Aurora Energys Financial Structure - Example

Executive Summary This report throws light on the complete analysis of Aurora Energy’s financial structure for the period 1st July 2011 to 30th June 2012. A complete picture of the equity structure, debt structure, external financing, key fixed assets, intangible assets, company’s policy of recognizing impairment losses and gains along with company’s financial operations have been explained in details. Aurora Energy is fully owned by Tasmania government and generates, distributes and retails electricity in Tasmania covering over 250000 Tasmanian customers. The equity structure has been constant when compared with previous year in terms of issued capital, however the company has been successful to make a growth in its reserves. There has been a decline in the debt-equity ratio from 65.9% in 2011 to 64.1% which is indeed a good sign for future prospects of the organization. Fixed assets mainly comprising of property, plant and equipment have been valued at fair market prices to show a true and fair view. There has been increase in fixed assets showing signs of good infrastructure building. Intangible assets had been subjected to impairment losses and gains as per applicable accounting standards. The company contributed $27.8 million of returns to the government in the current year, where dividend payouts of 2010-11 of $11.9 million dollars had a major impact. In a nutshell the company shows sign of positive trends in future years to come. Table of Contents Introduction 3 Nature of Company Activities 3 Equity Composition of Aurora Energy 4 Debt Structure & Non Equity Financing 4 Provision for Income Tax, Deferred Tax Assets/ Liabilities 5 Key Elements of Fixed Assets Category 6 Intangible Assets and Impairment of Such Assets 8 Conclusion 9 References 11 Introduction This report analyzes Aurora Energy by looking into different aspect like the nature of work being carried out, the equity financing decision and activities undertaken by Aurora Energy, the debt structure of the organization, the non equity financing of the organization, key elements of fixed assets and impairment of different assets. The overall analysis thereby will work on carrying out the different activities and will help to understand the manner in which the overall progress and aspect of the business can be understood. Nature of Companies Activity: Aurora Energy is of the major player of generating, distributing and retailing electricity in Tasmania and is wholly owned by the Tasmanian government. It provides employment to over 1000 people is various fields of its business operations. The company is currently a monopolistic supplier of electricity in many states of the country. The company also retails natural gas in Victoria and Tasmania. The company is structured into two major businesses which are supported by corporate and shared service divisions providing complete functional leadership in all its required fields. Energy business is responsible for electricity generation of electricity business, the company owns a subsidiary company Aurora Energy (Tamar Valley) Pty. Ltd trading as AETV power which operates Tamar Valley Power Station using natural gas piped from Victoria to generate electricity. The Distribution business is responsible for distribution of energy generated commonly referred to as poles and wires. It is majorly responsible for providing safe and reliable power supply to all its customers. Aurora Energy in 2011-12 achieved a profit before tax of $20.7 million which is a 56% increase from its previous year figures. The company believes is complete customer satisfaction and assisted funds of $326000 to its customers facing difficulty in paying their bills. Equity Composition of Aurora Energy: Equity composition plays a vital role in any organization as it comprises of shareholders fund and has a major impact on the capital structure of the organization. Aurora Energy ordinary shares have been classified as equity, further the effective portion of changes in the fair value of derivatives are deferred as equity by the management of the company and are recycled as profit or loss when the corresponding hedging instrument is recognized (Antony, 2004). The company objective is to follow a 40 percent equity structure and 60 percent debt in its capital structure. Total Equity of the company has increased from $561063(’000) in 2011 to $601076 (’000) in 2012 of which there has been no changes in the issued capital. The increase in total equity was mainly on account of increasing reserves and retained earnings. The company till date has issued and paid up capital of 112,700,004 ordinary shares which comprises of $314,255,000, while the company is authorized to 500,000,000 number of shares and still has ample scope to widen its equity share base in future years to come. It is to be further noted that the company did not experienced any movements in its issued and paid up capital all year round. Debt Structure & Non Equity Financing: Debt plays an important role in any organization, an appropriate mix of debt and equity helps an organization to make strategic decisions and allows management to allocate funds as per the requirement. Gearing ratio is always eyed upon by the stakeholders, Aurora Energy has done well in 2011-12 to reduce its debt-equity ratio from 65.9% to 64.1% in 2012. Its total debt has reduced from $1,085,246,000 in 2011 to $1,074,582,000 in 2012 which shows sign of company being able to pay its borrowings and external finances on time. Cash generated from operating activities are on the higher side which has helped the company net debt i.e. borrowings less cash and cash equivalents below $1 billion mark. Aurora Energy is equipped with both secured and unsecured sources of external borrowings with fair market rate of interests (Eljelly, 2004). The company in its long-term objectives certainly needs to lower its debt-equity ratio to 50% mark in order to churn its finances is an effective and efficient manner. Provision for Income Tax, Deferred Tax Assets/ Liabilities Taxation structure of Aurora Energy is governed by The Electricity Companies Act 1997 along with Government Business Enterprises Act 1995 which requires the Group to compute tax equivalents as if it were a company subjected to Commonwealth Income Tax Laws. Current tax is calculated as per the taxable profit or loss for the period using the tax rates that have been enacted or substantially enacted by its reporting date. Deferred tax is accounted using balance sheet liability method in respect of any temporary differences arising from differences in carrying amount of assets and liabilities shown in the financial statements and value of assets as per income tax act (Lyroudi & Lazaridis 2000). However the same is not recognized if the temporary differences arise from initial recognition of assets and liabilities. Furthermore, a deferred tax liability in respect of temporary differences arising from goodwill is not recognized. Deferred tax assets and liabilities arising from such temporary differences are offset when such taxes are levied by the same taxation authority and the organizations wishes to settle its current tax liability with such deferred taxes so aroused. It is to be noted that returns to government include any income tax equivalents paid by the company. The company in its consolidated financial statements had not made any payment of income tax equivalents during 2012. Its deferred tax assets amounts to $54,537,000 while deferred tax liabilities are standing at $175,915,000 which clearly shows that the company has made huge provisions as deferred tax liabilities to meet its future tax obligations. Major reason for the same may be due to temporary differences arising from accounting of depreciation in its financial sets of accounting and depreciation rates charged as per the respective income tax authority (Saleem & Rehman, 2011). Total tax from continuing operations amounts to $6,919,000 which is mainly on account of current year tax expenses and the same is charged to P/L which is rightly done by the company as the same relates to expenses of the current year. Deferred tax amounting $ 16,325,000 has been rightly charged directly to equity as the same relates fixed assets revaluation and cash flow hedges. In a nutshell the organization has huge provisions for income tax accounted as deferred tax liabilities arising from temporary differences and this proper funding of provisions will certainly help the organization to meets all its tax obligations with ease without much hindrances to its normal smooth running of business activities. Key Elements of Fixed Assets Category: Aurora has been doing well to generate higher returns from its assets employed. Its return on average assets has increased from 4.2% in 2010-11 to 4.9% in 2011-12 which shows signs of optimal utilization of its resources in its fixed asset category. The organization has a total asset base of $2.221 billion of which distribution assets contributes around $1.320 billion and generation assets of $326.9 million. The company has invested huge fund of $118.8 million for maintaining the safety and reliability of its infrastructure building. Aurora’s financial statement show a huge amount of $ 1,747,139,000 of property, plant and equipment which has been valued at fair market prices as per applicable accounting standards and any revaluation profit or loss arising of the same has been rightly charged to the profit and loss statement of the current year which amounts to $ 41,418,000 as revaluation gain. The organization has sold some of its assets amounting $1,889,000 while has purchased new assets as property, plant and equipment amounting $113,227,000 to widen its total asset base and ensure smooth running of its business while concentrating on building its infrastructure base. Generation assets are valued at historical cost less any depreciation and revaluation loss whereas distribution assets are valued at fair market value (Deloof, 2003). Valuation of all such asset is done annually and revaluation losses and gains are adjusted accordingly. All classes of assets are tested for any impairment losses. Depreciation on fixed assets had been charged on straight line basis over the remaining useful live of such classes of assets category (Padachi, 2006). Aurora Energy during the year has incurred a loss of $8,555,000 as against sale or scrapping of plant, property and equipment and the same has been rightly charged to the profit and loss statement of the current financial year. Thus we see Aurora Energy has divided its fixed assets into four categories which are generation assets, distribution assets, buildings and others and proper accounting treatment along with different depreciation rates as per the applicable class of fixed assets has been charged to the assets during the year. On an overall basis 33% of its plan asset has been invested in property, infrastructure and alternative assets which had increased around 14% from its previous year investment of 19%. Intangible Assets and Impairment of Such Assets: Intangible assets play a vital role in Aurora’s financial statement. The company has estimated an expense of billing system which was not recognized as an asset and decided to capitalize the same as intangible assets as parts of computer software of which $25.816 million was capitalized in the current year. Intangible asset of worth $59,331,000 stood in the financial statement of current year which decreased from last year figures of $68,810,000. A payment of $5,510,000 has been made as investing cash flow during the current year. It is to be noted that the company followed an accrual system of accounting however; intangible assets are valued at fair value to show a truer and fair view of the financial statements which is in accordance with the applicable accounting standards (Gandy, 2011). Computer software formed the major category of intangible asset and the same is amortized over a straight line basis over its estimate useful life of 5 years. Customer care, patents and billing system formed other intangible asset of the organization along with goodwill which was not subjected to any deferred asset or liability. Aurora energy uses the applicable accounting standard for treatment of its assets to impairment losses and gains. An impairment loss is recognized for any initial or subsequent write down of its assets from its fair value less cost of selling. Similarly a loss is recognized but not in excess of any cumulative impairment loss previously recognized. Receivables are reviewed on monthly basis for any impairment (Filbeck & Krueger, 2005). Objective evidence is primarily considered for recognizing any such impairment. Goodwill is recognized at cost less any impairment losses pertaining to the same. Goodwill being an intangible asset is tested for impairment allocating the goodwill to each of the entity’s cash generating units or group of cash generating units and tested on an annual basis or more frequently if the events or changes in circumstances shows sign of goodwill being impaired. If the recoverable amount of such cash generating units is more than their carrying amount then such impairment loss is first adjusted against the carrying amount of any goodwill allocated to such cash generating unit and to other assets of the cash generating unit on a pro-rata basis (Finance. 2011). An impairment loss is recognized immediately in the profit and loss statement unless the relevant asset is carried at fair value where the same is treated as revaluation decrease. In case of reversal of impairment loss the carrying amount is increased to the revised estimate of its recoverable amount, but the same is limited to the extent that the increased carrying amount does not exceed the carrying amount that would had been determined if there would had been no such impairment losses. Total impairment or reversal of impairment for Aurora Energy for the current was estimated at $1,272,000. Conclusion: Aurora Energy has made a significant growth in terms of profit before tax. There has a 56% increase in the same from the previous year performance. It has been successful to deliver $27.8 million in returns to the Tasmanian Government. The company has paid a dividend of $11.9 million in respect of 2010-11 whereas no such dividends had been paid for the current year. There has been no movement with regard to its issued and paid up capital. An increase in total equity of the company was as a result of increase in retained earnings from $105,713,000 in 2010-11 to $109,218,000 in 2011-12 and increase in its reserves. The debt equity ratio has been lowered from 65.9% to 64.1% showing signs of more flexibility in its capital structure. In a nutshell the organization has great prospect for its future years to come, the company’s financial statements had been prepared as per applicable accounting standards and true and fair disclosure are made as per the requirements. An increase in the overall profit before tax is indeed an attractive element for investors to invest in the shares of the company and enjoy higher returns. References Antony, T. (2004). Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. (2004). “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Finance. 2011. Why business needs finance. Retrieved on August 19, 2013 from http://tutor2u.net/business/gcse/finance_why_needed.htm Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Gandy, M. 2011. Is a low current ratio bad? Retrieved on August 19, 2013 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Read More