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 Year |
Average Operational Expenditure |
Wholesale Energy Price |
Net Average Production Volumes |
Post Tax Discount Rate |
Net Revaluation Movement |
FY2017 |
$158m /p.a. |
$70 to $104 /MWh |
6567 GWh/year |
7.5% to 7.9% |
$52m - $4m = $49m |
FY2016 |
$174m /p.a. |
$66 to $102 /MWh |
6556 GWh/year |
7.4% to 7.9% |
$137m - $1m = $136m |
FY2015 |
$168m /p.a. |
$63 to $97 /MWh |
7131 GWh/year |
7.5% to 7.9% |
$497m - $76m = $421m |
FY2014 |
$188m /p.a. |
$70 to $95 /MWh |
7107 GWh/year |
Unknown |
$40m - $0m = $40m |
FY2013 |
Unknown. |
Unknown |
Unknown |
Unknown |
$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).