MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

The FY2015 results came out on Friday. So time to do the annual statistical overview update.

For ease of comparison I have adjusted the eps figures before listing as though the 1.4b of shares currently on issue had been on issue throughout the entire comparison period. The financial year for MRP ends on 30th June.

'Earnings' used are normalised operational earnings, excluding one off gains/losses and asset revaluations.

FY2011: $161.6m/ 1,400m = 11.5cps
FY2012: $148.1m/ 1,400m = 10.8cps
FY2013: $167.9m/ 1,400m = 12.0cps
FY2014: $186.5m/ 1,400m = 13.3cps
FY2015: $155.5m/ 1,400m = 11.1cps

Conclusion: Fail Test

Financial Year	EBITDAF	less Adjustment	less DA	less I	times 0.72= Normalised NPAT	eps
2013	$391m	-($16.4m + $4.2m)	$150m	$57m	$147.1m	10.5cps
2014	$504m		$161m	$84m	$186.5m	13.3cps
2015	$482m	$17m/0.72	$170m	$99m	$136.4m	9.7cps
2016	$493m	$13m/0.72	$182m	$97m	$141.1m	10.1cps
2017	$523m	$5m	$189m	$95m	$168.5m	12.0cps

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

Conclusion: Pass Test

Further Note: I have put up these results in tabular form so that you can see the working, and an interesting point that is evident from it. If you take the best year (FY2014) and the last reported year (FY2017), then the $18m fall in profit should be read in context with the $28m increase in depreciation charge over the two years. IOW leave out the depreciation (which is dubious in these power generating assets anyway) and the FY2017 result was actually the best of the lot ( I guess this is why management like to use EBITDAF when reporting their results?). Quite impressive nevertheless.

SNOOPY

PS Eagle eyed readers will notice that some earnings figures have changed from when I did them two years ago.

1/ I previously made a different adjustment in FY2013 to reflect an impairment charge that was never included in EBITDAF to start with. I also did not adjust for the two factors that I did adjust for in this year's analysis. (my mistake)
2/ In FY2015 I assumed that the profits on the property sale I adjusted for was taxable. I have now changed my mind and decided it was probably not taxable.

[Snoopy]

Financial Year	EBITDAF	less Adjustment	less DA	less I	times 0.72= Normalised NPAT	eps
2013	$391m	-($16.4m + $4.2m)	$150m	$57m	$147.1m	10.5cps
2014	$504m		$161m	$84m	$186.5m	13.3cps
2015	$482m	$17m/0.72	$170m	$99m	$136.4m	9.7cps
2016	$493m	$13m/0.72	$182m	$97m	$141.1m	10.1cps
2017	$523m	$5m	$189m	$95m	$168.5m	12.0cps

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

To calculate a 'Normalised earnings' average I am going to use the figures for the last four years only. That is because during FY2013, the Ngatamariki Thermal Station was only just coming on stream. That means business conditions in FY2013 are probably not reflective of any future MCY business scenario. The averaged normalised eps for FY2014 to FY2017 inclusive is therefore:

(13.3 + 9.7 + 10.1 +12.0)/4 = 11.3cps

SNOOPY

[Snoopy]

Financial Year	EBITDAF	less Adjustment	less DA	less I	times 0.72= Normalised NPAT	eps
2013	$391m	-($16.4m + $4.2m)	$150m	$57m	$147.1m	10.5cps
2014	$504m		$161m	$84m	$186.5m	13.3cps
2015	$482m	$17m/0.72	$170m	$99m	$136.4m	9.7cps
2016	$493m	$13m/0.72	$182m	$97m	$141.1m	10.1cps
2017	$523m	$5m	$189m	$95m	$168.5m	12.0cps

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ FY2013 earnings modified by adding back IPO costs and loss on sale of German Geothermal Asset.
3/ FY2015 and FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable.)
4/ FY2017 result adjusted to remove profit on carbon credit sales.

Conclusion: Pass Test

Further Note: I have put up these results in tabular form so that you can see the working, and an interesting point that is evident from it. If you take the best year (FY2014) and the last reported year (FY2017), then the $18m fall in profit should be read in context with the $28m increase in depreciation charge over the two years. IOW leave out the depreciation (which is dubious in these power generating assets anyway) and the FY2017 result was actually the best of the lot ( I guess this is why management like to use EBITDAF when reporting their results?). Quite impressive nevertheless.

SNOOPY

PS Eagle eyed readers will notice that some earnings figures have changed from when I did them two years ago.

1/ I previously made a different adjustment in FY2013 to reflect an impairment charge that was never included in EBITDAF to start with. I also did not adjust for the two factors that I did adjust for in this year's analysis. (my mistake)
2/ In FY2015 I assumed that the profits on the property sale I adjusted for was taxable. I have now changed my mind and decided it was probably not taxable.

Financial Year	EBITDAF	less Adjustment	less DA	less I	times 0.72= Normalised NPAT	eps
2016	$493m	($13m/0.72 - $2m)	$182m	$97m	$142.5m	10.2cps
2017	$523m	($5m-$2m)	$189m	$95m	$169.9m	12.1cps
2018	$561m	$2m	$197m	$91m	$195.1m	13.9cps
2019	$505m	-$1m	$204m	$75m	$163.4m	11.7cps
2020	$494m	-$1m	$214m	$54m	$162.7m	11.6cps

Notes:

1/ 'eps' figures based on 1,400m share being on issue
2/ Underlying FY2016 earnings reduced by property/land sale profits (adjusted to reflect that non-core property land sales are not generally taxable). (AR2016 p10,54) and increased by Property Plant and Equipment sale losses (AR2016 p71).
3/ Underlying FY2017 result adjusted to remove profit on carbon credit sales (p60 AR2017) and increased by Property Plant and Equipment sale losses (AR2017 p31).
4/ Underlying FY2018 result reduced by a $2m Property Plant and Equipment sale gain (AR2018 p29).
5/ Underlying FY2019 result increased by a $1m Property Plant and Equipment sale loss (AR2019 p90).
6/ Underlying FY2020 result increased by a $1m Property Plant and Equipment sale loss (AR2020 p67).

CONCLUSION: There is only one underlying profit drop here, from FY2018 to FY2019 (The 2019 to 2020 profit drop is within the error bounds of a rounding error) => Pass Test

SNOOPY

[Marilyn Munroe]

[b]

....and 8 hydro stations on the Waitaki River in the northern-cental North Island.

SNOOPY

I sure Snoopy meant Waikato River.

Boop boop de
Marilyn

[Snoopy]

1/ Significant Business Scale (Top 3 in chosen market)

Mighty River Power is one of the 'big five' gentailers in the New Zealand Electricity market. They are currently (31st December 2014 figures) number three in terms of customers with 19% market share (behind Genesis with 26% and Contact with 22%). They are also number three in terms of GWh of power sold with 18% market share (behind Meridian on 33% and Contact on 23%).

Following the decommissioning of the Southdown gas power station on 31-12-2015, MRP will have a strong line up of 5 geothermal power stations in the central North Island and 8 hydro stations on the Waikato River in the northern-cental North Island. The geothermal stations will run as base load, while the hydro stations, which used to be exclusively base load too, will assume the role of 'topping up the power' as Southdown once did. Consummate with this wholesale capacity, MRP, under the Mercury Energy brand, runs the largest power retail business in Auckland. MRP has a significant South Island customer base too in Christchurch and Dunedin. These customers receive their power from a virtual asset swap deal that involves Meridian Energy doing their South Island generating.

Conclusion: Pass Test

'Mercury Energy', the former 'Mighty River Power' have a goal to be "New Zealand's leading Energy Brand". Mercury reported they gained a net 16,000 customers over FY2017. Mercury generated 19% of NZs power over FY2017 and supplied power to 14% of all retail customers.

End of financial year 2017 figures:

https://www.emi.ea.govt.nz/Retail/Re...ucture,p|1,v|3

shows that Mercury's sold 19.0% of power generated, only behind Contact Energy (20.4%) and Genesis Energy (24.5%), well clear of Meridian Energy in fourth place.

The tangible expressions of the 'leading energy brand' aim, can be covered in three 'foundation principles'.

1/ Well being of Mercury Energy people (measured engagement is now 81%, up from 79% the previous year) and customers (level of switching to other retailers is 17.8%, claimed to be the lowest of the big players). Perhaps some of the secrets of keeping customer engaged are 'Airpoints', 'Free Power days' (offered over the phone as part of the 'personal touch') and 'Fixed Price Contracts' to provide certainty. 34% of residential and 63% of commercial customers are signed up for those! Mercury have financially supported the development of the walking/cycling recreational trail along the Waikato River.

2/ Respect for "kaitiakitanga' (custodianship of equal resources). The Waikato river catchment, which houses all of Mercury's hydro dams, is ecologically monitored by Mercury. This includes monitoring of riverbed sediment and the riverbanks including downstream of Karapiro the 'last in line' hydro dam. Mercury keeps compliance with 121 hydro related consents and can mitigate the effects of flooding and droughts by controlling water release from the Waikato dam system.

"Kaitiakitanga' also covers working with the 'Waikato Tainui', 'Raukawa', 'Ngati Tahu - Ngati Wharoa' and 'Ngati Tawharetoa' iwi. These iwi relationships also cover the tribal geothermal resources harnessed by Mercury Energy in geothermal plant joint ventures.

3/ Making commercially astute decisions: Mercury have an integrated management approach to the operation of their hydro and geothermal stations.

Conclusion: Pass Test

SNOOPY

[Snoopy]

'Mercury Energy', the former 'Mighty River Power' have a goal to be "New Zealand's leading Energy Brand". Mercury reported they gained a net 16,000 customers over FY2017. Mercury generated 19% of NZs power over FY2017 and supplied power to 14% of all retail customers.

End of financial year 2017 figures:

https://www.emi.ea.govt.nz/Retail/Re...ucture,p|1,v|3

shows that Mercury's sold 19.0% of power generated, only behind Contact Energy (20.4%) and Genesis Energy (24.5%), well clear of Meridian Energy in fourth place.

The tangible expressions of the 'leading energy brand' aim, can be covered in three 'foundation principles'.

1/ Well being of Mercury Energy people (measured engagement is now 81%, up from 79% the previous year) and customers (level of switching to other retailers is 17.8%, claimed to be the lowest of the big players). Perhaps some of the secrets of keeping customer engaged are 'Airpoints', 'Free Power days' (offered over the phone as part of the 'personal touch') and 'Fixed Price Contracts' to provide certainty. 34% of residential and 63% of commercial customers are signed up for those! Mercury have financially supported the development of the walking/cycling recreational trail along the Waikato River.

2/ Respect for "kaitiakitanga' (custodianship of equal resources). The Waikato river catchment, which houses all of Mercury's hydro dams, is ecologically monitored by Mercury. This includes monitoring of riverbed sediment and the riverbanks including downstream of Karapiro the 'last in line' hydro dam. Mercury keeps compliance with 121 hydro related consents and can mitigate the effects of flooding and droughts by controlling water release from the Waikato dam system.

"Kaitiakitanga' also covers working with the 'Waikato Tainui', 'Raukawa', 'Ngati Tahu - Ngati Wharoa' and 'Ngati Tawharetoa' iwi. These iwi relationships also cover the tribal geothermal resources harnessed by Mercury Energy in geothermal plant joint ventures.

3/ Making commercially astute decisions: Mercury have an integrated management approach to the operation of their hydro and geothermal stations.

Conclusion: Pass Test

Mercury Energy is one of the top four gentailers servicing the New Zealand energy market. It is number three in terms of customers but it is not in the top three in terms of energy generation. However, Mercury's mission, "To be New Zealand's leading energy brand" is not just dependent on sales and generation numbers.

	No. NZ Customers EOFY2020	NZ Power Station Electricity Generation (TWh)
Contact Energy	510k	8.5
Genesis Energy	435k	6.8
Mercury Energy	348k	6.3
Meridian Energy	324k	14.2

From a customer perspective, the three primary goals are to have low 'customer churn', a high 'net promoter score' and good 'brand strength'. The comparisons I make are with the other NZ gentailers.

Customer Churn (refer my post 1334)

With a probable figure in the low to mid 15 percent range (the actual figure has not been released for a few years), Mercury is likely in second place, behind Meridian at 14.2% but ahead of Genesis at 15.8%.

Net Promoter Score (refer my post 1328)

Mercury is in third place with a score of 13.7, behind Trustpower on 40 and Contact Energy on 36

Brand Strength (refer my post 1338)

Mercury have not revealed the five key pillars they use to measure this. However, I do believe their bright yellow branding gets attention. And the 'kiss oil goodbye' campaign, along with Mercury Energy's poster car for electric transport Evie (A 1957 Ford Fairlane Convertible converted to electric power) certainly sticks in my memory.

CONCLUSION: Pass Test

SNOOPY

[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

[trader_jackson]

So in other words, MRP is a buy?

[couta1]

So in other words, MRP is a buy?

Must be the Aussies have already told us so.

[Snoopy]

So in other words, MRP is a buy?

I admire your desire to 'cut to the chase' TJ. But for a fundamentals investor such as myself, that isn't how it works. My procedure is:

1/ Design a financial model so that I can value MRP on my own assumptions.
2/ Check the market price to see what sort of discount I can get on my perceived 'value', and consequently whether I feel MRP is a buy or not.

So far I am only doing step 1. I bought MRP at float time. But whether I would buy more today is another question. At the moment, I don't know the answer.

SNOOPY

PS I might add a third step too. Even if I do decide MRP is a buy, I ask the question:

"Is it more of a buy than another comparative option such as CEN?"