Categorising Capex Confusion Over FY2022: Part 1
Quote:
Originally Posted by
Snoopy
(5) AR2022 Note A3 states Stay In Business (SIB) capital cashflow of $75m over FY2022. I have applied a 20% surcharge on this value to get an estimate of $85m for the total stay in business capital charge applicable to FY2022. Unlike previous years, overall SIB capex was not disclosed for FY2022 (except from AR2022 p60 'SIB Capex more than FY2021').
I am not happy with my guesstimate 'surcharge correction' referred to above (meaning I don't think I should have to guess what it is).
It is very disappointing how the Stay In Business (SIB) cashflow at Contact Energy has become opaque over FY2022. I say disappointing because dividends are based on 'operating free cashflow'. If you don't understand what the SIB capex is and how it is calculated, then you cannot calculate 'operating free cashflow'. So I am using this post to pull together a few clues to see if I can work it out.
If I look on slide 32 of the 21st June 2022 International Roadshow Presentation
https://contact.co.nz/-/media/contac...ion.ashx?la=en
(to put this in context the roadshow was put together before the FY2022 results were announced) talking about Tauhara, I find in the fine print at the bottom of slide 32 explaining 'Estimated forward capital expenditure (cash) of $390 the following 'clarification':
"1/ Excluding capitalised interest as at 31 May 2022. $550m as of 31 December 2021"
Maybe I have a comprehension problem or something, but I find it difficult to understand what that note 1 means. Is it saying:
a/ The estimated forward capital expenditure as at 31st December 2021, (the last disclosed reporting date) was $550m? That means $550m-$390m= $160m of capex on Tauhara was spent between 1st January 2022 and 31st May 2022 (with no implied comment on quantifying capitalised interest) OR
b/ $390m excluding capitalised interest on the Capex budget is the money still to spend? But when you add back the estimate of capitalised interest to be spent over the capital expenditure total, then that total comes to $550m (using interest capitalisation charges as forecast on 31st December, being the last declared set of results)
Next "Note 2" is a qualifying comment on an estimate of the net costs of generation.
"2/ Includes operating costs, carbon costs and stay-in-business capex (excluding make-up drilling and major mid-life capex replacement)"
My understanding of 'make up drilling' is boring an additional hole (or holes) into the geothermal field as a supplementary or new feed - to heighten a reduced temperature and pressure energy source in order to restore the feed of an existing geothermal turbine back to its design operating specification. This is not an unusual thing to require. In fact since the broader Wairakei/Tauhara geothermal field (incorporating Contact's Wairakei, TeMihi and Poihipi Road, combined with Te Huka and soon to be built Tauhara) has been being tapped for 64 years, that means make up drilling would be expected, (I would think). So how can you exclude 'make up drilling' from SIB capex? That doesn't make sense to me.
Or have they folded 'make up drilling' and 'major mid-life capex replacement' into construction costs for development capex, into the Tauhara project?, (as expanded on in foot note 3, quoted below).
"3/ The total addition to PPE on Tauhara commissioning will include ~$18m capitalised transmission asset, ~$80m of capitalised interest ($27m sunk) and $24m of residual sunk capex related to the next phase of development of the field expected total of $940m ($818m + $18m + $80m + $24m)"
So $818m is the Total Estimated Construction cost for Tauhara, which doesn't include a whole lot more costs that are going to be tacked onto this total, which means the real total is $940m, not $818m. I hate to sound cynical but, what kind of construction cost reporting is this?
The main point that I find baffling is the apportioning of 'capitalised interest' to both SIB and development capital. There are three sources of new capital for Contact:
a/ A capital raising from shareholders (which was done in 12th March 2021 during FY2021 ostensibly for Tauhara, but also to fund further developments like the Geofutures project).
b/ Retained operational cashflows.
c/ Borrowing from banks or setting up listed company bonds.
Now if Contact has already raised more capital than will probably be needed to build Tauhara, why is all of this interest ($8m over FY2021 and $19m over FY2022, refer AR2022 p113) being capitalised into Tauhara? Could you not equally well argue that due to the generous dividend payments being made by Contact Energy (dividends exceed NPAT), that really Contact is 'borrowing to pay their dividends'? That would mean that none of these interest charges should be capitalised at all (but interest expense would increase)?
SNOOPY
Categorising Capex Confusion Over FY2022: Part 2
Quote:
Originally Posted by
Snoopy
The main point that I find baffling is the apportioning of 'capitalised interest' to both SIB and development capital.
Next we move to page 104 of AR2022 and the cashflow statement. There we see 'interest paid' was $28m (over FY2022) compared with $43m (over FY2021). If we now go to section B5 in the notes titled 'Net Interest Expense', then we can see how these two numbers are arrived at:
|
FY2022 |
FY2021 |
Interest Expense on Borrowings |
($48m) |
($52m) |
add back Interest Capitalised |
$19m |
$8m |
add back Interest Income |
$0m |
$1m |
equals Net Interest Paid (Cashflow Basis) |
$29m |
$43m |
OK the figure for FY2022 is $1m out. But I am fairly sure this is but a rounding error (it is certainly within the error bounds of reporting on differences in whole number figures).
So far so good. But is adjusting for 'capitalised interest' the only difference between 'capital expenditure' and 'cashflow capital expenditure'? I wish I knew the answer!
Now we move to Slide 24 of PR2021. There we see growth investment of $76m, Stay In Business capital expenditure of $75m (does that mean $1m in growth capital expenditure, and $75m in existing installation capital expenditure?) and 'cash' SIB capital expenditure of $61m.
Adding back $8m of 'capitalised interest' (which I guess means I am assuming that all of that 'capitalised interest' refers to SIB capital) to that last figure gets us to:
$61m + $8m = $69m
Now $69m is some way short of $75m. This would suggest that 'capitalised interest' is not the only factor to consider when moving between 'capital expenditure' and 'cash capital expenditure'. Hmmm,,,,,,
SNOOPY
Categorising Capex Confusion Over FY2022: Part 3
Quote:
Originally Posted by
Snoopy
Now we move to Slide 24 of PR2021. There we see growth investment of $76m, Stay In Business capital expenditure of $75m (does that mean $1m in growth capital expenditure, and $75m in existing installation capital expenditure?) and 'cash' SIB capital expenditure of $61m.
Adding back $8m of 'capitalised interest' (which I guess means I am assuming that all of that 'capitalised interest' refers to SIB capital) to that last figure gets us to:
$61m + $8m = $69m
Now $69m is some way short of $75m. This would suggest that 'capitalised interest' is not the only factor to consider when moving between 'capital expenditure' and 'cash capital expenditure'. Hmmm,,,,,,
Breakthrough?
From slide 21 of PR2021, we learn that Contact have spent $7m on 'Capitalised Revenue Incentives' over FY2021. My understanding of this, from a retail perspective, is this. A Contact Energy representative knocks on your door and asks you to 'switch to them', while offering $20 off each of your bills for the ensuing two years. Despite them offering you a discount on the spot, the accounting treatment of this is to match the discount to the time period that the associated bill is issued. This means any customer discount offered on the Contact books is capitalised as a debt called a 'capitalised revenue incentive'.
The whole purpose of these 'capitalised revenue incentives' is to lock in future revenue streams. For example, customers can be sold 'as a block' between gentailers. So buying a 'block of customers' is akin to investing in a 'hard asset', in that:
a/ Revenue is generated in both cases AND
b/ Capital is required to purchase either asset class..
Thus in this way, securing customers can be thought of as a class of 'capital expenditure' for Contact to 'Stay In Business', with the to-ing and fro-ing of customers in a dynamic and competitive market.
Now if we add up for FY2021:
SIB Capital Expenditure (cash) + Capitalised Interest + Capitalised Revenue Incentive = $61m + $8m + $7m = $76m
If we consider the error bounds of the rounded whole numbers we are adding, this is a very close match for the $75m SIB capex (accounting) figure for FY2021.
Have I just solved the problem of bridging the gap between SIB Capital Expenditure (cash) and SIB Capital Expenditure (accounting)?
Or have I just written the biggest load of drivel that has appeared on this forum this month?
SNOOPY
P.S. Using the same technique for FY2022, I get:
SIB Capital Expenditure (cash) + Capitalised Interest + Capitalised Revenue Incentive = $75m + $19m + $5m = $99m
$99m is therefore the figure for SIB Capital Expenditure (accounting) for FY2022 that was not disclosed. But this assumes that all of the capitalised interest was stacked up against SIB Capital Expenditure and not growth Capital Expenditure in Tauhara.