SOE Economic Profit Analysis 25 November 2011 Reliance Restricted
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The Treasury SOE Economic Profit Analysis 25 November 2011 Reliance Restricted Duncan Wylie Peter Goss Senior Consultant Director Transaction Advisory Services Transaction Advisory Services T +64 4 470 0505 T +64 4 470 0502 M +64 274 899 594 M +64 274 899 457 F +64 4 495 7400 F +64 4 495 7400 E [email protected] E [email protected] Rajan Chopara Prof David Emanuel Executive Director Executive Director Transaction Advisory Services University of Auckland T +64 9 300 8113 T +64 9 300 8170 M +64 274 899 079 M +64 21 667 599 F +64 9 309 8137 F +64 9 309 8137 E [email protected] E [email protected] Ernst & Young Transaction Advisory Services Limited 100 Willis Street Wellington 6011, New Zealand PO Box 490, Wellington 6140 Tel: +64 4 499 4888 Fax: +64 4 495 7400 www.ey.com/nz 25 November 2011 Mr Andrew Turner Deputy Secretary Crown Ownership Monitoring Unit PO Box 3724 WELLINGTON Dear Andrew We are pleased to attach our report showing our calculation of economic profits for selected State Owned Enterprises, Television New Zealand Limited, Public Trust and Air New Zealand Limited for a period of ten years from 2002 to 2011 (inclusive) as per the terms of our engagement letter dated 14 September 2011. Yours sincerely Ernst & Young Transaction Advisory Services Limited Duncan Wylie Senior Consultant Abbreviations Air NZ Air New Zealand Limited Airways Airways Corporation of New Zealand Limited Animal Control Products Animal Control Products Limited AsureQuality AsureQuality Limited BCL Broadcast Communications Limited DRC Depreciated replacement cost EBIT Earnings before interest and tax FYxx Financial year ended xx Genesis Genesis Energy Limited GFC Global financial crisis IC Invested capital KiwiRail KiwiRail Limited Kordia Kordia Group Limited Landcorp Landcorp Farming Limited Learning Media Learning Media Meridian Meridian Energy Limited MetService Meteorological Service of New Zealand Limited MRP Mighty River Power Limited NOPAT Net operating profit after tax NZ Post New Zealand Post Limited Kiwibank Kiwibank Limited PP&E Property Plant & Equipment PropertyIQ PropertyIQ Limited QV Quotable Value Limited 28 November 2011 Abbreviations 111214 Treasury Economic Profit FINAL Report_v2.docx Abbreviations QVRP QVRP Information Services Limited ROIC Return on invested capital Solid Energy Solid Energy New Zealand Limited SOEs State owned enterprises and selected Crown entities TSR Total shareholder return TVNZ Television New Zealand Limited Transpower Transpower Limited WACC Weighted average cost of capital 28 November 2011 Abbreviations 111214 Treasury Economic Profit FINAL Report_v2.docx Contents Introduction 2 Economic profit analysis 15 1. Air New Zealand Limited ................................................................................................................17 2. Airways Corporation of New Zealand Limited..................................................................................19 3. Animal Control Products Limited .....................................................................................................21 4. AsureQuality Limited ......................................................................................................................23 5. KiwiRail Limited ..............................................................................................................................25 6. Kordia Group Limited .....................................................................................................................27 7. Landcorp Farming Limited ..............................................................................................................29 8. Learning Media Limited ..................................................................................................................31 9. Meteorological Service of New Zealand Limited ..............................................................................33 10. New Zealand Post Limited (excluding Kiwibank Limited) .................................................................34 11. Kiwibank Limited ............................................................................................................................36 12. Public Trust ....................................................................................................................................38 13. Quotable Value Limited ..................................................................................................................40 14. Solid Energy New Zealand Limited .................................................................................................42 15. Television New Zealand Limited .....................................................................................................44 16. Transpower Limited ........................................................................................................................46 17. Genesis Energy Limited .................................................................................................................48 18. Meridian Energy Limited .................................................................................................................50 19. Mighty River Power Limited ............................................................................................................52 Gentailers 54 Disclaimers 57 1 28 November 2011 Contents 111214 Treasury Economic Profit FINAL Report_v2.docx Introduction 2 28 November 2011 Introduction 111214 Treasury Economic Profit FINAL Report_v2.docx Introduction Introduction Background and objectives The Treasury has appointed Ernst & Young Transaction Advisory Services Limited (EYTAS) to provide it with a calculation of economic profits for selected state owned enterprises (SOEs), Television New Zealand Limited (TVNZ), Public Trust and Air New Zealand Limited (Air NZ) for a period of ten years from 2002 to 2011 (inclusive) (henceforth the term SOE is used to refer to the entire group). New Zealand Post Limited (NZ Post) and its subsidiary, Kiwibank Limited (Kiwibank), have been treated as separate entities for the purpose of this calculation. The Treasury intends to use this report as an input into its consideration of whether, and to what extent, the SOEs are creating value and to benchmark their performance against peers. The Treasury would also like an interpretative report having considered feedback from the SOEs and from the Treasury itself. Methodology adopted In light of the number of entities (the subject SOEs and their peers) across ten years, the calculations are based on publicly available data, primarily accounting data. Accordingly, the calculations for each firm are for the entity as a whole and not performed at a divisional level. While we have presented results both including and excluding revaluation adjustments (in order to provide return estimates that are closer to a sense of opportunity cost for the shareholder, versus returns based purely on historical cost), accounting carrying values of assets (even where revalued) will inevitably differ from market values. Hence, the return data should not be regarded as definitive, or a proxy for market based assessments such as total shareholder return (TSR). We understand that Treasury undertakes parallel TSR and market value based assessments and this (accounting based) analysis should be regarded as just one “lens” into the complex, multi-factor question of return on investment. Economic profit for each year is calculated using the following formula: Economic profit = Opening invested capital x (Return on invested capital or (ROIC) – Weighted average cost of capital (WACC) Where: Opening invested capital equals the sum of – Shareholders’ equity; – Net interest bearing debt, and – Revaluation gains on fixed assets. 3 28 November 2011 Introduction 111214 Treasury Economic Profit FINAL Report_v2.docx Introduction – Less: Capital work in progress; Financial assets held for sale; Minority interests, and Investments not deemed as integral to the operations of the firm. Return on invested capital is calculated by dividing net operating profit after tax (NOPAT) by the opening invested capital. NOPAT is calculated as follows: – Operating profits are defined as earnings before interest and taxes (EBIT) adjusted for revaluation gains or losses. In keeping with the calculation of invested capital, we also exclude the impact of earnings on financial assets held for sale, earnings attributable to minority interests and earnings attributable to investments not deemed to be integral to the operations of the firm. We have excluded the impact of gains or losses on the sale of fixed assets on the basis that reported gains or losses do not reflect the core operations of the business. An alternative approach may be to consider such gains or losses as reflecting over or under-recovery of depreciation if assets are used to the end of their economic lives. If the alternative approach were to be adopted, the correct approach would require that the gains or losses are spread over their useful lives and not fully accounted in the period in which these are disposed. – For this exercise, tax is calculated as the product of the company tax and operating earnings before tax calculated as above. Thus, for example, we calculate tax on revaluation gains (excluding land, where sufficient information is available to separate revaluation gains or losses on land).1 If, in any period, earnings are negative, no tax is calculated. Whilst tax losses will