MCY Mercury NZ ( MRP Mighty River Power)

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 EOFY2022	Commissioned	Generation Capacity
Waipipi	2021	133MW
Tararua I & II	1998,2004	68MW
Tararua III	2007	93MW
Mahinerangi I	2011	36MW
Turitea North	2021	119MW
Total Completed Capacity		449MW

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

Quote:

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Originally Posted by Snoopy

Financial Year	Normalised 'eps'	Net Dividend Paid (per share)	Gross Dividend Paid (per share)
2016	10.3c	8.4c + 2.5c(S) + 5.7c	11.67c + 3.47c + 7.92c = 23.06c
2017	12.1c	8.6c + 2.88c(NI,S) + 5.8c	11.94c + 4.0c + 8.06c = 24.00c
2018	14.0c	8.8c + 5.0c(S) + 6.0c	12.22c + 6.94c +8.33c = 27.49c
2019	11.7c	9.1c + 6.2c	12.64c + 8.61c = 21.25c
2020	11.6c	9.3c + 6.4c	12.92c + 8.89c = 21.81c
2021	10.1c	9.4c + 6.8c	13.06c + 9.44c = 22.50c
2022	11.6c	10.2c + 8.0c	14.17c + 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

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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 Year	Normalised 'eps'	Net Dividend Paid (per share)	Gross Dividend Paid (per share)
2019	11.7c	9.1c + 6.2c	12.64c + 8.61c = 8.61c
2020	11.6c	9.3c + 6.4c	12.92c + 8.89c = 21.81c
2021	10.1c	9.4c + 6.8c	13.06c + 9.44c = 22.50c
2022	11.6c	10.2c + 8.0c	14.17c + 11.11c = 25.28c
2023	?c	12.0c + ?c	16.67c + ?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

Quote:

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Originally Posted by 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%.

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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

Quote:

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Originally Posted by 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

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Quote:

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Originally Posted by Norwest

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.

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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

Quote:

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Originally Posted by Snoopy

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

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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

Quote:

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Originally Posted by xafalcon

Of course they want "alternative options to progress"

Onslow will cap profits

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Yes

Quote:

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Originally Posted by xafalcon

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

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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,

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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

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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

Quote:

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Originally Posted by Snoopy

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.

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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

Quote:

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Originally Posted by xafalcon

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.

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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"!

Quote:

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Originally Posted by xafalcon

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

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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/showth...l=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showth...l=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

Quote:

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Originally Posted by Snoopy

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/showth...l=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showth...l=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

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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

Quote:

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Originally Posted by 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.

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The post below relates to Contact Energy for the June 2022 financial year.

Quote:

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Originally Posted by Snoopy

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/showth...l=1#post973916

+$15.62m

and offset that against the downside
https://www.sharetrader.co.nz/showth...l=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'.

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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

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

Quote:

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Originally Posted by Jantar

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.

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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.

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June 2022 Quarter	Power Sold (GWh)	Power Generated (GWh)	VWAP Retail ($/MWh)	VWAP Wholesale ($/MWh) (1)
Mass Market	636
Commercial & Industrial	594
Line Losses	58
CfD sell contracts (total)	685
Hydro		925	$199.82	$193.83
Geothermal		647	$182.46	$176.99
Wind Power Purchase Agreement (Genesis) (2)		252	$72.14	$72.14
Wind Spot Generation		103	$169.07	$164.00
Buy CfD (Financial contracts)		676	$287.92	?
Total (2)	1973	2351

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.


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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

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.

What on earth happened in the last 6 months? Trustpower onboarding obviously. But what a shocking FY result

They paid too much for Trustpower and Tilt

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Originally Posted by shareman

They paid too much for Trustpower and Tilt

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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

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 “

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Originally Posted by 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 “

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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

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Originally Posted by xafalcon

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

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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-be...-export-rates/