MCY Mercury NZ ( MRP Mighty River Power)

[couta1]

Bought back a good sized holding today at $3.05, 8.6c fully imputed plus a 4c special is nothing to sneeze at IMO. No sign of a bubble anywhere aye TJ, unlike certain other stocks.

[Snow Leopard]

Total electricity grid disconnect / black out in South Australia today, something that one hoped would never happen.

Meanwhile, the long term suggests that Mercury is still rising.
Surely it is fully priced now?

Best Wishes
Paper Tiger

[macduffy]

Total electricity grid disconnect / black out in South Australia today, something that one hoped would never happen.

Meanwhile, the long term suggests that Mercury is still rising.
Surely it is fully priced now?

Best Wishes
Paper Tiger

The downside of over-reliance on renewable energy: 40% of SA's electricity is wind -generated which was unable to operate in the high winds during the storm.

http://www.theage.com.au/national/st...28-grqmn2.html

[mouse]

Total electricity grid disconnect / black out in South Australia today, something that one hoped would never happen.

Meanwhile, the long term suggests that Mercury is still rising.
Surely it is fully priced now?

Best Wishes
Paper Tiger

What is not being shouted about in South Australia is that about six?, months ago they closed down their dirty, filthy, nasty, Polluting Coal Fired Power Station. A great step forward in Saving the Planet. What could possibly go wrong?

[Snoopy]

The 'average value of dividends' does not allow for the company's ability to generate 'thin air capital'. If a company was never going to grow then this 'thin air capital' could be regarded as a bonus dividend stream. MRP has been able to commission two brand new significant geothermal power stations out of thin air capital since FY2010. And they have consent to build more (on the Taheke Geothermal Field, NE of Rotorua with local iwi co-ownership). Shareholders have the ability to fund MRP's growth without injecting any new cash capital into the company. I think that fact of the company has 'extra value' that is not reflected in the normalised 'earnings per share' figures.

Thanks for the reply Snoopy.

In regard to your question on asset revaluations post #663 (this may have already been answered) I would suggest the following but wouldn't put money on it.

I assume MRP claims depreciation on their dams and geothermal assets for tax purposes but they need to record a "fair value" for their assets for the presentation of the financial statements. Fair value is established using NPV and the assets are revalued up especially when interest rates are so low as interest rates form part of the capitalisation rate (low cap rate high asset value). There is no tax paid or imputation credits created by the revaluation but they recognise that if the assets were sold it would create an equivalent amount of income in the form of depreciation recovered so the revaluation is shown in equity after tax. That is my best guess but anyone can feel free to point out any errors in my theory.

Capital out of "thin air" watch it disappear again if interest rates start to rise and the capitalisation rate increases. You would have seen this with AIA with the return of capital. To me it looks like AIA borrowed real money to pay shareholders the asset revaluation increase(capital return). Also you see it all the time with property company revaluations. Interest rates fall, cap rates fall and assets increase in value. If interest rates rise it all heads the other way.
You shouldn’t see an allowance for tax (depreciation recovered) on property valuations anymore as they can no longer claim depreciation on buildings for tax purposes.
Large companies like these will have a tax fixed asset schedule and the one we see in the financial statements. Any tax deferred should be shown in the financial statements. In the case of MRP the tax deferral is indefinite as the assets are never likely to be sold.
The roughly $83mill tax paid on profits would be more than enough imputation credits for the dividends paid.
Property and asset revaluations would not incur any income tax. They are accounting journals based on subjective valuations that is one of the reasons we have a cashflow report.

I remain fascinated with this method of creating wealth out of 'thin air', that MCY seems to have perfected. On page 56 of AR2016, the company accountants have this to say:

"Property plant and equipment is held on capital account for income tax purposes. When 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 forseebale future under existing income tax legislation."

I presume that when assets are revalued, there is almost never an adjustment to the tax base. After all assets are just that: A means to an income, but not an income in themselves. Nevertheless Items on the 'capital account' are certainly 'real' and can be found in the balance sheet. And those 'revalued items' can be borrowed against for real cash.

Somehow the valuation process is done on the basis that the revalued assets might be immediately sold (?). I can't explain the revaluation associated 'deferred tax liability' any other way. In practice, selling one of the Waikato river hydro dams would be unthinkable for Mercury.

Aaron, above, reckons that such an 'unthinkable sale' would generate depeciation recovered income, if the sale price of our dam is well above depreciated value (which it would be). That makes more sense than just assuming that any dam sale would be subjected to some 'capital gains tax'.

SNOOPY

[horus1]

The cost of solar is now below the cost of new generation and in the medium term the value of the hydro dam starts to drop . The revaluations reduce.

[Snow Leopard]

Whilst they can generate a good cash flow and pay tax for the imputation credits then I am a fully paid up member of the "Contented Tiger Club'.

Best Wishes
Paper Tiger

[Snoopy]

Whilst they can generate a good cash flow and pay tax for the imputation credits then I am a fully paid up member of the "Contented Tiger Club'.

You need to check your latest 'Mercury' dividend statement PT.

Financial Year	Dividend Imputed	Attached Imputation	Dividend Unimputed
2014	7.2c	2.8c	0c
	5.2c	2.0c	0c
2015	8.3c	3.2c	0c
	5.0c	1.9c	0c
	5.6c	2.2c	0c
2016	8.4c+2.5c	4.2c	0c
	5.7c	2.2c	0c
2017	8.6c	3.3c	4.0c

As shown in the above dividend payment history, you and many others have been seduced by Chairman Joan Wither's (aka The Catwoman?) dulcet annual speeches of reassurance. In reality it was window dressing to maximise the proceeds of the float. Now we are outside of the prospectus forecast period, reality can resume. No more fully imputed dividends from now on! The Tiger trap was set, and now you are safely purring inside blissfully unaware of the disappearance of a good chunk of your imputation credits!

SNOOPY

[Snoopy]

Whilst they can generate a good cash flow...<snip>

Mercury Energy has a policy of paying out dividends based on cashflow. The following table is based on 1,400m share on issue.

Financial Year	Declared NPAT	Net Operating Cashflow	eps	Implied tax from Year's Operations	Stay in Business CAPEX	Free Cashflow per Share (by definition adjusted for Stay in Business CAPEX)	dps	Imputed Tax Credit	Imputed Tax Balance SOFY	Tax Paid Over Financial Year
2013									0c
2014	$212m	$317m	15.3c	6.0c	$60m	22.6c-4.3c= 18.3c	12.4c	4.8c	2.3c	6.3c
2015	$47m	$329m	3.4c	1.3c	$79m	22.1c-5.6c= 16.5c	18.9c	7.4c	3.3c	5.6c
2016	$160m	$280m	11.6c	4.4c	$60m	20.0c-4.3c= 15.7c	16.6c	6.5c	1.1c	6.4c
2017									0c	?c
Total			30.3c	11.7c		40.5c	47.9c	18.7c		18.3c

You can see in the above table that 'free cashflow per share' and 'dividend' are indeed closely matched. Over the period shown in the table (note that I have omitted the partially imputed dividend just paid out in early FY2017) all dividends paid to shareholders have been fully imputed.

I have shown the imputed tax credits on the books at the start of each year. This figure is of course 'topped up' by any tax paid during the year. So showing the tax credits on account at the start of the year is not really that useful as a stand alone figure. But it is useful in that it can show 'intent'. Why would you pay taxes in advance of paying shareholders (for that is what having a positive imputation balance means) unless you did intend to either:

a/ Use retained earnings for reinvestment (off the table as the major capital investment is done) OR
b/ Pay those imputaion credits through to shareholders down the track?

On 30th June 2016 ( =SOFY2017) the imputation credit balance for MCY has effectively been reduced to zero (actually there is a small positive balance, which when translated to 'per share' figures rounds down to zero). My contention is that this is an indicator that managment are not too worried about declaring fully imputed dividends from here on in.

If you look again at the table you can see that for each of the years FY2014, FY2015 and FY2016:

1/the 'imputed tax balance' at the start of the financial year PLUS
2/ the 'tax paid over the year'

exceeds the 'imputed tax credit' attached to the dividend of that year. This means that all of the dividends paid over FY2014, FY2015 and FY2016 could be paid as 'fully imputed dividends'.

Interestingly the 'implied tax due' from actual profits declared over FY2014-FY2016 (11.7cps) is rather less than the actual tax paid over FY2014 to FY2016 (18.3cps). My interpretation of that is that the company deliberately planned to overpay tax to create what in effect were 'fake imputation credits' to make the prospectus projected yields look better than they really were. If you pay tax without a tax liability then in latter years you can pay less tax than required, to bring your tax bill into balance and everything is hunky dory and legal. Nevertheless I would contend that the shareholder who invested assuming these fully imputed dividends would continue have been deceived. Not by Mercury, as all the information showing that such high fully imputed dividends could not be paid out indefinitely was there in the prospectus if you looked. Instead, shareholders were deceived by their own greed, that caused them not to look!

The final dividend for FY2016, paid in FY2017 and not shown on the table, was 8.6c imputed and 4c unimputed. The 8.6c imputed means that, so far, MCY has paid

8.6/0.72 -8.6 = 3.3 cps

in tax to the IRD subsequent to the publishing of their annual result and the payment of the first dividend in the current financial year. But the fact that MCY declared in tandem an unimputed 4cps dividend means that the previously calculated 3.3cps in tax is all that has been paid (so far). It also strongly implies that there is no intention for the company to ever pay tax on this 4c unimputed dividend. Finally the reason MCY will not pay tax on this 4c is that it isn't really profit at all. If it was profit, there would be a company tax liability. Since there is no profit, my contention is that this 4c 'unimputed dividend' is equivalent to a 4c return of capital, but with a tax bill added to be paid at the shareholder level. Now I personally have no problem paying my fair share of taxes. But is giving me some of my 'already owned' assets back, really a benefit to me that should be taxed?

Is paying that unimputed dividend prudent treatment of shareholders by the MCY directors?

SNOOPY

discl: hold MCY

[Snow Leopard]

Mercury's current dividend policy is stated here.

Your assertions are not worthy of comment.

Best Wishes
Paper Tiger