MCY Mercury NZ ( MRP Mighty River Power)

[Vaygor1]

One quite big assumption there ...

...The MRP literature informs me that next year's dividend will be 13c/share fully imputed...

That was then ... this is now ... the board (in their infinite wisdom) can find all sorts of very good reasons why the 13c could be come 12c, or 11c, or even less.

The 51% shareholder has that in their budget so they will require it to be made unless something major happens.

I would go so far to say that I think 13c/share fully imputed dividend can almost be deemed to be government guaranteed.

[Vaygor1]

I am also confident that the Labour/Green electricity bulk-buying policy (If they even form a government and subsequently implement the policy) will have zero impact on MRP's profits except to allow them to make a killing in the year the transition from the old pricing model to the new one occurs.

Interested to hear why you feel that Vaygor.

MRP has made no secret of regularly valuing their hydro assets upwards as power prices overall increase. If these asset revaluations are reversed to some historic norm, then the price of power that a single state buying agency will be prepared to pay to MRP will be rather lower than today, based on whatever reasonable 'return on asset' formula is used.

Other power companies have not regularly increased the value of their hydro assets like MRP has. IMO of all the power companies listed, MRP has by far the biggest downside risk from a Labour/Greens energy policy. And it will hit them from day 1 like a sledgehammer.

Of course if a National lead government is returned, MRP is likely to emerge out of the current flat power pricing into the future scenario better than the other electricity generators. This is because of the balance they have achieved between hydro and geothermal generation and their proximity to the largest power market (Auckland).

SNOOPY

discl: hold MRP

Hi Snoopy.

Electricty gen-trans-distr-retail.jpg

Regarding the picture above, and before reading on, refer to my post at http://www.sharetrader.co.nz/showthr...ht=#post394567

The problem the govt has always had with NZ's electricity business has been with the transmission side of the business where each lines company owns a monopoly... you don't see two sets of power poles going down each street, each owned by a different lines company. It is here that asset valuation vs profit controls are required, as is already the case. These businesses are valued under ODV (Optimal Deprival Value) and regulated already.

MRP already compete with every other generating company today. Under any model/mechanism that a greens/labour coalition might introduce, that won't change. MRP would be supported by the Greens more than its competitors due to their (MRP's) geothermal/hydro generation capability. If there is any control to be exerted by bulk-buying, it would affect the retail side of the gen-talier companies and MRP would remain essentially untouched imho. Asset valuation for MRP (whether overstated or not and I doubt it is too overstated... it is audited) has more to do with calculating NTA from an investors viewpoint more than its 'allowed' profit levels.

If in the event, market sentiment hit them like a sledgehammer as you say, then I will just buy more. The real risk in investing in MRP is set out in the post I refer to above.

[Snoopy]

The problem the govt has always had with NZ's electricity business has been with the transmission side of the business where each lines company owns a monopoly... you don't see two sets of power poles going down each street, each owned by a different lines company. It is here that asset valuation vs profit controls are required, as is already the case. These businesses are valued under ODV (Optimal Deprival Value) and regulated already.

I agree with this.

MRP already compete with every other generating company today. Under any model/mechanism that a greens/labour coalition might introduce, that won't change.

Quoting from your referenced post Vaygor

"Generating involves owning and operating power stations and feeding the national grid and GETTING PAID for doing so.
Retailing involves marketing, getting customers (by promising to deliver electricity at a $/unit volume), reading meters, invoicing, chasing bad debts, and PAYING the Generators for the electricity it has promised to deliver."

My understanding of the proposed 'Kiwipower' model differs from yours.

Under the 'single buyer' ('Kiwipower') model there will only be one energy price for consumers. A Labour/Green government will tell us that this is the lowest price possible, obtained by turning the screws on all those greedy generators by legislating that they must sell the energy they generate to 'Kiwipower' on an historical cost generated basis. Competition will remain for generating incremental new power. Kiwipower will call tenders from the big 5 and accept any new incremental power project at today's cost. When selling this new power however, it will just go into the overall soup of energy inputs already contracted, and all power will be sold at a new national average cost.

So whereas MRP will 'compete' in the future, it will IMO only compete at the incremental new power generation wholesale level. The retail price will be calculated by 'Kiwipower' for all small power consumers, so no real competition there any more.

MRP would be supported by the Greens more than its competitors due to their (MRP's) geothermal/hydro generation capability.

It will be a Labour/Green power policy, not a Green power policy. There is no need to 'support' MRP because their hydro and geothermal generation already exist. What Labour/Greens support is lower power prices for consumers. The MRP geothermal stations should be OK because they are reasonably modern and have not been comprehensively revalued over the years. Some of the hydro assets are more than 50 years old and so are ripe for a balance sheet revision - downwards. Once the dam valuations are reduced to historical levels, the price of power bought by Kiwipower from MRP will also fall to historic levels. That will hurt MRP shareholders big time.

If there is any control to be exerted by bulk-buying, it would affect the retail side of the gen-talier companies and MRP would remain essentially untouched imho.

But MRP is a retailer as well as a generator. So if retail prices charged are affected, how can you claim that MRP will not be affected?

Asset valuation for MRP (whether overstated or not and I doubt it is too overstated... it is audited) has more to do with calculating NTA from an investors viewpoint more than its 'allowed' profit levels.

I think that statement is entirely wrong. The revaluation in asset values upwards (particularly hydro dams) is entirely due to those assets becoming ever relatively cheaper generating units. Under the current model power prices are set at the generation price of the newest station in the network. However the cost of power generation at the old stations does not go up. The profit margin does, which is why those old hydro stations have incrementally become so valuable over the years. Conversely if the wholesale price of power were to fall, then the value of those power stations would fall too.

SNOOPY

[MAC]

Any price fixing here by Labour should work just as well as it did in Queensland.

http://www.brisbanetimes.com.au/quee...531-2ng00.html

[Snoopy]

Any price fixing here by Labour should work just as well as it did in Queensland.

http://www.brisbanetimes.com.au/quee...531-2ng00.html

The Queensland situation parallels NZ in that the incremental costs of the lines companies are will also be responsible for increasing power prices in NZ. This will not change with the proposed Labour/Green 'Kiwipower' policy.

But Queensland is very different in that it appears they have an increasing demand for electric energy. That doesn't appear to be the case in NZ, so the comparison is not valid in that sense.

SNOOPY

[Vaygor1]

But MRP is a retailer as well as a generator. So if retail prices charged are affected, how can you claim that MRP will not be affected?

MRP is not a retailer, it is is a generator. It sells onto the grid at the wholesale spot price, a contract that lasts 30 minutes that is renewed every 1/2 hour, around the clock. Generators make offers to supply electricity at 59 grid injection points (GIPs), while retailers (i.e. Mercury Energy) and major users make bids to buy electricity at 226 grid exit points (GXPs) on the national grid owned and controlled by Transpower. All electricity generated is required to be traded through the central pool, with the exception of small generating stations of less than 10MW. MRP, as with all generators, will have no idea who the electricity it produces is going to. http://en.wikipedia.org/wiki/New_Zea...le_Spot_Market

So if the generation and retail sides of the business are kept so separate via this bidding system (administered by Transpower) then of what benefit is MRP's 'retail arm' Mercury Energy to MRP? The answer is that outside of all this wholesale spot market process, they have an arrangement to protect each other. If Spot prices are high, it hurts Mercury Energy a lot but while they make a loss, MRP has a bonanza; visa versa when the spot price is low. So long as Mercury Energy's electricity contracts are matched with MRP's generation capacity then they intrinsically end up protecting one another and as such have a swap/derivative setup with each other in order to achieve this.

What Labour is proposing to do is introduce "... a new agency called NZ Power that will act as a single buyer of wholesale [domestic] electricity".

It believes that it "...will do a similar job to Pharmac - using bulk prices to keep prices low."

Refer http://www.labour.org.nz/nz-power

The Pharmac model is a fantastic one. The international drug companies hate us for it (As an aside, Pharmac is under threat as a potential concession to get the Trans-Tasman FTA with the U.S.... a concession we must never make). But to suggest that national electricity production, transportation, and consumption can be modelled against an international industry consisting of pills, potions, and inhalers? The issue with power is that you can't store it once the lake/dam is full. We can't ship it off to Russia during their cold snap.... and when lake levels are low, the historical (and present) value of the generation asset becomes irrelevant. If supply is scarce then people will have to pay (and will be glad to pay) to get it.

Given a potential scenario of NZ Power replacing the existing domestic retailers and bulk-buying all the required power to feed the domestic nation without the ability to generate the electricity themselves then, for the reasons above, they will be taking an unthinkable risk. Refer to my post with what happened to Australian Gas Light (AGL) when they went retail with comparatively little generation. http://www.sharetrader.co.nz/showthr...AGL#post394573

The only possible way this could work if NZ Power insert themselves as bulk-buying middle-men into the spot price process, thus creating another layer of contracts and administration and another entity to clip the ticket on the electricity throughput, perhaps enough to more than negate the very reason behind their existence. But whatever happens, the price submitted for grid injection by the generators will reflect the risks they calculate and perceive given the market set-up. Whatever uncertainties are introduced with the 'benefit' of having NZ Power in the system will be looked after by an increase in sell-price from the generation side.

So you may be right Snoopy, generators will be affected, but I believe in a manner that their shareholders will enjoy.

[Harvey Specter]

Vaygor - I don't think that is quite right If your generation and retail is perfectly balanced, then spit rates are irrelevant as they cancel out, all that matters is generation cost vs retail price.

For those gentailers not perfectly balanced, they normally have long term swap contracts to make the spit irrelevant.

[Vaygor1]

Vaygor - I don't think that is quite right If your generation and retail is perfectly balanced, then spit rates are irrelevant as they cancel out, all that matters is generation cost vs retail price.

For those gentailers not perfectly balanced, they normally have long term swap contracts to make the spit irrelevant.

Correct. The swap arrangements mean the retail and generation sides don't have to be perfectly matched. But it all has the potential to go very pear shaped if the retail delivery obligations are too much more than generation capacity. There is a grey area, but take the extreme of 100% retail and 0% generation... no swap arrangement can work. A gentalier's best position is to generate more than it needs to deliver because its swap arrangements keep it safe while providing healthy margins on the spot price side to those who are short on generation capacity.

[Harvey Specter]

A gentalier's best position is to generate more than it needs to deliver because its swap arrangements keep it safe while providing healthy margins on the spot price side to those who are short on generation capacity.

In one of the MEL/MRP prospectus' it said they were deliberately short generation as they though there would be pressure on the spot rates (ie. they though they would get better returns via the spot market than with Swaps). could be wrong - I only skimmed many months ago.

[Vaygor1]

Good post Vaygor1. Just one issue ...



We can store it ... and NZ is ideally placed to do it too ... But we don't! See: http://en.wikipedia.org/wiki/Pumped-...droelectricity

With NZ's current model of smallish, semi-private generators they have to band together to fund such a scheme ... And them darned greens would need to pull their horns in for once!

The energy used to pump it up is 10%-30% more than the energy gathered when it comes back down, so this is a concept I struggle with as it just such a waste with the only benefit coming from commercial variations due to supply and demand. ie Pump it up when the spot prices (and demand) are low, let it go when the spot price is high. Given that 30% is already gone ,the commercial difference between peak and non-peak spot price would need to be significant, but I guess this is what the research is all about. I will read up more on it. Thanks for the post.