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  1. #1301
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    Nice to have the dividend in the bank this morning, good reliable payer in a sea of cancelled and reduced dividends.

    Personally, I'm a wee bit sad it jumped up after Tiwai announcement as it was shaping to come back to a more realistic price to top up, I'm happy to stay on the sidelines at the current price.

  2. #1302
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    Quote Originally Posted by Norwest View Post
    Nice to have the dividend in the bank this morning, good reliable payer in a sea of cancelled and reduced dividends.

    Personally, I'm a wee bit sad it jumped up after Tiwai announcement as it was shaping to come back to a more realistic price to top up, I'm happy to stay on the sidelines at the current price.
    nearly at all time highs now , maybe you should have just done it
    bull
    One step ahead of the herd

  3. #1303
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    Look at the SP now...

  4. #1304
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    Yes its definitely shot up a lot since I last posted several weeks ago - I believe it has overshot in my opinion and I'm posting this as a happy holder.

    I still stand by my conviction that there will be better opportunities for me to continue to accumulate more of this stock at better prices in the next 12 months.

  5. #1305
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    Quote Originally Posted by Raz View Post
    Look at the SP now...
    truely wonderful sight it is
    bull
    One step ahead of the herd

  6. #1306
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    Default 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
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  7. #1307
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    Default 'Thin Air Capital' Reprised

    Quote Originally Posted by Snoopy View Post
    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
    Last edited by Snoopy; 29-11-2020 at 06:20 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  8. #1308
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    Default 'Thin Air' capital since the GFC (FY2020 Perspective)

    Quote Originally Posted by Snoopy View Post
    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 25.5 497 35.5
    2016 ? ? 100 7.1 139 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 1,856 133.5
    less Special Dividends Declared (per share) -10.4
    Residual Thin Air capital 123.1

    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. This distinction was reinstated in FY2017.
    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.

    123.1cps x 1,400m shares = $1,723m 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
    Last edited by Snoopy; 30-11-2020 at 04:04 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #1309
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    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.

  10. #1310
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    every time MR SP posts - a change of name required i think i have to start actually thinking...what we missed out on here was realising that the EV revolution is coming and these companies will benefit big.. or everyone will get some solar panels.. that wall of money went to EV.
    Last edited by Waltzingironmansinlgescul; 30-11-2020 at 09:28 AM.

  11. #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.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  12. #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

  13. #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 + 2.4(s) + 5.7 = 16.5
    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; Yesterday at 10:04 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  14. #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; Yesterday at 09:22 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

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