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