MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

The remaining thin air capital on the balance sheet is therefore: $1,573m - $231m = $1,342m

But how has this 'thin air capital' been deployed, and is there any left? That's next.

New projects and acquisitions are funded by a combination of equity and debt. Using the 'Optimised Gearing Ratio' (OGR) for the company, and knowing the future investment commitments already inked, we can figure out how much investment the remaining 'thin air capital' on the books can support.

Before we do that though, there is a bit more 'equity trading capital' that we can add to the 'thin air capital' equity pile.

Mercury Significant Asset Sales: 2019-2021	Profit	Reference
Snowtown Windfarm (Aus) Disposal Dividend (from Tilt)	$55m	(AR2021 p32, p35)
Hudson Geothermal Power Station (USA) Sale	$41m	(AR2021 p36, p52)
Tilt 19.9% stake sale	$367m	(post 1431, AR2021 p63)
Metrix Metering Business sale	$177m	(AR2019 p71)
Total equity capital raised	$640m

The Tilt stake asset sale actually occurred on 3rd August 2021, which is in the FY2022 financial year. However the terms were agreed on 16th April, in FY2021. I am therefore making the argument that 'effective completion' of the deal was in FY2021 and the planning downstream investment consequences of that deal were effectively 'baked in' by EOFY2021.

The net total of this 'thin air capital' plus 'equity trading capital' that has been accumulated could theoretically support extra debt 'd'. If we use the company's optimised gearing ratio.of 45%, then we can calculate 'd' as follows:

From post 1440, 'thin air capital' available was $1,344m.

$1,344m+$640m = $1,984m ('thin air capital + 'equity trading capital')

'd' / $1,984m = 45% => d= 0.45x $1,984m = $893m

We thus have a total funds available for investment an amount of:

$1,984m (equity) + $893m (debt) = $2,877m dollars,
(while still staying within Mercury's own optimised balance sheet guidelines.)

Offsetting that gain, the following significant capital investments have been committed to from FY2019 to FY2021

Mercury Significant Capital Investments: 2019-2022	Cost	Reference	Funding Spent
Turitea Windfarm (Stage 1 only)	$256m	(AR2019 p15)	($184m FY2020), ($72m FY2021)
Turitea Windfarm (Stage 2 only)	$208m	(PR2021 p14)	($79m FY2021), Balance by EOFY2023
ex-Tilt 'NZ Located' Wind Farms	$797m	(AR2021 p35)	August 2021 (FY2022)
Trustpower Retail Business	$441m	(AR2021 p35)	May 2022 (FY2022)
Total capital budgeted spend	$1,702m

Notes

1/ Turitea Funding: AR2020 p9, AR2021 p36

None of these investments were operating by the time the company balance date closed off (30-06-2021). But the Turitea North Windfarm was approaching the end of its construction with most capital expenditure already done. The expected uplift in EBITDAF from Turitea North, is forecast to be $35m on an annual basis.

Mercury has never been in a position where it has 'bought' so many new customers from another retailer in one block before, like the outlined Trustpower transaction. But nor has it proposed to buy such a large quantum of new generation capacity in any one year either. For the purpose of this exercise I will only consider 'capital spent' as relating to projects (and customers) that already exist. So I will remove 'Turitea South' (Turitea Windfarm Stage 2) from my capital spend total.

Available Capital to Spend @EOFY2021

$2,877m - ($1,702m-$208m) = $1,383m

This is enough to buy: $1,383m/$208m = 6 Turitea South windfarms

SNOOPY

[Snoopy]

With Turitea already budgeted for, the balance sheet suggests there is also enough investment capital available to build Pukeito as well. And Pukeito could be 40% larger than Turitea with the amount of investment capital available. So how much would these two wind farms boost Mercury's operational generating capacity?

1063MW Hydro (existing) x 0.514 = 546MW (effective)
463MW Geothermal (existing) x 0.940 = 435MW (effective)

222MW Turitea Wind (new) x 0.432 = 96MW (effective)
310MW Pukeito Wind (new) x 0.432 = 134MW (effective)

Hence the effective new capacity increase from the fully funded but as yet not switched on power stations is:

(96+134) / (546+435) = 23.4%

I realise this is a strange concept for some. That is, giving value to a couple of Mercury consented power stations that are not yet in service. But as you will see it does appear the market is doing just that. Because the current MCY share price is very difficult to justify on Mercury's earnings today.

One year on and there has been a step change in the generation assets of Mercury, due to the plans to acquire the former Tilt NZ based windfarms. As at balance date (30-06-2021), we are in the strange position of having the funds for this acquisition 'ready to go', but the assets themselves not yet 'on the books'. Since we are looking at this situation from a 'capital perspective', if we consider that these assets are on the books already, that will allow us to see how much capital remains available for future investment projects.

Mercury Windfarms EOFY2021	Commissioned	Generation Capacity
Waipipi (ex Tilt)	2021	133MW
Tararua I & II (ex Tilt)	1998,2004	68MW
Tararua III (ex Tilt)	2007	93MW
Mahinerangi I (ex Tilt)	2011	36MW
Turitea North (Mercury built)	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 six of these stations already funded to be constructed (refer Post 1441), the incremental value embedded in Mercury shares which is already embedded above existing production capacity is:

1 + (6x45MW)/(1175MW) = 1.230 or +23.0%

Giving value to some of Mercury's 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 the current MCY share price is very difficult to justify on Mercury's earnings today.

SNOOPY

[Snoopy]

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

I now use a 4.5% gross yield for utilities in this (still) low interest rate environment. I like a 2 percentage point margin over a utility share yield to make an alternative investment in gentailer bonds attractive. As I write this, the 'best' of the Mercury bonds, the MCY050 coupon rate 5.73% bonds are trading at an interest rate of 5.15%. That interest rate is too low, by a significant margin, to interest (sic) me. I want 6.5%!

A 6.5% bond yield for me is consistent with a 4.5% gross share yield.

So I can calculate a capitalised earnings valuation for MCY as follows.

23.41c / (0.045) = $5.20 (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:

$5.20 x 1.230 = $6.40

MCY closed on the market on Friday 27th May at $5.60. That means I see MCY as undervalued, by 12.5%.

SNOOPY

[Snoopy]

The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.

	Equity (A)	Assets (B)	Equity Ratio (A)/(B)
FY2013	$3,182m	$5,802m	0.5484
FY2014	$3,219m	$5,689m	0.5658
FY2015	$3,337m	$6,058m	0.5508
FY2016	$3,315m	$6,085m	0.5448
FY2017	$3,308m	$5,997m	0.5516
FY2018	$3,286m	$6,091m	0.5395
FY2019	$3,537m	$6,484m	0.5455
FY2020	$3,739m	$6,885m	0.5431
FY2021	$4,186m	$7,978m	0.5247
HY2022	$4,605m	$8,497m	0.5419

Notes

1/ The Tilt renewables NZ assets acquisition was not finalised until August 2021. I have included the HY2022 equity ratio so shareholders can get a feel for how the balance sheet looks following this transaction.

In order to work out the capital efficiency of Mercury, it is first necessary to determine the net equity within Mercury, less all the generation asset revaluations. Assets are funded by both equity and debt. This means we must back out the equity funded component of the generation asset revaluations only, by taking it off the quoted 'net asset backing'.

	Generation Assets Book Value {A (AR Note P,P&E)	Generation Assets At Cost {B} (calculated)	Generation Assets Revaluation {A}-{B}	Equity Ratio EOFY {C}	Total Net Assets {D} (from balance sheet)	Total Net Assets Revaluation Adjusted {D}-{C}x{{A}-{B}}
FY2017	$5,241m	$2,236m	$3,005m	0.5516	$3,308m	$1,650m
FY2018	$5,215m	$2,313m	$2,902m	0.5395	$3,286m	$1,720m
FY2019	$5,347m	$2,358m	$2,989m	0.5455	$3,537m	$1,907m
FY2020	$5,575m	$2,460m	$3,115m	0.5431	$3,739m	$2,047m
FY2021	$6,362m	$2,495m	$3,867m	0.5247	$4,186m	$2,157m

This information is needed for 'Buffett Test 3', should I choose to run it.

SNOOPY

[fish]

Thanks Snoopy.
I had been really struggling to understand the high share price and had even sold some Mcy to buy Mel -that stops today -I feel I am evenly balanced as well .

[Snoopy]

If you have a look at the trustpower presentation, they have contacted 100% of their generation to Mercury for a few years, tapering off after that. Hopefully that buys enough time to stick up a few wind farms using Tilt's pipeline.

Given the date of your post mfd (21-06-2021), I presume you are referring to the Trustpower presentation released on that day. It is quite a glossy presentation, but I must say I found the detail in it sloppy and the whole presentation ambiguous to follow. The key slide to follow is slide number 7 titled 'Energy Hedge' (although you would not know it is slide number 7, because the slides are not numbered - I had to count from the beginning to determine the slide number).

Slide 7 shows an Electricity Hedge against time graph. But there are no units on the vertical axis, so it is not at all clear what the graph represents (incredibly sloppy). It was only by looking at a later press release (22nd April 2022) that I figured out the horizontal grey line across from the number 2000 represents 2000GWh/year. I am guessing this figure represents the expected output of Trustpower's (now Manawa Energy's) remaining hydro electric generation portfolio. If that is so, it shows the entire output (if that is what 2,000GWh represents, this is unclear) of Manawa's generation assets has been bought up by Mercury, for a few years at least. However the label on the grey line is a 'demand side' label - 'mass market load'. So is 2,000GW/h a 'load forecast' or a 'contracted generation amount'? I don't find it clear.

Next we learn that the picture in the graph that the arrangement with Mercury:

"Allows for an orderly transition between a bi-lateral hedge and a portfolio of hedges/sales into the C&I market."

(I presume here that C&I refers to the 'Commercial and Industrial Market', as Manawa has retained their commercial and industrial customers, and only sold their retail customers to Mercury)

I take it from that, we currently have a private agreement on the electricity sale price between Mercury and Manawa. This applies to 100% of (expected?) output up until the end of FY2024. The price Mercury will pay for electricity up until that time was set at 'arms length' we are told - for certainty. But we are not told what that price is. We are then told the price is set at 'mutually agreed locations' and with 'peaking factors'. 'Peaking factors' would suggest the price is not fixed. So much for certainty then!

I generally back myself to keep a level head when reading through all this technical stuff. But what I take from that graph is that Mercury and Trustpower have a fixed price agreement to take a fixed generation output, (with no regard as to whether Manawa can deliver on that generation promise), at a fixed contracted price that is nevertheless variable at different locations (and times?) around the peaks. I don't think the message the old Trustpower are trying to communicate with that graph makes sense. What are they trying to say? If anyone has a more informed understanding as to what the power deal is between Manawa and Mercury, I am all ears.

SNOOPY

[Snoopy]

I have taken it upon myself to examine further the 'retail' part of Trustpower, in particular the bit that Mercury is buying. The first column in the table below is from the Trustpower Annual Report for FY2021 (AR2021 p92). The second and third columns are from the Trustpower Annual Report for FY2022 (AR2022 p99)

At EOFY2021 for Trustpower (31-03-2021), Trustpower counted 265,000 homes and businesses as their retail customers (AR2021 p92). At the agreed retail customer base purchase date, on 21st June 2021, the Mercury press release on that date tells us that 231,000 of Trustpower's retail customers are 'mass market' (i.e. private homes).

Trustpower Retail Division	Trustpower Retail Division FY2021 (AR2021)	Trustpower Retail Division FY2021 (AR2022)	Trustpower Retail Division FY2022 (AR2022)l
Segment Revenue	$888.061m	$650.825m	$696.099m
less Segment Operating Costs	$841.078m	$607.321m	$651.608m
equals Segment EBITDAF (3)	$46.983m	$43.504m	$44.491m
Retail Electricity Revenue	$477.260m (67%)	$477.260m	$502.046m
Other Retail Revenue (2)	$173.565m	$173.565m	$194.053m
Commercial & Industrial Electricity Revenue	$237.236m (33%)

Notes

1/ The difference between total annual reported revenue for FY2021, from the AR2021 and AR2022 perspectives, is that the AR2022 perspective removes commercial and industrial (C&I) revenue (as that part of the retail business is being retained by Trustpower/Manawa). Observe that all of the commercial and industrial customers are electricity customers only.
2/ 'Other retail revenue' includes Gas Revenue, Telecommunications Revenue, and Revenue allocated to customer incentives (I am guessing that last bit relates to revenue to be set aside to match amortising 'up front money' previously spent as a 'sign on' incentive).
3/ The implied commercial and industrial share of EBITDAF over FY2021 was: $46.983m-$43.504m= $3.479m (the difference in values between the first and second columns in the table above).

The implied EBITDAF on revenue figure for C&I was: $3.479m/$237.236m = 1.5%. That doesn't seem much, if you compare that to the EBITDAF on revenue figure for retail home customers for the same year. EBITDAF /revenue for 'mass market' = $43.504m/$650.825m= 6.7%. It makes you wonder why Trustpower/Manawa are keen to retain that commercial and industrial piece of the retail business.

From the Manawa/Trustpower 2nd May announcement, we learn more about the retained customer base.

"Its commercial and industrial electricity business supplies around 680 customers at more than 14,000 electricity connections nationally, currently supplying ~1,250GWh per annum"

From AR2022 p88, we learn that these C&I industrial sales are split between 407kWh at a 'fixed price' and 812GWh at a 'spot price' (407GWh+812GWh = 1,219GWh => ~1,250GWh). The other category of sales listed in the breakdown as 'mass market sales', I believe, refers to the electricity energy component of home retail sales (I say that because gas sales are listed separately further down the page).

Fast forward to dollars paid by MCY for the retail segment sale. From the Trustpower press release dated 15-02-2022, we learn:

---------

$441 million represents an excellent outcome for (Trustpower) shareholders
• ~$1,900 per customer
• Proforma standalone FY-21 EBITDAF multiple of 9 times

---------

So forecast EBITDAF for FY2022 = $441m/9 = $49m (excluding Commercial & Industrial ?) By the time FY2022 ended, a mere six weeks later, the underlying sales price seems to have reduced to $421m (see reference paragraph next).

Fast forward further, this time to the 2nd May 2022 Trustpower announcement:
"The final sale price of $467m is made up of an underlying price of $426m and a $41m payment for estimated working capital. The working capital value does not include ‘accounts payable as at completion’ which are retained by Trustpower. After settling all working capital balances, Trustpower expects to receive net proceeds from the sale of between $432m to $442m. Note the sale and purchase agreement includes typical working capital wash-up provisions."

The Mercury financial year does not end until 30th June 2022. From the Mercury HYP2022, (slide 14), we are told to expect a net EBITDAF contribution of $5m with $10m of revenue that will be offset by $5m of integration costs. I think that means that once we take integration costs into account, the EBITDAF contribution from the old Trustpower Retail Unit to Mercury over FY2022 will be zilch.

With the sale completion date being 1st May 2022, it means only 2 months of the old 'Trustpower retail' earnings will find their way into Mercury's EBITDAF earnings for FY2022. 2/12 x $49m = $8m. The fact that Mercury's estimate for the 'Trustpower retail' contribution is substantially lower than that means that Trustpower Retail likely did not have such a good year over FY2022. The 'good news' from all of this is that when Mercury announces their result for FY2022, it will include all of the costs of purchasing the Trustpower retail stake, but none of the benefits. That means, when the Mercury FY2022 result is announced, you will have to add 5/8 x $49m = $31m to the quoted EBITDAF figure for the year by Mercury. $31m added will give a good combined estimate of the earnings picture of a former Trustpower retail portfolio, now integrated with Mercury.

SNOOPY

[Snoopy]

This sort of thing should really be announced via the NZX, but I thought WTH. Why not give my mates on sharetrader the heads up instead? The market price for MCY will take a dive today. How do I know this for sure? Because I topped up my own holding in MCY yesterday!

SNOOPY

[see weed]

This sort of thing should really be announced via the NZX, but I thought WTH. Why not give my mates on sharetrader the heads up instead? The market price for MCY will take a dive today. How do I know this for sure? Because I topped up my own holding in MCY yesterday!

SNOOPY

I like it lol. I did the same with MNW last month.

[Snoopy]

Over the past couple of years, Mercury Energy has transformed themselves from having no windfarms, to building their first, - Turitea North - and taking over the entire Tilt Energy NZ based windfarm portfolio. I have compiled information on these windfarm assets (References, p15 AR2021 Tilt Renewables, MCY news release 27-03-2019). Furthermore, I have re-presented earlier information I had compiled on Mercury's Geothermal and Hydro generation assets. This gives a complete picture of Mercury Energy's generation capacity as it sits today.

Mercury Energy Wind	Station Generation Capacity	Annual Energy Generation Capability	Annual Energy Generation Forecast	Forecast Generation Utilisation
Mahinerangi 1 (Tilt)	36MW	315GWh	103GWh	32.7%
Tararua 1&2 (Tilt)	68MW	596GWh	239GWh	40.1%
Tararua 3 (Tilt)	93MW	815GWh	309GWh	37.9%
Waipipi (Tilt)	133MW	1,165GWh	455GWh	39.1%
Turitea North (Mercury)	119MW	1,042GWh	470GWh	45.1%
Total	330MW	3,933GWh	1,576GWh	40.1%

Mercury Energy Hydro	Station Generation Capacity	Annual Energy Generation Capability	Operational Energy Generation	Generation Utilization
Aratiatia (Upgrade by FY2020?)	78MW
Atiamuri	74MW
Waipapa	51MW
Ohakuri	112MW
Whakamaru (Upgraded 24MW in FY2020)	124MW
Arapuni (Upgraded 12MW in FY2011)	196MW
Maraetai 1 & 2	352MW
Karapiro	96MW
Total	1,059MW	9,277GWh	4,768GWh	51.4%

Mercury Energy Geothermal	Station Generation Capacity	Annual Energy Generation Capability	Operational Energy Generation	Generation Utilization
Rotokawa (Refurbished FY2015)	34MW
Ngatimariki (Completed FY2014)	82MW
Kawerau	100MW
Mokai (25% owned)	112MW
Nga Awa Purua (65% owned) (Completed FY2010)	138MW
Total	466MW	4,082GWh	3,837GWh	94.0%

The Tararua 1,2 & 3, Waipipi and Turitea North windfarms are all within balancing distance of the Lake Taupo 'hydro battery' system. With more windfarm developments consented for this region, Mercury will be in a very powerful position to operate their central windfarms and the Lake Taupo fed hydro-electric energy in tandem. When the wind blows, they can save hydro energy, and use that energy later when the windfarms are becalmed. Mercury have complained about erratic water inflows into Lake Taupo in recent years. These new windfarms should be able to compensate for that, while the geothermal stations supply most of the baseload generation. Furthermore, all of these central North Island stations are in close proximity (in power generation terms) to the metropolis of Auckland - Mercury's largest retail customer base.

With the subsequent acquisition of the Trustpower retail customer base, the whole generation/retail mix is looking very strong for Mercury going forwards from here.

SNOOPY