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  1. #1311
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    Quote Originally Posted by Ferg View Post
    Hello Snoopy

    Would a quicker way of getting this value be to look at the balance in the Asset Revaluation Reserve? The 2020AR has a balance of $3.28b. I also noticed the current year movement is "net of taxation". This balance would represent the accumulation of "thin air assets" or "thin air equity" since inception.
    Ah I see the figure you refer to in AR2020 on p51.

    Balance of 'Asset Revaluation Reserve': $3,281m

    However I see they arrived at that figure by adding in a 'net of tax' Asset Revaluation of $205m for the year. My calculated figure was $213m using the current NZ company tax rate of 28%. How did I work that out?

    From p58 AR2020: $253m (hydro) + $43m (geothermal) = $296m (total asset revaluation)

    $296m x (1-0.28) = $213m

    So I take it whoever compiled the annual 'Consolidated Statement of Change in Equity' must have used a higher tax rate?

    Just to expand on this matter a bit more (from where I see it, I in no way class myself as a tax expert)....

    --------

    It seems if you bring a new asset onto your books it comes with a partially offsetting 'deferred tax' entry on the liability side of the balance sheet. The implication here being that should this asset ever be sold for a profit, an accompanying tax bill will be generated (the deferred tax liability becomes an actual tax liability?). I don't really understand this, because I thought that profits on capital assets are not taxable in New Zealand. In the case of Mercury these 're-valued assets' are core company assets, being long lived hydro stations and geothermal power stations. They will never be sold. So I guess the deferred tax liability will never be crystallised?

    I am all ears if anyone can better explain this topic!

    --------

    The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you have requoted Ferg!

    SNOOPY
    Last edited by Snoopy; 30-11-2020 at 06:22 PM.
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  2. #1312
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    Quote Originally Posted by Snoopy View Post
    So I guess the deferred tax liability will never be crystallised?

    [snip]

    The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you quote Ferg!
    Hi Snoopy

    Apologies in advance for the long post but this got away on me, the more I dug into it.

    It could be your figure is lower due to older revaluations not being included in your analysis. My interpretation of your analysis is that it is showing the amounts created out of thin air since 2009. I reckon the other $2b would have been created prior to 2009.

    Regarding deferred tax. I'm not an expert on this and my knowledge is sketchy at best but the DTL on revaluations won't crystallise. There is a worked example here https://auditnz.parliament.nz/good-p...osure-examples

    Click the first link of the link above for the TMCL excel example. This suggests that if you take the revaluation through the P&L under comprehensive income, then there is a partially offsetting entry into deferred tax. Using the MCY 2020AR I believe this looks like:
    Dr Assets $285m (page 57 is showing $296m - see *note below)
    Cr Asset Reval Reserve/Equity $285m (per p49 - disclosed under comprehensive income)

    Dr Asset Reval Reserve/Equity $80m (the nett of this line and the one above is $205m per p51 under ARR, note the amount on p49 of comprehensive income shows $91m due to the presence of other transactions)
    Cr Deferred Tax Liability $80m (the note on p57 has $83m, so there is another PP&E deferred tax transaction, interesting that this is not far from 28% of the fixed asset difference of $13m)

    NB: $80m is 28% of $285m so the values make sense.

    From the notes on p56:
    "Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax and accounting bases of the Group’s assets and liabilities. A deferred tax asset is only recognised to the extent that there will be future taxable profit to utilise the temporary difference.

    Property, plant and equipment is held on capital account for income tax purposes. Where assets are revalued, with no similar
    adjustment to the tax base, a taxable temporary difference is created that is recognised in deferred tax. The deferred tax liability
    on these revaluations is unlikely to crystallise in the foreseeable future under existing income tax legislation."

    FYI "capital account" refers to capital vs revenue account. In IRD terminology capital accounts are non-taxable, whereas revenue accounts are taxable.

    So it is confirmed these book adjustments for revaluations create a deferred tax liability that does not crystallise. Accordingly, I remove any deferred tax assets or liability from any NTA calculations along with any other IFRS adjustments I don't think represent tangible assets or liabilities (such as leased assets & liabilities under IFRS16), but I digress....

    The nett ARR balance is $3,281m (p 51) - which grossed up for tax at 28% would be $4,557m gross before DTL adjustments. 28% of $4,557 is $1,276m. The current balance in the deferred tax liability account under the heading PP&E on p57 is $1,263m. A difference of $13m which is pretty close (this is completely different from the $13m difference I tagged in the journal above which I explore below and not to be confused).

    *Note: regarding the $13m difference in the asset journal entry of $285 and the $296m per p57. This note from p58 might explain some of the difference:
    "Any surplus on revaluation of an individual item of property, plant and equipment is transferred directly to the asset revaluation reserve unless it offsets a previous decrease in value recognised in the income statement, in which case it is recognised in the income statement."

    This sounds to me like the P&L received a credit of $13m in the fiscal year, based on a revaluation of an asset that was previously written down in the P&L. That probably explains why the assets are showing revaluations of $296m but the statement of comprehensive income has $285m. What is interesting is that this "credit" has been buried somewhere else in the P&L given the disclosed value for depreciation and amortisation per the P&L ties directly into the PP&E and intangible asset reconciliations ($186m + $28m = $214m per the P&L). So where is this $13m credit? I think it has been deducted from operating costs. Hmmm.....

    Back to carrying values, this note from page 58 (half way down right hand side):
    "The carrying amount of revalued generation assets, had they been recognised at cost, would have been $1,959 million".
    That is an interesting statement in light of this statement from bottom left of p58:
    "As a consequence of the revaluation, accumulated depreciation on these hydro and geothermal assets has been reset to nil."
    So it appears that the actual cost of the generation assets is $1,959m, despite there being $170m of depreciation on generation assets (p57).

    This means that $170m goes into the P&L as an expense and is (partly?) deductible for tax purposes but that is reversed, plus some, using a revaluation to give a gain in the statement of comprehensive income, which is not taxable. Interesting - I learned something today.

    Lastly, the NBV of generation assets per p57 is $5,575m. The historical cost of $1,959m. The difference is $3,616m, which appears to be all revaluations given there is no accumulated depreciation. The "revaluation difference" of $3,616m is considerably less than the gross revaluation from my calc above of $4,557 - a difference of $941m. Why does this not work?
    Last edited by Ferg; 30-11-2020 at 10:22 PM. Reason: typos

  3. #1313
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    Default Twelve years of uninterupted dividend growth?

    Quote Originally Posted by Snoopy View Post
    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.
    From p10 of AR2020

    "This brings the full-year ordinary dividend to 15.8cps, up 2%, marking our 12th successive year of ordinary dividend growth."

    What about actual dividend growth though? Remember those special dividends that some analysts were keen to normalise only a few years ago?

    Financial Year Dividends Paid (cps)
    FY2009 3.96 + 0.00 = 3.96
    FY2010 4.02 + 5.70 + 10.72(s) = 20.44
    FY2011 2.17 + 4.62 = 6.79
    FY2012 3.26 + 5.34 = 8.60
    FY2013 3.21 + 4.80 = 8.01 (1)
    FY2014 7.2 + 5.2 = 12.4
    FY2015 8.3 + 5.0(s) + 5.6 = 16.9
    FY2016 8.4 + 2.5(s) + 5.7 = 16.6
    FY2017 8.6 + 4.0(s) + 5.8 = 18.4
    FY2018 8.8 + 5.0(s) + 6.0 = 19.8
    FY2019 9.1 + 6.2 = 15.3
    FY2020 9.3 + 6.4 = 15.7

    Notes

    1/ This breaking of the upward dividend trend at an earlier date is because I have grouped the dividends in the years they are actually paid whereas Mercury groups their dividends relating to the earnings period in which they were generated.
    2/ Pre FY2014, the number of shares in my calculation have been adjusted so that the shares on issue pre-float equal the shares on issue post float.

    This means the real picture is that dividend growth has effectively stalled over the last six years.

    SNOOPY
    Last edited by Snoopy; 12-08-2022 at 02:44 PM.
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  4. #1314
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    Quote Originally Posted by Ferg View Post

    Snoopy wrote:
    "The other problem I have is that the total of all the revaluations that I have added up of $1,856m is rather lower than the $3,821m Balance of 'Asset Revaluation Reserve' figure that you quote Ferg!"

    It could be your figure is lower due to older revaluations not being included in your analysis. My interpretation of your analysis is that it is showing the amounts created out of thin air since 2009. I reckon the other $2b would have been created prior to 2009.
    Yes that might be the answer. But I am sticking to the $1,856m figure. Why? Because 'thin air capital' is not only used to build new power stations. The older 'thin air capital' may be being used to support the balance sheet in historic ways. And we have to assume that at the point that Mercury (or Mighty River Power as it was then) was restructured prior to being floated, then the shares were 'prepared for the market' with an optimised capital structure, given:

    1/ All the construction projects on the books at the time.
    2/ The expected operating performance of the company.

    The new power station construction projects (both geothermal) 'in the planning' around float time were:

    A/ Nga Awa Purua, commissioned in FY2010. Total cost $430m or 30.7cps
    B/ Ngatamariki, commissioned in FY2014. Total cost $475m or 33.9cps

    I think it is reasonable to assume that the 'optimised capital structure' would have been in place before the construction of the first of these - in FY2009. And if we consider the asset revaluations from that point only, we are comparing the 'incremental gain of revaluation' from a date with the 'incremental cost of building new power stations' from that same date. And that is the exercise we want to achieve.

    SNOOPY
    Last edited by Snoopy; 01-12-2020 at 09:22 PM.
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  5. #1315
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    Quote Originally Posted by Snoopy View Post
    Yes that might be the answer. But I am sticking to the $1,856m figure. Why? Because 'thin air capital' is not only used to build new power stations. The older 'thin air capital' may be being used to support the balance sheet in historic ways. And we have to assume that at the point that Mercury (or Mighty River Power as it was then) was restructured prior to being floated, then the shares were 'prepared for the market' with an optimised capital structure, given:

    1/ All the construction projects on the books at the time.
    2/ The expected operating performance of the company.

    The new power station construction projects (both geothermal) 'in the planning' around float time were:

    A/ Nga Awa Purua, commissioned in FY2010. Total cost $430m or 30.7cps
    B/ Ngatamariki, commissioned in FY2014. Total cost $475m or 33.9cps

    I think it is reasonable to assume that the 'optimised capital structure' would have been in place before the construction of the first of these - in FY2009. And if we consider the asset revaluations from that point only, we are comparing the 'incremental gain of revaluation' from a date with the 'incremental cost of building new power stations' from that same date. And that is the exercise we want to achieve.

    SNOOPY
    I worked at Nga Awa Purua the last couple of months. Rotokawa is I think made from vinylester resin (fibre glass) Less susceptible to corrosion from acid building up in columns.

    In Nga Awa Purua we replaced most of the top half of the cooling tower as for some reason it was made out of polyester resin not vinylester. Would have been a fair bit of money spent and more work to be done next year starting feb/march.

    The reason we stopped work was because in the summertime they need each cell of the cooling tower running at full capacity to avoid huge fines from the govt. The govt will fine them if they arent producing enough power.

    Every Mercury work vehicle I saw there was an EV and charged on site at the geothermal plant.

  6. #1316
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    in the race to buy tilt from infratil?
    one step ahead of the herd

  7. #1317
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    Quote Originally Posted by bull.... View Post
    in the race to buy tilt from infratil?
    They will certainly be talking about it... would be a good fit for us.

  8. #1318
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    Default Thin Air Capital, Special. Div. Adj. (FY2020 view)

    Quote Originally Posted by Snoopy View Post
    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 or alternative investment 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.
    3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.

    --------------------------


    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.
    The quest top explain why supposedly sensible investors are prepared to pay a phenomenal multiple for what seems on the surface to be a utility share continues....

    I am continuing with the 'fish theory' that special dividends are Mercury management's way of optimising the capital structure of the company.

    I am going to use the assumption that, following the completion of the most recently commissioned all new power station, the Ngatamariki geothermal station in FY2013, Mercury considered itself 'capital optimised'. Using the balance sheet from that year, we can therefore calculate an optimised gearing ratio for the company:

    Optimised Gearing ratio: (Total Liabilities)/Total Assets): $2,620m / $5,802m = 45%

    That means I must modify my 'thin air capital' table by removing the respective special dividends paid over the period of consideration. 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 N/A $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
    FY2018 $55m 0.72 $39.6m $70m 1.0 $70m 5.0c
    FY2019 $250m 0.72 $180m $0m N/A $0m 0c
    FY2020 $296m 0.72 $213.1m $0m N/A $0m 0c
    Total $897m $215m 15.4c

    Notes:

    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 on the dividend indicates that the dividend was not imputed and 28% tax needs to be paid.
    3/ The 'New Thin Air Capital' is 'Asset Revaluations' less 'Impairments'.
    4/ Surplus capital returned per share assumes 1,400m shares on issue.

    ----------------------

    The remaining thin air capital on the balance sheet is therefore: $897m - $215m = $682m

    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' / $682m = 45% => d=$307m

    We thus have a total available for investment amount of: $682m (equity) + $307m (debt) = $989m dollars, while still staying within Mercury's own optimised balance sheet guidelines.

    From this 'available for investment total', we can subtract the $144m paid to acquire a 19.9% stake in Tilt Renewables in FY2018. We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines. By my calculations that still leaves:

    $989m - $464m - $144m = $381m

    We can add to this the $272m proceeds from the sale of the Metrix metering business in FY2019.

    That makes total capital of $381m + $272m = $653m still available for investment. I wonder what other investment direction MCY might 'Tilt' those funds towards ;-)?

    And now for a confession....

    I consider that I may have made a conceptual mistake the previous times that I have used this method to incrementally increase my valuation of this company. I said that I didn't want to count special dividends twice. But by removing the special dividend total from the incremental 'thin air capital' I am reducing the amount of capital by the amount paid as a special dividend. So I am allowed to count that special dividend as dividend income, because it is in effect discarded money that has already reduced the thin air capital to below what it otherwise would have been. That means I can count the special dividend as a bonus dividend because it no longer forms part of the thin air capital.

    SNOOPY
    Last edited by Snoopy; 27-05-2022 at 04:28 PM.
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  9. #1319
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    Default Mercury to take out Tilt? Or Not?

    Quote Originally Posted by Snoopy View Post
    We thus have a total available for investment amount of: $682m (equity) + $307m (debt) = $989m dollars, while still staying within Mercury's own optimised balance sheet guidelines.

    From this 'available for investment total', we can subtract the $144m paid to acquire a 19.9% stake in Tilt Renewables in FY2018. We can also subtract the $464m (AR2020 p10) required to complete the new Turitea wind farm to the full extent of the 60 consented turbines. By my calculations that still leaves:

    $989m - $464m - $144m = $381m

    We can add to this the $272m proceeds from the sale of the Metrix metering business in FY2019.

    That makes total capital of $381m + $272m = $653m still available for investment. I wonder what other investment direction MCY might 'Tilt' those funds towards ;-)?
    A back of the envelope summary of the situation between Mercury and Tilt.

    1/ 20% of the business cost Mercury $144m. On that basis Tilt was valued at $144m/0.2 = $720m. So the remaining 80% of the company had an implied value of $720m - $144m = $576m.

    2/ Right now, Mercury has $653m of investable capital available. So they have enough surplus investable capital on the balance sheet now available to take out all of Tilt, except for one thing. The price of TLT shares is now rather higher than it was when Mercury bought their 20% stake.

    3/ Mercury offered $2.30 for their 20% stake. TLT is trading on the market today at near double that price. So the amount that Mercury would have to pay to take out the remainder of the company would be at least:

    $576m x 2 = $1,152m

    4/ $1,152m would be getting near the upper limit of what Mercury could cope with without a capital raising. Would Grant Robertson support a capital raising for such a 'frivolous' investment?

    5/ I am tending think that Mercury will hold their 20% stake if the balance of the company gets a new owner. Alternatively, if they sold their stake that would be $144m of profit. And maybe a nice bonus dividend for shareholders?

    $144m/1400m = 10cps

    Grant might like that. It would make him look 'responsible' after all the Covid-19 bail out expenditure he has been doing.

    SNOOPY
    Last edited by Snoopy; 08-12-2020 at 10:38 AM.
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  10. #1320
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    Or Is this or some part now available for the resumption of special dividends. Really not happy we missed this last move up. Were Busy buying offshore travel.. Not over valued then? Safe place for more bank deposit money to flow into.. Did not go to OCA. Will sell off when interest rate move up... if they ever do.

    Surely buying into more free energy is the best plan. As the petrol engine may simple be a social no no before long as the kiwi driving public start to wake up to pollution... green kiwi land ...tourists ....
    Last edited by Waltzing; 08-12-2020 at 10:19 AM.

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