Contact Energy - CEN Chart

[Snoopy]

I think you will find the change on page 60 of the 2010 annual report, where it explains that the 2007 valuation gains were reversed in a move back to cost basis:

"Contact has elected to make a voluntary change in accounting policy in relation to the measurement basis for generation plant and equipment and move to a cost basis as it is reliable and more relevant. The change in accounting policy has been applied retrospectively to 1 October 2004, the date of Contact’s transition to NZ IFRS and the date of acquisition of 51.4 percent of the shares in Contact by Origin. Fair value at 1 October 2004 is considered deemed historical cost owing to the impracticability of determining actual cost back to the original asset purchase date. As a result of the change, the revaluation reserve at 1 October 2004 ($1,547.6 million) has been transferred to retained earnings. In addition, the revaluation in 2007($401.1 million) and the consequential deferred tax ($120.3 million) have been reversed."

In FY2010 Contact changed their policy from revaluing assets every three years according to their earnings capability, to what I have quoted above. However, what more recent shareholders may not know is that there were earlier revaluations of generation assets that were not reversed.

Revaluation of Generation Assets

FY1999	$673m
FY2002	$843m
FY2004	$550m
Total	$2,066m

These revaluations are incorporated into the baseline valuations adopted by Contact at EOFY2010. Assets are funded by a combination of equity and debt. So using the equity ratio at EOFY2010, we can calculate the proportion of these revaluations that are supported by equity.: 0.5394 x $2,066m = $1,114m. Why does this matter? Because when we calculate the return of shareholder equity as presented in AR2010:

$155m / $2,777m = 5.6%

Then compare that return on equity to that achieved with the generation assets revaluations removed:

$155m / ($2,777m - $1,114m) = 9.3%

the results are very different. The picture of how efficiently Contact is using its assets to generate profits changes significantly.

SNOOPY