Analysis of SOEs shows variance

With two, possibly three, state-owned enterprises scheduled for partial listing on the NZX this year, the focus from the point of both investors and opponents to the sale will be on what dividends the companies pay. Business editor Dene Mackenzie reports.

Presuming the Government wins its next court case, Mighty River Power, Meridian Energy and Genesis are likely to be floated on the NZX this year.

Opponents, including the Maori Council, which is taking the Government to the Supreme Court over the issue, say the dividends from those energy companies will be lost to taxpayers, who already own the assets.

Investors are likely to be queuing up for a slice of the companies, but they will be more interested in what dividends can be earned from their investments.

While the three energy companies are the highest-profile state-owned enterprises, there are nine other SOEs in the Crown's portfolio, only some of which pay dividends to the Government.

The Treasury's Crown ownership monitoring unit recently released a 10-year analysis of the 12 companies but excluded others owned by the Crown.

Unit deputy-secretary Andrew Turner said the 10-year analysis showed significant variance in behaviour and suggested further work in that area was warranted.

KiwiRail was excluded because of the significant changes in its scope and balance sheet and because it relied heavily on government financial support.

NZ Post was excluded because Kiwibank's significant financial assets and liabilities distorted the analysis.

Transpower was excluded because it was a regulated monopoly, capital spending and revenue being scrutinised by a regulator.

Mr Turner said the 12 SOEs covered by the analysis had generated more than $10 billion of net operating cash flow in the 10 financial years from 2002-03 to 2011-12 and just below $5 billion of reported profits after tax.

''These seem like large figures but they are over a 10-year period and the companies currently have $21.5 billion of assets and $11.6 billion of equity.''

In round terms, that represented $1 billion a year in operating cash flows and $500 million a year of reported profit.

Of the $10 billion of net operating cash flow, 45%, or $4.5 billion, had been paid to the Crown as dividends - representing 91% of the reported profits.

Mr Turner said the aggregate figure for the 12 companies disguised significant variations between them.

Meridian was the largest SOE, with a commercial value of about $6.6 billion - more than 1000 times larger than Animal Control Products (ACP), the smallest SOE with a commercial value of $5.7 million.

Despite the difference in size, the two companies had both paid a significantly larger proportion of their operating cash flows as dividends than any other SOE, he said.

In the past 10 years, Meridian had paid $3 billion in dividends, 79% of its net operating cash flow, although its cash inflows had been augmented by the sale of the southern hydro subsidiary in 2006 and the Tekapo transfer in 2011.

When taking those into account, and associated special dividends, Meridian's dividends still represented about 50% of net operating cash flows plus cash from asset sales. Even when adjusted, Meridian's percentage was greater than all other SOEs except ACP. ACP had paid $7.8 million in dividends, 74% of its cash flow.

The average of the other 10 companies out of the 12 analysed was only 24% of operating cash flows paid out as dividends. Those 10 companies paid a total of $1.5 billion in dividends, half the total paid by Meridian.

''To put this in context, the combined commercial value for the other 10 companies is $10.6 billion. So Meridian is less than two-thirds of the size of the other 10 companies but has paid twice as much in dividends,'' Mr Turner said.

Genesis had paid no dividends over the past two financial years as a result of the Tekapo transfer and also had a period without paying dividends in the mid-2000s.

As well as generating more than $10 billion of operating cash flow, the 12 SOEs had increased their borrowing by $3.3 billion in the past decade, he said.

The increase was matched by the growth in their assets and taxpayers' funds.

Collectively, the 12 SOEs had a gearing ratio of 30% in 2003. That dropped to about 15% by 2007 but had increased to 28% - almost the same as it was 10 years earlier.

Of the $10.2 billion of operating cash flow and the $3.3 billion of increased borrowing by the companies, $4.5 billion was paid to the Crown as dividends. The remaining $9 billon had been invested by the companies in the purchase of physical assets. Some of that would have been for capital spending on existing assets rather than new investments and it was not possible to separate that information out, Mr Turner said.

Analysis of the results of the investment showed there had been only a marginal improvement in the reported profitability of the 12 companies, despite the significant investment in new and existing assets. At the same time, there had been a significant increase in operating cash flows and dividends.

The Crown ownership monitoring unit noted the changes in accounting standards over the period under analysis, particularly around the fair value of assets which needed to be reflected in the profit and loss statements. In his conclusion, Mr Turner said the analysis, on the surface, was not encouraging for a shareholder with a preference for dividends.

''At this stage, we have only compared internally across SOEs and have not benchmarked against NZX-listed companies. Consequently, the Treasury may expand upon this analysis. Irrespective, the broad range of results in respect of dividend priority suggests scope for dividend yield improvements,'' he said.

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State-owned enterprises
Analysed:
• Energy: Mighty River Power, Genesis, Meridian, Solid Energy.
• Others: Animal Control Products, Airways, AssureQuality, Landcorp, Learning Media, MetService, Kordia, Quotable Value.
• Excluded: KiwiRail, New Zealand Post, Transpower.

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- dene.mackenzie@odt.co.nz