INDEPENDENT AUDITOR’S REPORT continued
The key audit matter
How the matter was addressed in our audit
2. Impairment assessment of a) the Gas Trading and b) the Regulated Networks cash generating units (inclusive of $1,207 million of goodwill). Refer to Note 13 of the financial statements
We considered the impairment assessment of the Gas Trading cash generating unit (CGU), including $157m of goodwill, to be a key audit matter due to the continued low margin trading environment and also in the context of the impairment of $64 million recorded in 30 June 2016 period. We also considered the impairment assessment of the Regulated Networks CGUs to be a key audit matter due to the significance of goodwill of $1,050 million to the financial position of the Group and the significant judgment used to estimate future pricing of the regulated revenue streams beyond the timeframe of the current Commerce Commission regulatory price paths.
The procedures we performed to evaluate the impairment assessments included: — assessing whether the methodology adopted in the discounted cash flow models was consistent with accepted valuation approaches within the energy industry; — evaluating the significant future cash flow assumptions by comparing to historical trends, customer contracts and supplier agreements, Asset Management Plans, regulatory pricing models and budgets; — comparing the discount rates applied to the estimated future — challenging the above assumptions and judgements by performing sensitivity analysis, considering a range of likely outcomes based on various scenarios; and — comparing the Group’s total net assets as at 30 June 2018 of $2,458 million to its market capitalisation of $3,390 million at 30 June 2018 which implied total headroom of $932 million. For each CGU we found the methodology to be consistent with industry norms. We found: — the discount and terminal growth rates were in an acceptable industry range; — future cash flow assumptions to be supportable by comparison to the sources we considered above; and — the overall comparison of the Group’s net assets to market capitalisation did not indicate an impairment. The procedures we performed to conclude on the valuation assessments included: — understanding the sale and purchase agreement for the acquisitions, critically assessing the approach and assumption used to identify and value the respective intangible assets and understanding the intrinsic value that is represented by the resulting goodwill; — evaluating the performance of the Australian metering business, in particular understanding the status and critically challenging the expected future outlook of the Group’s bids for meter data and deployment contracts with Australian energy retailers cash flows and the terminal growth rates to relevant benchmarks using our own valuation specialists;
3. Valuation of investments in new energy technologies and markets as part of the Group’s strategy to ‘Create a New Energy Future’
During the 18 months ending 30 June 2018 the Group has invested circa $210 million in new energy technologies and markets as part of its strategy to ’Create a New Energy Future’, including but not limited to: — acquisitions of E-Co Products Group Limited and PowerSmart NZ Limited (refer Note 25 of the financial statements); — investment in mPrest Systems (2003) Limited in October 2017; and
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