MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

Mercury is using special dividends to payout surplus cash in years of high profit whilst having a normal dividend that goes up more slowly-maybe in keeping with inflation and improved efficiency?
Should free cash flow and demand reaches a level that allows the building of new generation then it may disappear for a time.

Mercury defines 'Free Cashflow' as

"Operational Cashflow" less "Stay in Business CAPEX".

Building a new power station would not involve what I would describe as "Operational Cashflow". I would call it "Investment Cashflow". So we could have a situation where "Free Cashflow" remains unchanged , even as Mercury starts building a new power station! However it would seem incredulous that Mercury could just ignore the financial commitments required to build a circa $500m new power plant and carry on paying dividends as though nothing abnormal was happening. Yet I suppose if the existing generation assets are revalued up by enough, then a whole new power station could be funded by borrowing. So perhaps Mercury are indeed saying, with their dividend policy, that future dividends will not be affected by such a potential project?

You do raise an interesting point fish about special dividends perhaps being connected to having 'surplus capital', even if some of this 'Surplus Capital' is indeed "Thin Air Capital". I might have to take those special dividends out of my thin air capital piggy bank, and check there really is enough borrowing capacity left to build that new power station?

SNOOPY

[Snoopy]

Summary FY2016 Perspective:

I value MCY as worth between $2.70 and $2.93 (ex-dividend).

Summary FY2017 Perspective:

I value MCY as worth between $2.87 and $3.59 (ex-dividend).

There is quite a large uplift in the upper limit of my MCY share valuation year on year. I have changed by valuation window from the last six years of operations to the last four years of operations. Normalised Dividend payments on average have been much greater in recent years. So it is no surprise that the upper limit of my valuation, based on dividend payments, has risen in line with this. However the high dividend payments have been accompanied by a draining of the imputation credit balance over the same period. I can't help thinking that the imputation credits have been pumped for all they are worth over the last four years and the well is now dry. This being so, I find it hard to conceive of that upper limit ($3.59) of my valuation range being reached.

If you regard Mercury as a dividend paying cyclical then I have a 'rule of thumb' for the share price that says over the business cycle, Mercury is likely to cycle at 20% above and 20% below the business cycle mean value based on earnings. This implies a range (around the earnings valuation mean of $2.87) of $2.30 to $3.44. If you look at the share price chart since listing, that pretty much covers the share price range that Mercury has traded since listing. Given the very low interest rates around at present, and the benign market environment for the Gentailers, it is no surprise that MCY is trading near the top end of this range.

SNOOPY

[Snoopy]

You do raise an interesting point fish about special dividends perhaps being connected to having 'surplus capital', even if some of this 'Surplus Capital' is indeed "Thin Air Capital". I might have to take those special dividends out of my thin air capital piggy bank, and check there really is enough borrowing capacity left to build that new power station?

I am going to modify my 'thin air capital' table by removing the respective special dividends paid over the period of consideration. This is one way to test fish's theory that the special dividends can be considered as capital optimisation adjustments. I am going to start from the year FY2014. This is based on the assumption that at the end of FY2013 the capital structure of the company was optimised. So it is only the thin air capital generated after that time, less any capital optimizing special dividends, that count as possible future power station development capital.

Year	New Thin Air Capital	Post Tax Effect Multiplier	Effective New Thin Air Capital	Special Dividend	Post Tax Effect Multiplier	Surplus Capital Returned	Surplus Capital Returned per Share
FY2014	$40m	0.72	$28.8m	$0m	1	$0m	0c
FY2015	$421m	0.72	$303.1m	$70m	1	$70m	5.0c
FY2016	$136m	0.72	$97.9m	$35m	1	$35m	2.5c
FY2017	$48m	0.72	$34.6m	$56m	0.72	$40m	2.9c
Total			$464m			$145m	10.4c

Note:

1/ A post tax effect multiplier of 1 indicates that tax has already been paid on this dividend
2/ A post tax effect multiplier of 0.72 indicates that the dividend was not imputed and 28% tax needs to be paid.

The remaining thin air capital on the balance sheet is therefore: $464m - $145m = $319m

The net total of this 'thin air capital' that has been accumulated could theoretically support extra debt 'd' according to the company's optimised gearing ratio.

'd' / $319m = 45% => d=$144m

We thus have a total of amount of: $319m (equity) + $144m (debt) = $463m investable available to build a new geothermal power plant. Compare this to the $475m cost of building the Ngatamariki 85MW thermal plant in FY2013. This is really spooky. The difference between those figures is only 3%, well within the margin of error! It does look like your suggestion that the special dividends are part of a wider capital optimization strategy, fish, are credible!

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.

Nevertheless there is still enough 'thin air capital' available to build that new power station if required. This is the important point and the reasoning behind my upping the calculated valuations by 10% during the valuation process. So none of this affects my valuation of the company.

SNOOPY

[Snoopy]

Mercury are looking at the future-for instance an investment with Tesla into battery storage -initially a mere 100gw storage at an Auckland site to investigate .
They are into solar installations.
They have bought electric company cars and have built alliances with other companies doing the same.
they subsidise electric bikes

Fraser Whineray, Mercury CEO, has become a poster boy for the widespread adoption of electric vehicles in NZ. I have often wondered whether this is simply a 'greenwash veneer' so that Fraser can go to international conferences and rub shoulders with big wigs like Eoin Musk. Will electric vehicles really be able to lift Mercury Energy profits over the next few years? It is time to find out.

Most power consumers will pay a monthly energy bill that contains a fixed charge and a variable charge. This perpetuates an illusion that because people understand 'how they think themselves' as regards their power bills, they also understand 'how energy companies think' by imagining themselves on the flip side of their monthly transaction. Unfortunately consumers do not really understand how energy companies think. Because the billing system that the energy company manages is far more complicated than what the consumer sees. I am a Christchurch consumer and consequently my electricity lines are managed by Orion. I don't suppose all line's companies operate in exactly the same way. But the Orion example will serve the purpose of this explanation. Stay tuned if you want to find out more.

SNOOPY

[Snoopy]

Will electric vehicle really be able to lift Mercury Energy profits over the next few years? It is time to find out.

Most power consumers will pay a monthly energy bill that contains a fixed charge and a variable charge. This perpetuates an illusion that because people understand how they think themselves as regards their power bills, they also understand how energy companies think by imagining themselves on the flip side of their monthly transaction. Unfortunately consumers do not really understand how energy companies think though, because the billing system that the energy company manages is far more complicated than what the consumer sees. I am a Christchurch consumer and consequently my electricity lines are managed by Orion. I don't suppose all line's companies operate in exactly the same way. But the Orion example will serve the purpose of this explanation. Stay tuned if you want to find out more.

In the back page of a free local Newspaper about a year ago, Orion published details of their electricity price delivery charges. I was probably one of a handful of people who read the advertisement and probably the only one who cut it out. To keep it simple I will talk about 'General Connections' of which there were just over 198,000 in the Orion serviced area.

Orion Electricity Delivery Prices (from 01-04-2017)

Peak Charge (peak period demand)		$0.5310 /kW/day
Volume Charge	: Weekdays Mon-Fri 7am to 9pm	$0.08773 /kW
	: Nights and Weekends	$0.01125 /kW
Low Power factor Charge		$0.20 /kVa/day

Notice how different this structure is to the prices you pay in your own power bills at home. For a start there is no 'fixed daily charge'. The daily charge varies depending on your power use over the peak power period. Consider the scenario of someone cooking dinner for a family on a cold winter's night. Let's say the peak power use was 5kW over the hour (5kWh) while I (as an example) was cooking dinner. This means that my provider (Contact Energy) would be paying a daily charge delivery of:

$0.5310/kw x 5 kW = $2.65

Since I am only being charged 32.95c/day on the low user rate (29.66c with GST added and 20% discount taken off) this means Contact are losing out big time on fixed charges. Of course if I was away on holiday and peak power consumption is a background 150W, then my daily charge would for me billed to Contact would be.

$0.5310/kw x 0.15 kW = 8c

So even with my low user rate, Contact are well in the money.

My house has a dual electricity pricing structure. I pay 28.129c 'Anytime' ( 25.32c with GST added and 20% discount taken off) and 17.548c ( 15.79c with GST added and 20% discount taken off) 'Night Boost'. I should point out that these numbers will cover the transmission costs of Transpower and Orion as well as the energy cost of the power supplied by Contact Energy. So it is not an apples with apples comparison to compare these charges with what Contact pays to Orion. What is of interest is the ratio of Peak to off Peak charging.

In my case my 'Night Rate' is 17.548c/28.129c = 62% of the day rate charge.

In the case of Orion their 'Night Rate' is $0.01125/ $0.08773 = 13% of the day rate charge

Now I don't like peak charging. But Orion hates power peaks with an absolute passion. They really sting the energy providers hard, charging them nearly eight times more per kilowatt at peak times.

I won't go into the power factor charge here, as that is something the energy providers take on the chin and we the end line consumer gets away with.

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!

SNOOPY

[horus1]

It is worth reading the note from Z to the sharemarket a couple of days ago. The whole transport sector is changing. Electric vehicles are not the only thing being modified. There will not be another long life base load power station built in NZ. That is what trust power said about a year ago . Solar is being built overseas for about 2c/Kwhr. Technology is driving costs down for generation. The art in the future will be to avoid transmission and distribution signals.

[fish]

It is worth reading the note from Z to the sharemarket a couple of days ago. The whole transport sector is changing. Electric vehicles are not the only thing being modified. There will not be another long life base load power station built in NZ. That is what trust power said about a year ago . Solar is being built overseas for about 2c/Kwhr. Technology is driving costs down for generation. The art in the future will be to avoid transmission and distribution signals.

And mercury is well positioned for this-working with Tesla to experiment with battery storage on the grid at Auckland.
Solar installation and electric vehicles
.Change is inevitable and its good to be with a company situated for this and close to Auckland.

[Marilyn Munroe]

And mercury is well positioned for this-working with Tesla to experiment with battery storage on the grid at Auckland.
Solar installation and electric vehicles
.Change is inevitable and its good to be with a company situated for this and close to Auckland.

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

[Joshuatree]

Jantar reckons Contact has the best(2) pumped storage locations.

This hasn't copied well(scroll down) but NZ is the 4th highest user of electricity per capita after USA ,Sth Korea, and Australia. Ok take the smelter away and we'd be lower down i guess but uk japan germany and russia are below us. .lots of efficiencies to improve on i guess.


Electricity Consumption

Kilowatt Hour Consumption Per Capita Per Annum


USA South Korea Australia New Zealand Singapore Japan Germany Russia Hong Kong U.K. Malta Malaysia China Thailand Vietnam Jamacia Indonesia India Philippines North Korea Sri Lanka Pakistan PNG Bangladesh Myanma

• The world economycontinues to electrify;nearly 67% of theincrease in demand forenergy comes fromelectricity
• The rising share reflectsconsumer preferencesfor energy that is cleanand convenient at thepoint of use
• High growth opportunityin emerging markets asprosperity rises
   Support this growthwith clean and greenenergy

]







]kilowatt hour consumption per capita per annum.Source data: World Bank

[Dassets]

Wiki has nz at 55th. The other issue is other countries eg russia use gas/coal/diesel for direct heating and hot water. Damned statistics....