MCY Mercury NZ ( MRP Mighty River Power)

[Snoopy]

Financial Year	Net Operating Cashflow (A)	Stay in Business CAPEX (B)	Free Cashflow (A)-(B)	Free Cashflow (per share)
2013	$286m	$69m	$217m	15.5c
2014	$317m	$60m	$257m	18.4c
2015	$309m	$79m	$230m	16.4c
2016	$280m	$60m	$221m	15.8c
2017	$372m	$114m	$258m	18.4c

Financial Year	eps	Dividend Paid (per share)	Imputed Tax Credit (per share)	Imputed Tax Balance SOFY (per share)	Tax Paid Over Financial Year (per share)
2013	10.5c			0c
2014	13.3c	7.2c + 5.2c = 12.4c	4.8c	2.3c	6.3c
2015	9.7c	8.3c + 5.0c + 5.6c = 18.9c	7.4c	3.3c	5.6c
2016	10.1c	8.4c + 2.5c + 5.6c = 16.5c	6.4c	1.1c	6.4c
2017	12.0c	8.6c + 4.0c(NI) + 5.8c = 14.4c +4.0c (NI)	5.6c	0c	7.7c
2018		8.8c + 5.0c(NI) + ?c = ?		-1.7c
Total			24.2c		22.0c

Notes:

1/ The above 'per share' table is based on the 1,400m MCY shares on issue.
2/ The 'imputed tax credits' relate to dividends actually paid in the financial year listed (it is normal for the final dividend from any particular financial year to be actually paid out n the next financial year).
3/ The 'imputed tax balance' at SOFY is derived from note 5 (Share Capital and Distribution) from the respective annual reports.
4/ The 'tax paid' each year is derived from the respective cashflow statements
5? (NI) means 'Not Imputed'


Sample Imputation Credit Calculation

FY2017: 14.4c/0.72 - 14.4c = 5.6c

Observe that the actual tax paid does not generally equal the annual tax liability. That's because annual tax liabilities are met over more than one financial year. In the long term though, the actual tax liability and the tax paid should converge when added up over multiple years.

The 'imputed tax credit' is based on actual declared profits for the year and should therefore be available to shareholders as an imputation credit on any dividends paid up to that imputed level. This presupposes that MCY pay their own tax bill before the concomitant dividend is paid out to shareholders. However, if MCY do not pay their tax bill in a timely manner, then there is still a chance that shareholders will get imputed dividends. Mercury may rely on their 'piggy bank' of already paid tax credits in advance. This is represented by the column "Imputed Tax Balance SOFY (per share)".

Sadly this piggy bank of credits has steadily been emptying at 'annual snapshot' time, to the point that it was actually negative come the last balance date. From note 5 in AR2017 "The imputation credit balance is required to have a surplus balance at 31st March each year." Subsequent to balance date MCY has paid out a dividend (the final for FY2017 paid in the FY2018 year) with imputation credits attached. This implies that the imputation account balance has been settled up, and then some, well before the 31-03-2018 required date.

Nevertheless you can't go on and on paying tax in advance if the profits to support those tax payments do not arise. Yet, in the short term it can look like you are making you are making generous imputed dividend payments to shareholders that are not really there. I don't think shareholders should assume that annual dividends will ever be fully imputed again.

Everything is 'back on track' after FY2017, with a solid pass in all four tests. A great recovery from the abnormal inflows of FY2105 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.

The 'Buffett Growth Model' works by looking at what a company is able to do with its retained earnings. The more earnings they retain to reinvest at a high ROE, the more the value of the business is liable to grow over future years. So a key question to identify is, what level of earnings are retained by Mercury? This question I have answered in a previous post (see above). But it is time to bring the salient figures into one table.

It is Mercury company policy to pay out 70 to 85% of free cashflow as dividends per year, if you consider dividend flow as a long term picture. Note that I have started the table from FY2014, because that covers the first year of reporting that Mercury (or Mighty River Power as it was then) after which the company was half-floated to the New Zealand public. I am taking this perspective because I think the company's imputation credit balance would have been reduced to zero at float time due to the change in company ownership (*). I am not sure about this. I am also not sure whether pre-float, imputation credits have any meaning for a fully state owned enterprise.

Financial Year	Free Cashflow (per share)	70~85% of Free Cashflow (per share)	Imputed Dividend Paid (per share)	Unimputed Dividend Paid (per share)	Normalised Earnings (per share)
2014	18.4c	12.9c~15.6c	12.4c		13.3c
2015	16.4c	11.5c~13.9c	18.9c		9.7c
2016	15.8c	11.1c~13.4c	16.5c		10.1c
2017	18.4c	12.9c~15.6c	14.4c	4.0c	12.0c
Total	69.0c	48.4c~58.5c	62.2c	4.0c	45.1c

So what does this table tell us? My interpretations are listed below:

1/ The actual imputed dividends paid to post float shareholders since listing are above the top end of stated dividend policy range in the time since listing.
2/ The actual imputed dividends paid are above the normalized earnings booked over the post float period. To quantify:

62.2c/45.5c = 1.37 => Imputed dividend paid so far is 37% higher than what shareholders might expect long term.

3/ Not shown in the above table is the decline in the imputed credit balance from 2.3c (SOFY2014) to -1.7c (EOFY2017). This decline of 4c, represents an imputed dividend payment of:

FY2017: D/0.72 - D = 4.0c <=> D( 1/0.72 -1 ) = 4.0c => D = 10.3c

This means that 10.3c in imputed dividend has been paid over the period, by raiding the pre-paid tax piggy bank. Since the pre-paid tax piggy bank is now empty (actually negative at balance date), this source of imputed dividends is now (more than) exhausted.

4/ From 1, 2 & 3 and management's low growth overall market outlook, normalized earnings going forwards can no longer sustain anything like the historical rate of dividend payment if future dividends are to be fully imputed.
5/ Over the study period, dividends have greatly exceeded earnings, and consequently no earnings have been retained.
6/ According to the Buffett model, this means MCY will not grow in the future. It will shrink!
7/ This brings into question whether the Buffett Growth model is appropriate for valuing this company.

SNOOPY

(*) Confirmed from my post 691: " By the end of FY2012 (SOFY2013) just before the public partial float management virtually cleared out their imputation credits($2.9m left) by issuing a lot of tax paid bonus shares ($258m)." Taken from Note 7 is the Mighty River Prospectus

[Dassets]

Flick saved customers money because we had a long period of strong hydrology , 2 x std dev from norm. So pretty easy to look like a hero. Forward pricing shows a totally different picture. If rain dos not come soon we are likely to get into the 10% risk range by May/June which could see wholesale see 300 plus on a regular basis. The thermal guys are flat out. They are already going out for maintenance and will likely have to again before winter. That is a totally different situation to last few years. Plus demand is increasing by the looks after a static few years.
I have looked at batteries and solar. They are both far from viable here in NZ. As for house owner getting 7cent per kw, sorry they should prob get nothing. Generators last fiscal year were only getting an average of 50 to 60 per mwh. And they provide bulk. Happy to contribute to the discussion.

[fish]

Fish have a look at Ecotricity if you are considering a change to solar and a new power supplier. www.ecotricity.co.nz I went with them a few months ago. They have two rates for me, 12c and 22.5c GST and network charges included and they pay me 7.5c for solar back to grid.
Sorry to be of thread.

Discl: only a happy customer of Ecotricity

Thanks iceman
You are cool!
But why sell back
I envisage having 2 ev cars-one for the wife of course
When the sun is strong and output good I intend to heat the water,charge a car,switch on the deep freeze(one with the best insulation),the air con will switch on,plus the irrigation to a header tank-I am growing a big orchard
At night in summer the ev cars can power the house-in winter I will buy cheaper power at night to charge the ev cars and water heating.
Battery economics are looking better and some stage in the future maybe an ex car ev battery which still has years of life left may supplement storage

[iceman]

Thanks iceman
You are cool!
But why sell back
I envisage having 2 ev cars-one for the wife of course
When the sun is strong and output good I intend to heat the water,charge a car,switch on the deep freeze(one with the best insulation),the air con will switch on,plus the irrigation to a header tank-I am growing a big orchard
At night in summer the ev cars can power the house-in winter I will buy cheaper power at night to charge the ev cars and water heating.
Battery economics are looking better and some stage in the future maybe an ex car ev battery which still has years of life left may supplement storage

I beat you to it with my first hybrid car on Friday :-) Intend to charge it mostly from solar

[Snoopy]

7/ This brings into question whether the Buffett Growth model is appropriate for valuing this company.

I am going a bit left field with this analysis. The following are the one liners (sometimes with other lines tacked on for clarification) on how our Chair Joan Withers sees the business. All quotes are taken from the respective annual reports. I have mined no new information. Yet I think reading a snapshot view of Mercury through the years does add value.

FY2013: "We again demonstrated that in a tough market (Waikato drought), we have the ability to deliver both growth in market share by adding value for our customers and operating performance and financial results above IPO forecasts."

FY2014: "Operating earnings were up and increased 29% year on year, primarily as a result of the additional generation from the Ngatamariki (geothermal) plant and our success in lowering the company's operating costs. The improvement in net profit primarily reflects one off costs and non-cash impacts, largely relating to impairments from taking control of international geothermal investments in early 2013. In our second successive year of weak inflows into the Waikato river catchment, hydro conditions were the lowest and most challenging in the company's history."

FY2015: "In a year like this - of very low North Island rainfall and record low hydro generation, our earnings have held up extremely well. Last year we achieved a huge lift in operating earnings following the commissioning of the Ngatamariki geothermal station. This year operating earnings were only down 5% on that result."

FY2016: "Mercury is reporting a 2.3% lift in operating earnings, reflecting steady customer sales in a highly competitive market and the strength of our renewable generation portfolio."

FY2017: "Mercury achieved a 6.1% lift in operating earnings largely reflecting strong inflows across the Waikato catchment in the second half of the financial year."

What I get from is is as follows:

1/ Forecasting performance in an 'average year' may be difficult if the average is made up of extreme years (worst Waikato droughts and then floods) that are "anything but average".
2/ The trend in improving underlying net profit is closely connected to the trend in more favorable weather conditions for the Waikato catchment. Weather conditions can not be relied upon to continually improve.

SNOOPY

[Wsp]

Forward pricing shows a totally different picture. If rain dos not come soon we are likely to get into the 10% risk range by May/June which could see wholesale see 300 plus on a regular basis. The thermal guys are flat out. They are already going out for maintenance and will likely have to again before winter.

Snow storage in Meridian’s catchment looks to be lower than anytime since 1987! https://www.meridianenergy.co.nz/abo...s/snow-storage

[Baa_Baa]

Snow storage in Meridian’s catchment looks to be lower than anytime since 1987! https://www.meridianenergy.co.nz/abo...s/snow-storage

Meaning? "Reliance should not be placed on the accuracy or completeness of the estimates provided and you should not use this information for investment or trading purposes."

[Joshuatree]

Snow storage in Meridian’s catchment looks to be lower than anytime since 1987! https://www.meridianenergy.co.nz/abo...s/snow-storage

Thanks Wsp useful and pertinent info and great snow storage data i wasn't aware of being accessible. the warehouse here has sold out of fans and everyones aircond/heatpumps are cranked to the max atm, a perfect storm ahead for pricing?

[fish]

Thanks Wsp useful and pertinent info and great snow storage data i wasn't aware of being accessible. the warehouse here has sold out of fans and everyones aircond/heatpumps are cranked to the max atm, a perfect storm ahead for pricing?

Too hot to be outside so staying indoors and using lots power..
Soil very dry and could soak up a lot of rain-if it comes as forecast for feb.
Looks like
trustpower has been fleecing its customers-one gentailer i chose not to invest in

[Scrunch]

Too hot to be outside so staying indoors and using lots power..
Soil very dry and could soak up a lot of rain-if it comes as forecast for feb.
Looks like
trustpower has been fleecing its customers-one gentailer i chose not to invest in

And fleecing in a commercially stupid way. Why do a greater than inflation rate increase on a fixed term Customer (like me before I shift at end of contract) a few months before the end of a 2yr period when big break fee applies. Annoy them just before they decide to continue/shift. Silly.