Flinders Power Pty Ltd (Flinders Power) was incorporated under the Corporations Law in May 1998. On the restructure of the State’s electricity businesses in October 1998 assets, liabilities and staff were transferred to the Company. For financial statement purposes the transfers were deemed to have taken place from 1 July 1998.
Pursuant to a Ministerial Transfer Order, dated 23 March 2000, the shares in Flinders Power Pty Ltd held by the SA Generation Corporation were transferred to the Treasurer as a body corporate.
Under the Company’s charter the nature and scope of its operations include the:
generation, supply and sale of electricity from Northern Power Station and Playford Station;
ownership and operation of the Leigh Creek Coal Mine and Railway;
management of the contract to purchase electricity from the CUBE Co-generation Contract.
The Government has announced that on 3 August 2000 an agreement was signed with NRG Energy for the disposal of the assets and liabilities of Flinders Power Pty Ltd. Although settlement of the transaction did not occur until the 8 September 2000, the benefits and risk associated with the business were transferred as at the date of the agreement, ie 3 August 2000.
As a result of the agreement:
Prescribed generation assets, together with the Leigh Creek township and the Leigh Creek to Port Augusta railway line, were transferred to Generation Lessor Corporation.
Non-prescribed assets (net of liabilities) were sold to the new owners.
Sales of energy for the year were $280.9 million, an increase of $82.5 million and comprised $240.1 million from the generation of electricity and $40.8 million from the sale of gas.
Operating profit before income tax increased by $14.5 million to $28 million.
There was a repayment of borrowings of $20 million.
In accordance with section 31 of the Public Finance and Audit Act 1987 and subclause 13(3) of the Schedule to the Public Corporations Act 1993 the Auditor-General may at any time, and must in respect of each financial year, audit the accounts and financial statements of Flinders Power Pty Ltd.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal controls.
During 1999-2000 specific areas of audit attention included:
Testing of controls and a sample of transactions in relation to the completeness, accuracy, timeliness and recording of revenue and expenditure in relation to the co-generation contract.
Review of controls and reporting mechanisms established to ensure compliance with the Electricity Trading Risk Management Framework.
Testing of controls and a sample of transactions in relation to the completeness, accuracy, timeliness and recording of revenue and associated charges from electricity contracts and electricity pool sales.
As components of the audit were completed, Audit provided management letters detailing the findings and recommendations arising from that work. The letters were forwarded to the Chief Executive Officer with copies provided to the:
Chairman, Board of Directors Flinders Power;
Manager, Internal Audit, Flinders Power.
Satisfactory replies were received to all Audit management letters.
Work undertaken by Audit during the course of the year indicated that Flinders Power had maintained a sound internal control environment. In particular there are a number of strategic initiatives which underpin this environment, including:
an Internal Audit function which reports directly to the Board of Directors;
management representations made to Directors of Flinders Power, providing a tool for the Directors to assess the level of the internal controls. These representations include matters relating to legal compliance, and other matters supporting the integrity and fairness of presentation of information conveyed within the financial statements. These representations contained a strong focus with respect to key account reconciliations and the physical verification and valuation of assets.
In addition, Audit was invited to attend selected Board meetings to discuss matters relating to the audit of the Company.
Over the past few years negotiations have occurred with other parties to establish a ‘co-generation’ plant, whereby steam is provided for a production process and electricity provided to the South Australian electricity grid. As a result, contracts were signed whereby the Government would sell gas and buy electricity at a fixed price on the commencement of the co-generation plant.
The rules of the National Electricity Market require electricity from generators with a capacity of more than 30 MW (which includes the co-generation plant) to be sold into the ‘pool’. As the costs of electricity purchased at a fixed contract price from the co-generation plant operator may be more than what can expected to be recovered from the sale of the electricity into the pool, there is potential for ‘losses’ to be incurred.
As a result, a provision for future co-generation contract losses is recognised in the financial statements of Flinders Power.
A review of the provision as at 30 June 2000 has resulted in the provision decreasing by $13.1 million to $116.9 million.
The introduction of the National Electricity Market (NEM) led to significant changes in the risk facing all electricity generators. An example of this is the large fluctuations in the prices of the electricity pool into which the generators are required to sell their electricity.
To manage these risks Flinders Power has established an electricity risk management policy and framework designed to ensure the activities reflect the targets and strategies of the Board. The policy identifies a number of specific risks and details responsibility for their management. Implementation of the policy includes a Management Committee to oversee the Flinders Power’s electricity trading risks.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of Flinders Power Pty Ltd included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.
Audit formed the opinion that the controls exercised by Flinders Power Pty Ltd in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
Revenue from operating activities increased by $83.6 million (42 percent) and operations and services expenditure increased by $70.5 million (42 percent) due to:
increased production at the Northern and Playford Power Stations;
the full year impact of the co-generation contract.
Current liabilities for accounts payable decreased by $13.5 million due mainly to a significant accrual for capital purchases in the previous year.