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FINANCIAL PERFORMANCE
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* Information for years prior to the Group’s transition date of 1 April 2006 to NZ IFRS have been prepared under existing NZ FRS and have not been translated to equivalent NZ IFRS amounts.
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TrustPower’s consolidated operating surplus after tax was $98.1 million for the year ended 31 March 2008, compared with $102.4 million, as restated for International Financial Reporting Standards (“IFRS”) adjustments, for the same period last year.
Earnings before interest, tax, depreciation, amortisation and fair value movements on financial instruments (“EBITDAF”) grew by 6 per cent to $208.0 million from $196.4 million in the previous year.
Operating revenue of $681.5 million increased 9 per cent on the previous year as a result of higher energy prices charged to those customers paying spot market prices together with a $12.7 million revenue contribution from telecommunication services. Total electricity volume sold was 4,540 GWh compared with 4,575 GWh in the year to 31 March 2007. Customer numbers increased to 222,000 at 2008 year end from 219,000 a year earlier.
The New Zealand electricity environment has been characterised by lake storage levels and inflows that have been below average for much of the 2008 financial year. However, spot electricity prices in the first nine months remained below average but increased significantly in the final quarter.
Generation production of 2,018 GWh for the year was up 4 per cent on the previous year but around 270 GWh down on long term average. Hydro production was down 220 GWh or 13 per cent on long term average. North Island hydro production accounted for around 185 GWh of this shortfall as a result of record low inflows into a number of catchments. Wind production was up 272 GWh on the previous year due to nearly a full year’s contribution from Stage III of the Tararua Wind Farm which was commissioned in July 2007. However, wind production was also down 50 GWh (8 per cent) on long term average. This was due to a combination of lower than expected wind speeds over the second half of the financial year and some Stage III turbines experiencing post commissioning operational issues which have caused lower than expected availability. The Company expects this situation to be resolved shortly.
Operating expenses including energy and line costs increased 10 per cent on the previous year, primarily driven by higher wholesale electricity costs. High frequency keeping costs in the North Island due to low availability of North Island hydro generation supply in the last quarter of the financial year together with higher generation production costs have also contributed to increased operating expenses.
Net profit after tax, return on average shareholders’ funds, was 7.9 per cent (last year 8.6 per cent).
Group operating cash flow was $161.0 million for the 2008 financial year versus $161.2 million in the previous year.
Taking into account the significant shortfall in production from the Company’s own generation assets and high wholesale prices for the final quarter of the financial year, the result was satisfactory and again demonstrates that the Company’s trading and risk management practices are sound.
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FINANCIAL POSITION
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TrustPower’s balance sheet as at 31 March 2008 remains in good shape. Shareholders’ funds have increased to $1,257 million from $1,217 million.
Included in accounts payable and accruals is an amount of $102.7 million relating to milestone payments due under the Snowtown Stage I wind turbine supply contract. A similar amount was held in year end cash balances following settlement of foreign exchange hedge contracts matching the wind turbine supply contract obligations.
Debt (including subordinated bonds) to debt plus equity was 34.3 per cent at year end versus 29.5 per cent in the previous year. This increase is due to the Company debt funding the capital expenditure programme of the last two years which has included the 93 MW Tararua Stage III wind farm, the 6 MW hydro expansion at Deep Stream in Otago and the partial construction of 98 MW of wind generation for Stage I of the Snowtown wind farm in South Australia.
TrustPower continues to maintain high levels of committed credit facilities. Including subordinated bonds the Company currently has equivalent of NZD 950 million of committed debt funding in place. Given the current uncertainty in financial markets the Company decided to refinance early $100 million of bank facilities due to mature in July 2008 and to establish an additional $100 million three year bank facility loan. The arrangements have recently been concluded and provide the Company with certainty of funding to undertake new smaller scale generation projects and, if necessary, repayment of the $50.5 million subordinated bond tranche maturing in December 2008. Debt facilities drawn at year end totalled $656 million.
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CAPITAL STRUCTURE
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A final decision has not yet been made with respect to the rollover or repayment of the subordinated bond tranche maturing in December 2008. However, current market conditions are challenging for issuers. As outlined in the Notice of Annual Meeting, the Company is seeking shareholder approval to issue further tranches of subordinated bonds. At this stage, the approval is sought solely to give the Company flexibility to access this funding source if required and in particular for the relatively longer terms that can be achieved in the retail market for this type of funding. The Company’s generation development programme is in a fluid state and should another major project reach a position where the Company commits to construction, it is important that there is a range of funding options readily available.
The Board has approved that the Company be able to buy-back up to 5 million of its shares over the next six months. Given the current volatility in financial markets the Board considers that the Company should have the flexibility to buy back its shares where there are opportunities to add value for existing shareholders.
Approval from shareholders will be sought at the Annual Meeting for an annual share buy-back programme of a similar scale.
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GENERATION DEVELOPMENT
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TrustPower’s New Zealand generation development programme continues to progress satisfactorily despite resource consenting taking longer than expected for many development opportunities. Following commissioning of the Deep Stream hydro enhancement project the Company now owns 594 MW of renewable generation capacity in New Zealand producing on average around 2,320 GWh per annum.
Good progress is being made on the development of the 98 MW Snowtown Stage I Wind Farm. Civil works have been completed and to date six wind turbines have been erected and commissioned. The balance of the planned 47 2.1 MW Suzlon wind turbines are expected to be progressively erected and commissioned over the next three months. If all goes to plan the project could be completed three months ahead of schedule which would be a pleasing outcome for the Company’s first Australian renewable generation project.
Expensed generation development costs for the year were $9.5 million compared with $10.3 million in 2007. This expenditure reflects a range of costs including preliminary design, environmental investigations and resource consent application costs over a number of hydro and wind development opportunities in both New Zealand and Australia.
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SUSTAINABILITY
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TrustPower is firmly committed to sustainability principles and readers will find that this year’s report contains greater detail in support of the Company’s progress in relation to its sustainability goals.
TrustPower takes its environmental obligations very seriously and has detailed systems and focused resource in place to help manage compliance with its ever increasing level of consent conditions.
Pleasingly, TrustPower continues to report only a very small number of minor non-compliance events and none of these events have resulted in any adverse environmental consequences or are the subject of any enforcement proceedings.
TrustPower continues to invest heavily in its Community Awards Programme. Twenty three regional awards have been held around the country this year culminating in the National Awards held in Wanaka during March. TrustPower is very proud of the Community Awards Programme and the outstanding community initiatives that are recognised through the Awards process. The contribution made by so many New Zealanders through voluntary work in their communities is inspirational.
In addition to the Community Awards Programme, TrustPower has portfolio of other sponsorship initiatives regionally targeted at assisting education, the arts and wider communities through support of school music festivals, youth orchestras, photographic competitions, the Bay of Plenty rescue helicopter in association with the Tauranga Energy Consumer Trust and significant regional events that are of benefit to the wider community.
During the year the Company was recognised internationally as one of two country level winners for Australia and New Zealand in the Top Companies for Leaders 2007 Survey undertaken by Hewitt Associates, the RBL Group and Fortune Magazine. Attracting and retaining key talent and demonstrating strong accountability for leadership behaviours at all levels of the organisation has been a significant contributor to this result. TrustPower has worked hard over many years on leadership initiatives and establishing a strong culture of staff engagement and commitment and the Directors are pleased to see the Company recognised for its achievements.
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REGULATORY ISSUES
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Legislation to enact the New Zealand Emission Trading Scheme (“ETS”) is currently under review by a parliamentary select committee following public consultation. The proposed introduction of the ETS for the electricity sector from 2010 together with a ten year moratorium on thermal generation should provide a supportive environment for progressing renewable generation opportunities. TrustPower believes New Zealand’s electricity sector is globally well placed to deliver low cost renewable projects utilising geothermal and wind resources supported by hydro peaking capacity. The multi company industry structure also ensures New Zealand has a strong diversity of development options providing good resilience and cost competitive solutions to meet the climate change challenge. However, the Company remains frustrated by the lack of progress towards amendment of High Voltage Direct Current (“HVDC”) pricing methodology which is required to provide a level playing field for new renewable generation in both North and South Islands. If this issue is not dealt with it is difficult to see how the Government’s objective of 90 per cent renewable generation by 2025 will be achieved as many of New Zealand’s best future wind and hydro sites are located in the South Island.
In TrustPower’s experience customers have good choice of alternative electricity retailers and TrustPower strives to offer the best quality retail service as its primary response to the competitive retail environment.
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DIRECTORS
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Mr Sam Knowles was appointed a Director effective 26 August 2007. Mr Knowles is currently Chief Executive of Kiwibank Limited and brings extensive banking and consumer marketing experience to the Board.
In accordance with the Company’s Constitution, Messrs IS Knowles, BJ Harker, HRL Morrison, and Sir Ron Carter will retire at the 2008 Annual Meeting and being eligible offer themselves for re-election.
The Board has also agreed that Directors enter into a fixed share purchase plan whereby Directors will allocate a percentage of their directors’ fees and automatically instruct a share broker to purchase shares in the Company at market price following the Company’s annual and interim announcements. Fixed share purchase plans are quite common internationally and the Board views individual ownership by Directors in the Company as a positive way of ensuring that Board and shareholder interests are closely aligned.
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AUDITORS
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PricewaterhouseCoopers has indicated its willingness to continue in office.
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DIVIDEND
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The Directors are pleased to announce a partially imputed final dividend of 15 cents per share, partially imputed to 11 cents per share, payable 6 June 2008. This together with an interim dividend of 15 cents per share provides a total payout of 30 cents per share relating to the 2008 financial year. This represents growth in dividend payout of 11 per cent when compared with the 2007 financial year.
Shareholders should be aware that it is likely that dividends for the foreseeable future are likely to be partially imputed as the Company will pay relatively lower levels of tax in the early years following the commissioning of wind farm developments. This is due to the availability of higher tax depreciation levels for wind farm assets which will result in a lower expected level of corporate tax to be paid. The Company expects that a minimum level of 60 per cent imputation is likely to be achieved on dividends over the next two to three years.
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OUTLOOK
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TrustPower believes that New Zealand’s significant wholesale and retail price rises, driven initially by the end of the era of cheap gas and more recently to cover costs of moving to a renewable generation future, will moderate somewhat but price rises above inflation are still likely for a period, especially as any New Zealand dollar weakness will be reflected in the costs of new projects.
TrustPower currently has resource consent applications pending for over 550 MW of hydro and wind generation projects in New Zealand. TrustPower is working hard to ensure that it is in a position to progress renewable projects should the Company conclude that shareholder value is likely to be created. However, should this conclusion not be able to be reached due to regulatory uncertainty or negative policy impacts, then the Company will aim to protect the value of its development rights as longer term options.
Forecast capital expenditure in the 2009 financial year for committed generation development projects is expected to be around $70 million which mostly relates to the completion of Stage I of the Snowtown wind farm.
Generation development costs to be expensed in the 2009 financial year are projected to be around $7 million.
On 1 May 2008 Transpower, as the independent system operator, advised that despite the recent rain hydro storage levels remain a significant concern to the industry and as such the industry is continuing with contingency planning efforts to ensure a secure supply of electricity this winter. At the time of writing this report New Zealand hydro lake levels were around 60% of average storage for this time of year.
While it is too early to make predictions about the 2009 financial year, it is worth noting that the Company remains in a satisfactory position to meet its customers’ needs this winter.
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BJ Harker
Chairman
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