MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

ROE = Net profit / EOFY Shareholder Equity

FY2010: $115.3m/ $2,689.0m = 4.3%
FY2011: $161.6m/ $2,906.5m = 5.6%
FY2012: $148.1m/ $3,104.2m = 4.9%
FY2013: $167.9m/ $3,181.7m = 5.3%
FY2014: $186.5m/ $3,219m = 5.8%

Conclusion: Fail Test

There is an alternative calculation using different data to work out the return on shareholders equity of MRP. If you look right at the end of note 10 in AR2014 you will see the carrying value of assets had they been recognised at cost. Just above that you will see the note referring to the increase in value of generation assets of $40m, in addition to the $80m booked in FY2013. With MRP there have been many prior year asset revaluations like this.

Go to the income statement (p6) and you will see that the total comprehensive income for the year of $258m includes revaluation of generation assets of $35m +$5m =$40m. None of this is included in the net profit of $212m (p5). Now go to the Statement of Changes in Equity (p8) and you will that there are entries for fair valuation of hydro and thermal assets ($4m) and other generation assets ($25m) net of taxation. The tax paid on these asset revaluations was therefore:

($40m - ($25m+$4m))/ $40m = 28%

This is the normal company income tax rate. This implies the company has chosen to revalue their generation assets and pay tax on that revaluation and therefore generate extra income tax imputation credits that will be available for shareholders. That policy strikes me as strange. I would have thought revaluation of capital assets like power stations was a non taxable item! Can any accountants out there explain why MRP have treated their asset revaluations in this way?

Whatever the explanation, it looks to me as though these asset revaluations are being treated as though they will be a perpetually occurring benefit over and above the net profit for every year. The asset valuations, as I see it, are effectively new capital that goes onto the balance sheet out of thin air! This is a good thing for shareholders. But it artificially decreases the ROE figures if you calculate these at declared asset value. That's because the capital that arose out of thin air was never contributed by shareholders!

If we redo the ROE calculations, removing the 'thin air' capital I have described above, then the ROE results are very different.

FY2010: $115.3m/ ($2,689.0m - $2342.0m)= 33.2%
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%

Conclusion: Pass Test, with flying colours!

SNOOPY

[Snoopy]

The company has chosen to revalue their generation assets and pay tax on that revaluation and therefore generate extra income tax imputation credits that will be available for shareholders. That policy strikes me as strange. I would have thought revaluation of capital assets like power stations was a non taxable item! Can any accountants out there explain why MRP have treated their asset revaluations in this way?

Whatever the explanation, it looks to me as though these asset revaluations are being treated as though they will be a perpetually occurring benefit over and above the net profit for every year. The asset valuations, as I see it, are effectively new capital that goes onto the balance sheet out of thin air! This is a good thing for shareholders.

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 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. The figures I present below are from FY2009 onwards. This is the first year after the GFC hit, and power usage growth changed from its historical pattern.

All base figures are taken from the 'Statement of Change in Equity' Group figure for the appropriate year.

	Revaluation Hydro & Thermal Assets ($m)	Revaluation Other Generation Assets ($m)	Total Revaluation ($m)	Pre Tax Revaluation ($m)	Pre Tax New Capital Per Share (c)
2009	0	170.987	170.987	244	17.4
2010	200.900	60.250	261.150	373	26.6
2011	153.300	135.275	288.575	412	29.4
2012	119.520	2.880	122.240	170	12.1
2013	30.960	26	57	79	5.6
2014	4	25	29	40	2.9
Total			929		94.0

Note:

1/ eps 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.

That first total figure represents the new 'thin air' capital that has appeared on the MRP balance sheet from 2009 to 2014 inclusive. $929m is a lot of money, perhaps even enough to fund a new power station, without going back to shareholders for more capital? It would certainly go a way towards that!

The last total figure represents the equivalent extra eps in a gross dividend form. This is the amount of extra gross dividend that could have been paid to shareholders, should the MRP board have decided not to reinvest their 'thin air' capital. I do note the amount of 'thin air' capital has been decreasing, year on year. But perhaps this is not a problem, given MRP have declared they are not planning on building any more new power stations in the forseeable future? Furthermore 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 MRP may never need to raise capital again to build new power stations!

SNOOPY

[Snoopy]

I thought the revaluations were on the basis of "replacement cost" rather than earnings or revenue. That makes sure the valuations never retreat. This little accounting trick seems to work across multiple sectors and industries in MNSHO.

No smilie with your post. So just in case you were serious, at the end of the PP&E notes section of the Annual Report, the following sentence appears:

"All hydro thermal and other generation assets shown at valuation were revalued using a net present value valuation methodology by Pricewaterhouse Coopers, an independent valuer."

I note as an observation that Contact Energy, a similar gentailer which operates hydro and geothermal assets, does not do this!

SNOOPY

[Harvey Specter]

Perhaps you could explain to a non-accountant the difference between NPV and "replacement cost". Ain't they the same thing?

cheers; fool

Replacement cost is what it costs to replace
NPV is the net present value of future cashflows.

If you can buy something for $100, that will deliver more than $100 in todays dollar terms, then NPV is higher than replacement.

[Snoopy]

The figures I present below are from FY2009 onwards. This is the first year after the GFC hit, and power usage growth changed from its historical pattern.

All base figures are taken from the 'Statement of Change in Equity' Group figure for the appropriate year.

	Revaluation Hydro & Thermal Assets ($m)	Revaluation Other Generation Assets ($m)	Total Revaluation ($m)	Pre Tax Revaluation ($m)	Pre Tax New Capital Per Share (c)
2009	0	170.987	170.987	244	17.4
2010	200.900	60.250	261.150	373	26.6
2011	153.300	135.275	288.575	412	29.4
2012	119.520	2.880	122.240	170	12.1
2013	30.960	26	57	79	5.6
2014	4	25	29	40	2.9
Total			929		94.0

Note: eps figures assume 1,400m shares on issue throughout the whole comparative period.

That first total figure represents the new 'thin air' capital that has appeared on the MRP balance sheet from 2009 to 2014 inclusive. $929m is a lot of money, perhaps even enough to fund a new power station, without going back to shareholders for more capital? It would certainly go a way towards that!

The following table illustrates the actual cashflow in and out of the balance sheet over the years.

	NPAT as declared (cps)	Dividend (cps)	Pre Tax New Capital Per Share (c)
2009	11.3	3.96	17.4
2010	6.1	20.43	26.6
2011	9.1	6.79	29.4
2012	4.9	8.60	12.1
2013	8.2	8.01	5.6
2014	15.1	12.40	2.9
Total	54.7	55.6	94.0

You can see that net profits are almost exactly cancelled out by dividends over the years. This means that the only source of strengthening the balance sheet has had since the beginning of FY2009 is the previously described 'thin air equity'.

During this time two new geothermal have been constructed. These were

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

Total cost: 30.7 + 33.9 = 64.6c = 65c (figure A)

The after tax value of the asset revaluations from FY2009 to FY2014 inclusive were:

= 0.7*(17.4+26.6+29.4) + 0.72*(12.1+5.6+2.9) = 66.2c

Now take away the 0.9c 'dividend deficit': 66.2c - 0.9c = 65.3c = 65c (figure B)

To the nearest cent, 'Figure A' matches 'Figure B'. So this shows that both of Mighty River Power's brand new geothermal stations built since 2009 have been created out of nothing else but 'thin air capital', without a cent having been stumped up by shareholders! Amazing stuff.

SNOOPY

[Snoopy]

To the nearest cent, 'Figure A' matches 'Figure B'. So this shows that both of Mighty River Power's brand new geothermal stations built since 2009 have been created out of nothing else but 'thin air capital', without a cent having been stumped up by shareholders! Amazing stuff.

My 'proof' as presented above actually still has a big hole in it. There is another way to create two new power stations without stumping up new equity. That way is to borrow the money! I think it is worthwhile looking at the balance sheet at the end of FY2008 verses how it was at the end of FY2014 to see if the borrowing did go up over that time.

	EOFY2008		EOFY2014
Total Assets ($m)	4,058	(100%)	5,689	(100%)
Total Liabilities ($m)	1,800	(44.4%)	2,470	(43.4%)
Net Assets ($m)	2,258	(55.6%)	2,470	(56.5%)

This table shows that the total liabilities have increased over the comparative period. However, the assets have increased too. As a proportion to assets, the company was slightly less indebted at the end of FY2014 compared to FY2008. This in turn means the company did not expand by becoming more indebted out of proportion to its growth. Finally, that means that my explanation of MRP as a company expanding using 'thin air' capital is still valid.

SNOOPY

[xafalcon]

https://nzx.com/companies/MRP/announcements/269216

[trader_jackson]

Is it just me or do these look pretty bad?

[LAC]

Not that good, NPAT

[xafalcon]

Looks OK to me once the exceptional costs are removed

Keep in mind that water inflow into Waikato catchment was comparatively low and Southdown was being run much harder at higher cost