Ann: WAV/RULE: MRP: MRP Waiver application - NZSX

• Release Date: 18/07/13 13:58
• Summary: WAV/RULE: MRP: MRP Waiver application - NZSX Listing Rule 3.6.3(f)
• Price Sensitive: No
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MRP
18/07/2013 11:58
WAV/RULE

REL: 1158 HRS Mighty River Power Limited (NS)

WAV/RULE: MRP: MRP Waiver application - NZSX Listing Rule 3.6.3(f)

NZX Regulation Decision
Mighty River Power Limited
Application for Waiver from NZSX Listing Rule 3.6.3(f)

Background

1. Mighty River Power Limited ("MRP") is a listed Issuer with ordinary shares
quoted on the NZX Main Board. MRP is a mixed ownership model company as
defined in the Public Finance Act 1989 and is a public entity for the purpose
of the Public Audit Act 2001 ("PAA").

2. Section 14 of the PAA requires the New Zealand Controller and
Auditor-General to act as MRP's auditor. The Auditor-General has appointed
Ernst & Young ("EY") to audit MRP on its behalf, as permitted under section
32 of the PAA.

3. Brent Penrose (Partner, EY) is the current lead audit partner for MRP. The
audit for the financial year ending 30 June 2013 will be his fifth as lead
audit partner.
Application

4. MRP has approached NZX Regulation ("NZXR") seeking a waiver from the
requirement in NZSX Listing Rule ("Rule") 3.6.3(f) for MRP's audit committee
to ensure that the lead audit partner is changed at least every five years in
order to allow Mr Penrose to remain as lead audit partner until completion of
the audit of MRP's financial statements for the financial year ended 30 June
2014. Mr Penrose will have led six audits if he continues in the role for the
2014 audit.

5. In support of its application, MRP submits that:
(a) MRP has a complex and diverse range of operations and investments (both
domestically and abroad) and has extensive financial reporting requirements:
(i) MRP's financial statements for the year ended 30 June 2012 ran to 46
pages;
(ii) In MRP's recent combined investment statement and prospectus ("Offering
Document"), financial information as a whole comprised 122 pages, including
23 pages of prospective financial information for the years ending 30 June
2013 and 30 June 2014;
(iii) The Offering Document specifically notes that accounting for MRP's
international jointly controlled entities is "complex", given the complex
capital structure of these entities and the use of the Hypothetical
Liquidation at Book Value accounting method rather than traditional equity
accounting; and
(iv) Recent changes to MRP's international investment arrangements (in
February 2013) have complex financial reporting implications.

(b) Given these complexities, MRP considers that:
(i) It is important to maintain continuity through the financial year ending
30 June 2014, as Mr Penrose has significant knowledge of MRP and has
undertaken preparatory work in relation to the on-going financial reporting
implications of recent changes to MRP's international investment
arrangements; and
(ii) It is desirable for its new lead audit partner or external auditor to
have a longer lead-in period to become fully acquainted with MRP's
operations, and financial reporting implications of them, prior to the
commencement of their first audit.

(c) MRP is in a critical period of transition from being a wholly-owned
subsidiary (albeit subject to greater disclosure requirements as a
state-owned enterprise) to a company which is listed on two stock exchanges
and which is also a mixed ownership model entity.

(d) There is a risk that any change of continuity in audit firm or lead audit
partner will require a significant amount of time and resource from MRP's
executives and senior management team. MRP wishes to avoid this distraction
during such a critical period.

(e) The Offering Document contains detailed prospective financial information
until the year ended 30 June 2014, and MRP anticipates there will be
widespread interest in the comparisons it is required to publish between its
actual results and this prospective financial information. Granting the
waiver will ensure that audit quality is maintained, and will also assist MRP
to finalise its financial statements (including the comparisons) in an
efficient, timely and reliable manner. The waiver from Rule 3.6.3(f) would
enable Mr Penrose to remain as the lead audit partner until the end of the
prospective financial information period.

(f) Granting the waiver would align MRP's rotation cycle with the regime
which applied to it prior to Listing and would also be consistent with other
relevant accountancy policies:
(i) The Auditor-General's Auditing Standards provide for rotation of the lead
audit partner of public entities every six years (although the standards do
note that the Rules contain a shorter period). The Standards also state that
the Auditor-General reserves the right to extend the rotation period beyond
six years "in the interest of maintaining audit quality".
(ii) By way of comparison, the New Zealand Institute of Chartered
Accountants' Code of Ethics: Independence in Assurance Engagements  ("NZICA
Code of Ethics") normally requires rotation of the lead audit partner of an
issuer (defined by reference to accounting standards, and is broader than
listed entities) every seven years.
(iii) The NZICA Code of Ethics provides guidance for when an audit client
becomes an issuer, and indicates that the lead audit partner may continue for
two additional years before rotating off the engagement.  MRP considers that
this is a useful analogy for its situation, where the waiver would only allow
Mr Penrose to continue for one additional year.

(g) Granting the waiver would also be consistent with relevant requirements
in Australia. The ASX Listing Rules and ASX Corporate Governance Principles
and Recommendations do not contain any mandatory rotation requirements. The
ASX Listing Rules (via the ASX Good Governance Principles and
Recommendations) require MRP to make information on its procedures for the
rotation of its external audit partners publicly available or if it does not
make that information publicly available it must explain in its annual report
(on an "if not, why not" basis). In addition, although these requirements do
not apply to MRP:
(i) Under the Corporations Act 2001 (Cth), individuals cannot play a
"significant role" in the audit of a listed Australian Company for more than
five successive years. However the board, in accordance with a recommendation
from the audit committee, may provide for the individual to play a
significant role for up to seven successive years. The extension must be
consistent with maintaining the quality of the audit and not give rise to a
conflict of interest situation. The individual must stand down for two years
before recommencing their involvement; and
(ii) Under the Australian Professional & Ethical Standard 110, a member of an
Australian accounting body shall not be a "Key Audit Partner" for more than
seven years. One additional year is allowed in rare and unforeseen
circumstances outside the audit firm's control (for example, illness of the
intended partner). The extension is only permitted if the threat to
independence can be eliminated or reduced. The partner must stand down for
two years before recommencing their involvement.

(h) Mr Penrose has spoken with the Office of the Auditor-General who
confirmed it is supportive of him continuing to act as the lead audit partner
for an extra year.

(i) MRP's Audit Committee supports Mr Penrose remaining as MRP's lead audit
partner for an extra year and will continue to monitor compliance with MRP's
Audit Independence Policy.

(j) The footnote to Rule 3.6.3 provides:
"2. NZX may waive the requirement to change the external auditor or lead
audit partner if the Issuer is a "public entity" under section 4 of the
Public Audit Act 2001."
As outlined above, MRP is a public entity. MRP believes this footnote
highlights the fact that the Office of the Auditor-General provides an
external third party exercising heightened supervision around the auditing
practices of an Issuer who is a public entity, whereas a private company is
not subject to the same external scrutiny.

(k) MRP considers that granting the waiver from Rule 3.6.3(f) will have no
negative impact on shareholders. Rather, MRP considers that the benefits of
maintaining continuity and spreading the transition costs in relation to
Listing and changing lead audit partner over different time periods are
significant.

(l) Mr Penrose would continue to be required by MRP's Audit Independence
policy to confirm in writing to MRP that both he and EY are in compliance
with applicable professional standards and ethical guidelines, which includes
those relating to auditor independence.

(m) MRP notes that any waiver decision will be announced to the market and
disclosed in its annual report, providing transparency to shareholders and
other stakeholders.
Rules

6. Rule 3.6.3(f) provides:
The responsibilities of an Issuer's Audit Committee include as a minimum:
...
(f) ensuring that the external auditor or lead audit partner is changed at
least every five years.

Decision

7. On the basis that the information provided to NZXR is full and accurate in
all material respects, NZXR declines to grant MRP a waiver from Rule 3.6.3(f)
to permit Brent Penrose to lead EY's audit of MRP's financial statements for
the financial year ending 30 June 2014.

Reasons

8. In coming to the decision not to grant MRP a waiver from Rule 3.6.3(f),
NZXR has considered that:

(a) The policy of Rule 3.6.3(f) is to ensure that auditors and lead audit
partners remain independent from the Issuers they audit.

(b) NZXR's policy is that a waiver from Rule 3.6.3(f) should not be granted
unless:
(i) the extension of the auditor's term is necessary to safeguard the quality
of the audit; and
(ii) notwithstanding the extension, the auditor's ability to exercise
objective and impartial judgment in relation to the audit will not be
impaired.

(c) On the basis of the information provided NZXR is satisfied that Mr
Penrose's ability to exercise objective and impartial judgment would not be
affected if the term of his lead were to be extended for a sixth year.

(d) The information provided by MRP does not demonstrate that the extension
of Mr Penrose's term is necessary to safeguard the quality of the audit of
MRP's financial statements for the financial year ended 30 June 2014. In
particular, NZXR understands on the basis of the information provided that:
(i) Sufficient time remains for EY to complete its normal partner transition
process in respect of the audit of MRP for the financial year ended 30 June
2014.  The transition process will involve the new lead audit partner
shadowing the completion of the audit of the 30 June 2013 financial
statements in order to familiarise him or herself with MRP and the
requirements of the audit of MRP's financial statements.  Furthermore as much
as possible the audit team working on the MRP audit will be maintained to
provide continuity following the lead audit partner changeover.
(ii) The audit of MRP's financial statements is not unusually difficult or
technical such that the quality of the audit would be adversely affected if
Mr Penrose did not remain as lead audit partner for the financial year ended
30 June 2014.  The particular complexities present in MRP's financial
statements will continue to be present in financial years following 30 June
2014 which means that another audit partner will need to familiarise
themselves with those complexities in any event.  The transition process
described in paragraph 8(d)(i) will enable the new lead audit partner to gain
the requisite knowledge of these complexities prior to commencement of the
audit of the financial statements for the financial year ended 30 June 2014.
(iii) A change in lead audit partner would not adversely affect the quality
of the audit of MRP's financial statements for the period to which the
prospective financial information in the Offering Document relates.

ENDS.
End CA:00238733 For:MRP    Type:WAV/RULE   Time:2013-07-18 11:58:20