrete, and once breached would soon wash away.


https://ascelibrary.org/cms/asset/20a4b853-a0d2-4796-8642-5a95e2916580/figure6.jpg

[Snoopy]

Probably not an issue and I am unsure if there are any fault lines along the Waikato but I wonder what a major earthquake could do to Mercury? Potentially one broken dam taking out the others downstream. Suddenly the company is washed away, do the shareholders come up with the funds to rebuild?

The stuff of fiction and I guess no one could predict it, unless it happened, although engineers must have had a crack at some stage. Wild speculation on my part.

Just popped into my head this morning when reading about all the earthquakes going on in the North Island.

Not a silly thought at all Aaron. Such an event may not happen for 5,000 years. But it might happen next week. I guess this is a reason not to put all your money in one company, no matter how 'safe' that investment might seem.

I am fairly sure that all of those dams were designed with earthquakes in mind. Although when you read stories of how the 'new' Wellington Library built in the 1980s is now regarded as a so unsafe that it will cost more to modify than building a whole new library, you do wonder about structures built to 'historic' earthquake standards.

Fortunately the major shareholder in Mercury is 'The Gummint'. So it should be easy to access new capital to rebuild in your disaster scenario, even if other shareholders end up being diluted. You would hope catastrophic damage would be restricted to just one dam, and the would be enough bypass flow channels to avoid downstream damage. But I guess nothing would be big enough to withstand 'the really big one'......

Then you have to consider that maybe Lake Taupo will erupt again before that (I think it is due in geologic time at least), and that could mean the end of the Waikato river in its current form, stranding all those Waikato dam assets. Just as well these scenarios are really unlikely within our lifetimes, isn't it Aaron?

SNOOPY

[peat]

After the discovery of a fault line under the Clyde dam during construction, it was found that most rivers follow fault lines for at least part of their course. It would be extremely likely that some of mercury's dams do have fault lines under them.

Do you mean

It would be extremely likely that some of mercury's dams do NOT have fault lines under them. ?

[101nick101]

Curious as to why nobody (media) or otherwise is talking about the Meridian Energy trading halt.

Edit Sharesies has since removed the trading halt... weird

[Jantar]

Do you mean

It would be extremely likely that some of mercury's dams do NOT have fault lines under them. ? Both. It is extremely likely that some do and that some do not. The map of fault lines doesn't show exactly, but it appears that Ohakuri, Whakamaru and Maraetai are on fault lines.
https://www.waikatoregion.govt.nz/assets/PageFiles/2529/earthquake.pdf

[Norwest]

MCY looking to takeover TLT's NZ's assets in partnership with QIC taking the AU assets.

Would be a fantastic buy for MCY if they can get it over the line.

[Norwest]

Too boring for anyone to talk about? At least you have to love Grant from Jarden asking today what everyone else on the call was thinking about MCY's potential acquisition of TLT's NZ assets even after they said they will absolutely not talk about it as part of the presentation. Good on him for trying!

[Snoopy]

Mercury Energy HydroStation Generation CapacityNotesMercury Energy GeothermalStation Generation CapacityNotes


Aratiatia78MWUpgrade by FY2020Rotokawa34MWRefurbished FY2015


Atiamuri74MWNgatimariki82MWCompleted FY2014

[/TR]

Waipapa51MWKawerau100MW

[/TR]

Ohakuri112MWMokai (25% owned)112MW


Whakamaru124MWUpgraded 24MW in FY2020Nga Awa Purua (65% owned)138MWCompleted FY2010


Arapuni196MWUpgraded 12MW in FY2011


Maraetai 1 & 2352MW


Karapiro96MW


Total1059MWTotal466MW


Effective Capacity Factor0.514Effective Capacity Factor0.940


Total Operationally Adjusted544MWTotal Operationally Adjusted438MW





The Lake Taupo 'hydro-battery', which feeds all of Mercury's collective Waikato 1059MW of hydro-generation operates a little differently to other hydro-storage and generation systems.

This submission by Mercury is a repository of useful information for those interested in more detail as to how Lake Taupo is operated.

https://www.taupodc.govt.nz/repository/libraries/id:25026fn3317q9slqygym/hierarchy/our-council/consultation/documents/plan-change-34/Hydrology%20evidence%20D%20Payne%20Mercury.pdf

SNOOPY

[JAYAY]

https://www.nzx.com/announcements/368722 Mercury considers Green Bond offer.

I am not impressed.
What do other shareholders think of this?

[ratkin]

https://www.nzx.com/announcements/368722 Mercury considers Green Bond offer.

I am not impressed.
What do other shareholders think of this?

What bit of it are you unimpressed with?

[winner69]

https://www.nzx.com/announcements/368722 Mercury considers Green Bond offer.

I am not impressed.
What do other shareholders think of this?

Not impressed with raising more debt?

Or is it because it’s green?

Or something else?

[JAYAY]

Not impressed with raising more debt?

Or is it because it’s green?

Or something else?

Go woke go broke.

[macduffy]

I don't think MCY will "go broke" over this issue but labelling it "green" is the fashionable thing to do, most MCY assets qualify, and it won't cost the company any more - or less!

[artemis]

Let's not forget who is the majority shareholder. And that there will have been quiet chats to make sure the narrative is being correctly followed.

[mfd]

Go woke go broke.

I'm quite happy to see the company showing off their green credentials. If you'd prefer to invest in a company with some extra carbon emissions genesis is still in the business of burning finite resources for now.

[Snoopy]

MCY looking to takeover TLT's NZ's assets in partnership with QIC taking the AU assets.

Would be a fantastic buy for MCY if they can get it over the line.


Mercury has got it over the line!

https://www.nzx.com/announcements/369080

"Mercury will acquire all of Tilt’s New Zealand operations, including development options, for an enterprise valuation of approximately NZ$770m."

"The acquisition of the New Zealand operations by Mercury will be funded from the sale of Mercury’s 19.9% Tilt shareholding, worth NZ$585m and net debt of NZ$185m and are forecasted to lift Mercury’s earnings (EBITDAF) in FY2022 by $50m. The acquired Tilt assets will increase Mercury’s total annual generation by over 1,100GWh and include several prospective development options."

Most of the acquisition ends up as being equity funded (76% by my calculation) and as a result we are EBITDAF positive from day one. It is a disaster for Genesis Energy though. Genesis's 'own' new wind farm now falls into the hands of their deadliest competitor.

SNOOPY

[trader_jackson]

not just a disaster for GNE, but a disaster for MCY as well - huge (and huge is an understatement) premium paid for what is really not much.

[Jantar]

.... It is a disaster for Genesis Energy though. Genesis's 'own' new wind farm now falls into the hands of their deadliest competitor.

SNOOPY Maybe not quite so bad. The wind farm was never owned by GNE, but by TLT. GNE said this 2 weeks ago "... All electricity produced by the project is being purchased by Genesis Energy under a long-term offtake agreement."

I suspect that any new owner of Tilt's assests will be bound by that agreement, unless they purchse their way out of it.

[Norwest]

I can see why they were so coy about it on the last analysts call, I knew they must have been very close to them getting this over the line, congratulations to the MCY team.

I haven't read all 97 pages of the SIA in detail, however from first glance it doesn't state anything about the requirements around pre-existing agreements, it only state's that TLT cannot enter into any further agreements.

When the PPA/DSA was signed for Waipipi its extremely likely that MCY had some input into them and would have factored a potential takeover and/or sale of assets into it. The way the SIA is structured MCY are absolutely in the driving seat over any PPA/DSA's.

This is massive for MCY and further cements them as the best gentailer listed on the NZX.

[Norwest]

not just a disaster for GNE, but a disaster for MCY as well - huge (and huge is an understatement) premium paid for what is really not much.

To put this into perspective.

MCY acquired their initial holding in TLT for $144M in 2018 @ $2.30 per share.
They contributed another $55M in 2019 @ $1.75 per share.
They received $55M from capital distribution in 2020.
Along the way they got a couple of divvies as well.

Ultimately they're only putting up another ~$180M to own outright TLT's current NZ assets AND their development options.

[bullfrog]

As a TLT shareholder since 2018, getting in at around $1.7, I have mixed feelings about the takeover. I'm disappointed that I'm loosing what I hoped was a long-term dividend earner, but happy with the price. Yes, MCY are paying a premium but as Norwest pointed out, they already have a substantial holding at a realistic price.

The company that's impressed me in all this is IFT. Yet again they make a tidy sum by playing their cards right.

[Snoopy]

The new Turitea windfarm is scheduled to be built in two stages. There is the 33 turbine northern section timetables to be completed by the end of Q1 FY2021. The second 27 turbine southern section is set to be completed by the end of Q2 in FY2022. When finished this windfarm will consist of 60 turbines, and is budgeted to cost $465m including capitalised interest (AR2020 p40).

The Turitea wind farm will be New Zealand's wind farm with a total capacity of 222MW. Once operating the average projected energy to be produced each year is projected at 840GWh/year. If the wind farm were to operate 24/7 then the total energy generated would be:

222MW x 24 hr/day x 365 day/year = 1944720 MWh/year = 1945 GWh/year

This would suggest the windfarm will operate at: 840/1945 = 43.2%


We can use the above costings to figure out a present day value for the 'Tilt Renewables' power stations that 'Mercury Energy' are about to acquire.

Indicative construction cost =$465m / 222MW = $2.095m /MWh



Trustpower's Tararua wind farm.

http://www.windenergy.org.nz/tararua-wind-farm

This has a combined capacity of 161MW with average annual generation of 620GWh. The maximum energy that can be generated in any year is:

161MW x 24 hr/day x 365 day/year = 1410360 MWh/year = 1410 GWh/year

This would suggest the Trustpower Tararua windfarm will operate at: 620/1410 = 44.0%

Both of those operating yields seem high for a wind farm. Nevertheless they are in close agreement. That would suggest the wind farm Capacity Factors that I have calculated are correct.


To avoid any ambiguity, the windfarms I referred to above were originally owned by Trustpower. However, they were subsequently shunted across to Tilt Renewables when that company was created. At that point -and now- they were owned by Tilt Renewables. Nevertheless the future output from those windfarms has been sold back to Trustpower for the life of those windfarms (I think that means 20 years). However the earliest Tararua wind turbines have just clicked over 20 years of operation and show no signs of stopping. So I think it is inevitable that these 'lifetime' contacts will leave some value on the table for the Windfarm owner.

The additions to the Mercury wind energy (which doesn't include Mercury's own Turitea windfarm) portfolio, those windfarms to be acquired from Tilt, look like this



Generation CapacityForecast Annual Energy GenerationForecast Capacity UtilisationPresent day Value


Mahinerangi36MW105GWh33.3%$75m


Tararua 1&268MW235GWh37.8%$142m


Tararua 393MW324GWh39.8%$195m


Waipipii133.3MW455GWh39.0%$279m


Total$691m



Observant readers will note that the expected Tararua windfarms capacity utilisation is below that of the previous
http://www.windenergy.org.nz/tararua-wind-farm reference. The figures I have used in the above table p15 in the Tilt AR2020. I cannot explain the difference.

Today's press release shows that MCY paid $585m + $185m = $770m for these assets. In construction for value terms this purchase price is no bargain. Mercury overpaid by $79m! However, we have to remember that all of these assets, bar Mahinerangi, are within reasonable proximity to the giant Lake Taupo 'battery'. So these assets may have a strategic value to Mercury that could not be extracted by other buyers.

Furthermore Mercury has purchased the option, not included in my valuation, to build more windfarms at Omarari (70MW, 10km NW of Dannevirke), Mahinerangi 2 (160MW), Kaiwera Downs Stages 1 (40MW, 18kn SE of Gore) and 2 (200MW), and perhaps most presciently, the go ahead to upgrade Tararua to 140MW, a full 72MW above its current power generation capacity.

Overall I think Tilt should be very pleased with the buyout price for those NZ assets. But likewise Mercury has secured some strategic assets today that are immediately EBITDAF accretive. As a Mercury shareholder I am very happy with this NZ Tilt assets purchase.

SNOOPY

[Snoopy]

Based on a 4.5% gross yield that I now used for utilities in this ultra low interest rate environment, I can calculate a capitalised earnings valuations for MCY.

23.11c / (0.045) = $5.14 (based on averaged, dps)

However, this valuation does not take into account the two hidden not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1323) my fair value for MCY today is:

$5.14 x 1.234 = $6.34

As I write this MCY is trading at $6.81. That means I see it as overvalued, although not by as much as some might think ( +7.4% ).


Chaiman Prue Flacks reporting to the market today, having topped up at $6.72. Market price today $6.975!

I should point out that 'my'/ valuation was before the confirmed purchase of Tilt Renewables NZ assets. But the valuation method I have used means that this purchase does not increase my MCY valuation.

SNOOPY

[kiora]

"It's also putting pressure on power retailers Nova and Mercury - the first to pass on increases to consumers - with others likely to follow.

"The first thing that should be done, and it should be done right now I think is ask the public to conserve electricity. The Government has decided not to do that, and I think they're wrong," Leyland says.

The aluminium smelter at Tiwai Point is reducing its consumption until the end of May.

But the potential threat of blackouts remains, with the dry patterns forecast to stick around for at least the first half of winter."
https://www.newshub.co.nz/home/money/2021/05/new-zealand-faces-blackouts-higher-power-prices-if-heavy-rain-doesn-t-arrive-in-next-few-months.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Monday+3+Ma y+2021

[winner69]

Saw the heading FY2021 EBITDAF guidance revised to $460 million ....

...first reaction great an upgrade

....but then noticed that they would have included the the word 'increased' or 'upgrade' in the heading

.....so opened up the announcement

....and its a profit downgrade - Mercury announced today that it has revised its FY2021 EBITDAF guidance from $520 million to $460 million.


...that's quite a big downgrade

...won't affect dividend will it?

[bull....]

Saw the heading FY2021 EBITDAF guidance revised to $460 million ....

...first reaction great an upgrade

....but then noticed that they would have included the the word 'increased' or 'upgrade' in the heading

.....so opened up the announcement

....and its a profit downgrade - Mercury announced today that it has revised its FY2021 EBITDAF guidance from $520 million to $460 million.


...that's quite a big downgrade

...won't affect dividend will it?

huge downgrade for a power company , wonder if the other power companies are doing bad as well

[RTM]

Saw the heading FY2021 EBITDAF guidance revised to $460 million ....

...first reaction great an upgrade

....but then noticed that they would have included the the word 'increased' or 'upgrade' in the heading

.....so opened up the announcement

....and its a profit downgrade - Mercury announced today that it has revised its FY2021 EBITDAF guidance from $520 million to $460 million.


...that's quite a big downgrade

...won't affect dividend will it?

Maybe not significantly.

OUR DIVIDEND POLICY.
Mercury’s dividend policy is to make distributions with a pay-out ratio of 70% to 85% of Free Cash Flow on average over time subject to the board’s due consideration of the Company’s working capital requirements and medium-term asset investment programme; a sustainable financial structure for the company, recognising the Company’s targeted long-term credit rating of BBB+ assigned by S&P (or equivalent from another recognised credit rating agency); and the risks from predicted short and medium-term economic, market and hydrological conditions, and estimated financial performance.

The Board will seek to maintain consistency on a dividend per share basis from year to year while maintaining the dividend pay-out ratio on average over time.

Free Cash Flow is Net Cash Flow from Operating Activities less normalised stay-in-business capital expenditure.

Dividend payments are expected to be split into an interim dividend paid in April, targeting 40% of the total expected dividend for the financial year, and a final dividend paid in September.

It is the intention of the Board to attach imputation credits to dividends to the extent they are available. Details of past dividends and declared dividends announced can be found below under Historical Dividends.

[Jantar]

huge downgrade for a power company , wonder if the other power companies are doing bad as well Because their downgrade is due to lack of generation, that means the other companies must be generating more to compensate. MCY have less generation from Taupo, and they don't own any thermal firming generation. The failure of Kawerau just makes matters worse.

The deficit will be made up by GNE and CEN who will both experience higher generation at higher prices. MEL and TPW will benefit from higher prices, While NWF will be kicking themselves for being 100% hedged.

[trader_jackson]

huge downgrade for MCY indeed... yet despite announcing a shock over 10% drop in guidance, the share price (despite being the most expensive in the sector with the highest Price to EBITDAF in the sector I believe) isn't even down 4%... bizarre

[mfd]

huge downgrade for MCY indeed... yet despite announcing a shock over 10% drop in guidance, the share price (despite being the most expensive in the sector with the highest Price to EBITDAF in the sector I believe) isn't even down 4%... bizarre

4% down seems a lot to me, for an issue likely affecting one year only, and related to weather and a power plant being down. 10% drop in guidance for one year, valuing over the next few decades, isn't a particularly big deal.

That said, it's not down enough for me to buy more yet...

[bull....]

Because their downgrade is due to lack of generation, that means the other companies must be generating more to compensate. MCY have less generation from Taupo, and they don't own any thermal firming generation. The failure of Kawerau just makes matters worse.

The deficit will be made up by GNE and CEN who will both experience higher generation at higher prices. MEL and TPW will benefit from higher prices, While NWF will be kicking themselves for being 100% hedged.

thx jantar for the update

[Sideshow Bob]

Mercury agrees to acquire Trustpower's retail business - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/374216)

Mercury agrees to acquire Trustpower's retail business21/6/2021, 8:30 am GENERALMercury NZ Limited (Mercury) has announced that it has entered into binding agreements with Trustpower Limited (Trustpower, NZX:TPW) to acquire Trustpower’s retail business for NZ$441 million, payable in cash. The transaction is conditional on several matters, including Commerce Commission clearance, completion of the proposed restructure of Tauranga Energy Consumer Trust (TECT) and Trustpower shareholder approval.
Trustpower’s retail business is a leading multi-product utilities retailer selling electricity, gas, fixed and wireless broadband and mobile phone services to approximately 231,000 customers nationwide.
The combined business will have approximately 780,000 connections across both energy and telco services.
Mercury Chief Executive Vince Hawksworth said the acquisition would accelerate Mercury’s retail strategy, which is centred on delivering the right product mix and value for customers.
“Mercury and Trustpower are two highly complementary organisations, and this agreement would see the best of both being brought together for our customers,” said Mr Hawksworth.

“We know customers value the convenience and ease of bundled services in their home and Trustpower has deep expertise in bundling products in a way that people clearly appreciate. We see this adding material value to our customers and Mercury.”
“Bringing together the retail businesses of Mercury and Trustpower will also give us the scale to make meaningful investment in the underlying IT systems, driving greater innovation for our customers.”
Mr Hawksworth said the strength of Trustpower’s retail offering was underpinned by a highly skilled and motivated team, with approximately 500 staff focused on retail, based in Tauranga and Oamaru.
“We see a huge amount of talent and capability across both organisations, each with a strong focus on delivering the best possible outcomes for customers. We’re excited for how we can continue to build on this together,” said Mr Hawksworth.
“Customers will continue to enjoy all the great services and support they have today with Trustpower and with Mercury. And we’re looking forward to unlocking even more benefits and products for them over time.”
Mr Hawksworth noted that deeper integration of the two businesses is not planned until the underlying IT systems will enable improved customer experience.

Mercury has secured a commitment for a new bank facility sufficient to finance the acquisition.
Mercury notes:
The transaction is conditional on Mercury obtaining Commerce Commission clearance for the purchase of Trustpower’s retail business. Mercury will be working with the Commerce Commission to progress the application as efficiently as possible once filed.
In addition to requiring Trustpower shareholder approval, the transaction is also conditional on the proposed TECT restructure being completed. Independent of this transaction, the TECT trustees already have this restructure process underway, as they wish to ensure that all Trustpower’s local retail customers (as at 28 January 2021) will remain beneficiaries of the Trust following any sale of Trustpower’s retail business. Mercury’s offer is conditional on the restructure occurring to ensure that those Trustpower retail customers could continue as beneficiaries of the Trust. Further details of the TECT restructure can be found on TECT’s website.
The timing for regulatory approvals depends on several factors, including the current workload of the regulator. Mercury anticipates that these conditions will be fulfilled and completion of the transaction will occur within CY2021.
Further detail is provided in the accompanying presentation.
ENDS

[peat]

so ,,, MCY are not buying the power generating capabilities of TPW but they're buying the customers

and yet they havent been able to generate enough recently

???

[mfd]

so ,,, MCY are not buying the power generating capabilities of TPW but they're buying the customers

and yet they havent been able to generate enough recently

???

If you have a look at the trustpower presentation, they have contacted 100% of their generation to Mercury for a few years, tapering off after that. Hopefully that buys enough time to stick up a few wind farms using Tilt's pipeline.

[peat]

If you have a look at the trustpower presentation, they have contacted 100% of their generation to Mercury for a few years, tapering off after that. Hopefully that buys enough time to stick up a few wind farms using Tilt's pipeline.

cool thx... or it rains a bit more...

certainly no shortage of rain this weekend in Taranaki. I drove all around the region - circumnavigating the mountain but didnt get to see it once.

[peat]

I'm thinking they're still very exposed to dry risk. TPW generation is the same catchment kind of. Nth Is. mainly. Someone cant deliver what they don't have.

[huxley]

It’s interesting to read the news coverage, no one seems to be acknowledging that MCY CEO is the former CEO of TPW..

[Snoopy]

so ,,, MCY are not buying the power generating capabilities of TPW but they're buying the customers

and yet they havent been able to generate enough recently

???

The wind generation assets of Trustpower were moved into Tilt when Tilt Renewables was formed. So Mercury has bought the wind generation assets of the 'old' Trustpower. The Turitea Wind farm (total capacity 222MW when North and South sections are finished) is under construction and a second windfarm in the same area is already consented. All these wind farms are close enough to the Waikato catchment to allow dovetailing between the two generation sources (Wind & Hydro). The Waikato river system effectively becomes the battery for a wind/hydro system. It is true that hydro generation from the Waikato catchment has underperformed this financial year. But that doesn't mean a long term strategy as described will underperform over many years.

SNOOPY

[Norwest]

It's official, Mercury acquires Tilt Renewables’ New Zealand operations The SIA was originally entered into on 14 March 2021 and was amended on 16 April. Under the scheme, Mercury has now taken ownership of the New Zealand assets and PowAR has taken ownership of Tilt’s Australian assets. https://www.nzx.com/announcements/376610 In my opinion, this further solidifies MCY as the best gentailer on the NZX.

[peat]

It's official, Mercury acquires Tilt Renewables’ New Zealand operations The SIA was originally entered into on 14 March 2021 and was amended on 16 April. Under the scheme, Mercury has now taken ownership of the New Zealand assets and PowAR has taken ownership of Tilt’s Australian assets. https://www.nzx.com/announcements/376610 In my opinion, this further solidifies MCY as the best gentailer on the NZX.

and GNE is in there too...
I gathered GNE were the beneficiaries of Waipipi ??
https://announcements.nzx.com/detail/376548
but it cant be both them and MCY.

[JeffW]

and GNE is in there too...
I gathered GNE were the beneficiaries of Waipipi ??
https://announcements.nzx.com/detail/376548
but it cant be both them and MCY.

Mercury now owns it and Genesis has a contract to take the electricity

[peat]

Mercury now owns it and Genesis has a contract to take the electricity

Odd. Or it strikes me that way.

[mfd]

Odd. Or it strikes me that way.

Deal was made by Tilt I believe, so Mercury are stuck with it.

[Sideshow Bob]

MCY - resilient performance and ambitious acquisitions - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/377361)

MCY - resilient performance and ambitious acquisitions

17/8/2021, 8:30 amFLLYRMercury delivers resilient financial performance, makes ambitious acquisitions.
FY21 Financial Results Summary
[see table in attached news release]
17 August 2021 – The year ended 30 June 2021 saw Mercury deliver resilient financial performance, along with announcing two significant acquisitions to grow the company’s scale and capabilities.
Mercury reported EBITDAF of $463 million for the period, down 6% on FY20 EBITDAF of $490 million.

The operational result was adversely impacted by a sustained period of low inflows into Lake Taupo (for the second consecutive year) and an unplanned outage at the Kawerau geothermal power station in June.

The financial impact of this loss of generation was more acute than previous years due to historically high spot prices as a consequence of low national fuel (hydro and gas) availability.

Capital expenditure (capex) of $250 million comprised $56 million of stay-in-business capex and $194 million of growth investment. Operational expenditure remained broadly flat for the eighth consecutive year on a normalised basis.

Net profit after tax was $141 million, down $68 million on the previous year.

“Mercury has delivered a resilient financial performance in the face of some challenging market headwinds,” said Vince Hawksworth, Mercury Chief Executive.

“We have also made two ambitious acquisitions that will give Mercury additional scale and capability as we navigate a rapidly evolving landscape.

“The acquisition of Tilt Renewables’ New Zealand assets will increase Mercury’s total annual generation by over 1,100GWh. It has also secured several prospective development options.”

Construction of the Turitea wind farm also continues, with the transmission line, grid connection and northern wind farm substation fully commissioned. First generation has been achieved and Mercury anticipates the full completion of the 33-turbine northern section in the last quarter of 2021.

“These investments and our further pipeline of potential generation options are a clear demonstration of Mercury’s commitment todecarbonising the electricity supply, and investing for the future,” said Vince.

In addition to the extensive renewable generation pipeline, Mercury also reached agreement to acquire Trustpower’s retail business. This acquisition is subject to various approvals and completion of the acquisition is expected in the second half of FY22.

“We see Mercury’s and Trustpower’s retail businesses as highly complementary, and this agreement would see the best of both being brought together for our customers,” said Vince.

“Trustpower’s retail business is a leading multi-product utilities retailer selling electricity, gas, fixed and wireless broadband and mobile phone services to approximately 231,000 customers nationwide. The combined business would have approximately 780,000 connections across both energy and telco services.
“Bringing together the retail businesses of Mercury and Trustpower will also give us the scale to make meaningful investment in the underlying IT systems, driving greater innovation for our customers. Deeper integration of the two businesses is not planned until the underlying IT systems will enable improved customer experience.
“In combination, the Tilt and Trustpower acquisitions, along with our pipeline of renewable generation, will ensure Mercury has the scale and capabilities it needs to be able to thrive now and into the future,” he said.

OTHER KEY OPERATIONAL RESULTS
• A second consecutive year of low rainfall saw a decrease in hydro generation to 3,611GWh, well below the long-term average of around 4,050GWh.
• Geothermal generation for the year also decreased from 2,615GWh during the previous financial year to 2,594GWh, due to the outage at Kawerau.
• Rationalisation of existing assets, which included:
- The sale of Mercury’s interest in the US-based Hudson Ranch 1 geothermal power station joint venture, receiving net proceeds of NZ$41 million;
- Transfer of approximately 5,000 customers served under our Bosco brand to Mercury.
• Introduction of Thrive, a company-wide continuous improvement programme.
• Introduction of Whakapuāwai, a company-wide culture and capability programme.

DIVIDEND
The Board has approved a fully imputed final dividend of 10.2 cents per share (cps), taking total ordinary dividends for FY21 to 17.0cps, an increase of 7.6% on FY20. The dividend will be paid on 30 September 2021. This is Mercury’s 13th consecutive year of ordinary dividend growth.

OUTLOOK
“Across the industry in New Zealand, more than $1.5 billion of investment is already committed by the industry to the construction of renewable infrastructure. This means the country is well placed to increase the proportion of generation that is renewable from around 80% today to over 90% within five years,” said Prue Flacks, Mercury Chair.

“However, the current market conditions illustrate the challenge of ensuring the right balance is struck between investment in decarbonisation, security of supply, and ensuring energy is affordable.”

“Mercury strongly supports the goal of net zero carbon emissions by 2050, and we are well placed to play our part in achieving that goal. A key aspect is that policy certainty is required to send the right investment signals. One wind farm a year is required to be built to achieve net zero carbon emissions by 2050. Delivering that outcome, while maintaining security and affordability should be foremost in the Government’s mind,” she said.

GUIDANCE
Mercury’s FY22 EBITDAF guidance has been set at $590 million with increased earnings from the Turitea wind farm, newly acquired Tilt Renewables’ New Zealand assets and our Thrive programme. Guidance at the time of this report assumes 3,900GWh of hydro production and is subject to any material events, significant one-off expenses or other unforeseeable circumstances including hydrological conditions. FY22 stay-in-business capex guidance is $70 million.
FY22 ordinary dividend guidance is 20.0cps, fully imputed, representing a 17.6% increase on FY21 and the 14th consecutive year of ordinary dividend increases.

ENDS

[Aaron]

Just got my invite to the AGM, notice the effort gone in to justifying the directors fees by the "PWC Reward Services Team". Average out the fees paid by other large companies on the NZX.

Perhaps a breakdown of hours required in the role, the amount of reading and industry knowledge required, whether there is a dearth of suitably qualified people. $98,000 seems a lot if you are just showing up to 12 meetings to rubber stamp the CEOs plans.

I guess you need smart people of a high calibre to ensure the CEO doesn't go crazy. I guess difficult to quantify but pointing to the other companies and saying "that is what they are getting" doesn't seem a very rigorous basis for deciding remuneration. Just jealous I guess.
Who would vote for me if I put my name forward next year.
Even if we had $100mill combined that is only 1% of the vote (based on current market capitalisation). Not that I know anything about power generation other than it is a license to print money. Be good if we were large enough we could take turns voting each other onto generous company board of directors.

[Aaron]

Morningstar recommendation to sell as price seems very high to me as well.

What are other people's view. My strategy is to hold and not look at this as power companies are a license to print money, but traders obviously might have another view.

Maybe not the traders so much but long term investors what is everyone's view of selling when the price gets too high and waiting for it to fall back to a reasonable valuation especially with the possiblity of interest rate rises pushing asset prices down.

[tobo]

PEs are all over the place.
Based on the Morningstar valuation, MCY's PE 'should' be 40 instead of the the current 59.
13373

[Master98]

after bought tilt nz assets and tpw retailers business ( will be settled early this year), mcy is one of the best gentailers, another one is cen.

[Sideshow Bob]

Blah blah blah....

Results reflect significant change within half year - NZX, New Zealand’s Exchange (https://www.nzx.com/announcements/387633)

[Snoopy]

My take is that if not cancelled then no affect on the other shareholders as there is still the same number of shares on issue. I assume that they get the same dividend. Having them held as treasury stock enables them to be used for DRP's or performance issues without having to issue more shares.

Any affect would be minor as it is less than half a percent of the total shares on issue.


The comment above was made in relation to a share buyback in 2018. Perhaps they have now run out of shares to feed back into a DRP? That could explain the very strange announcement to the stock exchange today from Mercury.

https://www.nzx.com/announcements/389112

"Mercury announced on 22 February 2022 a Dividend Reinvestment Plan (‘DRP’) and its intention that for its FY2022 interim dividend the DRP is underwritten. This means that any shares not taken up by shareholders would be underwritten by an underwriter on the same terms."

"Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividend at the price set under the DRP."

Do I read this correctly? I think it says that if I don't join the DRP, then Mercury will take the shares they would have offered to me and on sell those to someone else. Thus my MCY shares will forever be diluted? I see that total dividends paid over FY2021 added to $221m. So a half year dividend might be around $100m? Given the cost of building a new power station today, that seems quite a paltry sum of capital to raise. Or will this new DRP apply to all future dividends? Will the government take part in the DRP, or will their ownership stake in MCY end up being diluted? So many questions, so many unknowns....

SNOOPY

[limmy]

From their announcement:-

Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividendat the price set under the DRP.

I may be wrong here but it sounds like Craigs will buy them and allocate to their bigger clients ?

[Snoopy]

From their announcement:-

Mercury advises that it has entered into an underwriting agreement with Craigs Investment Partners Limited (‘CIP’) under which CIP has agreed to underwrite shares not taken up by shareholders in connection with the DRP for the FY2022 interim dividendat the price set under the DRP.

I may be wrong here but it sounds like Craigs will buy them and allocate to their bigger clients ?


I must say, this is a strange transaction. I thought they were new shares at first, but actually they are treasury shares which, correct me if I am wrong, means that these 'shares to be disbursed' are MCY shares that the company has previously bought back on market. This means there has been a 'reverse buyback' effect on the share price. The result of a buyback is that the share price goes up due to a change in the supply demand imbalance (even though some companies are at great pains to point out they can only buy a certain percentage of shares traded every day so this doesn't happen - yeah right!). The result of a sell down has the opposite effect: Shares sinking towards the low of their trading range.

I am unclear as to why Mercury would offer up treasury shares like this. Normally treasury shares are there to be used as incentives for executives, and these treasury shares would have been bought for that purpose (we can tell that because the shares were not cancelled when bought). I can only conclude that Mercury does not intend to use share based incentives for their executive team going forwards.

SNOOPY

[Snoopy]

Financial YearNormalised 'eps'Net Dividend Paid (per share)Gross Dividend Paid (per share)


201610.3c8.4c + 2.5c(S) + 5.7c 11.67c + 3.47c + 7.92c = 23.06c


201712.1c8.6c + 2.88c(NI,S) + 5.8c11.94c + 4.0c + 8.06c = 24.00c


201814.0c8.8c + 5.0c(S) + 6.0c12.22c + 6.94c +8.33c = 27.49c


201911.7c9.1c + 6.2c12.64c + 8.61c = 21.25c


202011.7c9.3c + 6.4c12.92c + 8.89c = 21.81c


2021?c9.4c + ?c13.06c + ?c = ?c


Total FY2016 to FY202059.8c84.68c117.61c




Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.

In a change of policy I have decided to work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

From the table, the average annual normalised gross dividend payment over the last five years has been:

(23.06c+24.00c+27.49c+21.25c+21.81c)/5 = 23.52c

Nevertheless time has moved on and I have decided to include the first dividend for FY2021 (13.06c gross) -that has already been paid- and remove the equivalent dividend from five years previously (11.67c + 3.47c gross).

(7.92c+(24.00c+27.49c+21.25c+21.81c)+13.06c)/5 = 23.11c





Financial YearNormalised 'eps'Net Dividend Paid (per share)Gross Dividend Paid (per share)


201610.3c8.4c + 2.5c(S) + 5.7c 11.67c + 3.47c + 7.92c = 23.06c


201712.1c8.6c + 2.88c(NI,S) + 5.8c11.94c + 4.0c + 8.06c = 24.00c


201814.0c8.8c + 5.0c(S) + 6.0c12.22c + 6.94c +8.33c = 27.49c


201911.7c9.1c + 6.2c12.64c + 8.61c = 21.25c


202011.6c9.3c + 6.4c12.92c + 8.89c = 21.81c


202110.1c9.4c + 6.8c13.06c + 9.44c = 22.50c


202211.6c10.2c + 8.0c14.17c + 11.11c = 25.28c





Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.
3/ 'Normalised eps' = 0.72x(EBITDAF-DA-I) / 1,400 shares on issue

For this valuation technique, I work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

FY2021

From the table, the average annual normalised gross dividend payment over FY2017 to FY2021 inclusive has been:

(24.00c+27.49c+21.25c+21.81c+22.50)/5 = 23.41c

FY2022

From the table, the average annual normalised gross dividend payment over FY2018 to FY2022 inclusive has been:

(27.49c+21.25c+21.81c+22.50+25.28)/5 = 23.67c

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.



Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2013$3,182m$5,802m0.5484


FY2014$3,219m$5,689m0.5658


FY2015$3,337m$6,058m0.5508


FY2016$3,315m$6,085m0.5448


FY2017$3,308m$5,997m0.5516


FY2018$3,286m$6,091m0.5395


FY2019$3,537m$6,484m0.5455


FY2020$3,739m$6,885m0.5431



FY2021$4,186m$7,978m0.5247


HY2022$4,605m$8,497m0.5419



Notes

1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. I have included the HY2022 equity ratio so shareholders can get a feel for how the balance sheet looks following this transaction.

SNOOPY

[Snoopy]

Time to update my table



Reval. Hydro & Thermal Assets ($m)Reval. Geothermal & Other Generation Assets ($m)Total Revaluation ($m)Post tax New Capital Per Share ($m)Pre Tax Revaluation ($m)Pre Tax New Capital Per Share (c)


20090170.987170.98712.224417.4


2010200.90060.250261.15018.737326.6


2011153.300135.275288.57520.641229.4


2012119.5202.880122.2408.717012.1


201330.96026574.9795.6


2014425292.1402.9


2015356035625.449735.5


2016??997.11379.9


2017038382.7523.7


2018040402.9553.9


20191097118012.925017.9


20201823121315.229621.1


202139627967548.293867.0


Total2,530
181.6253



less Special Dividends Declared (FY2015-FY2018) (per share)-229-15.4


add Snowtown Windfarm dividend (FY2021)553.9


add Hudson Geothermal sale Profit (FY2021)412.9


add Tilt Stake Gain (FY2022)40428.9


equals Residual Thin Air capital201.9



Notes:

1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time from my analysis, as these may been seen as a method of balance sheet optimization by paying back excess 'thin air capital' (ref post 1440).
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.
7i/ Mercury acquired 19.9% stake in Tilt Renewables acquired for $144m in FY2018. This had a market value of $130m at EOFY2018.
7ii/ During FY2019 Mercury subscribed $55m to a 'Tilt Renewables' capital raising. The book value of Mercury's share of Tilt increased to $249m over FY2019.
7iii/ During FY2020 Mercury acquired a seat on the Tilt board. This meant that Mercury could exert 'significant influence' over Tilt. Consequently accounting rules forced the Tilt stake to be reclassified in the balance sheet as an 'associate' rather than an 'investment'. The Tilt 'associate shareholding' was valued at $230m on the books at EOFY2019.
7iv/ Mercury subsequently sold their 19.9% stake in Tilt for $608m
7v/ The Tilt sale price was adjusted down to account for a $5m pre-sale dividend already booked.
7vi/ The 'thin air' capital gain on this series of transactions was therefore:
$608m - $5m - $55m - $144m = $404m

This $404m figure is at variance with the profit figure of $376m in AR2021 p63, because I am basing my profit calculation on original cost, not book value at the time of sale.
7vii/ Final agreement on the Tilt stake sale was made 21st June 2021. This is why I am including the Tilt sale capital profit in this FY2021 analysis, even though teh actual money would not be received until August 2021.

---------


201.9cps x 1,400m shares = $2,827m of retained 'hidden value' 'Thin air capital' over the years.

Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years, the Turitea wind farm, and the acquisition of the NZ wind farm assets of 'Tilt Renewables'. These constructions and acquisitions were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.

Notwithstanding the large amount of thin air capital created since 2008, 2021 foresaw the biggest spend ups so far, signing up to buy the biggest NZ windfarm assets back off Tilt's new owner, and also signing up to buy the retail assets of Trustpower. (The transaction went through on 3rd August 2021, which was in FY2022, although commentators were aware of the details in FY2021 - refer AR2021 Note 19 'Subsequent Events).
.
And how much did shareholders have to stump up to make these acquisitions? Nothing. And how much was the debt ratio of the company increased so that borrowings could pay for these acquisitions? Not at all.

There is the power of 'thin air capital' for you.

SNOOPY

[Snoopy]

201.9cps x 1,400m shares = $2,827m of retained 'hidden value' 'Thin air capital' over the years.

Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years, the Turitea wind farm, and the acquisition of the NZ wind farm assets of 'Tilt Renewables'. These constructions and acquisitions were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.

Notwithstanding the large amount of thin air capital created since 2008, 2021 foresaw the biggest spend ups so far, signing up to buy the biggest NZ windfarm assets back off Tilt's new owner, and also signing up to buy the retail assets of Trustpower.


Big spending going on as Mercury transforms itself, integrating major newly acquired windfarm assets into its generation portfolio, combined with servicing a much enlarged retail base. I think it is worth putting these transactions, and the associated costs, on separate record (via this post).

1/ The former Tilt Renewables New Zealand wind farm assets purchased are as follows:



NameCommissionedGeneration Capacity


KaiwaikawaNot Yet75MW

j
Waipipi2021133MW


Tararua I & II1998,200468MW


Tararua I & II (Repowering)Not Yet+72MW


Tararua III200793MW


Mahinerangi I201136MW


Mahinerangi IINot Yet160MW


KaiwaraNot Yet240MW


Total Completed Capacity330MW


Total Consented Incremental Development547MW



The price paid for these wind-farms, both operational and consented, was $797m 'Enterprise Value' (AR2021 p35) (means the current share price and the price to pay off any company debt). Net borrowings associated with the acquired Tilt assets were $236m (HYR2022 p12). Therefore the money paid for the ex-Tilt assets was:

$797m - $236m = $561m

The funds to buy this came from the sale Mercury's 19.9% stake in the taken over 'Tilt' company, and borrowings of $189m (AR2021 p9). The Mercury 19.9% stake in Tilt was sold for $603m (HYR2022 p11). This translated to a profit of $367m, after taking into account the 'book value' of that holding.

$603m - $248m + $21m - $9m = $367m

where: $248m represents the carrying value of the investment, and $21m represents accumulated other comprehensive income attributable to Tilt and $9m represents transaction costs.

Notes

i/ The deal was completed on 3rd August 2021.
ii/ Energy generation capacity over period of ownership (03/08/2021 to 31/12/2021):

330 MW x(28+30+31+30+31) x24hours = 1188 GWh
Actual Energy Generated = 482GWh (HYR2022, p3)

=> Capacity Utilisation = 482/1188 = 40.6%

2/ Turitea Wind Farm generated its first energy for the national grid in July 2021 (AR2021 p26). At EOFY2021, $335m had been spent at Turitea (AR2021 p36) (c.f. estimate for first stage of Turitea $256m, AR2019 p15). With the commissioning of Turitea North, emphasis will shift to Turitea South. Total project spend for the completion of Turitea is $464m (excluding capitalised interest). That equates to a further investment of $129m required to bring Turitea South to operation.

The Turitea North windfarm generated 13GWh during the July-September 2021 commissioning period (from Quarterly Operational Update September 2021) and 105GWh over the first half year (HYR2022 p3). The difference of 105GWh-13GWh=92GWh represents the total energy generation from the 33 turbines of the Turitea North Windfarm being fully operational.

Specific information on this north section of the windfarm may be found here:
https://www.mercury.co.nz/news/mercury-new-wind-farm-at-turitea-palmerston-north

Generating capacity is 119MW. For the three months over which the wind farm was operating, this represents:

119MW x (31+30+31) x 24hours = 263GWh

This means the capacity utilisation was: 92/263 = 35.0%

35% is a lower capacity utilisation than other Tararua based wind farms (refer post 1321). But I believe that some commissioning issues may have spilled over into this time period. Plus we learn from AR2022 p5 "Less windy weather constrained performance of our newest assets."

3/ Trustpower Retail Customer Base acquired, as announced in June 2021, for $441m (AR2021 p35). The necessary restructuring of the seller, the Tauranga Consumer Energy Trust (TECT), was announced to the market on .4th April 2022. Completion of this transaction is expected on 1st May 2022 (late in FY2022).

SNOOPY

[Snoopy]

Regarding deferred tax. I'm not an expert on this and my knowledge is sketchy at best but the DTL on revaluations won't crystallise. There is a worked example here

https://auditnz.parliament.nz/good-practice/tax/tax-calculation-and-disclosure-examples

Click the first link of the link above for the TMCL excel example. This suggests that if you take the revaluation through the P&L under comprehensive income, then there is a partially offsetting entry into deferred tax.

Using the MCY 2020AR I believe this looks like:


Dr Assets $285m (page 57 is showing $296m - see *note below)

Cr Asset Reval Reserve/Equity $285m (per p49 - disclosed under comprehensive income)


Dr Asset Reval Reserve/Equity $80m (the nett of this line and the one above is $205m per p51 under ARR, note the amount on p49 of comprehensive income shows $91m due to the presence of other transactions)


Cr Deferred Tax Liability $80m (the note on p57 has $83m, so there is another PP&E deferred tax transaction, interesting that this is not far from 28% of the fixed asset difference of $13m)

NB: $80m is 28% of $285m so the values make sense.

From the notes on p56:
"Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax and accounting bases of the Group’s assets and liabilities. A deferred tax asset is only recognised to the extent that there will be future taxable profit to utilise the temporary difference.

Property, plant and equipment is held on capital account for income tax purposes. Where assets are revalued, with no similar adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax liability on these revaluations is unlikely to crystallise in the foreseeable future under existing income tax legislation."


I am not sure I have mastered this horse yet. But since it is an important key to understanding the value of Mercury, I have decided to get back on it. Ferg has had a good go at tackling the FY2020 edition. So I intend to go down a similar path to see if I can tame the deferred tax liability for FY2021.

From MCY AR2021:

On p49 under 'Property Plant & Equipment' we find a 'net revaluation movement' of $938m. Cross referencing that with the second column on page 49, and we see that the group's hydro generation assets have increased on value by $550m and geothermal generation assets are up by $388m. Note that $550m + $388m = $938m, so the cross references tally.

Moving on to taxation, on p48 under 'Taxation' and in particular the 'Movement in deferred tax', we see a figure of $263m

Now, $263m/$938m = 28% (the company tax rate).

However, because these generation assets are held on 'capital account' (see Taxation notes on Deferred tax AR2021 p48), there is no legal requirement to ever pay this 'deferred tax' (except in the unlikely event of this capital asset being sold to a third party, in which case previous depreciation claimed on the capital revalued portion of such sold assets may create a tax bill.)

So what is the relevance of this to the valuation of Mercury? If you look at my post 1430, you will see I have separate columns for 'pre' and 'post' tax revaluations. You will also see that I am working on the increase in revaluation value of Mercury 'post tax' which seems like the right thing to do, as dividends - the other important metric for valuing Mercury - are typically quoted 'post company tax'.

I now find myself wondering, if a tax liability is on the books -but never collected, is it really a tax liability? I would imagine a prudent banking syndicate lending to Mercury might look at their balance sheet which includes this 'never to be collected' tax debt. Is any security required for a debt that never has to be paid? There is always the possibility that a government might change the law and demand that a deferred tax liability on revalued assets in a capital account must be paid. But surely there would be an absolute outcry if they did such a thing?

Can anyone explain to me why a 'deferred tax liability' on a 'revalued asset' even exists? (answered by JeffW in post 1433)

SNOOPY

[JeffW]

Can anyone explain to me why a 'deferred tax liability' on a 'revalued asset' even exists?

SNOOPY

The tax liability relates to the income tax payable on the depreciation recovered if the assets were to be sold at the revalued amounts. Given the type of assets, I guess this is fairly unlikely - more likely a purchaser wold make a takeover offer for the company. You can't have it both ways though - if the assets are recorded at the revalued amount, the theoretical tax liability needs factoring in

Potentially some of the liability would be real if a major asset was to be destroyed, perhaps through say earthquake, and the insurance proceeds received matched the valuation

[Snoopy]

The tax liability relates to the income tax payable on the depreciation recovered if the assets were to be sold at the revalued amounts. Given the type of assets, I guess this is fairly unlikely - more likely a purchaser wold make a takeover offer for the company. You can't have it both ways though - if the assets are recorded at the revalued amount, the theoretical tax liability needs factoring in


Thanks JeffW. Your answer sounds plausible.

I took the liberty of going to AR2021 p57 Note 7, and finding out what the depreciation charge for 'generation assets' for the year actually was: Answer $170m.

Then I looked up the page and took notice of the equivalent depreciation charge over FY2020: Answer $163m.

That means the depreciation charge, after revaluation, for what are in effect the same assets (because the acquired Tilt assets were not brought on to the books until August 2021, which was after the balance date) only increased by $170m-$163m= $7m. Yet to offset this, the movement in deferred tax increased by $263m. Huh? That hardly seems a balanced offsetting adjustment!

SNOOPY

[Snoopy]

Potentially some of the liability would be real if a major asset was to be destroyed, perhaps through say earthquake, and the insurance proceeds received matched the valuation.


Interesting thought experiment.

I could imagine a central North Island earthquake doing damage to one of Mercury's dams. It would be quite a reconstruction job too. Potentially you would have to construct a 'by pass' channel, so that the damaged dam could be isolated and worked on. Construction costs would have gone up significantly since the dam was built as well. But this kind of event isn't analogous to a car accident when the insurance company 'writes off' your damaged vehicle, takes possession of it, and sells it for scrap to recover costs. The only thing to 'take possession of' from a damaged dam might be some concrete rubble. IOW the insurance company couldn't 'sell' the damaged dam to a third party to recover costs.

If I am reading your scenario correctly JeffW, you would have the insurance company paying out an agreed fixed amount to cover the reconstruction. But then the tax man would stick his unwelcome nose in and say.

"Hang on, that dam you claimed depreciation on during the year no longer exists. So please give the depreciation money you claimed in your company tax return back please!"

Yet if Mercury refunded the depreciation money, that would reduce the free cash available to the company by that amount, with the net effect being the 'net earthquake payout' would be reduced by the depreciation recovered by the IRD. So once the depreciation money was taken away, Mercury would no longer have the money available to rebuild the dam. Could it really work like that? It hardly seems fair. Although I do appreciate that the words 'fair' and 'IRD' rarely appear in the same sentence.

SNOOPY

[JeffW]

Interesting thought experiment.

I could imagine a central North Island earthquake doing damage to one of Mercury's dams. It would be quite a reconstruction job too. Potentially you would have to construct a 'by pass' channel, so that the damaged dam could be isolated and worked on. Construction costs would have gone up significantly since the dam was built as well. But this kind of event isn't analogous to a car accident when the insurance company 'writes off' your damaged vehicle, takes possession of it, and sells it for scrap to recover costs. The only thing to 'take possession of' from a damaged dam might be some concrete rubble. IOW the insurance company couldn't 'sell' the damaged dam to a third party to recover costs.

If I am reading your scenario correctly JeffW, you would have the insurance company paying out an agreed fixed amount to cover the reconstruction. But then the tax man would stick his unwelcome nose in and say.

"Hang on, that dam you claimed depreciation on during the year no longer exists. So please give the depreciation money you claimed in your company tax return back please!"

Yet if Mercury refunded the depreciation money, that would reduce the free cash available to the company by that amount, with the net effect being the 'net earthquake payout' would be reduced by the depreciation recovered by the IRD. So once the depreciation money was taken away, Mercury would no longer have the money available to rebuild the dam. Could it really work like that? It hardly seems fair. Although I do appreciate that the words 'fair' and 'IRD' rarely appear in the same sentence.

SNOOPY

Interesting thoughts - I guess the question in this scenario really is, are they fixing the old dam, or building a brand new one? If the former then presumably, at least in theory, the insurance proceeds offset the R&M costs, so no issue - although in reality the "fixing" would take several years so potentially a timing mis-match. In the latter senario, of course the brand new dam would have a higher cost base for depreciation, so ultimately a (very) long term timing difference I guess

[Ferg]

Snoopy
Depreciation on revalued assets is not tax deductible.
Ferg


But then the tax man would stick his unwelcome nose in and say.

"Hang on, that dam you claimed depreciation on during the year no longer exists. So please give the depreciation money you claimed in your company tax return back please!"

[Snoopy]

Snoopy
Depreciation on revalued assets is not tax deductible.
Ferg


Yes, quite right, and now we are getting to the nub of the two sets of Mercury accounts that are prepared each year. The first being the nice shiny set, complete with revaluations and their consequences, that gets printed up in the annual report. The second being the rather dull affair, - without any reporting standard gymnastics - that gets sent to the IRD.

The reason why extra devaluation on revalued assets is not tax deductible, is that the IRD does not recognise such revaluations. The depreciation allowed each year by the IRD is based on the original price paid for the asset, not a valuation figure dreamed up by the 'valuation professionals' each year.

The question then becomes not one about whether depreciation is paid on the revalued portion of an asset's value (it isn't). But

i/ Whether the reported depreciation charge on Generation assets over FY2021 of $170m (AR2021 p57) represents the actual depreciation allowance accepted by the IRD, -OR-
ii/ Whether the reported $170m depreciation entry is a modified 'accounting construct depreciation' served up for we shareholders.

I had assumed it was the latter, but I guess I could be wrong :-0 ?

SNOOPY

[Snoopy]

I took the liberty of going to AR2021 p57 Note 7, and finding out what the depreciation charge for 'generation assets' for the year actually was: Answer $170m.

Then I looked up the page and took notice of the equivalent depreciation charge over FY2020: Answer $163m.

That means the depreciation charge, after revaluation, for what are in effect the same assets (because the acquired Tilt assets were not brought on to the books until August 2021, which was after the balance date) only increased by $170m-$163m= $7m. Yet to offset this, the movement in deferred tax increased by $263m. Huh? That hardly seems a balanced offsetting adjustment!


A follow up thought has occurred to me. If indeed that $7m year to year depreciation increment represents an increase in reported depreciation due to asset revaluations (and as I write this I have to acknowledge there is some doubt about that, refer my post 1438), then any extra reported depreciation must be written off over the life of the revalued asset. So if we take the $256m reported generation revaluation at 'face value' (AR2021 p58), and an incremental $7m is written off each year, then the expected life -on average- of the revalued assets being written off is: $256m/$7m = 36 years,

If you look at the depreciation schedule for generation assets (AR2021 p58) which says between 3 and 100 years, then 36 years looks like a reasonable 'average depreciation life' figure for geothermal and hydro assets that are generally long lived.

A 'total' incremental write off summed over time of $256m is also close to that 'movement in deferred tax increase' of $263m. Mystery solved?

SNOOPY

[Snoopy]

Post 1430 was useful to put on record, showing the tremendous amount of thin air capital that was generated from the public accounts available for scrutiny. Nevertheless it was the partial privatisation of Mercury Energy (or Mighty River Power as it was then), that put in the spotlight what capital structure for the company would be appropriate going forwards, following the public partial float.

I am going to use the assumption that, during the company float in FY2013:

i/ With consideration of how much new capital (if any) would be needed going forwards AND
ii/ The completion and commissioning of the all new Ngatamariki geothermal station fully costed in that year, AND
iii/ The listing of the company in April being so close to the end of the financial year in June.

then this meant that Mercury considered itself 'capital optimised' at the EOFY2013 balance date. Using the balance sheet from that year, we can therefore calculate an 'optimised gearing ratio' for the company:

Optimised Gearing Ratio (OGR): (Total Liabilities)/Total Assets): $2,620m / $5,802m = 45%

Once we have settled on this optimised 'base case', this means it is only the 'thin air capital' generated after that time that counts as possible future power station development capital. That is the basis for my table of numbers below.

I consider that the special dividends, paid over the years from FY2015 to FY2018 inclusive, represented a 'capital optimisation' exercise for the company. This means I must modify my 'thin air capital' table by removing the total special dividends paid from the summed 'thin air capital' created by revaluations.



YearNew Thin Air CapitalDeferred Tax Effect MultiplierEffective New Thin Air CapitalSpecial Dividend PaidDividend Tax Effect MultiplierSurplus Capital ReturnedSurplus Capital Returned per Share


FY2014$40m0.72$28.8m$0mN/A$0m0c


FY2015$421m0.72$303.1m$69m1.0$69m5.0c


FY2016$136m0.72$97.9m$34m1.0$34m2.5c


FY2017$48m0.72$34.6m$56m0.72$40m2.9c


FY2018$55m0.72$39.6m$70m1.0$70m5.0c


FY2019$250m0.72$180.0m$0mN/A$0m0c



FY2020$296m0.72$213.1m$0mN/A$0m0c


FY2021$938m0.72$675.4m$0mN/A$0m0c



Total$1,572.5m$229m$213m15.4c



Notes:

1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 on the dividend indicates that the dividend was not imputed and 28% tax needs to be paid.
3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.
4/ Surplus capital returned per share assumes 1,400m shares on issue.
5/ By removing the special dividend total from the incremental 'thin air capital', this means that in any complimentary dividend analysis, I should instead count these special dividends as 'regular dividend income', (because it no longer represents company money that can be used in any other way.)
6/ I have considered whether I should represent the 'thin air capital' on a 'declared dollar value basis' or a 'deferred tax adjusted basis'. I have decided to use the latter method. This is the more conservative approach, and will mean no adjustment would be necessary, should that 'deferred tax bill' ever be legislated to be collected.

In a small adjustment from previous years, I now consider that the reduction in 'thin air capital' from the special dividend should be looked at from a 'company perspective' (Special Dividend paid), not from a 'shareholder perspective' (Surplus Capital Returned).

The remaining thin air capital on the balance sheet is therefore: $1,573m - $229m = $1,344m

But how has this 'thin air capital' been deployed, and is there any left? That's next.

SNOOPY

[Snoopy]

The remaining thin air capital on the balance sheet is therefore: $1,573m - $231m = $1,342m

But how has this 'thin air capital' been deployed, and is there any left? That's next.


New projects and acquisitions are funded by a combination of equity and debt. Using the 'Optimised Gearing Ratio' (OGR) for the company, and knowing the future investment commitments already inked, we can figure out how much investment the remaining 'thin air capital' on the books can support.

Before we do that though, there is a bit more 'equity trading capital' that we can add to the 'thin air capital' equity pile.



Mercury Significant Asset Sales: 2019-2021
ProfitReference


Snowtown Windfarm (Aus) Disposal Dividend (from Tilt)$55m(AR2021 p32, p35)


Hudson Geothermal Power Station (USA) Sale$41m(AR2021 p36, p52)


Tilt 19.9% stake sale$367m(post 1431, AR2021 p63)


Metrix Metering Business sale$177m(AR2019 p71)



Total equity capital raised$640m




The Tilt stake asset sale actually occurred on 3rd August 2021, which is in the FY2022 financial year. However the terms were agreed on 16th April, in FY2021. I am therefore making the argument that 'effective completion' of the deal was in FY2021 and the planning downstream investment consequences of that deal were effectively 'baked in' by EOFY2021.

The net total of this 'thin air capital' plus 'equity trading capital' that has been accumulated could theoretically support extra debt 'd'. If we use the company's optimised gearing ratio.of 45%, then we can calculate 'd' as follows:

From post 1440, 'thin air capital' available was $1,344m.

$1,344m+$640m = $1,984m ('thin air capital + 'equity trading capital')

'd' / $1,984m = 45% => d= 0.45x $1,984m = $893m

We thus have a total funds available for investment an amount of:

$1,984m (equity) + $893m (debt) = $2,877m dollars,
(while still staying within Mercury's own optimised balance sheet guidelines.)

Offsetting that gain, the following significant capital investments have been committed to from FY2019 to FY2021



Mercury Significant Capital Investments: 2019-2022
Cost
Reference
Funding Spent


Turitea Windfarm (Stage 1 only)
$256m
(AR2019 p15)
($184m FY2020), ($72m FY2021)
Quick Settings

Turitea Windfarm (Stage 2 only)
$208m
(PR2021 p14)
($79m FY2021), Balance by EOFY2023


ex-Tilt 'NZ Located' Wind Farms
$797m
(AR2021 p35)
August 2021 (FY2022)


Trustpower Retail Business
$441m
(AR2021 p35)
May 2022 (FY2022)


Total capital budgeted spend$1,702m



Notes

1/ Turitea Funding: AR2020 p9, AR2021 p36

None of these investments were operating by the time the company balance date closed off (30-06-2021). But the Turitea North Windfarm was approaching the end of its construction with most capital expenditure already done. The expected uplift in EBITDAF from Turitea North, is forecast to be $35m on an annual basis.

Mercury has never been in a position where it has 'bought' so many new customers from another retailer in one block before, like the outlined Trustpower transaction. But nor has it proposed to buy such a large quantum of new generation capacity in any one year either. For the purpose of this exercise I will only consider 'capital spent' as relating to projects (and customers) that already exist. So I will remove 'Turitea South' (Turitea Windfarm Stage 2) from my capital spend total.

Available Capital to Spend @EOFY2021

$2,877m - ($1,702m-$208m) = $1,383m

This is enough to buy: $1,383m/$208m = 6 Turitea South windfarms

SNOOPY

[Snoopy]

With Turitea already budgeted for, the balance sheet suggests there is also enough investment capital available to build Pukeito as well. And Pukeito could be 40% larger than Turitea with the amount of investment capital available. So how much would these two wind farms boost Mercury's operational generating capacity?

1063MW Hydro (existing) x 0.514 = 546MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)

222MW Turitea Wind (new) x 0.432 = 96MW (effective)
310MW Pukeito Wind (new) x 0.432 = 134MW (effective)

Hence the effective new capacity increase from the fully funded but as yet not switched on power stations is:

(96+134) / (546+435) = 23.4%

I realise this is a strange concept for some. That is, giving value to a couple of Mercury consented power stations that are not yet in service. But as you will see it does appear the market is doing just that. Because the current MCY share price is very difficult to justify on Mercury's earnings today.


One year on and there has been a step change in the generation assets of Mercury, due to the plans to acquire the former Tilt NZ based windfarms. As at balance date (30-06-2021), we are in the strange position of having the funds for this acquisition 'ready to go', but the assets themselves not yet 'on the books'. Since we are looking at this situation from a 'capital perspective', if we consider that these assets are on the books already, that will allow us to see how much capital remains available for future investment projects.



Mercury Windfarms EOFY2021CommissionedGeneration Capacity

j
Waipipi (ex Tilt)2021133MW


Tararua I & II (ex Tilt)1998,200468MW


Tararua III (ex Tilt)200793MW


Mahinerangi I (ex Tilt)201136MW


Turitea North (Mercury built)2021119MW


Total Completed Capacity449MW



Capacity generation will not be achieved unless all of the windfarms are running 24/7. This isn't going to happen. So I will use a capacity reduction factor of 43.2% (see post 1321) to account for this. Combining this information with other information on existing hydro-electric and geothermal energy generation capacity and utilisation gives us an EOFY2021 picture.



Generation Asset Class
Existing Generation Capacity
Usage rate
Effective Generation Capacity


Hydro 1063MW 51.4% 546MW


Geothermal 463MW 94.0% 435MW



Wind 449MW 43.2% 194MW



Total 1175MW



The yet to be constructed Turitea 2 is designed to deliver 103MW of generation capacity, or

103MW x 0.432 = 45MW of effective generation capacity

With the equivalent of six of these stations already funded to be constructed (refer Post 1441), the incremental value embedded in Mercury shares which is already embedded above existing production capacity is:

1 + (6x45MW)/(1175MW) = 1.230 or +23.0%

Giving value to some of Mercury's consented power stations, which apart from Turitea South, have not been given the go ahead yet is a strange concept. But it does appear the market is doing just that. Because the current MCY share price is very difficult to justify on Mercury's earnings today.

SNOOPY

[Snoopy]

From the table, the average annual normalised gross dividend payment over FY2017 to FY2021 inclusive has been:

(24.00c+27.49c+21.25c+21.81c+22.50)/5 = 23.41c



I now use a 4.5% gross yield for utilities in this (still) low interest rate environment. I like a 2 percentage point margin over a utility share yield to make an alternative investment in gentailer bonds attractive. As I write this, the 'best' of the Mercury bonds, the MCY050 coupon rate 5.73% bonds are trading at an interest rate of 5.15%. That interest rate is too low, by a significant margin, to interest (sic) me. I want 6.5%!

A 6.5% bond yield for me is consistent with a 4.5% gross share yield.

So I can calculate a capitalised earnings valuation for MCY as follows.

23.41c / (0.045) = $5.20 (based on averaged, dps)

However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1442) my fair value for MCY today is:

$5.20 x 1.230 = $6.40

MCY closed on the market on Friday 27th May at $5.60. That means I see MCY as undervalued, by 12.5%.

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.



Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2013$3,182m$5,802m0.5484


FY2014$3,219m$5,689m0.5658


FY2015$3,337m$6,058m0.5508


FY2016$3,315m$6,085m0.5448


FY2017$3,308m$5,997m0.5516


FY2018$3,286m$6,091m0.5395


FY2019$3,537m$6,484m0.5455


FY2020$3,739m$6,885m0.5431



FY2021$4,186m$7,978m0.5247


HY2022$4,605m$8,497m0.5419



Notes

1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. I have included the HY2022 equity ratio so shareholders can get a feel for how the balance sheet looks following this transaction.



In order to work out the capital efficiency of Mercury, it is first necessary to determine the net equity within Mercury, less all the generation asset revaluations. Assets are funded by both equity and debt. This means we must back out the equity funded component of the generation asset revaluations only, by taking it off the quoted 'net asset backing'.




Generation Assets Book Value {A (AR Note P,P&E)
Generation Assets At Cost {B} (calculated)
Generation Assets Revaluation {A}-{B}
Equity Ratio EOFY {C}
Total Net Assets {D} (from balance sheet)
Total Net Assets Revaluation Adjusted {D}-{C}x{{A}-{B}}


FY2017
$5,241m
$2,236m
$3,005m
0.5516
$3,308m
$1,650m


FY2018
$5,215m
$2,313m
$2,902m
0.5395
$3,286m
$1,720m


FY2019
$5,347m
$2,358m
$2,989m
0.5455
$3,537m
$1,907m


FY2020
$5,575m
$2,460m
$3,115m
0.5431
$3,739m
$2,047m


FY2021
$6,362m
$2,495m
$3,867m
0.5247
$4,186m
$2,157m




This information is needed for 'Buffett Test 3', should I choose to run it.

SNOOPY

[fish]

Thanks Snoopy.
I had been really struggling to understand the high share price and had even sold some Mcy to buy Mel -that stops today -I feel I am evenly balanced as well .

[Snoopy]

If you have a look at the trustpower presentation, they have contacted 100% of their generation to Mercury for a few years, tapering off after that. Hopefully that buys enough time to stick up a few wind farms using Tilt's pipeline.


Given the date of your post mfd (21-06-2021), I presume you are referring to the Trustpower presentation released on that day. It is quite a glossy presentation, but I must say I found the detail in it sloppy and the whole presentation ambiguous to follow. The key slide to follow is slide number 7 titled 'Energy Hedge' (although you would not know it is slide number 7, because the slides are not numbered - I had to count from the beginning to determine the slide number).

Slide 7 shows an Electricity Hedge against time graph. But there are no units on the vertical axis, so it is not at all clear what the graph represents (incredibly sloppy). It was only by looking at a later press release (22nd April 2022) that I figured out the horizontal grey line across from the number 2000 represents 2000GWh/year. I am guessing this figure represents the expected output of Trustpower's (now Manawa Energy's) remaining hydro electric generation portfolio. If that is so, it shows the entire output (if that is what 2,000GWh represents, this is unclear) of Manawa's generation assets has been bought up by Mercury, for a few years at least. However the label on the grey line is a 'demand side' label - 'mass market load'. So is 2,000GW/h a 'load forecast' or a 'contracted generation amount'? I don't find it clear.

Next we learn that the picture in the graph that the arrangement with Mercury:

"Allows for an orderly transition between a bi-lateral hedge and a portfolio of hedges/sales into the C&I market."

(I presume here that C&I refers to the 'Commercial and Industrial Market', as Manawa has retained their commercial and industrial customers, and only sold their retail customers to Mercury)

I take it from that, we currently have a private agreement on the electricity sale price between Mercury and Manawa. This applies to 100% of (expected?) output up until the end of FY2024. The price Mercury will pay for electricity up until that time was set at 'arms length' we are told - for certainty. But we are not told what that price is. We are then told the price is set at 'mutually agreed locations' and with 'peaking factors'. 'Peaking factors' would suggest the price is not fixed. So much for certainty then!

I generally back myself to keep a level head when reading through all this technical stuff. But what I take from that graph is that Mercury and Trustpower have a fixed price agreement to take a fixed generation output, (with no regard as to whether Manawa can deliver on that generation promise), at a fixed contracted price that is nevertheless variable at different locations (and times?) around the peaks. I don't think the message the old Trustpower are trying to communicate with that graph makes sense. What are they trying to say? If anyone has a more informed understanding as to what the power deal is between Manawa and Mercury, I am all ears.

SNOOPY

[Snoopy]

I have taken it upon myself to examine further the 'retail' part of Trustpower, in particular the bit that Mercury is buying. The first column in the table below is from the Trustpower Annual Report for FY2021 (AR2021 p92). The second and third columns are from the Trustpower Annual Report for FY2022 (AR2022 p99)

At EOFY2021 for Trustpower (31-03-2021), Trustpower counted 265,000 homes and businesses as their retail customers (AR2021 p92). At the agreed retail customer base purchase date, on 21st June 2021, the Mercury press release on that date tells us that 231,000 of Trustpower's retail customers are 'mass market' (i.e. private homes).



Trustpower Retail Division
Trustpower Retail Division FY2021 (AR2021)
Trustpower Retail Division FY2021 (AR2022)
Trustpower Retail Division FY2022 (AR2022)l


Segment Revenue
$888.061m
$650.825m
$696.099m


less Segment Operating Costs
$841.078m
$607.321m
$651.608m


equals Segment EBITDAF (3)
$46.983m
$43.504m
$44.491m



Retail Electricity Revenue
$477.260m (67%)
$477.260m
$502.046m



Other Retail Revenue (2)
$173.565m
$173.565m
$194.053m



Commercial & Industrial Electricity Revenue$237.236m (33%)



Notes

1/ The difference between total annual reported revenue for FY2021, from the AR2021 and AR2022 perspectives, is that the AR2022 perspective removes commercial and industrial (C&I) revenue (as that part of the retail business is being retained by Trustpower/Manawa). Observe that all of the commercial and industrial customers are electricity customers only.
2/ 'Other retail revenue' includes Gas Revenue, Telecommunications Revenue, and Revenue allocated to customer incentives (I am guessing that last bit relates to revenue to be set aside to match amortising 'up front money' previously spent as a 'sign on' incentive).
3/ The implied commercial and industrial share of EBITDAF over FY2021 was: $46.983m-$43.504m= $3.479m (the difference in values between the first and second columns in the table above).

The implied EBITDAF on revenue figure for C&I was: $3.479m/$237.236m = 1.5%. That doesn't seem much, if you compare that to the EBITDAF on revenue figure for retail home customers for the same year. EBITDAF /revenue for 'mass market' = $43.504m/$650.825m= 6.7%. It makes you wonder why Trustpower/Manawa are keen to retain that commercial and industrial piece of the retail business.

From the Manawa/Trustpower 2nd May announcement, we learn more about the retained customer base.

"Its commercial and industrial electricity business supplies around 680 customers at more than 14,000 electricity connections nationally, currently supplying ~1,250GWh per annum"

From AR2022 p88, we learn that these C&I industrial sales are split between 407kWh at a 'fixed price' and 812GWh at a 'spot price' (407GWh+812GWh = 1,219GWh => ~1,250GWh). The other category of sales listed in the breakdown as 'mass market sales', I believe, refers to the electricity energy component of home retail sales (I say that because gas sales are listed separately further down the page).

Fast forward to dollars paid by MCY for the retail segment sale. From the Trustpower press release dated 15-02-2022, we learn:

---------

$441 million represents an excellent outcome for (Trustpower) shareholders
• ~$1,900 per customer
• Proforma standalone FY-21 EBITDAF multiple of 9 times

---------

So forecast EBITDAF for FY2022 = $441m/9 = $49m (excluding Commercial & Industrial ?) By the time FY2022 ended, a mere six weeks later, the underlying sales price seems to have reduced to $421m (see reference paragraph next).

Fast forward further, this time to the 2nd May 2022 Trustpower announcement:
"The final sale price of $467m is made up of an underlying price of $426m and a $41m payment for estimated working capital. The working capital value does not include ‘accounts payable as at completion’ which are retained by Trustpower. After settling all working capital balances, Trustpower expects to receive net proceeds from the sale of between $432m to $442m. Note the sale and purchase agreement includes typical working capital wash-up provisions."

The Mercury financial year does not end until 30th June 2022. From the Mercury HYP2022, (slide 14), we are told to expect a net EBITDAF contribution of $5m with $10m of revenue that will be offset by $5m of integration costs. I think that means that once we take integration costs into account, the EBITDAF contribution from the old Trustpower Retail Unit to Mercury over FY2022 will be zilch.

With the sale completion date being 1st May 2022, it means only 2 months of the old 'Trustpower retail' earnings will find their way into Mercury's EBITDAF earnings for FY2022. 2/12 x $49m = $8m. The fact that Mercury's estimate for the 'Trustpower retail' contribution is substantially lower than that means that Trustpower Retail likely did not have such a good year over FY2022. The 'good news' from all of this is that when Mercury announces their result for FY2022, it will include all of the costs of purchasing the Trustpower retail stake, but none of the benefits. That means, when the Mercury FY2022 result is announced, you will have to add 5/8 x $49m = $31m to the quoted EBITDAF figure for the year by Mercury. $31m added will give a good combined estimate of the earnings picture of a former Trustpower retail portfolio, now integrated with Mercury.

SNOOPY

[Snoopy]

This sort of thing should really be announced via the NZX, but I thought WTH. Why not give my mates on sharetrader the heads up instead? The market price for MCY will take a dive today. How do I know this for sure? Because I topped up my own holding in MCY yesterday!

SNOOPY

[see weed]

This sort of thing should really be announced via the NZX, but I thought WTH. Why not give my mates on sharetrader the heads up instead? The market price for MCY will take a dive today. How do I know this for sure? Because I topped up my own holding in MCY yesterday!

SNOOPY
I like it lol:t_up:. I did the same with MNW last month.

[Snoopy]

Over the past couple of years, Mercury Energy has transformed themselves from having no windfarms, to building their first, - Turitea North - and taking over the entire Tilt Energy NZ based windfarm portfolio. I have compiled information on these windfarm assets (References, p15 AR2021 Tilt Renewables, MCY news release 27-03-2019). Furthermore, I have re-presented earlier information I had compiled on Mercury's Geothermal and Hydro generation assets. This gives a complete picture of Mercury Energy's generation capacity as it sits today.



Mercury Energy Wind
Station Generation Capacity
Annual Energy Generation Capability
Annual Energy Generation Forecast
Forecast Generation Utilisation


Mahinerangi 1 (Tilt)
36MW315GWh103GWh32.7%


Tararua 1&2 (Tilt)
68MW596GWh239GWh40.1%


Tararua 3 (Tilt)
93MW815GWh309GWh37.9%


Waipipi (Tilt)
133MW1,165GWh455GWh39.1%


Turitea North (Mercury)
119MW1,042GWh470GWh45.1%


Total
330MW[/b][/TD]3,933GWh1,576GWh40.1%





Mercury Energy Hydro
Station Generation Capacity
Annual Energy Generation Capability
Operational Energy Generation
Generation Utilization



Aratiatia (Upgrade by FY2020?)78MW


Atiamuri74MW


Waipapa51MW


Ohakuri112MW


Whakamaru (Upgraded 24MW in FY2020)124MW


Arapuni (Upgraded 12MW in FY2011)196MW


Maraetai 1 & 2352MW


Karapiro96MW


Total
1,059MW
9,277GWh
4,768GWh
51.4%





Mercury Energy Geothermal
Station Generation Capacity
Annual Energy Generation Capability
Operational Energy Generation
Generation Utilization


Rotokawa (Refurbished FY2015)34MW


Ngatimariki (Completed FY2014)82MW


Kawerau100MW


Mokai (25% owned)112MW


Nga Awa Purua (65% owned) (Completed FY2010)138MW


Total466MW
4,082GWh
3,837GWh
94.0%



The Tararua 1,2 & 3, Waipipi and Turitea North windfarms are all within balancing distance of the Lake Taupo 'hydro battery' system. With more windfarm developments consented for this region, Mercury will be in a very powerful position to operate their central windfarms and the Lake Taupo fed hydro-electric energy in tandem. When the wind blows, they can save hydro energy, and use that energy later when the windfarms are becalmed. Mercury have complained about erratic water inflows into Lake Taupo in recent years. These new windfarms should be able to compensate for that, while the geothermal stations supply most of the baseload generation. Furthermore, all of these central North Island stations are in close proximity (in power generation terms) to the metropolis of Auckland - Mercury's largest retail customer base.

With the subsequent acquisition of the Trustpower retail customer base, the whole generation/retail mix is looking very strong for Mercury going forwards from here.

SNOOPY

[Snoopy]

This is an alternative Capitalised Dividend valuation to my post 1443, now using a 5.0% gross yield for utilities, as I have just done in my recent Contact Energy valuation.

So I can calculate a capitalised earnings valuation for MCY as follows.

FY2021: 23.41c / (0.05) = $4.68 (based on averaged 'dps')

FY2022: 23.67c / (0.05) = $4.73 (based on averaged 'dps')

However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1442) my fair value for MCY today is:

FY2021: $4.68 x 1.230 = $5.76
MCY closed on the market on Friday 12th August 2022 at $6.50. That means as at 12-08-2022, I see MCY as overvalued, by 12.8%.

MCY closed on the market on 30th September 2021 at $6.50 (same price as above). That means as at 30-09-2021, I saw MCY as overvalued, by 12.8%.

SNOOPY

[winner69]

This is an alternative Capitalised Dividend valuationI, now using a 5.0% gross yield for utilities in this (still) low interest rate environment.

So I can calculate a capitalised earnings valuation for MCY as follows.

23.67c / (0.05) = $4.73 (based on averaged, dps)

However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1442) my fair value for MCY today is:

$4.73 x 1.230 = $5.82

MCY closed on the market on Friday at $6.50. That means I see MCY as overvalued, by 11.7%.

SNOOPY

Good stuff Snoopy

Does that methodology mean GNE value should be over $4.00 ... thus really undervalued at the moment

Or isn't it that simple

[Snoopy]

Good stuff Snoopy

Does that methodology mean GNE value should be over $4.00 ... thus really undervalued at the moment

Or isn't it that simple


I had a nightmare last night that I was given the job of valuing Genesis Energy. Then I

1/ Got up
2/ Opened the Genesis Energy thread,
3/ Opened the Advanced Search box,
4/ Put in Author 'Snoopy' and keyword 'valuation'.

Then three pages of my posts on the topic came up. It seems I have been suffering from 'suppressed memory syndrome' and it is all true :-0!

SNOOPY

[winner69]

I had a nightmare last night that I was given the job of valuing Genesis Energy. Then I

1/ Got up
2/ Opened the Genesis Energy thread,
3/ Opened the Advanced Search box,
4/ Put in Author 'Snoopy' and keyword 'valuation'.

Then three pages of my posts on the topic came up. It seems I have been suffering from 'suppressed memory syndrome' and it is all true :-0!

SNOOPY

Yes I remember …you warned me not to get seduced the by GNE yield ….because of Kupe by look of it.

[alokdhir]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/MCY/397010/376576.pdf

What a great result !!! Divvy also growing fast ...next year guidance is great .

[Snoopy]

Time to update my table



Reval. Hydro & Thermal Assets ($m)
Reval. Geothermal & Other Generation Assets ($m)
Reval. Wind Generation Assets ($m)
Total Revaluation ($m)Post tax New Capital Per Share ($m)Pre Tax Revaluation ($m)Pre Tax New Capital Per Share (c)


20090170.987
N/A
170.98712.224417.4


2010200.90060.250
N/A
261.15018.737326.6


2011153.300135.275
N/A
288.57520.641229.4


2012119.5202.880
N/A
122.2408.717012.1


201330.96026
N/A
574.9795.6


2014425
N/A
292.1402.9


20153560
N/A
35625.449735.5


2016??
N/A
997.11379.9


2017038
N/A
382.7523.7


2018040
N/A
402.9553.9


201910971
N/A
18012.925017.9


202018231
N/A
21315.229621.1


2021396279
N/A
67548.293867.0


2022100
1
110
21115.129320.9


Total

2,741
196.7274


less Special Dividends Declared (FY2015-FY2018) (per share)

-229-15.4


add Snowtown Windfarm dividend (FY2021)


553.9


add Hudson Geothermal sale Profit (FY2021)


412.9


add Tilt Stake Gain (FY2022)

40428.9


equals Residual Thin Air capital

217



Notes:

1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time from my analysis, as these may been seen as a method of balance sheet optimization by paying back excess 'thin air capital' (ref post 1440).
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.
7i/ Mercury acquired 19.9% stake in Tilt Renewables acquired for $144m in FY2018. This had a market value of $130m at EOFY2018.
7ii/ During FY2019 Mercury subscribed $55m to a 'Tilt Renewables' capital raising. The book value of Mercury's share of Tilt increased to $249m over FY2019.
7iii/ During FY2020 Mercury acquired a seat on the Tilt board. This meant that Mercury could exert 'significant influence' over Tilt. Consequently accounting rules forced the Tilt stake to be reclassified in the balance sheet as an 'associate' rather than an 'investment'. The Tilt 'associate shareholding' was valued at $230m on the books at EOFY2019.
7iv/ Mercury subsequently sold their 19.9% stake in Tilt for $608m
7v/ The Tilt sale price was adjusted down to account for a $5m pre-sale dividend already booked.
7vi/ The 'thin air' capital gain on this series of transactions was therefore:
$608m - $5m - $55m - $144m = $404m

This $404m figure is at variance with the profit figure of $376m in AR2021 p63, because I am basing my profit calculation on original cost, not book value at the time of sale.

---------


217cps x 1,400m shares = $3,038m of retained 'hidden value' 'Thin air capital' over the years.

Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years, the Turitea wind farm, and the acquisition of the NZ wind farm assets of 'Tilt Renewables'. These constructions and acquisitions were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.

Notwithstanding the large amount of thin air capital created since 2008, 2021 foresaw the biggest spend ups so far, signing up to buy the biggest NZ windfarm assets back off Tilt's new owner, and also signing up to buy the retail assets of Trustpower (The transaction went through on 3rd August 2021, which was in FY2022).

And how much did shareholders have to stump up to make these acquisitions? Nothing. And how much was the debt ratio of the company increased so that borrowings could pay for these acquisitions? Not at all, until the arrival of the ex Tilt windfarm assets which reduced the equity ratio by 3.5 percentage points. However, Mercury has raised their EBITDAF profit target by $100m as a result of this Tilt acquisition.

There is the power of 'thin air capital' for you.

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.



Equity (A)Assets (B)Equity Ratio (A)/(B)


FY2013$3,182m$5,802m0.5484


FY2014$3,219m$5,689m0.5658


FY2015$3,337m$6,058m0.5508


FY2016$3,315m$6,085m0.5448


FY2017$3,308m$5,997m0.5516


FY2018$3,286m$6,091m0.5395


FY2019$3,537m$6,484m0.5455


FY2020$3,739m$6,885m0.5431


FY2021$4,186m$7,978m0.5247


FY2022$4,752m$9,660m0.4919



Notes

1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. This means FY2022 is the only entry above that includes the ex-Tilt renewable windfarm assets.

SNOOPY

[Snoopy]

In order to work out the capital efficiency of Mercury, it is first necessary to determine the net equity within Mercury, less all the generation asset revaluations. Assets are funded by both equity and debt. This means we must back out the equity funded component of the generation asset revaluations only, by taking it off the quoted 'net asset backing'.




Generation Assets Book Value {A (AR Note P,P&E)
Generation Assets At Cost {B} (calculated)
Generation Assets Revaluation {A}-{B}
Equity Ratio EOFY {C}
Total Net Assets {D} (from balance sheet)
Total Net Assets Revaluation Adjusted {D}-{C}x{{A}-{B}}


FY2018
$5,215m
$2,313m
$2,902m
0.5395
$3,286m
$1,720m


FY2019
$5,347m
$2,358m
$2,989m
0.5455
$3,537m
$1,907m


FY2020
$5,575m
$2,460m
$3,115m
0.5431
$3,739m
$2,047m


FY2021
$6,362m
$2,495m
$3,867m
0.5247
$4,186m
$2,157m


FY2022
$7,723m
$3,818m
$3,905m
0.4919
$4,752m
$2,831m



This information is needed for 'Buffett Test 3', should I choose to run it. It is also useful when working out 'Return on Equity' at cost.

SNOOPY

[Snoopy]

Post 1456 was useful to put on record, showing the tremendous amount of thin air capital that was generated from the public accounts available for scrutiny. Nevertheless it was the partial privatisation of Mercury Energy (or Mighty River Power as it was then), that put in the spotlight what capital structure for the company would be appropriate going forwards, following the public partial float.

I am going to use the assumption that, during the company float in FY2013:

i/ With consideration of how much new capital (if any) would be needed going forwards AND
ii/ The completion and commissioning of the all new Ngatamariki geothermal station fully costed in that year, AND
iii/ The listing of the company in April being so close to the end of the financial year in June.

then this meant that Mercury considered itself 'capital optimised' at the EOFY2013 balance date. Using the balance sheet from that year, we can therefore calculate an 'optimised gearing ratio' for the company:

Optimised Gearing Ratio (OGR): (Total Liabilities)/Total Assets): $2,620m / $5,802m = 45%

Once we have settled on this optimised 'base case', this means it is only the 'thin air capital' generated after that time that counts as possible future power station development capital. That is the basis for my table of numbers below.

I consider that the special dividends, paid over the years from FY2015 to FY2018 inclusive, represented a 'capital optimisation' exercise for the company. This means I must modify my 'thin air capital' table by removing the total special dividends paid from the summed 'thin air capital' created by revaluations.



YearNew Thin Air CapitalDeferred Tax Effect MultiplierEffective New Thin Air CapitalSpecial Dividend PaidDividend Tax Effect MultiplierSurplus Capital ReturnedSurplus Capital Returned per Share


FY2014$40m0.72$28.8m$0mN/A$0m0c


FY2015$421m0.72$303.1m$69m1.0$69m5.0c


FY2016$136m0.72$97.9m$34m1.0$34m2.5c


FY2017$48m0.72$34.6m$56m0.72$40m2.9c


FY2018$55m0.72$39.6m$70m1.0$70m5.0c


FY2019$250m0.72$180.0m$0mN/A$0m0c



FY2020$296m0.72$213.1m$0mN/A$0m0c



FY2021$938m0.72$675.4m$0mN/A$0m0c




FY2022$293m0.72$211.0m$0mN/A$0m0c




Total$1,783.5m$229m$213m15.4c



Notes:

1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 on the dividend indicates that the dividend was not imputed and 28% tax needs to be paid.
3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.
4/ Surplus capital returned per share assumes 1,400m shares on issue.
5/ By removing the special dividend total from the incremental 'thin air capital', this means that in any complimentary dividend analysis, I should instead count these special dividends as 'regular dividend income', (because it no longer represents company money that can be used in any other way.)
6/ I have considered whether I should represent the 'thin air capital' on a 'declared dollar value basis' or a 'deferred tax adjusted basis'. I have decided to use the latter method. This is the more conservative approach, and will mean no adjustment would be necessary, should that 'deferred tax bill' ever be legislated to be collected.

I consider that the reduction in 'thin air capital' from the special dividend should be looked at from a 'company perspective' (Special Dividend paid), not from a 'shareholder perspective' (Surplus Capital Returned). This is because the amount of the payment is determined by the company based on the company capital remaining as a result of the quantum of the special dividend payment going out (i.e. what the shareholder ends up with in their hands is irrelevant).

The remaining thin air capital on the balance sheet is therefore: $1,784m - $229m = $1,555m

But how has this 'thin air capital' been deployed, and is there any left? That's next.

SNOOPY

[Snoopy]

The remaining thin air capital on the balance sheet is therefore: $1,784m - $229m = $1,555m

But how has this 'thin air capital' been deployed, and is there any left? That's next.


New projects and acquisitions are funded by a combination of equity and debt. Using the 'Optimised Gearing Ratio' (OGR) for the company, and knowing the future investment commitments already inked, we can figure out how much investment the remaining 'thin air capital' on the books can support.

Before we do that though, there is a bit more 'equity trading capital' that we can add to the 'thin air capital' equity pile.



Mercury Significant Asset Sales: 2019-2022
ProfitReference


Snowtown Windfarm (Aus) Disposal Dividend (from Tilt)$55m(AR2021 p32, p35)


Hudson Geothermal Power Station (USA) Sale$41m(AR2021 p36, p52)


Tilt 19.9% stake sale$367m(post 1431, AR2021 p63)


Metrix Metering Business sale$177m(AR2019 p71)



Total equity capital raised$640m




The net total of this 'thin air capital' (post 1459) plus 'equity trading capital' that has been accumulated could theoretically support extra debt 'd'. If we use the company's optimised gearing ratio.of 45%, then we can calculate 'd' as follows:

$1,555m+$640m = $2,195m ('thin air capital + 'equity trading capital')

'd' / $2,195m = 45% => d= 0.45x $2,195m = $988m

We thus have a total funds available for investment an amount of:

$2,195m (equity) + $988m (debt) = $3,183m dollars,
(while still staying within Mercury's own optimised balance sheet guidelines.)

Offsetting that gain, the following significant capital investments have been committed to from FY2019 to FY2022



Mercury Significant Capital Investments: Announced 2019-2022
CostReference


Turitea Windfarm (Stage 1 only)$256m(AR2019 p15)
Quick Settings

Turitea Windfarm (Stage 2 only)$208m(PR2021 p14)


ex-Tilt 'NZ Located' Wind Farms$797m(AR2021 p35)


Trustpower Retail Business$441m(AR2021 p35)


Total capital budgeted spend$1,702m




Of these investments, the Turitea North Wind Farm became operational in the second quarter of FY2022. The Tilt wind farm portfolio was under the control of Mercury in August 2021 (in Q1 FY2022). were operating by the time the company balance date closed off (30-06-2021), and the old Trustpower retail customer base did not come on board until May 2022. The expected uplift in EBITDAF from Turitea North, from a full year of operation, is forecast to be $35m on an annual basis.

Mercury has never been in a position where it has 'bought' so many new customers from another retailer in one block before, like the outlined Trustpower transaction. But nor has it proposed to buy such a large quantum of new generation capacity in any one year either. For the purpose of this exercise I will only consider 'capital spent' as relating to projects (and customers) that already exist. So I will remove 'Turitea South' (Turitea Windfarm Stage 2) from my capital spend total.

Available Capital to Spend @EOFY2022

$3,183m - ($1,702m-$208m) = $1,689m

This is enough to buy: $1,689m/$208m = 7 Turitea South windfarms (actual number is 7.7 which is equivalent to 7 with a 10% cost contingency).

SNOOPY

[Snoopy]

EOFY2022 and we have the the former Tilt NZ based windfarms and the first stage of the Turitea wind farm 'on the books' and generating.



Mercury Windfarms EOFY2022CommissionedGeneration Capacity

j
Waipipi2021133MW


Tararua I & II1998,200468MW


Tararua III200793MW


Mahinerangi I201136MW


Turitea North2021119MW


Total Completed Capacity449MW



Capacity generation will not be achieved unless all of the windfarms are running 24/7. This isn't going to happen. So I will use a capacity reduction factor of 43.2% (see post 1321) to account for this. Combining this information with other information on existing hydro-electric and geothermal energy generation capacity and utilisation gives us an EOFY2021 picture.



Generation Asset Class
Existing Generation Capacity
Usage rate
Effective Generation Capacity


Hydro 1063MW 51.4% 546MW


Geothermal 463MW 94.0% 435MW



Wind 449MW 43.2% 194MW



Total 1175MW



The yet to be constructed Turitea 2 is designed to deliver 103MW of generation capacity, or

103MW x 0.432 = 45MW of effective generation capacity

With the equivalent of seven of these stations already funded to be constructed (post 1460), the incremental value embedded in Mercury shares which is already embedded above existing production capacity is:

1 + (7 x45MW)/(1175MW) = 1.268 or +26.8%

Giving value to some of Mercury's own consented power stations, which apart from Turitea South, have not been given the go ahead yet is a strange concept. But it does appear the market is doing just that. Because IMO, the current MCY share price is very difficult to justify on Mercury's earnings today. My explanation is that 'everyone needs power' and the country is on the path of 'renewable electrification'. So even though not all of the Mercury consented power stations are yet built, there is reasonable certainty that they will be. And people are prepared to pay for 'certain cashflow', even if it is a few years away.

SNOOPY

[Snoopy]

Financial YearNormalised 'eps'Net Dividend Paid (per share)Gross Dividend Paid (per share)


201610.3c8.4c + 2.5c(S) + 5.7c 11.67c + 3.47c + 7.92c = 23.06c


201712.1c8.6c + 2.88c(NI,S) + 5.8c11.94c + 4.0c + 8.06c = 24.00c


201814.0c8.8c + 5.0c(S) + 6.0c12.22c + 6.94c +8.33c = 27.49c


201911.7c9.1c + 6.2c12.64c + 8.61c = 21.25c


202011.6c9.3c + 6.4c12.92c + 8.89c = 21.81c


202110.1c9.4c + 6.8c13.06c + 9.44c = 22.50c


202211.6c10.2c + 8.0c14.17c + 11.11c = 25.28c





Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend'.
3/ 'Normalised eps' = 0.72x(EBITDAF-DA-I) / 1,400 shares on issue

For this valuation technique, I work with all dividends. Despite special dividends not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

From the table, the average annual normalised gross dividend payment over FY2017 to FY2021 inclusive has been:

(24.00c+27.49c+21.25c+21.81c+22.50)/5 = 23.41c

From the table, the average annual normalised gross dividend payment over FY2018 to FY2022 inclusive has been:

(27.49c+21.25c+21.81c+22.50+25.28)/5 = 23.67c


Big Announcement: I am changing my dividend analysis by looking at the previous four years of dividends paid, not the previous five years as before. In an analysis such as this, there is always a balance between gaining enough data to cover a 'business cycle', but not gathering so much data that the oldest becomes too historic and irrelevant to be a predictor of future dividends going forwards. Competitor Contact Energy has announced that they will be paying dividends on the basis of cashflows from the previous four years. I don't have a strong view as the whether using four or five years worth of dividend data is preferable. But since Contact has chosen four years, and they probably have a better idea of the better representative earnings period than I do, I am from now going with four years.



Financial YearNormalised 'eps'Net Dividend Paid (per share)Gross Dividend Paid (per share)


201911.7c9.1c + 6.2c12.64c + 8.61c = 8.61c


202011.6c9.3c + 6.4c12.92c + 8.89c = 21.81c


202110.1c9.4c + 6.8c13.06c + 9.44c = 22.50c


202211.6c10.2c + 8.0c14.17c + 11.11c = 25.28c


2023?c12.0c + ?c16.67c + ?c = ?c




Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ (NI) means 'Not Imputed', (S) means 'Special Dividend' (not used for FY2022.5 data) .
3/ 'Normalised eps' = 0.72x(EBITDAF-DA-I) / 1,400 shares on issue

For this valuation technique, I work with all dividends. Despite special dividends, when declared, not being repeatable, they are paid frequently. And, using this particular valuation method, I have not recognised these special dividends as a benefit for shareholders in any other way.

From the table, the average annual normalised gross dividend payment over FY2019.5 to FY2022,5 inclusive has been:

(8.61c+21.81c+22.50c+25.28c+16.67c)/4 = 23.72c

SNOOPY

[Snoopy]

This is an alternative Capitalised Dividend valuation to my post 1443, now using a 5.0% gross yield for utilities, as I have just done in my recent Contact Energy valuation.

So I can calculate a capitalised earnings valuation for MCY as follows.

23.67c / (0.05) = $4.73 (based on averaged, dps)

However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1442) my fair value for MCY today is:

$4.73 x 1.230 = $5.82

MCY closed on the market on Friday 12th August at $6.50. That means I see MCY as overvalued, by 11.7%.



I have decided that using a 5.0% gross yield, as I have just done in my recent Contact Energy valuation, is an appropriate measuring stick for 'fair value' of a relatively secure cashflow utility.

So I can calculate a capitalised earnings valuation for MCY as follows. Average 'earnings per share' for the most recent four years of dividend data may be found in post 1462.

23.72c / (0.05) = $4.74 (based on averaged, dps)

However, this valuation does not take into account the any not yet operational wind farms for which the capital is already built into today's balance sheet. Adjusting for that (my post 1461) my fair value for MCY today is:

$4.74 x 1.268 = $6.01

MCY closed on the market on Thursday 18th August 2022 at $6.30. That means I see MCY as overvalued, by 4.8%.

SNOOPY

[Snoopy]

I can’t work out how to ask questions on the webcast of the AGM. I wanted to ask about the proposed pumped hydro at Lake Onslow and get Mercury’s take on the feasibility of it and the impact on their business.
Is anyone on the call able to propose this question???
TIA



It was however talked about "pumped storage either in South Island or the North Island" i.e. maybe they think there are options, not just Lake Onslow.

Lake Taupo is only 600GWH storage which is quite small compared to some of the South Island Lakes.


Have just skimmed through the AGM presentations. It looks like that while not directly decrying Onslow, they see much better outcomes if 'alternative battery strategies' go ahead. From Chairman Prue's address

"We are contributing to a number of reviews currently looking at the challenge of reliability. One of these is the New Zealand Battery Project. It is vital that this project rigorously and transparently tests the full range of options against the Government’s default option of a multi-billion dollar pumped hydro scheme at the bottom of the South Island. The analysis must also consider the impact of the preferred solution on the other legs of the trilemma, namely affordability and renewability."

From the posts I quote from 2020, maybe they still favour pumped storage at Taupo? This would be fantastic for Mercury. More water through that series of dams Mercury own on the 'Mighty River' Waikato!

There is also veiled comment on the 'threat' of electricity price caps.

"However the reality is that significant investment will be required to build the new renewable generation necessary to transition to a low carbon economy and it will be important to ensure that our market structure remains fit for purpose and regulatory settings do not dis-incentivise investment."

This is referring to Mercury being able to fund their entire new power station construction program, so far, via 'thin air capital' (the capitalised increased earning capability of existing generation assets). If the wholesale price of power does not keep rising, this means the government, via their controlling shareholding in Mercury, might have to front up with some 'real capital' (cash) to fund the building pipeline of renewable generation assets. Some would say that would be a better use of money anyway, than pouring $4billion into the Onslow pumped hydro project 'down south'.

SNOOPY

[xafalcon]

Have just skimmed through the AGM presentations. It looks like that while not directly decrying Onslow, they see much better outcomes if 'alternative battery strategies' go ahead. From Chairman Prue's address

"We are contributing to a number of reviews currently looking at the challenge of reliability. One of these is the New Zealand Battery Project. It is vital that this project rigorously and transparently tests the full range of options against the Government’s default option of a multi-billion dollar pumped hydro scheme at the bottom of the South Island. The analysis must also consider the impact of the preferred solution on the other legs of the trilemma, namely affordability and renewability."

From the posts I quote from 2020, maybe they still favour pumped storage at Taupo? This would be fantastic for Mercury. More water through that series of dams Mercury own on the 'Mighty River' Waikato!

There is also veiled comment on the 'threat' of electricity price caps.

"However the reality is that significant investment will be required to build the new renewable generation necessary to transition to a low carbon economy and it will be important to ensure that our market structure remains fit for purpose and regulatory settings do not dis-incentivise investment."

This is referring to Mercury being able to fund their entire new power station construction program, so far, via 'thin air capital' (the capitalised increased earning capability of existing generation assets). If the wholesale price of power does not keep rising, this means the government, via their controlling shareholding in Mercury, might have to front up with some 'real capital' (cash) to fund the building pipeline of renewable generation assets. Some would say that would be a better use of money anyway, than pouring $4billion into the Onslow pumped hydro project 'down south'.

SNOOPY

Of course they want "alternative options to progress"

Onslow will cap profits and allow increased renewable generation to be added

Veiled threats against government aren't a good idea either. There will be plenty of companies ready to spend the capital on renewable energy projects to, even at significantly lower wholesale electricity prices

[Snoopy]

Of course they want "alternative options to progress"

Onslow will cap profits


Yes



and allow increased renewable generation to be added

There will be plenty of companies ready to spend the capital on renewable energy projects to, even at significantly lower wholesale electricity prices


I think the Mercury argument is the opposite. Putting a cap on energy prices will act as a strong disincentive to build new energy power plants.

There is an interesting interview here from the founder of 'Harmony Energy' New Zealander Pete Grogan, a UK listed income trust, that specialises in building renewable energy projects. They are the instigator of a 'solar farm' project in the Waikato

https://www.rnz.co.nz/audio/player?audio_id=2018859594

The interview is about solar farms, but the arguments apply to any smaller scale renewable energy development project,

-------------------

Some highlight points 12:00:
"(Solar farms) can't go anywhere. They need to go somewhere, where there is proximity to transmission or distribution grid infrastructure. It isn't that you can connect a solar farm to any overhead line, or any substation. You have to do an analysis of that asset and determine what its rating is and the amount of power it might be able to take and transmit."

17:00:
Attractive to a fund as revenues are very secure and very stable for the long term

20:30:
Management of distributed generation (which is what a series of solar farms will be) is tricky.

23:45:
Everything goes into the wholesale market, and if you have excessive generation in a relatively small economy and the generation profile is the same as would be the case if we 'over solar' then you will start to see a price impact on that At midday at the time of the day when the sun is at its highest there will be a huge amount of new generation in the system and the price will come down and that will then determine as an economic driver what new capacity the market accepts.

In terms of what we can connect there is really no limit but that is the (market) danger. The pressures should be on developers to bring forward the best projects, the projects that are not just about clean green energy but also about all of those other things: biodiversity, ecology, education, cultural sensitivity, appropriate location, visual impact - all of those things

------------------

Pete is talking his own book here (which is fair enough), as he emphasizes that land for a solar farm can still support a sheep farm under it, the farms are silent, and the commitment to restoring other aspects of nature (e.g. wetlands) on solar farm land ticks the biodiversity, ecology and cultural sensitivity boxes. However, pushing ahead with this project without understanding how low those wholesale power prices may go in the middle of a sunny day is a worry. Such power price dips can of course be avoided by selling your expected solar farm output at a fixed price as part of a long to contract to a power hungry customer business. Does the 'build it and they will come' kind of energy planning still add up when the government has strongly signalled there will be price caps under a 'national battery' policy initiative? Is this just another 'small time' project that only exists at the tolerance whim of the big four gentailers?

I haven't read anything to change my mind from the fact that the economic success of renewable energy projects that are to be built in the future is still tied to an ever increasing wholesale power price.

SNOOPY

[xafalcon]

Yes



I think the Mercury argument is the opposite. Putting a cap on energy prices will act as a disincentive to build new energy power plants.

There is an interesting interview here from the founder of 'Harmony Energy' , a UK listed income trust, that specialize in building renewable energy projects. They are the instigator of a 'solar farm' project in the Waikato

https://www.rnz.co.nz/audio/player?audio_id=2018859594

Some highlight points 12:00:
"(Solar farms) can't go anywhere. They need to go somewhere, where there is proximity to transmission or distribution grid infrastructure. It isn't that you can connect a solar farm to any overhead line, or any substation. You have to do an analysis of that asset and determine what its rating is and the amount of power it might be able to take and transmit."

17:00:
Attractive to a fund as revenues are very secure very stable for the long term

20:30:
Management of distributed generation (which is what a series of solar farms will be) is tricky.

Most definitely MCY asserts that putting a cap on energy prices will act as a disincentive to build new energy power plants. This is part of their strategy to coerce government to make the decision not to proceed with Lake Onslow

This was the veiled threat I referred to as being unwise for them to make

Because Lake Onslow will also (as the Oracle of knowledge, aka Jantar, previously noted) put a floor under prices when renewable generation is plentiful. Hence Lake Onslow will most likely make renewable generation more lucrative

[Snoopy]

Most definitely MCY asserts that putting a cap on energy prices will act as a disincentive to build new energy power plants. This is part of their strategy to coerce government to make the decision not to proceed with Lake Onslow

This was the veiled threat I referred to as being unwise for them to make.


I guess the Mercury board would say that they have a responsibility 'to look after their shareholders'. The ironic thing being that Mercury's largest shareholder is the government. So it comes down to a case of "the government threatening itself"!



Because Lake Onslow will also (as the Oracle of knowledge, aka Jantar, previously noted) put a floor under prices when renewable generation is plentiful. Hence Lake Onslow will most likely make renewable generation more lucrative


I refer you back to work I did on another electricity market player where I calculated the upside of Onslow
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973916&viewfull=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973765&viewfull=1#post973765

-$208.68m

I know this analysis was somewhat simplistic (ignoring long term power contracts - not struck at the spot price - for example).

But 'long term' these two numbers still give you a feel for 'the drivers of price'. But it looks to me like 'losing the upside' will have a greater effect on the viability of a renewable power generation project than 'losing the downside'.

SNOOPY

[xafalcon]

I guess the Mercury board would say that they have a responsibility 'to look after their shareholders'. The ironic thing being that Mercury's largest shareholder is the government. So it comes down to a case of "the government threatening itself"!



I refer you back to work I did on another electricity market player where I calculated the upside of Onslow
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973916&viewfull=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973765&viewfull=1#post973765

-$208.68m

I know this analysis was somewhat simplistic (ignoring long term power contracts - not struck at the spot price - for example).

But 'long term' these two numbers still give you a feel for 'the drivers of price'. But it looks to me like 'losing the upside' will have a greater effect on the viability of a renewable power generation project than 'losing the downside'.

SNOOPY

From memory your analysis was against existing MEL generation capacity??

My comment was referring to the economics of constructing new renewable generation in the future. "There will be plenty of companies ready to spend the capital on renewable energy projects to, even at significantly lower wholesale electricity prices"

The reason being (again from info gleened from Jantar posts). At present when wind (and soon to be solar) are generating significant % of capacity, wholesale prices often fall to almost zero = poor ROI. But when Lake Onslow is operating, it will put a floor under wholesale pricing as XS renewable electricity is bought to pump water uphill = improved ROI.

So I expect there will be a number of new market entrant wind and solar companies building plants in the next 10 years to take advantage of the price floor

Given the potential size of Lake Onslow (up to 6TWh from memory), the renewable energy sources, and the lowering effect it will have on peak power prices, it may even encourage energy hungry businesses to locate to NZ south island. Especially since the European era of low energy prices seems by their own admission, to be over

[Snoopy]

The rationale for Onslow is for it to be government controlled 'reserve generation' that puts a lid on the maximum price offered into the nationwide power system. Without Onslow, this maximum price would be controlled by the gentailers who have made big money from rogue power price peaks. Peaking Thermal generation in particular would not be competitive with Onslow. But if Onslow were used all the time to flatten any wholesale power price spike, then there would be a possibility of the Onslow water supply being used up. That would remove the threat of Onslow coming on stream to reduce high spot power prices, and so defeat the whole rationale for Onslow existing in the first place. This means the 'default state' of Onslow must be to remain idle.


The post below relates to Contact Energy for the June 2022 financial year.



I refer you back to work I did on another electricity market player where I calculated the upside of Onslow
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973916&viewfull=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showthread.php?2674-Contact-Energy-CEN-Chart&p=973765&viewfull=1#post973765

-$208.68m

I know this analysis was somewhat simplistic (ignoring long term power contracts - not struck at the spot price - for example).

But 'long term' these two numbers still give you a feel for 'the drivers of price'. It looks to me like 'losing the upside' will have a greater effect on the viability of a renewable power generation project than 'losing the downside'.


This is a similar exercise that I did for Contact Energy, of the CEN thread in August 2022. To keep it comparable, I am going to initially look at the year FY2022 for Mercury. The purpose of this exercise is not a retrospective on the year FY2022. Instead I aim to answer the question:

"If the climatic conditions of FY2022 occurred in some future year in which Onslow was operating, how much profit (in this case EBITDAF) would Mercury lose as a result of Onslow being operational?"

When looking at Mercury there is an additional complicating factor. That being the generation side of the business has 'substantially changed' with the acquisition of the former Trustpower windfarm portfolio. This should bring positive benefits to Mercury as it will allow them to substitute wind for hydro production, thus leaving the hydro-generation assets more water to generate power when the wind is low and wholesale energy prices are consequently higher. Exactly how this wind energy for hydro substitution pans out in future years is interesting to contemplate. But that is for a separate analysis another time.

SNOOPY

[Snoopy]

To predict the consequences of the future behaviour of the operators of Onslow, I am going to rely on Jantar's vision (espoused in the Contact Energy thread) on how this might occur



Onslow would not pump, or generate, based on the season, but rather it would do so based on the wholesale price. It is likely that it would be pumping when prices are less than around $50 per MWh, and generating when prices are above $100 per MWh. Because it can bid (for pumping) and offer (for generation) there would be a number of price bands, not a single price in each direction. It is likely that it would do both: Pumping overnight when prices are low, and generating during the day when prices are high on many days.


Returning to my quest trying to figure out how the profitability of Mercury Energy would be affected if Onslow is built....

Mercury provides the market with quarterly operating reports, and for the purposes of this discussion I am looking at their June 2022 quarterly report. The 'Otahuhu Wholesale Market Price and National Hydro Storage Levels' graph (misnamed because it contains wholesale price information on the Benmore node as well) contains:

a/ A trailing twelve monthly price trace of 'Wholesale Electricity Pricing' at the OTA (Otahuhu) and BEN (Benmore) nodes, based on a 12 month average 'rolling price' PLUS
b/ An accompanying trace of national (hydro) energy storage for both the current year, the previous year and a longer term historical average.

If we now move back to the 'Mercury Operating Statistics' page and cast our eye over the 'Electricity Generation' section, then we get a breakdown in unit terms of:

i/ How much energy Mercury has generated from Hydro, Geothermal and Wind generation respectively.
ii/ Into which customer classifications that energy was sold.

Of those three energy generation sources, I suspect it is only hydro that can be 'ramped up' to meet peak demand. This is consistent with the VWAP received for hydro energy in the table below being the highest of the three energy generation operational groups.

With hydro-energy, opening and closing the turbine gates are part of normal operations. So the timing of exactly when the water moves through the turbines will not affect the wear and tear on those turbines. IOW there will be no 'incremental depreciation' at the Mercury dams because of Onslow. Neither will Mercury's interest on debt change according to when Onslow operates. So IMO it is more correct to think about Onslow affecting profits at EBITDAF level, and not NPAT level.

Nevertheless, when determining peak demand pricing, it will be a thermal generation asset from another generator provider that sets the price benchmark. The price figures in the table provided are retail, which is inconsistent with the accompanying graphed wholesale prices - very annoying! This means I have to guess what the equivalent wholesale prices are using a formula estimate (1). I have repeated some information on p3 of the June 2022 quarterly report in my own table below.

-----------------



June 2022 QuarterPower Sold (GWh)
Power Generated (GWh)
VWAP Retail ($/MWh)
VWAP Wholesale ($/MWh) (1)


Mass Market636


Commercial & Industrial594


Line Losses58


CfD sell contracts (total)685


Hydro925
$199.82$193.83


Geothermal647
$182.46$176.99


Wind Power Purchase Agreement (Genesis) (2)252
$72.14$72.14


Wind Spot Generation103
$169.07$164.00


Buy CfD (Financial contracts)676
$287.92?


Total (2)19732351



From this we can work out the net power generated to be: 2351GWh - 1973GWh = 378GWh

Calculation Notes

1/ Wholesale calculation prices are retail calculation prices multiplied by: 1/1.035= 0.97. This is based on the average EBITDAF margin for Mercury Energy over the last four years (2019 to 2022 inclusive) (see 'Power Shares' thread post 1120).
2/ This is not spelt out in the report. But I believe the PPA referred to is the long term agreement between Genesis Energy and Tilt Renewables (now Mercury) where the full output of the 133MW Waipipi wind farm in South Taranaki has been agreed to be purchased by Genesis Energy for twenty years. The information as tabulated by Mercury suggests this is a retail arrangement. But this is not true. It is clearly a long term wholesale arrangement. This generation figure has therefore been not added to the power generation total, as it is outside of the day to day Mercury operational business model.
3/ The Mercury table explanatory note 7 on the 'Net Position' number states that this total "Includes all physical and financial buys and sells except spot customer purchases." I believe this note is at best misleading, because it doesn't mention that the net totals do not include wind generated under the PPA agreement with Genesis. But the net total does include wind spot generation.


------------------

Operational reporting by Mercury has been affected by the 'tyranny of averages'. If we believe Jantar's proposition that wholesale prices above $100/MWh will be capped, and all of Mercury's wholesale prices are above that level for the three month June 2022 quarter, then what does that mean for any future scenario profits? One word - disaster! Or to quantify that, the EBITDAF reduction that Onslow would have trimmed from Mercury's profits for the quarter if such hydrological and market conditions were to be repeated in the future would be:

($193.83/Mwh-$100/MWh)925,000MWh + ($176.99/MWh-$100/MWh)647,000MWh + ($164.00/MWh-$100/MWh)103,000MWh
= $86.8m + $49.8m + $6.6m = $143.2m

To put this in context EBITDAF for the full year FY2022 was $581m. Multiply that quarterly loss over four quarters and all of Mercury's profits disappear! Fortunately I do not believe such a scenario would come to pass, and this is where my 'tyranny of averages' remark becomes important. Average prices can be affected by very high short term peaks. So if, for example, wholesale electricity prices spiked to $2000/MWh for one day in a month, while on the other 30 days the price was $80/MWh, then the average price for the month would be:

(30 x $80/MWh + 1 x $2000/MWh) / 31 = $142/MWh

Taking that average figure as typical, you would expect Onslow to crash profitability for Mercury for a whole month. But if you look at the individual daily figures, you can see that in fact Onslow would only affect the profitability of Mercury on a single day of that month. The lesson here is that judging what Onslow might do to profitability of Mercury based on an 'average price for the month' would give *completely the wrong impression* on what might occur when looking at electricity pricing on a day to day basis.

Finally to return to my original question:
"How would the profitability of Mercury Energy be affected if Onslow is built?"

The answer is that from the information published by Mercury, this is unknowable. That is because we don't have any information of frequency and duration of the wholesale power price peaks, and how high the wholesale power prices rose during those peaks. Extremely disappointing. It is almost as if the quarterly operational reports were written in such a way as to deliberately obscure the prospects of the company.

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/407035

Significant investment to increase scale and strong generation underpinned Mercury’s financial results for the six months to 31 December 2022.

Hydro production was up 852GWh to 2,735GWh after Lake Taupō experienced its highest ever inflows for the July to December period. Wind production was also notably higher (up 201GWh to 788GWh), reflecting a full six months of generation across Mercury’s wind farms including from the newly commissioned Turitea North wind farm.

“Wet weather has defined the period, in sharp contrast to a dry FY2022. In addition to producing the highest hydro generation volume in our company’s history, another 675GWh was spilled to maintain lakes within Resource Consent operating limits,” said Mercury Chief Executive Vince Hawksworth.

The result also reflects a significantly larger retail business, primarily due to completion of the Trustpower retail acquisition in May 2022 and a full six-month contribution at increased scale. Mercury also acquired the outstanding shares in the broadband company NOW NZ in December 2022.

“Mercury is a much larger business than it was this time last year, and it shows strongly in our result. We added 440,000 more connections from those two transactions alone,” said Mr Hawksworth.

The company has recently embarked on a major period of growth, having spent more than $1.7b acquiring Tilt Renewables’ New Zealand operations in 2021, Trustpower’s retail business in 2022 and building New Zealand’s biggest windfarm at Turitea.

While operating earnings (EBITDAF) were up $223m to $451m for the period, net profit was down $197m to $230m with the previous period including the one-off net gain made from the sale of Mercury’s shareholding in Tilt Renewables when Mercury acquired Tilt’s NZ operations in August 2021.

The early exit of a long-term hedge with Norske Skog in HY2022, which reduced revenue by $65m in that period, also contributed to the lift in EBITDAF in HY2023.
Operational expenditure was $54m higher than the prior comparable period while stay-in-business capital expenditure was up $11m, reflecting increased scale and activity across the business.

RECENT WEATHER EVENTS

While the country’s generating assets were largely undamaged by recent weather events, the scale of destruction for distribution and lines networks has been significant.

“Resilience of critical infrastructure needs to be one of New Zealand’s biggest priorities. We know that weather events will become increasingly severe, and we need to adapt,” said Mercury Chair Prue Flacks.

“Keeping the lights on for New Zealanders is a collective goal and so collective action will be vital. Whole-of-system thinking about the investment and delivery of critical infrastructure is our best hope for a reliable and affordable system in an uncertain future.

"This has undoubtedly been a challenging time, and our thoughts are with those impacted by the devastation caused. Across the country many people have lost access to electricity and telecommunications, which has been hugely disruptive.”

“Like all of New Zealand, we responded quickly to support our customers and communities. Our team have been making welfare calls, providing financial support to those who are worst affected and staying connected to communities to help hard-to-reach customers where possible.

DELIVERING THROUGH HEADWINDS

Both the retail and generation business encountered significant headwinds over the period including an inflationary environment, access to technology and a tight labour market.

“These challenges are not confined to Mercury alone, with businesses around New Zealand facing similar challenges. We expect these to continue into the future and have factored these into our business planning,” said Ms Flacks.

CARING FOR CUSTOMERS

Ms Flacks said regardless of the drivers behind the results, it was still coming in a high cost of living environment.

“Recent events aside, we understand the cost pressures many families are facing, and we are focused on our extensive programme of support for those customers experiencing hardship.”

This includes working with the sector, other essential service providers and community organisations to create a more comprehensive approach to supporting those in hardship. Mercury’s role will be to trial a capped electricity product that helps contribute to overall wellbeing for these households.

Last year mass market customers’ prices increased by an average of 2% across lines and energy and will be limited to between 3% and 5% for the coming year.

“This is despite costs to our business increasing over and above this, which we are absorbing on behalf of our customers.”

Ms Flacks also noted that in addition to targeted support, Mercury was delaying price changes (including lines increases) for at least six months for those adversely impacted by recent weather.

EXECUTING ON RENEWABLE GENERATION PIPELINE

The first half of the year saw tangible progress in the delivery of Mercury’s substantial renewable generation pipeline, consistent with the goal to play a leading role in the low carbon transition.

Commissioning of the 103MW Turitea South wind farm will begin in April with completion taking longer than expected due to construction and delivery challenges.
“Once complete, Turitea will be Aotearoa New Zealand’s largest wind farm and materially shifts the dial on our decarbonisation ambitions. That’s a win not just for Mercury, but for the Manawatū region and New Zealand as a whole,” said Ms Flacks.

In September Mercury also announced the construction of Stage 1 of the Kaiwera Downs wind farm (43MW), expected to cost $115m excluding capitalised interest. Construction started in October 2022, with all turbines operational by October 2023.

“We’re advancing several other wind farm projects through prospecting, feasibility, consenting and business case phases and we want to get the next cab off the rank as quickly as we can.”

OTHER OPERATIONAL HIGHLIGHTS

• Cross-sector work on the low-carbon transition including supporting an independent report by the Boston Consulting Group to provide a whole-of-sector view of the transition; inputting into a winter peak product proposed to the Electricity Authority.

• Lodging consent for the expansion of an additional unit at Ngā Tamariki geothermal power station, with Mercury currently in the process of engaging with iwi partners.
• Progressing the carbon reinjection trial at Ngā Tamariki (8,000 tonnes of CO2e successfully reinjected so far). Mercury is currently assessing expansion to other units at Ngā Tamariki and researching options for technology development at Kawerau geothermal power station.

• Piloting a number of customer care initiatives including a trial to secure access to basic needs like food, water and electricity; and another which caps energy bills for customers.

• Building health, safety and wellbeing maturity with a suite of initiatives to facilitate this. TRIFR (Total Reportable Incident Frequency Rate) for the half year was 0.58.

INTERIM DIVIDEND

The Board has declared a fully imputed interim dividend of 8.7 cents per share, representing a 9% increase on HY22 dividend and will continue the Dividend Reinvestment Plan for this dividend.
GUIDANCE

Mercury’s full year EBITDAF guidance remains at $795m.

The uplift in forecasted EBITDAF compared to prior year reflects a lift in the FY23 hydro production forecast to 4,900GWh (from 4,500GWh), with additional hydro mostly generated at a time of low spot electricity prices and the active management of Lake Taupō within consented operating limits.

This increase in generation margin has been eroded by higher operating expenditure including Trustpower retail integration costs that have been bought forward into FY23 with the project running ahead of schedule.

Guidance may change and remains subject to any material events, significant one-off expenses or other unforeseen circumstances including changes to hydrological conditions.

[xafalcon]

What on earth happened in the last 6 months? Trustpower onboarding obviously. But what a shocking FY result

[shareman]

They paid too much for Trustpower and Tilt

[xafalcon]

They paid too much for Trustpower and Tilt

Very succinct and to-the-point summary . Thanks

I don't follow this one on a day to day basis. But HY forward guidance vs FY result were miles apart. Good to know the reasons why without a heap of research

[stoploss]

I just installed Solar and as a long standing customer called to see what sort of a deal they would offer . Their buyback rate is 12 cents . Meridian will do 17 cents and guarantee it for 5 years . I asked if Mercury could improve and she said “ I know we are not competitive we haven’t got anything to offer you at this time “

[xafalcon]

I just installed Solar and as a long standing customer called to see what sort of a deal they would offer . Their buyback rate is 12 cents . Meridian will do 17 cents and guarantee it for 5 years . I asked if Mercury could improve and she said “ I know we are not competitive we haven’t got anything to offer you at this time “

Sometimes it is not the highest buy-back rate that gets you the best deal

Some offer several hours of free power overnight, which when coupled with daytime solar can make a big difference if you don't have a battery. Genesis (who we are with) offer solar + EVerywhere, where "on the road" rapid DC charging of your EV is at retail power price rather than the charger price = one third the cost. There are probably others

If your solar install is new, I suggest you think twice about a long lock-in period until you have 12 months of data to make an informed decision. You really need to know (don't believe the salesman) how much power you will be selling over a 12 month period. FYI we have 15kW solar and 30kWh of home made (nissan leaf) house batteries running for 4 years. About to install another 5kW solar and increase battery storage to 60kWh

[stoploss]

Sometimes it is not the highest buy-back rate that gets you the best deal

Some offer several hours of free power overnight, which when coupled with daytime solar can make a big difference if you don't have a battery. Genesis (who we are with) offer solar + EVerywhere, where "on the road" rapid DC charging of your EV is at retail power price rather than the charger price = one third the cost. There are probably others

If your solar install is new, I suggest you think twice about a long lock-in period until you have 12 months of data to make an informed decision. You really need to know (don't believe the salesman) how much power you will be selling over a 12 month period. FYI we have 15kW solar and 30kWh of home made (nissan leaf) house batteries running for 4 years. About to install another 5kW solar and increase battery storage to 60kWh
Yes I have been wondering what is best .
found this company , they will pay out any credit once a year in August if you have a surplus.
https://poweredge.nz/power-shield-best-solar-export-rates/

[Sideshow Bob]

Changes at the helm...

https://www.nzx.com/announcements/432573

Mercury’s board today announced that Vince Hawksworth has decided to retire as Chief Executive, effective 31 August 2024. The board is delighted to announce that Stew Hamilton, the company’s current Executive General Manager Generation, has been appointed to the role of Chief Executive to succeed Mr Hawksworth.