MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

Mercury's current dividend policy is stated here.

Your assertions are not worthy of comment.

Best Wishes
Paper Tiger

"Mercury’s dividend policy is to make distributions with a pay-out ratio of 70% to 85% of Free Cash Flow on average over time"

They have been paying 100% of late, so is that a signal for dividend reduction going forwards?

"The Board will seek to maintain consistency on a dividend per share basis from year to year while maintaining the dividend pay-out ratio on average over time."

Or are the board assuming a rise in earnings, so that the absolute value of the dividend won't be reduced?

If you believe in a 'steady state' power market over the next few years, then I would say the 'actual payout' verses the 'company policy payout' is definite evidence that the dividend yield was pumped over the forecast period following on from the float.

I had a call from Mercury on Friday.

"We are ringing people." they said. "We think you are paying too much for your power" they said. Now I am officially a 'low power user', but nevertheless the bill starts to get up over winter. So what to do? Firstly they offered to discount my daily charge down to just over 28c. Great! But then when I went through the charged rates I was paying the promised savings seemed difficult to match. In the end the guy on the phone said

"Actually you are on pretty good rates, so we won't be making you a switching offer."

First time that has happened in my dealings with power companies that have approached me! But good to see from a 'shareholder perspective' that they won't be chasing business at any price. No doubt my responses provided some nice market intelligence information for Mercury too, without having to pay workers to 'tramp the streets' to get it.!

SNOOPY

[Snoopy]

Your assertions are not worthy of comment.

One comment that you could have made is that the poor result for FY2015 was due to the writing down and writing off of various overseas investments by new CEO Fraser Whineray. This is not an unusual thing when a new CEO takes the helm. Clear out the old legacy issues and start from a clean slate. All these write downs were delivered with the rider.

"These are not cash write downs"

But the money for those overseas forays was real cash - once.

The other point you could have made was that three years is perhaps not a representative yardstick over which to judge the performance of a company subject to managing very long lived assets that are performance affected by weather events.

Both points would have been fair. The counterpoint to that last argument being shares have only been available to public shareholders over the last three years, so that is all the comparative data available.

SNOOPY

[Snoopy]

The cost of solar is now below the cost of new generation and in the medium term the value of the hydro dam starts to drop . The revaluations reduce.

If that comes to pass you are right Horus. However, I still have difficulty seeing how 'new solar' can undercut 'old hydro', when the marginal cost of pouring more water through the existing dam turbines is effectively zero.

For me the bigger risk I see at Mercury on the horizon is 'rising interest rates'. These certainly will affect generation asset valuations.

The table below is compiled from information published in the respective annual reports:

Financial Year	Modelled Forecast Wholesale Electricity Prices	Modelled Average Operational Expenditure	Modelled Average Electricity Produced	Actual Electricity produced	Modelled Asset Value Change with Discount Rate + or -0.5%	Bank and Bond Debt EOFY less Cash on Hand	Net Interest Bill	Implied Interest Rate
2012						$1,143m
2013				6,426MWh	($541m)/$727m	$1,047m	$57m+$31m	8.0%
2014	$75-$95/MWh	$188m p.a.	7,107GWH p.a.	6,295MWh	($489m)/$645m	$1,022m	$84m+$6m	8.7%
2015	$63-$97/MWh	$168m p.a.	7,131GWH p.a.	6,563MWh	($648m)/$891m	$1,145m	$99m	9.1%
2016	$66-$102/MWh	$174m p.a.	6,956GWH p.a.	6,842MWh	($521m)/$624m	$1,131m	$97m	8.5%

With house mortgage rates so low, I am surprised to see the high average interest rates that Mercury Energy is paying. Nevertheless this interest rate is different to the interest rate used to determine the discount rate that determines power station asset values. That, I believe, can be found from a CAPM (Capital Asset Pricing Model) and the particular figure used is not disclosed in the respective Annual Reports. Nevertheless, the fact that interest rates paid by the company are so high right now could mean that if interest rates in the market rise, then the particular interest rates paid by Mercury could fall as these even higher priced loans roll over.

The CAPM takes the form:

[Expected Return] = [Risk Free Interest rate] + [Company Beta]([Expected Market Return]-[Risk Free Interest Rate])

The 'Risk Free Interest rate' does change over time, but is often taken to be the current return available from government stock. The interest rate that MCY will pay to its bankers will be related to the government bank rate, but with a premium appropriate to the risk of the MCY company added on. The interest rate that MCY is paying will be determined at the time a particular loan is created.

A further point of note is that the modelled electricity to be produced in the future is reducing year on year. The actual energy produced is increasing. Nevertheless the actual energy produced has always been less than the average modelled energy to be produced. Prior to FY2015 the thermal Southdown station was still in the picture. However, because it was always going to be used as a peaking station, the Southdown closure has not affected the forecast production from what I can see. Perhaps one reason for the slightly decreasing forecast production is the increasingly erratic water inflow into the Taupo catchment?

SNOOPY

[horus1]

Snoopy ,the problem is the margin the generators make on domestic customers . The operating cost of hydro is about 4c/Kwhr or maybe 3c/Kwhr but they sell it for 17- 25 c/kwhr to the small consumers. Solar is cheaper than that. As the solar comes down in price thet lose the high margin sales and if they drop there price they lose profitabilty.The reform of the electricity industry in the 90's was very good for the shareholders but very bad for small customers ,technological change , solar,batteries, fuel cells later are starting to redress the balance , Be very careful of generator retailers.

[Snoopy]

Snoopy ,the problem is the margin the generators make on domestic customers . The operating cost of hydro is about 4c/Kwhr or maybe 3c/Kwhr but they sell it for 17- 25 c/kWhr to the small consumers. Solar is cheaper than that. As the solar comes down in price they lose the high margin sales and if they drop there price they lose profitabilty.

Horus, you are right if you don't have to be connected to the grid. The problem is the network fixed costs (not only the line charges, but all the metering and billing systems from the retailer and non variable wholesale energy costs) have to be paid. And that 90c per day on your bill, or whatever your retailer charges you, doesn't do that. So if the energy cost of your retailer's bill reduces, the retailer will 'rebalance' by putting up your fixed charge and reducing the energy charge so that they can 'compete' with your solar panels.

Genesis Energy, for instance, currently has an optional system for gas billing where you pay one higher fixed charge but nothing for the actual gas you use. The same thing could happen to electricity, if the electricity retailers are no longer getting the same income as they do now from their retail customers. Either under today's billing system or tomorrow's you will be forced to pay for the grid.

If you go off grid then the game changes. But you will probably have to buy a lot more solar panels and a battery storage system, and maybe a windmill too. And that means your total solar panel electricity generation cost will be much higher than it is now.

SNOOPY

[horus1]

People are going of grid.Only the enthusiasts at this stage but more will follow. Most new houses on life style blocks are having a hard look and many not going onto the grid. The energy cost for the consumer is 17c /Kwhr at least and at that solar is economic. Thats without reducing line charges. The whole sector is changing and the dominant firms are trying to prevent the changes but they are fighting new technology and will lose. It is like the telecommunications industry ,coal, etc. The real killer will be fuel cells in cars ,watch toyotas video's on their new cars.

[thedrunkfish]

I have to disagree, if it gets to the point where solar is cheaper will the electricity companies not then use it to generate and distribute it on the existing grid? And with the move to electric vehicles and rapid chargers that require up to 10kw or more residential instllations continue to require more and more capacity. Solar is a viable option for some in specific circumstances, but I dont believe you will see urban sprawl with mass solar roofing any time soon.

[horus1]

I go overseas every year. Solar is everywhere and privately owned. The CUSTOMERS do not like the electricity industry,they are viewed as rip off merchants and customers are starting to get choice.

[Jantar]

..... The energy cost for the consumer is 17c /Kwhr at least and at that solar is economic. Thats without reducing line charges. ......

horus, With your background in the industry I would expect you to have a much better handle on the energy component of your bill. The energy component from the retailer is around 8 cents. The remainder is network charges from the lines company, Grid charges from Transpower, and the EA security charge. The actual energy charge can be easily seen from each company's monthly operations report. It is the Netback value: $85 netback is exactly equivilent to 8.5 c per unit.

Edit: To be fair I should add that the actual cost of energy is also shown on the monthly operatioons reports as just that: Cost of energy. A cost of Energy of $45 means that it costs the company 4.5 c per unit that it supplies. The difference between Netback and CoE is the equivilent of the gross margin.

[Harvey Specter]

People are going of grid.Only the enthusiasts at this stage but more will follow. Most new houses on life style blocks are having a hard look and many not going onto the grid. The energy cost for the consumer is 17c /Kwhr at least and at that solar is economic. Thats without reducing line charges. The whole sector is changing and the dominant firms are trying to prevent the changes but they are fighting new technology and will lose. It is like the telecommunications industry ,coal, etc. The real killer will be fuel cells in cars ,watch toyotas video's on their new cars.

It works for lifestyle blocks normally because there is a big connection cost. My friend went off grid for his farm bach as the cost to connect to the grid was more than the full solar, battery, wetback, efficient appliances, etc install. So off grid is fine in the woops, but not in suburbia.