Part 2: The audit reports we issued in 2015

Energy sector: Results of the 2014/15 audits.

2.1
Under the Public Audit Act 2001, the Auditor-General is required to report on the matters arising out of the work done on her behalf. In this Part, we provide information about the audit results for the public entities in the energy sector. We comment on:

2.2
We also discuss two common issues that emerged in some of the audit reports issued to public entities in the energy sector.

2.3
This information was compiled as at 17 February 2016. Other audits might have been completed since, but they are not included here.

Our audits of annual financial statements and service performance information

2.4
In the energy sector, we issue audit reports covering financial statements. For some entities in the energy sector, we are also required to issue an audit report covering service performance information.6 The most common service performance information produced by entities in the energy sector is about network reliability (see paragraphs 2.31 to 2.33).

2.5
We issued 104 audit reports on the financial statements of public entities in the energy sector. Of these reports, 23 also covered service performance information. Of the 104 reports, 89 were standard audit reports. This means that 15 were non-standard. Appendix 2 contains summaries of the 15 non-standard audit reports.

2.6
Although this is a significant number of non-standard audit reports, 12 related to entities within the Solid Energy New Zealand Limited (Solid Energy) group.7 We discuss the reasons behind the opinions we issued in paragraphs 2.34 to 2.41.

2.7
Appendix 3 explains how we determine which type of audit report to issue.

Modified audit opinions

Disclaimers of opinion

2.8
In 2015, we expressed disclaimers of opinion regarding the service performance information of two public entities because we were unable to form an opinion on the reliability of the information.

2.9
We expressed disclaimers of opinion for Counties Power Limited and group (for 2014/15) and Network Waitaki Limited and group (for 2014/15) on the completeness and accuracy of their performance reporting on network reliability. These companies do not have a fully automated system for recording network fault information. This means that the companies might not become aware of network faults until they are told about them by customers. A fully automatic system provides automated notification of the duration of the fault and the number of customers affected.

2.10
Because they do not use fully automated systems, the two companies could not provide independent evidence of the completeness and accuracy of their fault information (such as the duration of a fault and the number of customers affected).

2.11
We issued unmodified opinions for the two companies on their financial statements and other performance measures that were not affected by these limitations.

Qualified audit opinions

2.12
In 2015, we expressed two qualified opinions on the financial information of entities. We express a qualified opinion when we disagree with the treatment or disclosure of an issue in the financial statements, or when we cannot get enough audit evidence to form an opinion about a matter.

2.13
We expressed a qualified opinion on the financial statements of Solid Energy and Spring Creek Mining Company (a subsidiary of Solid Energy) for 2014/15 on the valuation of mining operation assets. We could not obtain enough evidence to support the value of these assets recognised in the financial statements because we were unable to independently verify the assumptions used when valuing them.

2.14
We also drew attention to disclosures in both companies' financial statements indicating that they were not prepared on the basis that they were a going concern. After year-end, Solid Energy and its New Zealand-based subsidiaries were placed in voluntary administration and entered into a Deed of Company Arrangement with its creditors. Solid Energy group's assets will be offered for sale by March 2018 (see paragraphs 2.34 to 2.41).

Unmodified audit opinions

"Emphasis of matter" paragraphs

2.15
We issued 11 audit reports with unmodified audit opinions that included emphasis of matter paragraphs, drawing attention to particular areas.

2.16
Our opinions on 10 subsidiaries of Solid Energy drew attention to disclosures in the 2014/15 financial statements indicating they were not prepared on the basis that they were a going concern. The companies were:

  • Biodiesel New Zealand Limited;
  • Coal Bed Methane Limited;
  • Coalcorp Services Limited;
  • Coal New Zealand Limited;
  • Coal New Zealand International Limited;
  • Pike River (2012) Limited;
  • Solid Energy Briquettes Limited;
  • Solid Energy Land Holdings Limited;
  • Stockton Alliance Limited; and
  • Terrace Coal Mine Limited.

2.17
As well as the above emphases, we also drew attention to disclosures in Coalcorp Services Limited's financial statements about the cancellation of the company's captive insurance licence. Coalcorp Services Limited provided insurance to Solid Energy and its subsidiaries.

2.18
We also drew attention to the disclosure in the 2014/15 financial statements of Wanganui Gas Limited that the company had not complied with the Energy Companies Act 1992. The company did not publish a statement of corporate intent for the year ended 30 June 2015. However, it did report performance information for that year.

Timeliness in annual reporting

2.19
Public entities in the energy sector are required under legislation to meet certain statutory deadlines for the adoption of audited financial statements (and sometimes for service performance information). The deadlines differ by type of entity:

  • Crown entities and Crown agents – four months after year-end, under the Crown Entities Act 2004.
  • Electricity distribution businesses – three months after year-end, under the Energy Companies Act 1992.
  • Gas distribution businesses – five months after year-end, under the Companies Act 1993.
  • Mixed-ownership model companies – three months after year-end, under the NZX Main Board/Debt Market Listing Rules.
  • State-owned enterprises – three months after year-end, under the State-Owned Enterprises Act 1986.
  • Subsidiaries of the above – five months after year-end, under the Companies Act 1993.
  • Community or consumer trusts – there is no statutory deadline for adoption, although the trust deed usually sets one (typically, four or five months after year-end).

2.20
Thirteen entities did not meet the deadlines for adopting audited financial statements. Twelve were subsidiaries of Mighty River Power Limited, which gave priority to group reporting in 2014/15. The other entity was a community trust owner of an electricity distribution company.

2.21
These entities need, where possible, to better manage the way they produce their annual financial statements to adopt their audited financial statements on time.

The audits of regulatory information

2.22
We issued 33 audit reports on regulatory information produced by public entities in the energy sector. Of the 33 reports, 26 were standard audit reports and 7 were non-standard. Figure 2 shows the split of audit reports by type of regulatory audit (see paragraphs 1.23-1.26).

Figure 2
Audit reports issued, by type of regulatory audit completed

Number of audit reports issuedNumber of non-standard audit reports issued
Default price-quality path compliance statement* 12 2
Regulatory information disclosure 21 5

* We have included in these results the audit report issued on Orion New Zealand Limited in accordance with Orion New Zealand Limited Customised Price-Quality Path Determination 2013.

2.23
Appendix 2 contains summaries of the non-standard audit reports that we issued.

2.24
All entities publicly disclosed their regulatory information within the applicable deadlines.

Modified audit opinions

Disclaimer of opinion

2.25
In 2014/15, we expressed a disclaimer of opinion on the 2011/12 comparative information of Aurora Energy Limited as it was reported in the default price-quality path compliance statement (this statement covers five years). No independent evidence was available to support the completeness and accuracy of data records held in the company's automated data system for registering network faults. Between January 2011 and August 2011, the system automatically deleted some records. The company was able to restore some of the deleted files, but not all.

2.26
We issued an unmodified opinion on the price path information and the other quality information that was not affected by the limitations of the data system.

Qualified audit opinions

2.27
In 2014/15, we expressed five qualified audit opinions on certain information disclosed by electricity distribution businesses. The qualifications related to the completeness and accuracy of network reliability information in the regulatory information disclosure. We issued qualified opinions for reasons related to the accuracy of fault recording systems that were not fully automated (see paragraphs 2.9 and 2.10). The entities affected were:

  • Alpine Energy Limited;
  • Counties Power Limited;
  • Electricity Invercargill Limited;
  • Network Waitaki Limited; and
  • The Lines Company Limited.

2.28
Alpine Energy Limited, Electricity Invercargill Limited, and The Lines Company Limited did not receive a modified audit opinion on the service performance disclosures reported in their annual reports. This is because they did not specifically report network reliability information.

Unmodified audit opinions with "emphasis of matter" paragraphs

2.29
We drew attention to the disclosure in the default price-quality path compliance statement of The Lines Company Limited about the way quantities for prompt payment discounts are estimated. The company offers a 10% prompt-payment discount on most of its charges. The actual effect of the discount needs to be reflected in its price-path calculations. The company does not have enough information to determine, for each price, the actual billed quantities to which the prompt payment discount has been applied. Instead, the company estimates these quantities, using an appropriate approach.

Common issues arising in the non-standard audit reports

2.30
Two common issues featured in the non-standard audit reports of public entities in the energy sector:

  • The adequacy of systems and processes for recording complete and accurate information about the network's reliability.
  • The financial statements of Solid Energy and its subsidiaries not being prepared on a going-concern basis after the group was placed into voluntary administration.

Network reliability information

2.31
Five electricity distribution businesses received qualified opinions on their network reliability information. These entities do not have fully automated systems to track and record network faults and interruptions.

2.32
Network faults can occur for various reasons, including weather events, road accidents, and asset failure. An increasing trend in faults over time could be a sign the network assets are not well maintained. Electricity distribution businesses that rely on systems that are not fully automated might not have the best information on which to make maintenance and replacement decisions for their network assets. We encourage these companies to review their processes for collecting network reliability information and improve them as far as reasonably possible. Our view is consistent with other feedback to the sector.8

2.33
We do not always reflect the effect of the system weaknesses in our audit opinions. The content of our opinions is driven by the audit requirements in place. For some regulatory audit work, we do not need to assess the completeness and accuracy of network reliability information.9

Solid Energy

2.34
In July 2012, the international price of coal fell dramatically and has not recovered. As a result, Solid Energy's trading position deteriorated significantly. Figure 3 shows the past few years' financial performance of Solid Energy.

Figure 3
Summarised financial information from 2011/12 to 2014/15 for the Solid Energy group

2011/12 $million2012/13 $million2013/14 $million2014/15 $million
Revenue 978.4 631.1 449.2 369.8
Cost of sales (820.3) (596.6) (474.8) (386.6)
Results from operating activities (54.8) (262.2) (163.7) (289.7)
Net profit/(loss) (40.2) (335.4) (181.9) (176.7)
Shareholders' equity 423.4 91.6 12.5 (94.6)
Total assets 1,166.9 859.2 636.1 550.0
Total liabilities 743.5 767.6 623.6 644.6

2.35
In response, we did additional work on aspects of Solid Energy's governance and management, which formed the basis of a briefing to the Commerce Committee in 2014.10 Among our findings, we found that the board was receiving adequate information and asking the right questions. However, the board and management did not have the right skills and experience that we would expect. For example, there was only one board member and one member of senior management with mining experience. Further, there were no board members with commodity experience. Solid Energy subsequently addressed these deficiencies.

2.36
Most of the post-tax losses of Solid Energy were due to losses in the value of its property, plant, and equipment, and mining assets. The loss in value of these assets was $582.5 million from 2012/13 to 2014/15.11 Accounting standards refer to these losses in value of assets as "impairments". An impairment is recognised when the amount of money an asset can make from using it (or disposing of it) is less than what it is recorded at. In Solid Energy's case, the amount of money was based on an estimate of the future cash flows. These cash flows were significantly affected by the downturn in the coal price.

2.37
Solid Energy's financial position was also adversely affected by the debt it was carrying. From 2008/09 to 2012/13, Solid Energy spent $621.4 million on capital purchases. In the same period, borrowing increased by $353 million. The level of debt carried by Solid Energy restricted its ability to respond to the collapse in coal prices.

2.38
Although Solid Energy managed the effect of the adverse trading conditions in 2013 and 2014, it could not sustain this into 2015. The company considered two options: immediate liquidation or a managed sale of its assets to maximise the proceeds to creditors. After discussions with its banks and receiving financial and legal advice, the Board of Directors placed the Solid Energy group in voluntary administration on 13 August 2015. On 17 September 2015, Solid Energy's creditors adopted the Board's proposal for a Deed of Company Arrangement and a Restructured Debt Deed was entered into.

2.39
Under the Deed of Company Arrangement, Solid Energy's land, mines, and certain assets will be offered for sale by March 2018. Proceeds from the sales will be used to pay the participating creditors under the Restructured Debt Deed. The Restructured Debt Deed set common terms and conditions for the participating creditors. Trade creditors are not subject to the Restructured Debt Deed and will be repaid in priority from available facilities and operating cash flows.

2.40
Because Solid Energy and its subsidiaries were put in voluntary administration, they could no longer apply the going-concern assumption. This affects an entity's financial statements because it changes how assets and liabilities are measured. For example, Solid Energy needed to measure its assets at a value no greater than it could sell them for. Normally, an asset is measured at cost or the value of the future cash flows that it will produce during its useful life.

2.41
Auditing standards require us to draw readers' attention in our audit report to the fact that the financial statements did not apply the going-concern assumption. As long as Solid Energy and its subsidiaries prepare financial statements that do not apply the going-concern assumption, we will continue to emphasise this matter in our audit reports.

6: We express an opinion on service performance information for electricity distribution businesses, Crown agents, and independent Crown entities.

7: As at 30 June 2015, the financial statements and audit opinion of Solid Energy New Zealand Limited included "(Subject to Deed of Company Arrangement)" in the company name and the names of its subsidiaries. For simplicity, we have not included that wording in this report.

8: See, for example, Commerce Commission New Zealand (2014), General comments and observations about EDBs information disclosures: Disclosure year 2013, page 8.

9: The regulatory work is the audit of the default price-quality path compliance statement. See Commerce Commission New Zealand (2012), Electricity Distribution Services Default Price-Quality Path Determination 2012, pages 29 and 30.

10: Office of the Auditor-General (2014), Additional Work on Solid Energy New Zealand Limited, Wellington.

11: The Solid Energy group recognised impairment write-downs of $256.6 million in 2014/15, $110.6 million in 2013/14, and $215.3 million in 2012/13.