MCY Mercury NZ ( MRP Mighty River Power)

[fish]

Do you want to know what the cheapest mass stored energy device is?

Drum roll please.... It is a lake.

Boop boop de do
Marilyn

What a star
Cheapest by far-and thats where mcy obtains most of its energy .
MCY are building with Tesla experimental battery storage.
I think the cost to mcy is a drop in the ocean and it will gain a lot of information.
For instance under a wet winter they could purhase surplus electricity for a pittance at night and release it direct into Auckland at peak times and potentially make a profit.Other uses might be if there is a transmission fault....etc

[Dassets]

I looked at Telsa battery tech, which is fairly similar to others but is a poster boy. I ran some rough numbers over the South Australia installation. Within a NZ pricing environment I could only generate revenue of circa $30 to $35m. This excludes energy cost in nor operational costs nor capital costs. This is on a capital spend of circa (estimated) of NZD $100m. The Vector build in GI meant an expensive sub_station rebuild could be avoided at least for a while. So there could be other factors. But stand alone they are not financially viable.

[horus1]

Where these batteries come into there own is when you are avoiding investment in wires. i.e. Lines business' The distribution and trans. assets are pit in for about the top 10% of load. Batteries avoid the need to put in long term assets and give you option value.

[Dassets]

Let me say this another way. That $100m battery will provide enough power for up to an hour for 30000 homes. For Auckland work on 1mil homes for ease. Nzd3.3 bil for 1 hr for energy excluding industrial, commercial etc demand. Then you still need the lines anyway. No board could ever commit capital except insignificant capital as a test to gather some knowledge. I would rather have a 2nd harbour crossing than a battery that provides an hour of electricity. Just saying.

[horus1]

you missed the point . The most expensive costs in supplying electricity these days are the wires which are long life low return assets . You can avoid many of these costs by using batteries. I am talking about the costs not the artificial pricing

[Snoopy]

The point of this post is this. Energy providers are getting quite different pricing signals from Orion, compared to what they pass on to we consumers. Orion (and Transpower) hate power peaks with a passion. If Fraser could convince we consumers to use a lot more off peak power this could benefit the end user in the pocket, but benefit the energy provider much more. I think the quest to get a lot more consumers charging their EVs at night could be a real winner for the Energy Retailers like Mercury. Time to put some big picture numbers on it!

I have been inspecting the Mercury Energy website and the deal for EV owners goes like this.

1/ You have to be signed up with Mercury as your power provider to take part (no surprises there).
2/ Charge your EV between 11pm and 7am and you can save 20% of your home's entire electricity bill between 11pm and 7am. This means you could program your washers are dryers to work overnight, for instance.

The website then goes on to talk about:

"Electricity price - $0.1724 per kWh, based on Vector Central standard user inclusive pricing as at Aug 9 2017 3:36PM, including GST, pre PPD and pre PPD and post plug-in vehicle charging discount (20%)."

However the equivalent price I pay in Christchurch for night rate electricity $0.1579 per kWh (with GST added and 20% discount taken off). So it looks like I am already on a much better deal than Mercury's 'special' rate for plug in EV owners. Admittedly this could be because Vector's network charges in Auckland could be higher than Orion's network charges in Christchurch.

Mercury lists the Nissan Leaf's (by far the most popular electric car) EV commute efficiency as 17 kWh/100km. Let's say our typical Auckland EV commuter owner travelled 150km per week. This means the annual energy used would be:

52 x 17kWh x 1.5 = 1326 kWh

The money that Mercury would charge per year for such a customer's EV use would be:

1326 kWh x $0.1724 per kWh = $229

The government goal is to put 64,000 EVs on our roads by the end of 2021. In September 2017 it was reported that 4541 EVs were on the road. So the incremental gain since the last reporting period will be roughly 60,000. As at September 2017 around half of the EV fleet was registered in Mercury's core EV target market of Auckland - 2452. So we might expect around half of the projected new EVs to be registered in Auckland.

The electricity retailers market share, based on ICP count, may be found here.

https://www.emi.ea.govt.nz/Retail/Reports/HR5D1V

The current (01 Dec to 31 Dec 2017) market share in Auckland for Mercury is 229,672/601,111 = 38%

However I believe that Mercury will be pushing above its weight in customer EV ownership, because they are specifically targeting that market. I will account for this by using an extra 20% rule of thumb multiplier. Finally then, we can estimate the total extra revenue that Mercury might expect from incremental EV uptake by the end of 2021:

$229 x 30,000 x 0.38 x 1.2 = $3.133m per year

How much of this will translate to incremental profit is another question. My hunch is most of it, because Mercury's cost of incremental energy units is low, and all of those units will be delivered 'off peak' when Transpower and Network Operators costs are very low. So lets be really optimistic and say it is all profit for Mercury. Take some tax off and I get:

$3.133m x 0.72 = $2.256m

Spread that over the 1,400m share on issue and the incremental profit works out at:

$2.256m / 1,400m = 0.16c /share

While welcome, this is barely a blip on incremental company earnings. Of course Fraser would argue that 2021 is merely a point on the journey to full electrification. But once all the early adopters are on board and road user charges kick in I predict a slow down in the rate of EV adoption. A 10% electric vehicle fleet for NZ (five times the 2021 projection) would still only mean a 0.8cps incremental profit (NPAT) gain for Mercury. Put like this, it does seem like Fraser's enthusiasm for EVs could be overselling the realistic profit gains available to Mercury Energy. Perhaps when he eventually moves on as CEO of Mercury Energy, an senior opening at Disneyworld's Fantasyland would be the logical career path for our Fraser?

SNOOPY

[Dassets]

Horus. No I havent. The batteries only last 5000 cycles and then must get replaced. That is 5000 hours of 100 mwh in the case of SA or 500 gwh or there abouts ignoring battery efficiency loss. I can buy 500 gwh for $40m. Why would i pay 100m for batteries which i still need to buy power for to store. Now you still need wires to get the energy in or out of the batteries . Batteries in nz are nonsensical financially.

[fish]

I looked at Telsa battery tech, which is fairly similar to others but is a poster boy. I ran some rough numbers over the South Australia installation. Within a NZ pricing environment I could only generate revenue of circa $30 to $35m. This excludes energy cost in nor operational costs nor capital costs. This is on a capital spend of circa (estimated) of NZD $100m. The Vector build in GI meant an expensive sub_station rebuild could be avoided at least for a while. So there could be other factors. But stand alone they are not financially viable.

Those figures appear close to viability.Operational costs would be very small-it would be fully automated.For much of the year night power on the wholesale market is a fraction of the wholesale cost at peak times.
I can see why mcy are going to experiment in this area.
Battery life is being extended and the cost is falling.
I assume when you quoted $100m that was for the whole plant and the battery would be much less.Only the battery would need replacement/augmentation in the future-you wouldnt have to spend $100m for this in the future

[Snoopy]

The remaining thin air capital on the balance sheet is therefore 'This Air Capital Gained' less 'Surplus capital Returned': $464m - $145m = $319m

<snip>

Readers may be wondering why I didn't include special dividends in my dividend valuation before. I hope you can now see that to do so would have been 'double counting'. You should only account for the effect of these special dividends once in any valuation. In my instance the effect of the 'thin air capital' less 'special dividends' is taken as a capital adjustment that allows a new power station to be constructed. The value can then be attributed to the new power station alone.

I see that after my little treatise against 'double counting', I have managed to:

1/ not count the special dividend AND
2/ subtract the effect of the capital return on the 'thin air capital' retained by the company.

By not counting either effect, it looks like I have 'zero counted' the excess capital, which some might see as as bad a sin as 'double counting'.

To see the possible effect of all this, it is necessary to take a step back and ask a more fundamental question: "What am I trying to show?"

What shareholders want to know is what will happen in the future, not what has happened in the past. As shareholders our interest in 'thin air capital' rests on what Mercury is going to do with it. The important point is that 'right now', Mercury has sufficient capital on the books to build a new 100MW geothermal plant. The reason they have this capital is because of historical asset revaluations. These asset valuations were made in a climate of low interest and hence low discount rates. As interest rates rise the pressures that created these revaluations could stagnate or even reverse. Thus as a forecast tool, it is probably not reasonable to assume that 'thin air capital' will continue to be generated in the medium term. So it is probably not wise to forecast future distributions of excess capital (special dividends) into shareholders expected future returns.

To summarize:

1/ I am comfortable with accounting for the remaining and existing thin air capital on the books.
2/ I am not comfortable in assuming that the special dividends of the last few year are indicative of what shareholders might expect in the future.

This means my previously published fair business cycle valuation range:

"between $2.87 and $3.59 (ex-dividend)."

Remains unchanged. At the moment I consider we are close to the top of the business cycle. At $3.36 on the market today, MCY is IMO a 'hold', principally because of the poor alternative returns on fixed interest investments. I was thinking of reducing my holding, but I can't stomach putting the funds into a bank earning a measly 2% interest!

SNOOPY

[Snoopy]

I like snoopys posts and cannot argue with the facts as clearly presented.
But its not the whole picture-for instance customer numbers have increased by 6000.
We can only speculate as to the reasons.

I am still trying to identify that X factor that allows MCY to trade on such a premium PE. What does the longer term market share trend (as measured by ICP numbers and ICP market share) look like?

The following annual market share figures I have obtained from the Electricity Authority website. I have chosen to look at the average over the financial year (1st July to June 30th) for my figures.

https://www.emi.ea.govt.nz/Retail/Reports/HR5D1V

Year	Market Share (All ICPs)	Change	ICP Count	Electricity Generated (GWh)
FY2017	18.96%	+0.38%	397,074	7,533
FY2016	18.59%	-0.50%	384,611	6,842
FY2015	19.08%	-0.17%	389,991	6,563
FY2014	19.25%	-0.42%	390,387	6,295
FY2013	19.67%	-0.01%	395,273	6,462

Last year was the first up tick in market share for five years. Market share isn't everything. Power retailers sometimes let go of their low yielding customers if retention costs do not justify the small profit margin. Last year Mercury had the highest average number of customers for five years. But it was all downhill for the preceding four years. In fact Mercury have only just recruited more customers than they had five years ago. And even then, retail market share is down from five years ago, due no doubt to the growth in the overall market in that time. What we have here is an uptick in a market where retaining retail customers is an ongoing battle. There is no evidence here that last years boost in customers was anything more than a one off event.

In the world of the modern gentailer, matching 'internal customer demand' to 'internal generation capability' is no longer a necessity. It is possible to buy generation capability you do not have on the wholesale futures market. Nevertheless the increased generation 'in house' over the last two years may be driving Mercury's quest to increase customer numbers.

SNOOPY