big news from crikey: truth hits fan.
Gee I am glad this came out the way it did. I am happy that a journalist is breaking this amazing story. I did not know about this of course when I shorted the stock to the hilt: World Bank raises questions for Pacific Hydro
Australia's biggest renewable energy company Pacific Hydro has hired Carnegie, Wylie and Company to try to flog itself to the highest bidder – and plenty of global players have been kicking the tyres. The following lobbed in the Crikey inbox – we suspect it's from some bottom fisher trying to talk the price down. But much of what is claimed checks out, so we've edited it as follows:
Pacific Hydro is currently attempting to have itself taken over, but questions are being raised about its most profitable operation, the Bakun power project in the Phillippines, otherwise known as Luzon Hydro. This link takes you to a very interesting World Bank document which seems to provide a little more informative than what Pacific Hydro has been telling the Australian market.
It is lengthy, but if you dig deeply it does describe many of the components of the contract for Pacific Hydro. For instance, it discloses that:
Total capital cost was US$147million of which US$44 million was equity (see table 9). The capital recovery charge only applies for ten years (see page 100 – in the annexe: project profile for Bakun). There is a six-year tax waiver (see table 5) The last two are important as it suggests Pacific Hydro might be front loading its earnings because the capital recovery fee will soon disappear and it will soon commence paying tax at Philippines corporate tax rate of 32%.
In 2003-04 Pacific Hydro declared a profit contribution from this plant of $23.7 million out of a total net profit (before non recurring items) of $31.2 million. That is 76% of the total earnings and a ridiculously good return on a US$22 million equity contribution (Pacific Hydro only owns 50%).
It arises because in reality what is occurring is that the contract is paying down capital on the plant (the capital recovery fee) but Luzon, and therefore Pacific Hydro, recognise this as revenue. Depreciation on the other hand is expensed over the 25 year long term of the Build Own Operate Transfer (BOOT) contract.
In the opinion of some Pacific Hydro critics, who may well be short the stock in a volatile takeover environment, this constitutes front loading its earnings. Perhaps we'd all be better informed if Pacific Hydro could explain the following:
When does the Phillippines tax holiday end? When does the capital recovery fee revenue cease? What share of Luzon Hydro revenue has the capital recovery fee constituted? Why has this not been more fully explained in the past? We put this scenario to Pacific Hydro spinner Clare Laffan this morning who replied as follows:
The front ending of the Bakun tariff is well known and the reduction reflects the paying down of debt from the project financing. The original banking model was designed to keep annual cash generation pretty stable throughout the project.
Managing director Jeff Harding, who owns 946,000 shares and 1.1 million options, did a fairly detailed interview with Corporatefile when the last results came out in February that you can read here. There's some talk about el nino hitting earnings and a legal dispute over Luzon, but none of the points made above are raised.
Check out the latest half year results here and go to note 11 for a detailed explanation of a legal battle between Luzon and Transfield over the design and construction of the project. Each party is suing the other for more than $40 million.
CRIKEY: Feedback and other interesting corporate tips to [email protected].
