MCY Mercury NZ ( MRP Mighty River Power)

[couta1]

It just seems crazy and as long as you buy with the intention of a long-term hold-as I always do-does the sp today really matter?
I bought a lot just a week ago when they went down to315.5.
If they go up at anytime the value of my holding gets out of the proportion I want in this stock so I sell a few-the more they go up the more I sell and vv if they go down.
Their lakes are full and the money keeps rolling in so when the sp islow I tell myself it doesnt matter.When the price is a bargain I buy

Agree for sure, just trying to find a reason for the behaviour, but of course there doesn't always have to be one.

[RTM]

Stock has tanked the day before it goes Ex a 6c divvy, has been behaving strangely for a while now, after the strong result, maybe it's coming out of the MSCI index?

Tanked ? Really ? Down 3c at end of day and had run up to 332 from high teens last in the last week or so. I wanted to buy some more to, but unlike Fish was unable to buy them at the price I was prepared to pay. From memory, Craigs were not overly enthusiastic.

[couta1]

Tanked ? Really ? Down 3c at end of day and had run up to 332 from high teens last in the last week or so. I wanted to buy some more to, but unlike Fish was unable to buy them at the price I was prepared to pay. From memory, Craigs were not overly enthusiastic.

Was at $3.22 when I wrote that, regardless it's still trading significantly below fair value, which I reckon is $3.40 plus, so $3.27 before shedding 6c isn't that flash.

[Snoopy]

fish quoted on the CEN thread


-------

"Recent Morningstar analysis"

"Narrow-moat-rated Mercury NZ posted record first-half EBITDA of NZD 301 million, up 11% on the same period last year. The firm benefited from ideal weather conditions, with plenty of rain in the North Island boosting its hydroelectric production, while low South Island rain kept the wholesale price high. Full-year guidance for EBITDA of NZD 530 million is unchanged, and we think the firm can do a little better. We make minor adjustments to our earnings forecasts but maintain our NZD 3.60 fair value estimate. We also adjust our historic and forecast dividend numbers to now include special dividends as well as ordinary dividends."

--------

I hope you don't mind me replying on the Mercury thread fish, as it is of interest to Mercury shareholders rather than Contact shareholders.

The bit in italics I don't agree with at all. A 'special dividend' is called a 'special dividend' because it is paid taking into account special circumstances. The latest special dividend IIRC was paid because of windfall profits from the recent bumper flow into the Taupo catchment combined with high wholesale prices. Last year I think it was because of a windfall cashflow after selling down an overweight position in carbon credits. The year before that I can't remember, was it surplus property sales? The reason these were 'special dividends' is because they arose out of unusual circumstances that are unlikely to be repeated. Yes we have had special dividends three years in a row. But to assume they will continue, just because we got lucky three times seems manifestly wrong. If these new dividends were expected to be payable year after year, then Mercury management would just increase the ordinary dividend. The fact that management did not do this, and keeps classifying 'special dividend's as 'special' tells me that Morningstar's updated valuation is wrong.

IMO the correct way to value a special dividend is to add the value of that dividend to the share price as a one off event.

The other reason for the upgrade:

"The firm benefited from ideal weather conditions," <snip> "we think the firm can do a little better."

is almost as ridiculous. First they acknowledge that MCY benefitted from ideal weather, and end the same paragraph saying that "Mercury can do a little better". Well guess what? Mercury has no control over weather conditions. They may well have another bumper year next year in the Taupo catchment. But this is largely unforecastable and certainly nothing to do with the amount of water that flowed into Taupo over recent months. I don't think that Mercury Energy is worth anything like $3.60. Whoever wrote that Morningstar analysis should hang their head in shame!

SNOOPY

[fish]

Snoopy a special dividend that has happened for the last 3 years and almost certainly will happen this year cannot be viewed as a one off.
Cen lost a lot of customers last month(some will be going to mercury) and sold much less electricity.
Its not just a matter of changing hydrology-although the clutha catchment is much lower than you might think.
CEN will benefit from higher prices but I dont like the loss of customers.
Maybe the fact that they use fossil fuels has become a factor.
Mercury are certainly promoting the clean ,green image and maybe you should consider future trends in energy in making your valuation .
Nobody really knows but we all have our own feelings about global warming etc-look at what Norway and others are doing.
Hydro close to Auckland imho is very valuable-higher prices and less line losses.

[Snoopy]

Snoopy a special dividend that has happened for the last 3 years and almost certainly will happen this year cannot be viewed as a one off.

Fish, you see 'a special dividend' for three years. I see three years with a different special dividend declared each year because of three different sets of special circumstances. MCY may well declare a special dividend next year. But I don't think you can predict that as a certainty, because this is what happened in the last three years and therefore you should not assume that as a certainty in your valuation.

Management of utility type companies hate cutting dividends. The best way not to cut 'ordinary dividends' is to declare the odd 'special dividend' so that if the next year is not so favourable you can cut the special dividend, yet still claim an unbroken record of flat to rising dividends because the 'ordinary dividend' has not been cut. The fact that a dividend declared is 'special' is enough reason in itself to believe that you should not rely on it in the future to be repeated. I am not saying there won't be a special dividend next year. I just don't think you should rely on that assumption for valuation purposes.

Hydro close to Auckland imho is very valuable-higher prices and less line losses.

Looking back on my 'one evening' sample from last week, from my check of the the EMI website at both Huntly

https://www.emi.ea.govt.nz/Wholesale...ES&_si=p|0,v|3

and Benmore

https://www.emi.ea.govt.nz/Wholesale...ES&_si=p|0,v|3

to get clarification of that. Let's look at an assortment of dates and times over the last week.

	Benmore Node 2201	Huntly Node 2201	Difference	%ge Difference
Wholesale Price 5pm 14-03-2018	$52.34/MWh	$64.26/MWh	+$11.92/MWh	+22.8%
Wholesale Price 6pm 14-03-2018	$49.36/MWh	$61.92/MWh	+$12.56/MWh	+25.4%
Wholesale Price 7pm 14-03-2018	$23.78/MWh	$28.77/MWh	+$4.99/MWh	+21.0%
Wholesale Price 8pm 14-03-2018	$71.20/MWh	$83.34/MWh	+$12.14/MWh	+21.0%
Wholesale Price 9pm 14-03-2018	$71.48/MWh	$81.96/MWh	+$10.48/MWh	+17.0%
Wholesale Price 10pm 14-03-2018	$41.73/MWh	$46.22/MWh	+$4.49/MWh	+10.8%
Wholesale Price 11pm 14-03-2018	$69.63/MWh	$73.51/MWh	+$3.88/MWh	+5.6%

Last year Mercury generated 7,000GWh of flexible hydro and base load geothermal generation (source p3 of November 2017 Investor Presentation). If the cost of doing this was around $12/MWh lower than if that same energy had been bought from competitors in the South Island and imported via the cook strait cable, we can work out the annual saving to Mercury.

7,000 GWh = 7,000,000 MWh

7,000,000 MWh x $12/MWh = $84m per year (equivalent to an after tax profit increase of 0.72 x $84m = $60m)

Given I have previously calculated Mercury's normalised net profit after tax for FY2017 as $168m, that $60m boost because of a reduction in distribution costs is a huge boost for Mercury shareholders. But this boost is already included in Mercury's results, and should not be double counted by paying again for such a strategic advantage from an investors perspective.

SNOOPY

[Marilyn Munroe]

Snoopy, my recolection is that Transpower cherges are based on all grid exiit points being charged equally.

Thus someone who can see the Benmore Dam from their porch is charged the same by Transpower as someone who can see the Cape Reinga Lighthouse from their porch.

Boop boop de do
Marilyn

Dont foget that local line company charges asre also includred inthe line charge a consumer pays.

[fish]

Electricity is sold at different prices at these exit points

e g atm invercargill is $54 and Bream Bay is $64.
Lets say the cost of generation is $30.
Mercury sells power at bream bay(northland)=100% profit
Contact sells SI hydro to Bream Bay and they are going to have significant line losses which they have to absorb so profit maybe 10% less(jantar could tell us the exact figure).
in the future i can see with population growth this discrepancy growing.
Furthermore i understand there is a review of transpower charging-to consider user pays?-if this happens transpower charges may decrease for mercury(close to auckland) and increase for SI hydro
We really need Jantar to give one of his expert posts on this matter

[Snoopy]

Snoopy, my recolection is that Transpower cherges are based on all grid exiit points being charged equally.

Thus someone who can see the Benmore Dam from their porch is charged the same by Transpower as someone who can see the Cape Reinga Lighthouse from their porch.

Boop boop de do
Marilyn

Don't forget that local line company charges are also included in the line charge a consumer pays.

Marilyn, I was speaking from the perspective of the power retail company, in this case Mercury, paying the wholesale price of the power they then on sell to consumers. This all happens behind the scenes and is opaque to the end line consumer. The end line energy consumer, unless you are a customer of Flick Electric, is not concerned with the wholesale energy price, because all of that is managed by the retailer. The retailer can change what the pay for wholesale energy by using:

1/ the ASX NZ power futures market and/or
2/ choosing between cranking up their own power generation (if the retailer is also a generator) verses buying what they need from the wholesale spot power market and/or
3/ using the pre-signed inter generator agreements that allows them to purchase power from a competitor in certain circumstances at a pre-determined price and/or
4/ using a combination of 1,2 and 3 to game the market and manipulate power prices in periods of high power demand to their own advantage.

Gulp, did I really write out point 4/? Perhaps I had better say that 'obviously' no reputable gentailer would actually do that, even if it was in their power to do so ;-).

All of the above is in relation to energy pricing. Transpower is the outfit that shifts this energy from one grid node point to another. If this charge were the same for all wholesale customers, then surely there would be no incentive to buy more expensive Huntly node power over cheaper Benmore node power? IOW would not the wholesale market immediately equalize if the Transpower charges were the same for all power wholesalers? In theory there should be off peak rates for the transmission of power as well as the energy cost. In practice I do not know if Transpower does this.

To go back to what I think was your original point though, from a retail perspective there doesn't seem to be too much difference in the price that Mercury charges its Auckland or Christchurch customers in retail cents per kWh. From that perspective I think your point is likely correct. A retail 'Someone' who can see the Benmore Dam from their porch has a similar Transpower wholesale component passed on to them in their power bill as 'someone' who can see the Cape Reinga Lighthouse

SNOOPY

[fish]

maybe I am missing something.I have just checked atm power prices-bream bay $125 ,invercargill $105 approx.
Power companies- lose power in line losses.
Hence mercury would make a lot more profit selling electricity to say whangarei,North than contact selling anywhere in the country