Powerco revises financial statements
18 June 2004
Powerco revises financial statements
Potential changes to Powerco’s ownership have had an impact on Powerco’s previously reported results of the year ended 31 March 2004, the Company announced today.
The recent announcements that the company’s three major shareholders, the New Plymouth District Council, the Taranaki Electricity Trust, and the Powerco Wanganui Trust, are considering selling their Powerco shares have triggered the financial statement revision.
Under tax law, a significant change in shareholder continuity will lead to the Company potentially losing the benefit of its accumulated income tax losses. Powerco Annual Reports since 2000 have recorded the benefit of these available losses under current GAAP, noting that this future income taxation benefit asset is reliant on shareholder continuity. Powerco Chairman Barry Upson said the potential sale meant the Company was now compelled to change its ownership continuity assumption, and this in turn has led to the restatement of the company’s financial results. He said the Company had sought extensive advice to ensure its actions were consistent with appropriate accounting standards. A change in shareholder continuity on carried forward tax losses is well understood by the market.
Mr Upson said the Powerco annual result announcement was made in April this year, before the major shareholders had informed the market of their intention to seek indicative bids for their shareholding.
“The result we announced in April complied with accounting standards at the time, but because shareholder continuity can no longer be assumed, we must now revise our financial statements since these are about to be released to all shareholders,” Mr Upson said.
“The potential change in shareholder continuity no longer makes the asset valuation of future income taxation benefits “virtually certain” as required by accounting standards. The write-down of this asset by $27.6 million in the balance sheet impacts the reported profit of $55.1 million announced in April 2004, down to a revised profit of $27.6 million”
Powerco has received an unqualified opinion from the Company’s auditor for the revised financial statements, which are included in the annual report shortly to be released.
Mr Upson noted that there would be no immediate cashflow or operational impact on the Company. If Powerco does lose the future income tax benefit asset, this will result in the Company becoming a cash taxpayer earlier than expected. This will have no financial impact for taxpaying shareholders, as once Powerco eventually becomes tax paying, they will receive imputation credits, which can be attached to dividends.
There will be no impact on the dividend paid to shareholders today the 18th June, said Mr Upson.
This release is consistent with the continuous disclosure obligations set by the NZX for listed issuers.
Powerco is New Zealand’s largest gas distribution business and second-largest electricity distributor, based in New Plymouth.
Key facts, and questions & answers
If Powerco’s major shareholder (or all three major shareholders) sell all or a significant part of their shares, under tax law Powerco will lose the accumulated tax losses which give rise to the future income tax benefit of approximately $27.6 million.
Under Generally Accepted
Accounting Practice (GAAP), unless Powerco and its auditors
are 95% certain (which is the generally accepted
understanding of what “virtually certain” means) that its
ownership will not change, it must revise its financial
statements to reflect the loss of this future income tax
benefit, notwithstanding the fact that Powerco’s three major
shareholder may not sell their shares.
As Powerco cannot be 95% certain that its ownership will not change, it must revise its financial statements to reflect the loss of this future income tax benefit in order to present a true and fair view of the financial position of the company at the time of release of the annual report to all shareholders.
If Powerco’s three major shareholders do not sell their shares, Powerco will not lose the future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.
The change has no effect on Powerco’s previously reported EBITDA, nor will it affect cash earnings per share or dividends per share.
If Powerco does lose the future income tax benefit asset, this will result in the company becoming a cash taxpayer earlier than expected. This will have no financial impact for taxpaying shareholders, as once Powerco becomes tax-paying, they will receive imputation credits which can be attached to dividends.
Powerco’s financial statements (and the results in announced in April, prior to the major shareholder announcements) gave a true and fair view of the financial position and complied with GAAP, and received sign-off by the auditor.
The impact of a change in shareholder continuity on carried forward tax losses is well understood (e.g. Tranzrail has recently made statements on this issue), and has been noted in Powerco’s Annual Reports and other company disclosed documents including investment statements and prospectus documents during recent periods.
Questions and answers about Powerco’s revised financial statements
Q. Will Powerco have qualified accounts from the Auditor? A. The revision being announced today means that Powerco has received an unqualified opinion from the Company’s auditor for Powerco’s financial statements, which are included in the annual report.
What is the reason for the revision to the accounts? A. Powerco’s tax depreciation is significantly higher than the accounting depreciation expensed in the Company’s accounts. The higher taxation depreciation has resulted in the Company recording losses for taxation purposes since the Company commenced business on 1st September 2000. These losses are a future taxation benefit and can be used to offset against future taxation profits subject to the shareholding in the Company not changing by more than 51% between the time the loss was incurred and the time the loss is to be utilised.
Accounting Standards provide for the treatment of future income tax benefits as an asset if the Company is “virtually certain” that they will be realisable. Virtual certainty requires the Company and its auditor to form a view that it is more than 95% certain (1) that it will record taxable profits in the future and (2) that there will be a 49% continuity of shareholding.
Powerco has valued these losses at the current rate of company income tax as a future income tax asset in its Statement of Financial Position. The announcement by the three major shareholders, holding a combined 53.64% shareholding in the Company, has changed the view of the Company such that it can no longer be virtually certain there will not be a 51% change in the shareholding base.
This change in view has required the Company to write-down this asset amounting to $27.6m against the 2004 earnings at the time of providing the annual report to the shareholders. Because Powerco and its auditors cannot be 95% certain that its ownership will not change, GAAP requires Powerco to revise its 2003/04 results (announced in April 2004) to reflect the loss of future income tax benefit at the time of providing the annual report to the shareholders.
If Powerco’s major shareholders do not sell their shares, Powerco will not lose the future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.
Q. What does this announcement mean for Powerco? A. The outcome depends upon whether the major shareholders sell their shares or not. If they do not sell their shares, Powerco will not lose the income tax losses and associated future income tax benefit asset and the accounting treatment will be reviewed by the Board when preparing the next set of financial statements.
If they do sell their shares, Powerco will lose the future income tax benefit asset valued at $27.6 million. The loss of the future income tax benefit asset will not have a current cash impact on the Company. The revised financial statements report EBITDA as unchanged at $190.0 million with NPAT down from the $55.1 million, announced in April 2004, to $27.6 million.
Q. What does the announcement mean for shareholders? A. There will be no immediate dividend impact for shareholders. In the future, when Powerco eventually becomes a tax-payer, tax paying shareholders will receive imputation credits, attached to dividends, which will offset any possible reduction in dividend at that time.
Q. Will shareholders have to repay dividends? A. Dividend repayments will not be required.
Q. What effect will this announcement have on the cashflow of the company? A. There is no immediate impact on the cash flow of the Company, other than the fact that the Company will eventually become a “cash tax-paying” entity earlier than anticipated.
Q. What effect will this announcement have on the operations of the company? A. There is no impact on the company from an operational perspective. Powerco’s strategic and operational approach to business will continue as planned.