MCY Mercury NZ ( MRP Mighty River Power)

[Beagle]

Remind me not to apply for the job of 'director of communications' at 'Anything at All Corp.' :-(
You'd be all right mate



I am perplexed how having a 'negative imputation credit balance' is even possible at any time. Doesn't having a 'negative imputation credit balance' mean the company has paid out imputation credits they haven't got? Why are the senior accountants in Mercury not in jail for tax fraud?

SNOOPY

Okay so you need to stop thinking of imputation credits as being paid per se. They are notionally allocated to dividends paid and their is no credit as such that's physically paid by the company to the shareholder nor is the credit paid to the IRD. Kind of a "look through" thing, shareholders get the credit on the basis the company has attached the imputation. When a company attaches an imputation credit to a dividend paid their Imputation Credit account is debited. When a company pays tax their ICA account is credited. Its not tax fraud to attach imputation credits you don't have but in practice the penalties that go with that make it uneconomic to run a negative imputation balance in one's company account which is why these companies are pre-paying their taxes.

[fish]

Okay so you need to stop thinking of imputation credits as being paid per se. They are notionally allocated to dividends paid and their is no credit as such that's physically paid by the company to the shareholder nor is the credit paid to the IRD. Kind of a "look through" thing, shareholders get the credit on the basis the company has attached the imputation. When a company attaches an imputation credit to a dividend paid their Imputation Credit account is debited. When a company pays tax their ICA account is credited. Its not tax fraud to attach imputation credits you don't have but in practice the penalties that go with that make it uneconomic to run a negative imputation balance in one's company account which is why these companies are pre-paying their taxes.

Could there be other advantages of pre-paying tax? like interest from the ird(?taxable)

[Beagle]

Could there be other advantages of pre-paying tax? like interest from the ird(?taxable)

Interest use of money credit, just over 1% last time I looked.

[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.

[axe]

Prepaying tax kinda makes sense ; the tax is going to the majority shareholder with 51%.....

Could there be other advantages of pre-paying tax? like interest from the ird(?taxable)

[Snoopy]

FY2011: $161.6m/ ($2,906.5m -$2,710.2m)= 82.3%
FY2012: $148.1m/ ($3,104.2m -$2,239.2m)= 84.6%
FY2013: $167.9m/ ($3,181.7m -$2,831.4) = 47.9%
FY2014: $186.5m/ ($3,219m -$2,844m) = 49.7%
FY2015: $155.5m/ ($3,337m -$3,204m) = 116.9%

Conclusion: Pass Test

The information in this post is for the consumption of shareholders only. If anyone in the Green Party found out about the real return that Mercury Energy are earning on their assets they would go bezerk. And, now being part of the government, the Greens could subject this company to punitive windfall taxes once the true picture of how much Mercury is making out of taxpayer assets emerges. Actually I think the departed leader of the greens, Russell Norman, did know all about this, and it caused some ructions leading up to the 2014 elections. But as shareholders will see the issue hasn't gone away.

The following figures you will not find in the annual report. This is because my return on assets (and hence return on equity) is based on 'cost value' not 'book value'. Cost value, or contributed value, is what the shareholders have put in. Book value is what the assets are worth now. Using 'book value' the return on assets is modest. But book value is principally made up from previous years asset revaluations These Asset valuations were effectively 'new capital' that goes onto the balance sheet out of thin air, with no contribution from shareholders! This is a good thing for shareholders, but makes for unrepresentative return on shareholder contributions. You will artificially (in my view) decrease the ROE figures if you calculate ROE at declared asset value. So what are the representative return on equity figures?

Net Profit Margin = Normalised Net profit / Contributed Equity


FY2013: $147.1m/ ($3,181.7m -$2,831.4m) = 42.0%
FY2014: $186.5m/ ($3,219m -$2,828m) = 47.7%
FY2015: $136.4m/ ($3,337m -$3,119m) = 62.5%
FY2016: $141.1m/ ($3,315m -$3,111m) = 69.2%
FY2017: $168.5m/ ($3,308m -$3,005m) = 55.6%

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 (rather magnificently)

SNOOPY

[Snoopy]

Margin = Normalised Net profit / Normalised Revenue

Note: all revenue figures are exclusive of line charges

FY2011: $161.6m/ $1,163.9m = 13.9%
FY2012: $148.1m/ $1,520.6m = 9.7%
FY2013: $167.9m/ $1,382.4m = 12.1%
FY2014: $186.5m/ ($1,705m -$431m)= 14.6%
FY2015: $155.5m/ ($1,678m -$422m)= 12.4%

Conclusion: Fail Test

Margin = Normalised Net profit / Normalised Revenue

Note: all revenue figures are exclusive of line charges

FY2013: $147.1m/ $1,382.4m = 10.6%
FY2014: $186.5m/ $1,274m = 14.6%
FY2015: $136.4m/ $1,256m = 10.9%
FY2016: $141.1m/ $1,145m = 12.3%
FY2017: $168.5m/ $1,181m= 14.9%

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.

There was a hiccup after 2014, but the ability to generate a recovering trend has been demonstrated in the three years afterwards.

Conclusion: Pass Test

SNOOPY

[Snoopy]

Thanks to the 'Thin air' asset value correction applying to the FY2014 result, the FY2014 data does support a Warren Buffet style growth projection calculation. However, what a difference a year makes.

The increasing earnings trend is no longer discernible. Neither is there any pattern showing an ability to increase margins across the years. The culprit? FY2015 was the worst on record for water inflows into the Taupo hydro scheme. But just a few years before that there were two more 'worst year since the company was formed' events: The Waikato river system drought of FY2008, and the second driest autumn in 80 years in FY2010. When the abnormal becomes the new norm, this is where many company valuation techniques break down.

Everything is 'back on track' after FY2017, with a solid pass in all four tests. A great recovery from the abnormal inflows of FY2015 that upset the five year result pattern. Or is it something to do with the fact that for the first time, all results are in the post listing period, subject to the scrutiny of independent investor gaze? Whatever the reason, we can now proceed to the next level of analysis.

SNOOPY

[Fatboyj]

Thank you Snoopy for the great analysis and sharing with us. I've been a happy holder since floating and intend to continue holding.

[Snoopy]

Thank you Snoopy for the great analysis and sharing with us. I've been a happy holder since floating and intend to continue holding.

Glad you are finding the analysis useful Fatboyj. Don't interpret my 'flying pass' in the Buffett tests as a recommendation though. So far all I have looked at is 'what you get' if you bought the share. But the key to any successful investment is 'what you pay for what you get'. I haven't addressed this 'value' point at all yet. A great company is not necessarily always a great investment. My jury is still out on Mercury Energy at $3.38!

SNOOPY