Question

Using the annual report of Meridian Energy Limited (MEL) for 2017 & 2016, answer the

following questions.

1. Using the consolidated financial statements of Meridian Energy Limited (MEL) for the

years 2017 and 2016, prepare common-size balance sheets and income statements.

2. Discuss THREE significant matters that have impacted the financial performance of

MEL, in the last financial year.                                                                                                                                                           

3. Evaluate MEL’s sales, gross margin, operating profit, net profit margin, asset, debt,

equity structure and explain trends and changes over the years 2016 and 2017.

4. Discuss the role of MEL’s governance in creating value for Meridian.                                                                                                                                                           

5. Using the following financial ratios for 2016 and 2017 periods, and other associated

information available in the public domain, assess the financial health of MEL from the

view of an investor.

a) Liquidity ratios

b) Asset management efficiency ratios

c) Profitability ratios

d) Market ratios                                                                                                                                                         

6. Assume you are a banker evaluating a loan request from Meridian Energy Limited

(MEL) for $220 million. Considering MEL’s recent earnings announcements and

earnings forecast updates, what would be your concerns in deciding on approval or

denial of the loan request? Use the company’s capital structure ratios for 2016 and 2017

in your explanation.

INCOME STATEMENT for the year ended 30 June 2017

		Group
	NOTE	2017 ($M)	2016 ($M)
Operating revenue	A2	2,319	2,375
Operating expenses	A3	(1,666)	(1,725)
Earnings before interest, tax, depreciation, amortisation, changes in fair value of hedges and other signifcant items (EBITDAF)		653	650
Depreciation and amortisation	A3	(264)	(236)
Impairment of assets	A3	(10)	4
Loss on sale of assets	A3	(4)	(1)
Net change in fair value of electricity and other hedges	D1	(76)	(15)
Operating proft		299	402
Finance costs	A3	(79)	(80)
Interest income	A2	2	2
Net change in fair value of treasury instruments	D1	55	(68)
Net proft before tax		277	256
Income tax expense	A4	(80)	(71)
Net proft after tax attributed to the shareholders of the parent company		197	185
Earnings per share (EPS) attributed to ordinary equity holders of the parent		Cents	Cents
Basic and diluted earnings per share	C3	7.7	7.2

COMPREHENSIVE INCOME STATEMENT

		Group
	NOTE	2017 ($M)	2016 ($M)
Net proft after tax		197	185
Other comprehensive income
Items that will not be reclassifed to proft or loss
Asset revaluation	B1	428	889
Deferred tax on the above item	A4	(120)	(248)
		308	641
Items that may be reclassifed to proft or loss:
Net gain on cash ?ow hedges		2	-
Exchange di?erences arising from translation of foreign operations		1	(23)
Income tax on the above items	A4	-	-
		3	(23)
Other comprehensive income for the year, net of tax		311	618
Total comprehensive income for the year, net of tax attributed to shareholders of the parent company		508	803

BALANCE SHEET

		Group
	Note	2017 ($M)	2016 ($M)
Current assets
Cash and cash equivalents	C5	80	118
Trade receivables	C6	260	194
Financial instruments	D1	59	71
Other assets		32	23
Total current assets		431	406
Non-current assets
Property, plant and equipment	B1	7,961	7,771
Intangible assets	B2	58	47
Deferred tax	A4	43	40
Financial instruments	D1	172	274
Total non-current assets		8,234	8,132
Total assets		8,665	8,538
Current liabilities
Payables and accruals		296	205
Employee entitlements		15	15
Current portion of term borrowings	C7	170	214
Finance lease payable	C8	1	1
Financial instruments	D1	67	48
Current tax payable		30	30
Total current liabilities		579	513
Non-current liabilities
Term borrowings	C7	1,022	1,000
Deferred tax	A4	1,710	1,617
Provisions		9	8
Finance lease payables	C8	46	47
Financial instruments	D1	124	203
Term payables		93	100
Total non-current liabilities		3,004	2,975
Total liabilities		3,583	3,488
Net assets		5,082	5,050
Shareholders’ equity
Share capital	C2	1,598	1,597
Reserves		3,484	3,453
Total shareholders’ equity		5,082	5,050

Answer 1

1) Common Size Income Statement = it is taken as percentages of revenues

Common Size Income Statement (As percentage of Revenue)	2017 ($M)	2016 ($M)
Operating revenue	100%	100%
Operating expenses	-72%	-73%
Earnings before interest, tax, depreciation, amortisation, changes in fair value of hedges and other signifcant items (EBITDAF)	28%	27%
Depreciation and amortisation	-11%	-10%
Impairment of assets	0%	0%
Loss on sale of assets	0%	0%
Net change in fair value of electricity and other hedges	-3%	-1%
Operating proft	13%	17%
Finance costs	-3%	-3%
Interest income	0%	0%
Net change in fair value of treasury instruments	2%	-3%
Net proft before tax	12%	11%
Income tax expense	-3%	-3%
Net proft after tax attributed to the shareholders of the parent company	8%	8%
Earnings per share (EPS) attributed to ordinary equity holders of the parent
Basic and diluted earnings per share	0.33%	0.30%
COMPREHENSIVE INCOME STATEMENT
	2017 ($M)	2016 ($M)
Net proft after tax	8.50%	7.79%
Other comprehensive income
Items that will not be reclassifed to proft or loss
Asset revaluation	18.46%	37.43%
Deferred tax on the above item	-5.17%	-10.44%
Items that may be reclassifed to proft or loss:
Net gain on cash ?ow hedges	0.09%
Exchange di?erences arising from translation of foreign operations	0.04%	-0.97%
Income tax on the above items
	0.13%	-0.97%
Other comprehensive income for the year, net of tax	13.41%	26.02%
Total comprehensive income for the year, net of tax attributed to shareholders of the parent company	21.91%	33.81%

Common size balance sheet is taken as percentage of total assets

Common Size Balance Sheet as Percenatge of Total Assets	2017 ($M)	2016 ($M)
Current assets
Cash and cash equivalents	1%	1%
Trade receivables	3%	2%
Financial instruments	1%	1%
Other assets	0%	0%
Total current assets	5%	5%
Non-current assets
Property, plant and equipment	92%	91%
Intangible assets	1%	1%
Deferred tax	0%	0%
Financial instruments	2%	3%
Total non-current assets	95%	95%
Total assets	100%	100%
Current liabilities
Payables and accruals	3%	2%
Employee entitlements	0%	0%
Current portion of term borrowings	2%	3%
Finance lease payable	0%	0%
Financial instruments	1%	1%
Current tax payable	0%	0%
Total current liabilities	7%	6%
Non-current liabilities
Term borrowings	12%	12%
Deferred tax	20%	19%
Provisions	0%	0%
Finance lease payables	1%	1%
Financial instruments	1%	2%
Term payables	1%	1%
Total non-current liabilities	35%	35%
Total liabilities	41%	41%
Net assets	59%	59%
Shareholders’ equity
Share capital	18%	19%
Reserves	40%	40%
Total shareholders’ equity	59%	59%

2) The three significant matters that have impacted the financial performance of MEL are:

• Reduction in sales from last financial year, the conventional criteria for a helathy firm is to grow its sales atleast by inflation percetage or more. The reduction in sales figures signal weak financial performance of MEL in current FY
• Revaluation of Assets leading to less increase in company value over last year i.e In the last financial year the assets were revalued by 889 more to previous year, but in current financial year the assets were revalued by only 428 more to previous year, this has led to reduced total comprehensive income for the current year. The faster the company increases its value the better it is
• The company has reduced significantly its cash on hand which gives it security to meet its financial obligations in an contingency event, Also it has increased its trade receivables meaning more sales were made this year on credit as a result increasing the riskiness of the company which should lead to increase in cost of capital for the company and thus lowering company's value

3) The required financial indicators are as below

Financial Indicator	2017	2016
Sales	2319	2375
Gross profit margin	28%	27%
Operating Margin	13%	17%
Net Profit Margin	8%	8%
Asset	8665	8538
Debt	3583	3488
Equity Structure	Equity = 59%	Equity = 59%
	Debt = 41%	Debt = 41%

• As we can see in above indicators the revenue has decresed in current financial year, signalling weak company's performance the current financial year
• Gross profit margin is nearly the same with 1% increase over last year, it is the company's ability to retain revenues after accounting for cost of goods and raw materials
• There is a steep drop in operating margins from 17% to 13% which is a major area of concern for the company this has come into effect due more depreciation expenses,change in fair value of electricity and other hedges, Impairment and loss on sale of hedges
• Net profit margin iss nearly the same as last year aided by change in fair value of treasury instruments
• Both Assets and debt have very slightly increased, the company has maintained its capital structure of Equity 59% and Debt 41% which seems reasonable

4) the role of Mel's governance in creating value for Meridian is not very significant, as we see in the financial statements over last year there has not been a considerable value of the company, revenues have decreased, cash in hand has reduced, there is more risk with more trade receivables, further are no signs of any expansion projects to work on top line since the equity and debt levels are also constant over last year, retained earnings also being nearly the same. So it is evident that there are no notable steps from the management to aid or grow the top line of the company and it is being rather conservative in its operations