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  1. #1461
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    Default Mercury's Hidden Power Stations (FY2022 Perspective)

    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
    Last edited by Snoopy; 24-08-2022 at 07:41 PM.
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  2. #1462
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    Default Capitalised Dividend Valuation (FY2022.5 view) Part 1: Data

    Quote Originally Posted by Snoopy View Post

    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
    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
    Last edited by Snoopy; 19-08-2022 at 03:04 PM.
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  3. #1463
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    Default Capitalised Dividend Valuation (FY2022.5 view) Part 2: Calculation

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 24-08-2022 at 08:39 PM.
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  4. #1464
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    Quote Originally Posted by tango View Post
    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
    Quote Originally Posted by Norwest View Post
    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
    Last edited by Snoopy; 22-09-2022 at 11:18 AM.
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  5. #1465
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    Quote Originally Posted by Snoopy View Post
    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

  6. #1466
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    Quote Originally Posted by xafalcon View Post
    Of course they want "alternative options to progress"

    Onslow will cap profits
    Yes

    Quote Originally Posted by xafalcon View Post
    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
    Last edited by Snoopy; 22-09-2022 at 02:11 PM.
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  7. #1467
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    Quote Originally Posted by Snoopy View Post
    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

  8. #1468
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    Quote Originally Posted by xafalcon View Post
    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"!

    Quote Originally Posted by xafalcon View Post
    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/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
    Last edited by Snoopy; 22-09-2022 at 03:49 PM.
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  9. #1469
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    Quote Originally Posted by Snoopy View Post
    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
    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

  10. #1470
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    Default Onslow Downside for Mercury Energy: Part 1

    Quote Originally Posted by Snoopy View Post
    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.

    Quote Originally Posted by Snoopy View Post
    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'.
    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
    Last edited by Snoopy; 11-02-2023 at 09:28 AM.
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