MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

maybe I am missing something.I have just checked atm power prices-bream bay $125 ,invercargill $105 approx.
Power companies- lose power in line losses.
Hence mercury would make a lot more profit selling electricity to say Whangarei,North than contact selling anywhere in the country

Updated as I write on the electricity info dashboard:

https://www1.electricityinfo.co.nz/

Bream Bay (northernmost node) $104.21
Invercargill (southernmost node) $77.98

Could you be missing that the spot price represents the marginal price of incremental power that wholesalers must pay to 'top up' to meet incremental retail demand? It does not represent the wholesale cost of generation for power gentailers already set aside to supply their base load demand? And it does not represent the pre-contracted retail price purchase rate already guaranteed to retail customers?

To sell to those northernmost customers, Mercury would have to pay the Transpower costs and local line company costs of getting their own generated power up there. And presumably these costs are well known and taken into account by those bidding on the spot market. That means the difference in node price is largely reflects the difference in line charges. As a result I would expect Mercury to receive the same profit margin for whatever electricity they chose to sell no matter what part of the country they chose to sell it to (assuming the Cook Strait cable is fully functional)?

SNOOPY

[Snoopy]

Last year Mercury generated 7,000GWh of flexible hydro and base load geothermal generation (source p3 of November 2017 Investor Presentation). If the cost of doing this was around $12/MWh lower than if that same energy had been bought from competitors in the South Island and imported via the cook strait cable, we can work out the annual saving to Mercury.

7,000 GWh = 7,000,000 MWh

7,000,000 MWh x $12/MWh = $84m per year (equivalent to an after tax profit increase of 0.72 x $84m = $60m)

Given I have previously calculated Mercury's normalised net profit after tax for FY2017 as $168m, that $60m boost because of a reduction in distribution costs is a huge boost for Mercury shareholders. But this boost is already included in Mercury's results, and should not be double counted by paying again for such a strategic advantage from an investors perspective.

I am not sure I put the above post fully in context, and that may have been misleading.

What I should have said was the theoretical maximum benefit of Mercury feeding power into the grid near Auckland could be equivalent to $60m NPAT, as an alternative to bringing equivalent spot power north via the Cook Strait cable (that purchase being made at the Benmore node). This $60m is the maximum theoretical benefit that could occur if all of Mercury's geothermal and Waitaki River generation were to shut down and Mercury had to buy all that power on the spot market to meet consumer demand. Of course selling all that power into the future to Mercury customers and then shutting down all Mercury's top of the North Island generating capacity is an extremely unlikely series of events. So the real 'saving' in having Mercury's power stations sited so strategically would be much less than $60m per year , because energy pre-contracted at a fixed price based on normalised supply and demand forecasts would have to come out of the equation. Take that out and Mercury's real strategic advantage of owning optimally sited power stations might only be $6m. Worth having, but not super significant.

Also I am unsure of the Transpower charge that Mercury would face to get the power to the North Island where it is needed. You would have to adjust for that expense by taking it off the $60m theoretical profit component.

SNOOPY

[fish]

Much as I respect and appreciate your posts I do not believe the conclusions you arrive from past statistics are correct.
Suggesting the strategic advantage of optimal sited power stations is only $6 million is but one example.
Should you not for instance take account of line losses-that is power lost in heat energy transmitting power distances-the longer the distance the more power is lost.Its a long way from low south Island to top of North Island and cook strait another potential problem
There is much more including population growth in the north compared to the south.
Then political/environmental stuff-Jacinda believes future is reneweables and mercury can sell the excess hydro they are getting in the current(and possible future climate change pattern of rainfall.)
Mercury is a 100% green and they are increasing customer numbers.
Morningstar have now changed their recommendation on mercury to accumulate so clearly I am not the only one thinking the future is rosy for mercury,

[Snoopy]

Much as I respect and appreciate your posts I do not believe the conclusions you arrive from past statistics are correct.

You could be right.

Suggesting the strategic advantage of optimal sited power stations is only $6 million is but one example.

The $6m figure was based on the extra $60m Mercury might be up for should they decide to stop all power generation in the upper North Island. That scenario isn't going to happen. But I figured in a bad year, the market might be down 10% on the energy they thought they had. So this is the kind of extra expense Mercury might save, if they did not have to buy that energy via the Cook Strait cable. 10% over a full year is quite a lot when most of these shortages are seasonal. So my estimated $6m benefit could be an overestimation?

Should you not for instance take account of line losses-that is power lost in heat energy transmitting power distances-the longer the distance the more power is lost.Its a long way from low south Island to top of North Island and cook strait another potential problem

Good point. I found this reference from 2005, when the upgrade to the Cook Strait cable was still being debated.

https://www.google.co.nz/url?sa=t&rc...oSxKxuJmc3Plx3

From section 5.1.4:

"The transmission losses for a monopole are twice that of a bipole at an equivalent operating power. For example, the approximate line losses for a +/-350 kV bipole
operating as 700 MW balanced would be 25 MW (~3.5 %). By contrast the approximate line losses for a 350 kV, 700 MW monopole using earth return would be
50 MW (~7 %). Similarly, for a monopolar metallic return mode, the line losses would be approximately 14 %."

So it looks like the Cook Strait cable losses are around 3.5% (one way). Since the HVDC cable is specifically designed to minimse losses, total losses from the rest of the Transpower journey are likely to be more than double that figure.

There is much more including population growth in the north compared to the south.

If you look back at my Mercury valuation, you will see that I have already valued in an additional 100MW geothermal power station that Mercury could build at any time without raising new capital. Effectively I am already valuing Mercury sales as 10% higher than they are now in my current valuation.

Then political/environmental stuff-Jacinda believes future is reneweables and mercury can sell the excess hydro they are getting in the current(and possible future climate change pattern of rainfall.)

If the future weather patterns mean a drier south and a wetter north, particularly the Taupo catchment, then I agree. However, just before this year's deluge, Mercury had three of its worst years on record for generating hydro. I don't believe you should extrapolate the favourable conditions of this year to all future years for valuation purposes.

Mercury is a 100% green and they are increasing customer numbers.

I still think this is because Mercury is able to generate the extra power to sell to these new customers. If generation conditions became less favourable (as it has done for Contact this year) just watch those customer numbers drop back again!

Morningstar have now changed their recommendation on mercury to accumulate so clearly I am not the only one thinking the future is rosy for mercury,

I am not suggesting the future of Mercury isn't rosy. I own MCY shares , held since the government sell down, and see no reason to sell my own shareholding down just yet. All I am saying is I think 'the rosy picture' is already built into the MCY share price. So I won't be accumulating any more at these levels.

SNOOPY

[fish]

Thank you Snoopy for that reply.
I wonder if you have read the Half-year report released at the end of Feb.
So many factors more than hydrological advantages paint a rosy future in the opinion of the company-for instance interest rate hedges start falling off at the end of this year to give an annual 6.66% increase in profit.This looks to be a certainty.
They have been refurbishing hydro,redrilling geothermal below budget and making the whole operation more efficient.
They are inline with government policy and have no fear of the electricity review due next year(unlike genesis)

[Snoopy]

The figures I present below are from FY2009 onwards. This is the first year after the GFC hit, and power usage growth changed from its historical pattern.

All base figures are taken from the 'Statement of Change in Equity' Group figure for the appropriate year.

	Revaluation Hydro & Thermal Assets ($m)	Revaluation Other Generation Assets ($m)	Total Revaluation ($m)	Pre Tax Revaluation ($m)	Pre Tax New Capital Per Share (c)
2009	0	170.987	170.987	244	17.4
2010	200.900	60.250	261.150	373	26.6
2011	153.300	135.275	288.575	412	29.4
2012	119.520	2.880	122.240	170	12.1
2013	30.960	26	57	79	5.6
2014	4	25	29	40	2.9
Total			929		94.0

Note:

1/ eps 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.

That first total figure represents the new 'thin air' capital that has appeared on the MRP balance sheet from 2009 to 2014 inclusive. $929m is a lot of money, perhaps even enough to fund a new power station, without going back to shareholders for more capital? It would certainly go a way towards that!

The last total figure represents the equivalent extra eps in a gross dividend form. This is the amount of extra gross dividend that could have been paid to shareholders, should the MRP board have decided not to reinvest their 'thin air' capital. I do note the amount of 'thin air' capital has been decreasing, year on year. But perhaps this is not a problem, given MRP have declared they are not planning on building any more new power stations in the forseeable future? Furthermore 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 MRP may never need to raise capital again to build new power stations!

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)
2009	0	170.987	170.987	12.2	244	17.4
2010	200.900	60.250	261.150	18.7	373	26.6
2011	153.300	135.275	288.575	20.6	412	29.4
2012	119.520	2.880	122.240	8.7	170	12.1
2013	30.960	26	57	4.9	79	5.6
2014	4	25	29	2.1	40	2.9
2015	?	?	356	25.5	497	35.5
2016	?	?	=79+21	7.1	137	9.8
2017	?	?	38	2.7	52	3.7
Total				102.2
less Special Dividends Declared (per share)				-10.4
Residual Thin Air capital				91.8

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.

SNOOPY

[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%

I want to roll back behind an old post and talk about the topic of 'effective' power generating capacity. Why is this so important for investors? Because the new power generating capacity (where growth will eventually come from) must build on the effective power generating base (what power is generated in a 'normal' year) as opposed to what power could be generated if all existing power stations worked flat out. It is the incremental return on the effective effective power generating base that determines the growth that investors will get going forwards.

The example I wish to use is Mercury's recently decommissioned Southdown Gas Turbine Station. It was Mercury's only gas fired station, so back in FY2012 we can be sure that all of Mercury's gas fired generation came from that station alone.

On p51 of the float prospectus, this is what Mercury has to say about it:

"The 175MW Southdown Power station is capable of producing up to 1,400GWh of of electricity per year ."

175MW is the power of the station, but electricity is an 1,400GWh is an 'energy' output. Energy is the result of running a power station over time.

Q/ How many hours in a day? A/ 24 hours
Q/ How many days in a year? A/ 365
Q/ How many hours in a year A/ 24 x 365
Q/ How many MW in a GW? A/ 1000

So the theoretical maximum amount of power that Southdown could produce was:

175MW x (24 x 365) hours = 1,542,000 MWh = 1,542 GWh

This is greater than the maximum generating capacity of 1,400GWh that Mercury claim. So what's going on? I suspect that the Southdown plant had annual servicing requirements that meant it was not available 24/7 as I had assumed.

(1542-1400) /1542 x 365 = an minimum annual downtime for Southdown of 33 days

Does that explanation sound plausible?

I am going to keep using my own calculated potential figure of 1542GWh, because at least I know for sure how that was derived. And as long as I am consistent with my treatment of this data point going forwards, the figure I choose will not affect comparative calculations going forwards based on a ratio using this figure.

We were told that the actual energy generated by Southdown over the period was 589GWh. So this means the factor we need to multiply the 'maximum generating capacity' to get an 'effective generating capacity' is:

589 GWh / 1542 GWh = 0.382

Unfortunately that figure isn't likely to be consistent for other gas fired power stations. But as far as Mercury is concerned, the figure is moot going into the future anyway. 'Southdown' is now 'Shutdown'. What I need to do now, as a CEN investor, is to figure out what the equivalent figure would be for Contact's gas fired power stations.


SNOOPY

[Snoopy]

I am going a bit left field with this analysis. The following are the one liners (sometimes with other lines tacked on for clarification) on how our Chair Joan Withers sees the business. All quotes are taken from the respective annual reports. I have mined no new information. Yet I think reading a snapshot view of Mercury through the years does add value.

FY2013: "We again demonstrated that in a tough market (Waikato drought), we have the ability to deliver both growth in market share by adding value for our customers and operating performance and financial results above IPO forecasts."

FY2014: "Operating earnings were up and increased 29% year on year, primarily as a result of the additional generation from the Ngatamariki (geothermal) plant and our success in lowering the company's operating costs. The improvement in net profit primarily reflects one off costs and non-cash impacts, largely relating to impairments from taking control of international geothermal investments in early 2013. In our second successive year of weak inflows into the Waikato river catchment, hydro conditions were the lowest and most challenging in the company's history."

FY2015: "In a year like this - of very low North Island rainfall and record low hydro generation, our earnings have held up extremely well. Last year we achieved a huge lift in operating earnings following the commissioning of the Ngatamariki geothermal station. This year operating earnings were only down 5% on that result."

FY2016: "Mercury is reporting a 2.3% lift in operating earnings, reflecting steady customer sales in a highly competitive market and the strength of our renewable generation portfolio."

FY2017: "Mercury achieved a 6.1% lift in operating earnings largely reflecting strong inflows across the Waikato catchment in the second half of the financial year."

What I get from is is as follows:

1/ Forecasting performance in an 'average year' may be difficult if the average is made up of extreme years (worst Waikato droughts and then floods) that are "anything but average".
2/ The trend in improving underlying net profit is closely connected to the trend in more favorable weather conditions for the Waikato catchment. Weather conditions can not be relied upon to continually improve.

I have been looking for a 'normal year' as a comparative yardstick. I am interested in looking at the individual performances of Mercury's individual Hydro and Geothermal power stations. I have settled on FY2016 as the one that most likely approximates normalized conditions at Mercury. I do find it notable that as per the Chair's comments, only one of the five years reported on since listing has had anywhere near normal inflows into the Waikato catchment! If four out of the five years reported on are abnormal, it makes you question just what normal means in this context?

My next step was to look in the annual report for individual power station generation records, much as Contact Energy provides. Guess what? There is no information like that listed in the Mercury report. Some of the presentations had consolidated generation figures from combined hydro and combined geothermal power stations as a group. But nothing on the individual stations. Nothing like what was so carefully detailed on p48 of the (then) Mighty River prospectus. Does anyone know if the information on individual stations as provided in the prospectus has ever been repeated by Mercury? My research has so far drawn a blank - very surprising when the equivalent information from Contact Energy was so easily found!

SNOOPY

[fish]

If four out of the five years reported on are abnormal, it makes you question just what normal means in this context?

Abnormal is the wrong term to use.
Normal has a wide range.
Best to say below average or above average then we all know what it means.

[Snoopy]

Snoopy wrote
"If four out of the five years reported on are abnormal, it makes you question just what normal means in this context?"

Abnormal is the wrong term to use.
Normal has a wide range.
Best to say below average or above average then we all know what it means.

To give some more context here.

If Mercury has enough equity to build an extra power station at will. with no recourse to more funds from shareholders, then that is really good. It is good because although they can build a new power station at any time, they will only build it when demand expands to the extent it becomes profitable. The worth of this new power station to shareholders depends on the incremental gain in electricity sales they will make over the rest of the already existing power station portfolio.

I am assuming the new power station they will build will be geothermal because:

1/ Geothermal as a base load allows more hydro power to be created at Mercury's discretion, when wholesale power prices are high.
2/ Geothermal is more reliable than wind.

However, if we have a low inflow into the Taupo catchment, this means less extra energy is available to be generated. Perversely though, it also means that this as yet unbuilt power station is worth relatively more, because the incremental generation it provides comes off a lower total base.

Conversely when we have a lot of hydro power available nationally, the incremental value of this new power station would be less, because incremental hydro power is cheaper to generate than incremental geothermal power.

To summarize, the value of a new geothermal power station will go up and down, depending on the ease (or not) of generating alternative power at other power stations. But to see whether a new power station is profitable or not to build, well, you can't get that answer by looking at extreme weather event years.

SNOOPY