TrustPower’s consolidated profit after tax was $119.4 million for the year ended 31 March 2010. This represents an increase of 14 per cent compared with $105.1 million for the same period last year.
Underlying earnings after tax excluding fair value movements on financial instruments and impairment charges in relation to the replacement of the Company’s customer information system was $116.8 million compared with $118.8 million in the prior year, a reduction of 2 per cent. This reduction reflects increased depreciation charges following revaluation of assets as at 31 March 2009.
Earnings before interest, tax, depreciation, amortisation, fair value movements of financial instruments and asset impairments (EBITDAF) grew by 5 per cent to $273.9 million from $261.4 million in the previous year.
Operating revenue fell 3 per cent from $785.4 million in the previous year to $759.3 million as a result of lower energy prices charged to those customers paying spot market prices.
Operating expenses including energy and line costs decreased 7 per cent on the previous year, primarily driven by lower wholesale electricity costs incurred during most of the financial year. This impact was offset by cost increases across a range of activities including network distribution costs which increased by 10 per cent.
Total electricity volume sold by the Company in New Zealand was 4,103 GWh compared with 4,032 GWh in the year to 31 March 2009. Customer numbers decreased by 2,000 from 227,000 as at 31 March 2009 to 225,000 as at 31 March 2010.
For most of the financial year wholesale electricity prices have been low due to above average levels of South Island hydro storage. However, a noticeable increase in wholesale prices occurred in the last quarter of the financial year as the market responded to declining hydro storage levels.
Electricity demand in New Zealand has increased over the 2010 financial year with Tiwai aluminium smelter returning to full capacity as well as commercial and industrial demand improving from the recessionary conditions experienced in the 2009 financial year.
The Group’s New Zealand generation production of 2,017 GWh was down 110 GWh (5 per cent) on the previous year and 243 GWh (11 per cent) down on expected long term average. This was primarily due to lower North Island hydro production.
Australian wind production from the first full year of operation at the Snowtown Wind Farm in South Australia was 373 GWh which was 4 per cent lower than expected long term average.
Fair value gains on financial instruments of $12.5 million were recorded in the 2010 income statement versus a $19.6 million loss in the previous year due to significant increases in long term interest rates which favourably impacted the value of the Group’s interest rate hedging portfolio.
Following the decision to re-evaluate the project to replace TrustPower’s customer information system, a review of alternative options has been undertaken. This has resulted in an impairment charge of $6.2 million against the capitalised cost of the project. The Company is actively considering two options and in the event that neither option is selected, remediation of the existing system would be undertaken.
Underlying return on average equity, adjusted for fair value movements on financial instruments and impairment of the customer information system was 8.1 per cent (last year 8.8 per cent).
Group operating cash flow was $234.1 million for the 2010 financial year versus $214.2 million in the previous year.
TrustPower’s balance sheet as at 31 March 2010 remains strong. Shareholders’ funds have increased to $1,437 million from $1,430 million.
Debt (including subordinated bonds) to debt plus equity was 33.9 per cent at year end, unchanged from the previous year.
TrustPower continues to maintain conservative levels of committed credit facilities. As at 31 March 2010 Group net debt was $726.1 million. TrustPower has recently accepted offers to refinance its AUD 160 million of bank facilities due to mature in early September 2010. These facilities will be increased to AUD 180 million and be extended to July 2013.
Following completion of the refinancing process committed debt funding will be NZD equivalent 1.07 billion.
During the financial year TrustPower successfully raised $140 million of five and seven year bonds from retail investors. This has provided diversity of long term funding for the Company and another investment option for New Zealand based retail investors in TrustPower.
The Board has recently agreed to reopen the Company’s Share Buyback Programme which was originally approved at the Annual Meeting in July 2008. The approval allows the Company to purchase up to 5 million shares over a 3 year period. To date 236,312 shares have been purchased. The Board has approved that the Company may purchase up to 2 million shares (0.6 per cent of total shares on issue) during the period 31 May to 29 October 2010 within predefined limits.
GENERATION DEVELOPMENT AND CAPITAL EXPENDITURE
Good progress has been made on a range of growth options in New Zealand and Australia.
The Board has approved a first stage development of the Mahinerangi Wind Farm adjacent to the Waipori Hydro Generation Scheme. Stage I will be a 36MW development including the installation of twelve 3MW Vestas V90 wind turbines. The long term expected annual output from this initial stage of the wind farm is forecast to be 105 GWh.
The construction is scheduled to be completed during September 2010 to April 2011 with final commissioning and takeover of the wind farm scheduled for May 2011.
The output from the wind farm will be embedded in the local Aurora network and retailed locally. This will enable HVDC costs to be avoided and underpins the project’s expected return on investment.
The projected capital cost of the project, including capitalised interest, is expected to be around $75 million.
TrustPower currently has consents for 440MW of wind farm development in the South Island and is awaiting judgements in relation to appeals made to the Environment Court for a further 118 MW of South Island hydro consents at Arnold and Wairau.
TrustPower has recognised for some time the opportunity for the Coleridge Hydro Scheme to play an important part in delivering reliable irrigation capacity along the Rakaia River Plains in Canterbury. TrustPower is working with landowners, as well as central and local government to develop solutions to increase irrigation reliability in the region.
TrustPower has commenced development of a pumping facility to supply water from the Rakaia River using the Company’s Highbank hydro generation scheme to a joint venture between Barhill Chertsey Irrigation Limited and Electricity Ashburton Limited. This project is expected to be commissioned by the end of the 2010 calendar year.
TrustPower expects that electricity prices will become more volatile over time and consequently generation capacity which is able to meet peak demand will become more valuable. Many of TrustPower’s hydro generation assets have peaking capacity and a detailed review is being undertaken to identify potential enhancement opportunities that can increase peaking capacity.
In Australia, TrustPower is currently seeking a variation to its existing planning consent for expansion of the Snowtown Wind Farm. The proposed variation is to seek approval for some amendments to turbine locations together with an alternative transmission route, for a stage II expansion of up to 214MW. TrustPower is also progressing grid connection studies with respect to a Stage II expansion which should be completed during the 2010 calendar year.
TrustPower continues to make good progress in reaching agreement with landowners and towards achieving its target of 10 – 12 wind farm sites with good development potential across New South Wales, Victoria, South Australia and Western Australia.
Forecast capital expenditure in the 2011 financial year is expected to be around $125 million which includes generation expenditure undertaken as part of the Company’s 10 year asset management plan, Stage I of the Mahinerangi Wind Farm, pumping facilities adjacent to the Company’s Highbank hydro scheme in Canterbury, enhancement projects and potentially the implementation of a new customer information system.
Generation development costs to be expensed in the 2011 financial year are projected to be around $9 million continuing the high level of investment in growing the Company’s portfolio of investment options. TrustPower is working to ensure that it is in a position to progress renewable projects should the Company conclude that shareholder value is likely to be created.
TrustPower is firmly committed to sustainability principles and progress in relation to achieving its sustainability goals is provided in this annual report.
TrustPower takes its environmental obligations very seriously and has detailed systems and focussed 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 significant adverse environmental consequences.
TrustPower continues to invest heavily in its Community Awards Programme which is now run in twenty four regions across the country with the aim of recognising the outstanding contribution volunteers make to their local communities.
In addition to the Community Awards Programme, TrustPower has a 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.
TrustPower, in conjunction with local like-minded charitable groups, has recently established the Lend a Hand Foundation in Dunedin, three towns on the West Coast, and Snowtown in South Australia. The Foundation aims to assist small charitable organisations and individuals in these communities through funding, mentoring or through the provision of goods and services.
Legislation to enact the recommendations of the Ministerial Review of the Electricity Industry is expected to occur sometime in 2010.
Some of the recommendations including SOE asset swaps, a mechanism to manage location price risk, expanding the hedge market and introducing scarcity pricing deal with complex issues that will require time to work through.
TrustPower is closely following the reform process and is ensuring that it is appropriately involved so that it is well positioned to deal with these changes.
The New Zealand Emissions Trading Scheme will commence for stationary energy from 1 July 2010 meaning that thermal generators will face a capped cost on carbon emissions through to the end of 2012.
In contrast the Australian Government has recently announced that its proposed emissions trading scheme has been deferred until at least 2013 as the result of not being able to pass supporting legislation through the Senate. However, the Mandatory Renewable Energy Trading Scheme (MRET) has been reviewed and the distortions caused by incentives given to domestic solar heating installations are proposed to be removed. Legislation has yet to be passed but once enacted should provide increased certainty to developers of large scale renewable energy, including wind, to progress new investment opportunities.
In accordance with the Company’s constitution, Mr Sam Knowles and myself will retire at the 2010 Annual Meeting and being eligible offer ourselves for re-election.
Sir Ron Carter has advised the Board that he will not be seeking re-election at the Annual Meeting. The Board and Management thank Sir Ron for his immense contribution and leadership since joining the Board in January 2002.
The Board has appointed Mr Richard Aitken as an independent director of the Company effective 19 May 2010. Mr Aitken is presently Executive Chairman of Beca Group and has been with Beca Group for over 40 years.
The Board considers that Mr Aitken’s civil engineering, project management and commercial skills will strongly complement the Board’s existing skill sets.
In accordance with the Company’s constitution Mr Aitken will retire at the 2010 Annual Meeting and being eligible will offer himself for re-election.
PricewaterhouseCoopers has indicated its willingness to continue in office.
The Directors are pleased to announce a final dividend of 19 cents per share, partially imputed to 13 cents per share, payable 11 June 2010 (record date of 28 May 2010). This together with an interim dividend of 19 cents per share provides a total payout of 38 cents per share for the 2010 financial year compared with 33 cents per share, excluding special dividends, for the 2009 financial year, representing dividend growth of 15 per cent.
New Zealand hydro storage is currently at above average levels for this time of year and TrustPower’s hydro storage lakes are in a similar position but low rainfall is affecting North Island hydro production. The current New Zealand hydro storage position should ensure a comfortable level of electricity supply to meet demand over the 2010 winter.
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, as retail pricing aligns with the increasing long run marginal cost of new generation.
The Company remains well positioned to meet its customers’ needs and to pursue further development of electricity generation assets when it is economically justifiable.