TRUST POWER

[Snoopy]

To answer my own question I have familiarized myself with balance sheets. So the asset value is increased, and then transferred back into assets as retained earnings over the life of the asset. So the $1b would slowly be added as retained earnings over the life of the asset. Therefore Trustpowers assets are not overvalued by $1b, unless you disagree with the independent valuers, or were you jumping three steps ahead to say, that under labour/greens, the value of Trustpower ability to earn a specificed ROI would fall under a central buyer model, and then would be reflected in Trustpower devaluing its asset base back down by $1b?

I was going to say CJ answered your question Silverlight, but I think the most thorough answer is the one you have composed yourself!

SNOOPY

[Snoopy]

Turn to page 42 of the FY2013 and look at the revaluation reserve. It comes to $1,025m. I see total assets are $2,976m. So it looks like Trustpowers assets are overvalued by a billion or so. All good grist to Labour/Green Minister of energy. Return on average shareholder funds is 8%. Sounds reasonable. But with a reduction is asset values by 1/3 our Labour/Greens Minister will be looking to reduce power prices by a third. A bomb here waiting for TPW shareholders?

I should note here that a potential Labour/Green government is interested in return on assets (ROA), rather than return on equity (ROE). While one can be a pointer to the other, ROE is also more dependent on the debt levels of the company. Management have a big say in the capital structure of any company and could make borrowing decisions that disguises the underlying return on assets in a very significant way.

Page 46 of AR2013 lists generation assets at cost to be $1,510.3m, vs $2.482m (p55 AR2013) as the actual book value of the generation assets. Underlying earnings after tax are listed as $127m (p30 AR2013).

So ROA becomes $127m / $2.482m = 5.1% if you subscribe to the power station valuations subscribed to by independent valuers OR
$127m / $1,510m = 8.4% if you subscribe to the Labour/Green valuation model.

Either way you look at it both figures are well ahead of Contact Energy (post 628 CEN thread)

$176m / ($5,163m + $51.5m) = 3.4% (based on FY2012 figures)

This illustrates the greater risk that exists at TPW, that a Labour/Green government might significantly downgrade TPWs allowable returns

SNOOPY

[andysh]

What about ROA using revenue, not NPAT? If you are using NPAT you can get more out of your assets by being an inefficient company / paying the directors and management more.

[CJ]

$127m / $1,510m = 8.4% if you subscribe to the Labour/Green valuation model.

Thats roughly what the comcom allows Vector isn't it?

[andysh]

Bit of a follow up post,

Revenue for Trust power is $765m, therefore under the cost model getting 57%, and under the valuation model is 29%. For Contact, got income of $2,680 I couldn't work out what the cost of the generation assets are, however under the valuation get 52%.

Therefore Contact is getting 52% income out of their assets, vs Trustpower is getting 29%, yet getting a higher ROA. Don't know what the Labour/Greens policy would be, but going purely of ROA might be a bit harsh? As I said before this does not encourage one to run their business efficiently, compared to a income return on assets?

Thoughts?

Disc: Hold IFT, not TPW.

[bull....]

from a operating cash flow point of view TP stacks up best if my calcs are correct followed by MRP an then contact guess could explain the relative out performance of tp

[Snoopy]

What about ROA using revenue, not NPAT? If you are using NPAT you can get more out of your assets by being an inefficient company / paying the directors and management more.

Yes good point Andysh. I had been assuming that Labour/Greens would use a 'traditional' ROA measure (net profit/assets employed), but of course this may not be correct. They could easily use a different measure, such as the one you suggest. Good lateral thinking there!

SNOOPY

[Snoopy]

from a operating cash flow point of view TP stacks up best if my calcs are correct followed by MRP an then contact guess could explain the relative out performance of tp

What years have you compared bull? Are you considering straight operating cashflow or operating cashflow divided by revenue? Can't comment too much on your proposition as I am not very clear what you are looking at. However, I do know that both Contact Energy and Mighty River power are in the middle of commissioning a major new thermal power station each. So this may have some bearing on your comparison.

Given that large capital expenditures can make operating cashflow lumpy, as a general rule I would say using operating cashflow to compare power producers would not be a good yardstick.

SNOOPY

[Snoopy]

Bit of a follow up post,

Revenue for Trust power is $765m, therefore under the cost model getting 57%, and under the valuation model is 29%.

I agree on your revenue to asset ratio on the book value (valuation in your terms) modelling for TPW for FY2013.
$756m / $2,482m =30.4%

I get a notably lower lower revenue to asset ratio figure for the cost value modelling for TPW for FY2013
$756m / $1,510m = 50.1%

For Contact, got income of $2,680 I couldn't work out what the cost of the generation assets are, however under the valuation get 52%.

I agree with your revenue on book value of assets for Contact Energy for FY2012:

$2,680m / ($5,163m+ 51.5m) = 51.4%

Out of interest I calculate the 'TOA' (as I have coined it below) for Mighty River Power for FY2014 as follows:

$1,834m/ ($5,154m+$69.5m+ $32.2m) = 34.9%

I have used FY2014 as a comparison because there are no large new power stations being commissioned in that forecast year.

Therefore Contact is getting 52% income out of their assets, vs Trustpower is getting 29%, yet getting a higher ROA.

Let's not use the word 'income' when you mean 'turnover'. They are very different things. But it doesn't invalidate your inter-company comparison.

Don't know what the Labour/Greens policy would be, but going purely of ROA might be a bit harsh? As I said before this does not encourage one to run their business efficiently, compared to a income return on assets?

Thoughts?

I agree that looking at just return on assets as a metric would not work , as one statistic on its own can always give misleading comparisons. Maybe a combination of ROA and TOA (Operating turnover on assets, as per your suggestion)?

Disc: Hold IFT, not TPW.

It occurs to me that the worst affected company on the NZX as regards potential Labour/Green power legislation would be Infratil. They are leveraged investors into TPW. Granted they have over 50% so can consolidate the TPW results and avoid large asset write-downs should the TPW share price plunge. But they would have to continue to hold their stake in Infratil to avoid assets write-downs that could cripple the company going forwards. Infratil would effectively be caught in an Trustpower straightjacket for the rest of their existence, which doesn't bode well for new investments outside of Trustpower going forwards.

SNOOPY

[Snoopy]

Bit of a follow up post,

Revenue for Trust power is $765m, therefore under the cost model getting 57%, and under the valuation model is 29%. For Contact, got income of $2,680 I couldn't work out what the cost of the generation assets are, however under the valuation get 52%.

Therefore Contact is getting 52% income out of their assets, vs Trustpower is getting 29%, yet getting a higher ROA. Don't know what the Labour/Greens policy would be, but going purely of ROA might be a bit harsh? As I said before this does not encourage one to run their business efficiently, compared to a income return on assets?

Thoughts?

A few more not so random thoughts on Trustpower.

Unlike Contact and Mighty River, they have some telecommunications assets and are looking at getting into irrigation as part of the Canterbury plains scheme as an adjunct to their hydro power generation in the area. Yet in the annual report divisional analysis they chose not to separate these alternative income streams out. Instead they considered themselves having 'New Zealand' and 'Australian' segments only. Everything else has been rolled up with head office functions into 'other'. Not good from a transparency viewpoint going forwards I thought.

Trustpower is also very different because their hydro power generated is substantial overall, yet spread over a very large number of 'mini' stations, at least in a CEN/MRP sense. I thought about using my CEN cost figures scaled down to estimate TPWs individual power station working parts values. But I don't think using costs for a 200MW station can be scaled down in a meaningful way to a power station one tenth of that size (a station size more typical of Trustpower).

SNOOPY