Equity Ratio: FY2013 to FY2020
The following is a break down of the equity ratio of what was once 'Mighty River Power' and is now 'Mercury Energy' since float time.
|
Equity (A) |
Assets (B) |
Equity Ratio (A)/(B) |
FY2013 |
$3,182m |
$5,802m |
0.5484 |
FY2014 |
$3,219m |
$5,689m |
0.5658 |
FY2015 |
$3,337m |
$6,058m |
0.5508 |
FY2016 |
$3,315m |
$6,085m |
0.5448 |
FY2017 |
$3,308m |
$5,997m |
0.5516 |
FY2018 |
$3,286m |
$6,091m |
0.5395 |
FY2019 |
$3,537m |
$6,484m |
0.5455 |
FY2020 |
$3,739m |
$6,885m |
0.5431 |
SNOOPY
'Thin Air Capital' Reprised
Quote:
Originally Posted by
Snoopy
They say you can't get something out of nothing. But with the NZ electricity market, I am not sure that holds. Here is how the 'something out of nothing' method works:
1/ Revalue assets to market.
2/ Note that after revaluation your return on assets in not acceptable.
3/ Put up prices to get an acceptable return on assets.
4/ Price increases now increase underlying value of assets
5/ Go back to step 1
The power companies are very keen on using EBITDAF as a measure of their operating performance. But MCY/MRP has another profit stream, generated according to steps 1 to 5 above, not included in EDITDAF. These revaluations are based on future earnings projections. That means they might go down, although in practice I have never seen this.
When the need for more electricity generation does become apparent, value will once again arise out of thin air based on increasing energy use projections. So Mercury (MRP now MCY) may never need to raise capital again to build new power stations!
'Thin Air Capital' is not a concept I have discussed for a while. So it might be worth going over it again 'for those who came in late'. It is important because it provides one way of understanding why gentailers like Mercury, can trade on what look like 'ridiculous multiples' for a utility (Mercury I calculate is on a normalised historic PE of 44) and yet still be a worthwhile investment.
Conventionally there are two ways to fund new projects:
1/ Raise money from shareholders (shareholder equity)
2/ Borrow money from the bank (bank debt)
Yet in the New Zealand electricity market there is a third way. Look at your long lived generation assets. Decide they are worth a lot more than their 'book value'. Increase 'book value' to 'market value' by imagining new capital that you 'create out of thin air'.
This somewhat unconventional way of raising capital is only possible because:
1/ Over time the wholesale price of power increases
2/ The cost of producing power from the long lived hydro assets and geothermal power stations remains largely fixed.
So with power becoming more and more expensive on the market , and production cost not rising in tandem, these long lived generation assets become more and more valuable over time. In fact they become so valuable that building a brand new power station at today's prices can be done without raising any new money from shareholders. The way the electricity market is structured in NZ means that this practice can continue in perpetuity. Not all power companies use this method of funding new power stations (Contact Energy doesn't). But Mercury Energy certainly does. Mercury shareholders might consider 'thin air capital' a 'secret source of value' that conventional valuation metrics overlook. The obvious question is, how much 'thin air capital' has Mercury Energy accumulated? And can we take this as an indication of how much more thin air capital might be accumulated in the future?
SNOOPY
'Thin Air' capital since the GFC (FY2020 Perspective)
Quote:
Originally Posted by
Snoopy
Time to update my table
|
Reval. Hydro & Thermal Assets ($m) |
Reval. Other Generation Assets ($m) |
Total Revaluation ($m) |
Post tax New Capital Per Share ($m) |
Pre Tax Revaluation ($m) |
Pre Tax New Capital Per Share (c) |
2009 |
0 |
170.987 |
170.987 |
12.2 |
244 |
17.4 |
2010 |
200.900 |
60.250 |
261.150 |
18.7 |
373 |
26.6 |
2011 |
153.300 |
135.275 |
288.575 |
20.6 |
412 |
29.4 |
2012 |
119.520 |
2.880 |
122.240 |
8.7 |
170 |
12.1 |
2013 |
30.960 |
26 |
57 |
4.9 |
79 |
5.6 |
2014 |
4 |
25 |
29 |
2.1 |
40 |
2.9 |
2015 |
? |
? |
356 |
25.5 |
497 |
35.5 |
2016 |
? |
? |
=79+21 |
7.1 |
137 |
9.8 |
2017 |
? |
? |
38 |
2.7 |
52 |
3.7 |
Total |
|
|
|
102.2 |
|
less Special Dividends Declared (per share) |
|
|
|
-10.4 |
|
Residual Thin Air capital |
|
|
|
91.8 |
|
Note:
1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased.
4/ In FY2016 I have added back the tax effect of the Southdown write down, to get the residual tax effect of the remaining generation assets.
5/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
6/ I have removed the special dividends declared over time , as these may been seen as a method of paying back excess 'thin air capital'.
7/ For the calculation of the 10.4cps special dividends paid, see my post 1003 on this thread.
91.8cps x 1,400m shares = $1,285m of retained 'hidden value' 'Thin air capital' over the years. Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years. These power stations were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.
Time to update my table
|
Reval. Hydro & Thermal Assets ($m) |
Reval. Geothermal & Other Generation Assets ($m) |
Total Revaluation ($m) |
Post tax New Capital Per Share ($m) |
Pre Tax Revaluation ($m) |
Pre Tax New Capital Per Share (c) |
2009 |
0 |
170.987 |
170.987 |
12.2 |
244 |
17.4 |
2010 |
200.900 |
60.250 |
261.150 |
18.7 |
373 |
26.6 |
2011 |
153.300 |
135.275 |
288.575 |
20.6 |
412 |
29.4 |
2012 |
119.520 |
2.880 |
122.240 |
8.7 |
170 |
12.1 |
2013 |
30.960 |
26 |
57 |
4.9 |
79 |
5.6 |
2014 |
4 |
25 |
29 |
2.1 |
40 |
2.9 |
2015 |
356 |
0 |
356 |
25.4 |
497 |
35.5 |
2016 |
? |
? |
99 |
7.1 |
137 |
9.9 |
2017 |
0 |
38 |
38 |
2.7 |
52 |
3.7 |
2018 |
0 |
40 |
40 |
2.9 |
55 |
3.9 |
2019 |
109 |
71 |
180 |
12.9 |
250 |
17.9 |
2020 |
182 |
31 |
213 |
15.2 |
296 |
21.1 |
Total |
|
|
1,855 |
133.4 |
|
185 |
less Special Dividends Declared (per share) |
|
|
|
-15.4 |
|
Residual Thin Air capital |
|
|
|
118.0 |
|
Notes:
1/ Capital per share figures assume 1,400m shares on issue throughout the whole comparative period.
2/ 30% tax rate assumed up until FY2012. 28% tax rate assumed from FY2012 forwards.
3/ I notice that after FY2014 the break down in the annual report between 'Hydro & Thermal Assets' and 'Other Generation Assets' has ceased in the 'Property Plant & Equipment table. This detail was reinstated in FY2017, if you looked at 'Assets at Fair Value' sub note under the subsequent annual report notes on 'Property Plant & Equipment'.
4/ Since I am counting 'thin air capital' as an extra return over and above dividends, I feel it is appropriate to look at the 'post tax' effect of the new thin air capital. That aligns more closely with the post tax effect of dividends. Dividends 'post tax' are what shareholders get in their bank account.
5/ I have removed the special dividends declared over time , as these may been seen as a method of balance sheet optimisation by paying back excess 'thin air capital'.
6/ For the calculation of the 15.4cps special dividends paid, see my post 1318 on this thread.
118.0cps x 1,400m shares = $1,652m of retained 'hidden value' 'Thin air capital' over the years.
Of course not all of this still exists because it has been used to build both the Nga Awa Purua (FY2010) and Ngatimariki (FY2013) power stations over the years. These power stations were built using a combination of new equity (the infamous 'thin air capital') and borrowings. We should also bear in mind that some of this thin air capital may be needed to retain the credit rating of the company. Put simply, the more capital the company have, the less borrowings they need. So some unspent thin air capital could contribute to a better credit rating for the company.
SNOOPY