If you are like me, then you've been trying to figure out why NEP has had so many issues with their accounting, and what those issues actually are. A couple weeks ago I got a good lesson about how and why companies have to take a loss based on the change in fair value of warrants. Today I read up on the other big write-down, which is related to the impairment of oil properties.
NEP had to take a $13.2mil impairment charge on their oil properties in Q4 of 2008, and another $13.8mil charge for Q1 of 2009. I did not understand what these were for, but after doing some reading up on the subject, I think I understand what happened.
In short, accounting rules require companies to make sure that the capitalized oil and gas properties as listed in their balance sheet are not higher then the current "SEC" value. This value is figured out by the company based on their current proved reserves, current oil price, and expected future production schedule. If the oil and gas assets are higher then their current "SEC" value, then the company must immediately write-down the difference and take it as an expense in the current quarter.
What this means is that if oil prices plunge, as they did in Q4 and Q1, then the "SEC" value of oil and gas properties will decline, and thus an impairment charge might be necessary. In NEP's case this resulted in a $27mil combined charge for the two quarters.
What is interesting about this charge is that the company cannot add back to the value of the properties later on if oil prices do go back up, which we know they did. Thus the company has charged off $27mil of its oil assets which would usually have been taken over a period of years as Depletion.
So what does this mean?
NEP's future stated income will be higher because there will be less future depletion expenses.
We also know the NEP's future stated income will be higher when the warrants are exercised.
When all is said and done, nothing has changed operations wise for NEP. They accounting department clearly needs some improvements, but I would argue that they actually hurt themselves more then anything because the company paid about $7mil more then it needed to in income taxes over the last couple years due to their understating non-cash expenses.