Chief Executive's Report
MAKING THINGS HAPPEN
TrustPower has a very strong culture of making things happen. This action orientation, backed by a very strong commercial and customer focus, right from our Board and senior management to our front line staff, underpins TrustPower’s continued performance as the leader in our sector.
As described in the Directors’ report, the Company delivered another solid earnings performance in 2009/10, despite a sustained drought which significantly reduced output from our North Island hydro power stations. Once again the geographical diversity of our generation assets proved to be a real strength as our South Island hydros mitigated the impact, but overall New Zealand generation output was down 5% on the previous year.
Despite reduced generation output EBITDAF was 5% above the previous year.
Competition has been intense during 2009/10, and has intensified further following Government’s announcement to reorganise the generation asset and energy inventory positions of the SOE power companies.
The number of customers changing suppliers reached its highest level since 2001, with 15% changing nationally in the year ended 31 March 2010.
TrustPower has long had a reputation as a leading service provider, and despite high levels of competition the Company’s customer numbers declined by only 1.2% over the year.
During the year we continued to grow our residential customer footprint with expansion into North Canterbury and Gisborne, and further growth in the Far North.
Customer service performance was further enhanced during the year with 78 per cent of all calls answered within 20 seconds, and 94% of our customers rating our service as very good or excellent in our post-call customer surveys (up from 87% last year).
Many of New Zealand’s blue chip companies, including Telecom, Carter Holt Harvey and Fletcher Building, continue to regard TrustPower as the supplier of choice in the commercial and industrial market.
Our highly experienced commercial sales team continues to be very successful in this market.
The volume of energy sold to the commercial market has increased by 21% over the past year.
Kinect telecommunications revenues have grown 16% during the year, with total sales just under $20 million. Customers are enjoying the higher service levels provided by Kinect, and this is reflected in recent customer satisfaction surveys. Customers also appreciate that, unlike many other telecommunications companies, TrustPower’s service centres are all in New Zealand, meaning service for Kiwis, from Kiwis.
Government’s ultra-fast broadband initiative, coupled with Chorus’ cabinetisation program, will provide Kinect with the network platform to provide a variety of new services to customers. We expect Kinect revenues to continue to increase in the coming year.
Customer Information System Replacement
In 2009 TrustPower embarked on a process to replace our existing customer information system with the objective of improving efficiency and further enhancing customer service. The proposed new system was to be provided by one of the global leaders in utility information systems. At the end of the detailed design phase of the project, we elected not to proceed with the implementation of the solution, and to re-evaluate our system options. The reason behind our decision was that the detailed design showed that the proposed system would have to be heavily customised in order to be able to support TrustPower’s business needs. The degree of customisation was a four fold increase on the supplier’s forecasts and we did not believe implementation was in the Company’s best interests. While a good portion of the work completed will be valuable moving forward, we have elected to impair approximately $6.2 million of the cost to date, which includes internal staff time. This has impacted earnings in the 2009/10 year as noted by the Chairman.
We are now evaluating three options, including “nursing along” our existing legacy system for a few more years. At some point in the near future however, we will have to replace our old system.
In its first year of full operation, the Snowtown Wind Farm near Adelaide has proven to be one of the most efficient wind farms in Australia, with a capacity factor to date of in excess of 43 per cent. The performance of the Snowtown Wind Farm is meeting the Company’s expectations and the sale of its output is secured at a fixed price until December 2018.
We will add further to our wind portfolio over the coming year with the development of the 36 MW Mahinerangi Wind Farm. This development nicely complements our Waipori hydro power station in the same area, and we are able to embed a significant portion into the local network, thereby avoiding HVDC link (Cook Straight Cable) charges. These charges are currently fully allocated to South Island generators, whether they use the link or not. However, small to medium scale embedded generation is correctly acknowledged as “made locally and consumed locally”.
The 36 MW is the first stage of what is potentially a 200 MW wind farm development. Before this and other South Island options are progressed however, the HVDC cost allocation method will need to change or these projects are likely to be non-viable.
Strong Portfolio of Development Options
As the Chairman has noted TrustPower has strong development options on both sides of the Tasman.
Perhaps the most exciting New Zealand based opportunity is the potential to establish in Canterbury a multi-use irrigation and generation facility based on our Coleridge hydro generation scheme. This project could provide TrustPower with multiple revenue streams including water supply for irrigation and new hydro generation. Initial indications are that the project could provide irrigation for an additional 100,000 hectares and add a further 70 MW of hydro generation.
The project can also add significantly to the local and national economy, with an estimated $2.5 million of additional GDP and 30 extra jobs per 1,000 hectares irrigated.
While there are a number of hurdles to overcome the project has tremendous potential.
Historically New Zealand has been characterised as energy constrained (in other words not enough total generation capacity). The country is now becoming increasingly capacity constrained, meaning that we are struggling to have enough “peaking” generation that can quickly respond to peaks in demand, particularly during cold winter months.
For TrustPower, this trend not only makes our existing storage hydro stations more valuable, but also creates the opportunity to add additional peaking capacity to our existing schemes. Up to 170 MW has been identified, and our hydro development team are in the process of identifying and progressing the most attractive options.
The Chairman has noted the range of generation development options that we hold in Australia. There is no doubt that in order to meet its own renewable energy targets the Australian Government will need to modify the existing MRET. While we await the conclusion of legislation to enable the proposed changes to the MRET, we are very well placed to take advantage of opportunities that favour renewables. A desk-top study places six of our potential projects (totalling 3,600 GWh) in the “best placed” category, with respect to likely economic value.
Existing Generation Portfolio
Increasing price volatility means starting and stopping our hydro generators more often to ensure we run them at the times when wholesale prices are the highest. In the past year we have, in total, started our machines 26,000 times, a 27% increase on the previous year. While this places strain on the machines and makes machine maintenance even more critical, the ability to capture high wholesale prices has tremendous value for the Company. Despite this very high number of machine starts, failed starts totalled only 48, which is testament to the effectiveness of TrustPower’s asset management plan and maintenance staff.
As noted, our North Island hydros were adversely affected by very dry conditions in 2009/10, with production down 18% on the prior year. This was balanced to a large degree by our South Island hydros and a 5% improvement in wind output.
The last ten years has seen TrustPower’s hydro catchments receive below long run average rainfall and hence generation production has been lower. TrustPower has had to buy the energy shortfall from the spot market rather than generating it cheaply from its own hydro schemes. TrustPower has studied reports on climate change and these reports all tend to suggest that the last ten years’ production results are not necessarily an indicator of changes to long run averages.
Government Led Industry Reforms
2009 saw the completion of the Ministerial Review of the electricity sector which resulted in a range of recommendations that will represent the most significant sector reforms in a decade.
The physical and virtual asset swaps (hedge contracts) between the SOE power companies will result in two of the North Island SOEs having significantly more energy to sell in the South Island, at the expense of one of the South Island SOE generators. That South Island SOE generator will gain energy to sell in the North Island at the expense of one of the North Island SOEs. While this sounds overly and unnecessarily complicated, the overall result is that TrustPower will face stiffer competition for its South Island customer base.
We do expect increased customer losses as a result, but we also have a range of strategies to retain our customers, something which we have a strong track record of doing.
We also believe opportunities will be created in some markets as a result of these SOE energy swaps and we are preparing plans to take advantage of these opportunities.
One of the other major aspects of the reforms is the expected introduction of “scarcity pricing” combined with the removal of the Government operated reserve energy scheme, which is based on the Government owned Whirinaki diesel power station.
TrustPower welcomes the removal of the reserve energy scheme which has created market distortions and artificially capped wholesale energy prices.
We also welcome the introduction of scarcity pricing mechanisms. The resulting price signals are required in any competitive wholesale market to ensure new capacity is built to meet both energy and capacity requirements.
TrustPower expects to respond to these price signals through our existing hydro stations, enhancement of existing schemes and development of new schemes.
While there will be some costs for the industry and some firming of wholesale prices, customers should benefit from increased security of supply for their homes and businesses.
The other key element of the reforms is Government’s desire to increase liquidity in the wholesale forward contracts (hedge) market. To this end Government requires that the industry form a liquid hedge market that offers 3,000 GWh of energy, which is the equivalent of around 375,000 households’ annual consumption. TrustPower expects to be both a seller and a buyer in this market and we believe that it creates opportunity for our Company.
While externally imposed reforms are always troubling for any industry, periods of change inevitably create opportunities. TrustPower has in the past successfully navigated a range of Government interventions and reforms, and while we don’t wish to downplay the significance of the current reforms, we believe we have the experience, resources and generation assets to take advantage of the changes, minimise the impacts and continue to prosper for the benefit of shareholders.
The Community and the Environment
The TrustPower National Community Awards celebration was held this year in Nelson, and was the culmination of 24 regional programmes.
The overall winner was the Friends of the Motueka Hospital Trust. The Trust, led by Jack Inglis, was not prepared to accept the closure of its local hospital and raised $3.7 million to develop a 45 bed community-owned and run hospital valued at $12 million. This is an amazing story of community leadership and effort, and is just one of the stories of the volunteers that make New Zealand the place that it is. This and many other stories of volunteers from other regions around New Zealand will be captured in a series of programmes jointly developed between TrustPower and TVNZ. The programmes commenced in May this year, and we encourage all New Zealanders to watch and be inspired by real people doing real things in our communities.
Our generation assets occupy, in many cases, environmentally and recreationally important parts of New Zealand. We continue to work closely with Government, local environmental agencies and local communities to ensure the flora and fauna in the regions hosting our generation assets are protected and enhanced and that recreational opportunities are maximised.
Of the over 3,000 Resource Consent conditions we monitor and comply with, it was pleasing that again only a very small number of minor breaches occurred.
Its important to us that New Zealanders have the opportunity to access the recreational opportunities that our assets present. Over the course of the year, many New Zealanders have taken these opportunities for kayaking, boating, sailing and walking.
Our People Are Our Strength
The power to make things happen in TrustPower is all about our people. TrustPower’s senior management and operational management staff have decades of collective industry experience and this underpins our success.
One of the challenges for any successful organisation is to ensure that it continues to maintain high quality skills and leadership over time.
For that reason, developing problem solving, management and leadership skills throughout our company has remained a strong focus over the past year.
We were delighted to again be recognised in the Hewitt, Fortune, RBL Group Top Companies for Leaders Awards. Only 72 organisations worldwide were recognised and TrustPower was one of only a handful in the Asia Pacific Region to receive an award. This is testament to the leadership development programmes that have been implemented at TrustPower.
We are entering one of the most significant periods of change the New Zealand electricity industry has seen in many years, but we are undaunted.
The expertise and experience of our people, coupled with a nimble, non-bureaucratic culture and strong commercial focus puts us in a good position to take on future challenges, and to recognise the opportunities that inevitably come with change.
Underpinning this is our unique geographical spread of well maintained and managed generation assets, and our substantial portfolio of development options, both in New Zealand and Australia.
These factors collectively truly provide us with the power to make things happen for shareholders, customers and staff.
Chief Executive (Acting)