Control of Operating Costs?
Quote:
Originally Posted by
fish
To me the most important metric is cash flow after subtracting interest,operating costs and depreciation .
CEO Fraser Whineray has made a big thing on how operating costs have greatly reduced since MCY was an SOE. But what is the actual pattern of operating costs? Strangely for a statistic so well promoted, it takes a bit of digging to find the operating costs of the business going back. The only graph I could find was the 'Operating Expenditure', listed in the financial commentary section (p12) of the Mighty River Power Annual Review for FY2014. In latter years the figure was listed in the financial commentary sections.
Year |
Normalised Operating Costs |
FY2017 |
$214m |
FY2016 |
$217m |
FY2015 |
$217m |
FY2014 |
$221m |
FY2013 |
$243m |
The big saving was in the FY2014 year and this is what the company said about that at the time:
"Following the completion of the IPO in May 2013 and with no large scale development projects currently planned due to the current demand conditions, the company has focussed on lowering the cost base and achieved $20m of permanent savings relating to optimization of the life cycle maintenance programme, insurance changes, professional service fees and international geothermal development costs. <snip> Year on year operating expenses fell $99m with $69m one off expenses in FY2013 relating to international geothermal restructuring and IPO costs."
Of course in my comparison table I would never have included IPO costs in operating costs, and I didn't. Likewise I would miss out the financial operating resources formerly dedicated to the international geothermal business which was quickly abandoned when Fraser Whineray took over as CEO.
The trumpeted $20m in ongoing savings is useful, even in light of the large number of MCY shares on issue:
$20m/ 1,400m = 1.4cps
On an after tax basis this means profits have been permanently increased by 0.72 x 1.4c = 1cps
To put this in context, normalised profit (NPAT) was 12cps in FY2017, and 1cps represents 8.3% of that total. Significant and worth having.
Nevertheless, it does look like the 'game changing' reduction in operating costs is over. I would imagine that supervising all of those overseas geothermal projects would have been quite expensive for little immediate return. So good savings would have been made cutting out those costs. The easiest savings in operating costs is to redefine what normal operations are. This seems to be what has happened here: game changing in the past, but not likely to be game changing into the future.
SNOOPY
Will Mercury's 'thin air capital' evaporate into thin air? (FY2017 view)
Quote:
Originally Posted by
horus1
There is only one problem and that is that the cost of new generation is DECREASING. There should be an impairment against the asset values. The gravy train is over.
As horus has identified, 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).
SNOOPY