Chief Executive's Report
As described in the Directors' Report this was a challenging year for hydrology and in the retail market, customer choice continues to challenge us to be on our game in respect to service and competitive offerings. From a strategic perspective this has been a good year for TrustPower with milestone progress on NZ irrigation and Australian wind.
In this context the EBITDAF result was solid and demonstrated the resilience of our core business as well as the benefits of the strategic focus on developing new revenue streams.
Health and Safety
TrustPower supports the work of the Government and the Independent Taskforce on workplace health and safety. TrustPower is committed to the welfare of our staff and is focused on both robust processes and developing a positive health and safety culture.
I am particularly pleased with the progress we have made with the Great Safety Performance (GSP) initiative. The GSP has brought increased focus to our health and safety discussions for management and staff. This programme is critical to sustaining our goal to achieve a safety improvement culture.
At TrustPower shareholder value is the main driver of strategy and investment decision making. This clarity of thinking has positioned the Company well in a challenging market environment.
Our goal is to be recognised as a leading supplier of utilities at home and beyond our shores. To achieve this TrustPower has three key strategic areas of activity. These are New Zealand energy markets, irrigation and water markets and Australian renewable energy.
We believe successful delivery to our customers in each of these markets will ensure that TrustPower remains a distinctive investment with the ability to grow for the benefit of all shareholders.
New Zealand Energy Markets
Currently the New Zealand market is characterised by low levels of demand growth, high levels of competition for customers and oversupply as a result of new generation build ahead of demand. TrustPower continues to adapt its business to these pressures and this is our first area of strategic focus.
There is considerable electricity industry and market development in progress and this is covered later, however, much of this is overshadowed by the uncertain outcome of negotiations between Pacific Aluminium and Meridian Energy. TrustPower believes that a decision to close the aluminium smelter at Bluff will accelerate a restructure of New Zealand's generation fleet with old coal and gas fired plant being retired earlier as significant hydro generation would come to market. Recently, the Labour Party and New Zealand Greens have announced a proposed electricity policy that is a radical reversal of the progressive market reforms over the last fifteen years in New Zealand. Fortunately there is time for full evaluation of this model but I do note that, somewhat ironically, if the Central Buyer model was in place, and demand falls, such as with the possible closure of Tiwai, cost recovery would be more difficult for the Central Buyer and power prices would need to rise as the Central Buyer's costs need recovering over a smaller sales volume. Under a market based framework excess supply leads to soft prices whereas with a centralised cost recovery Government department, prices must rise to cover fixed purchase cost obligations.
The continued high level of competition driven by the Electricity Authority's "What's My Number" campaign resulted in TrustPower electricity customer numbers declining 1.5% to 206,000. The Company did not restart sales activity until the second half of the year and a particular focus has been the retention of existing customers. Consequently TrustPower has continued to achieve lower levels of churn than our competitors.
We have grown the number of customers that use our Kinect telecommunications service. Over 43,000 services are now provided to our 26,000 Kinect customers. The majority of these customers are purchasing both electricity and telecommunication products. We believe that our customers are increasingly willing to buy bundled product offers, as long as we provide great value, great service and reward their loyalty. TrustPower expects to increase our product offering to customers during the next year.
The performance of our generation assets was particularly pleasing. Our hydro machines performed 28,154 starts compared with 27,735 starts in 2011/2012. Our failed starts reduced from 86 last year to 72 this year. In combination these achievements meant that TrustPower was successful at targeting higher priced periods despite lower hydro inflows.
Total generation in New Zealand was lower than the previous year with hydro production close to the long term average and wind production below the long term average. In Australia our Snowtown 1 Wind Farm output was close to the long term average. During the year we made significant progress on construction of the 3.8MW Esk Hydro Scheme and this is nearing completion. Following a review of project economics we decided not to proceed with a proposed small hydro investment at the Arnold Power Scheme.
TrustPower has significant new investment options in both wind and hydro generation, it is our intention to retain these until market and regulatory settings provide positive investment signals. In the meantime our focus is on extracting greater value from our existing assets by identifying innovative enhancement opportunities.
TrustPower has over 3,000 resource consent conditions and I am pleased to report that there were only a small number of minor breaches during the 2012/2013 year.
The second area of strategic focus is the New Zealand irrigation sector. The success of our application to vary the Rakaia Water Conservation Order was a significant milestone. Subsequently we have reached agreement with Barrhill Chertsey Irrigation and expect to conclude arrangements with Central Plains Water to supply up to 50 million cubic metres of water with the potential to irrigate 40,000ha.
The use of Lake Coleridge to store water ensuring it is available when and where it is needed provides much needed certainty for farmers to make "on farm" investment in irrigation. The transformation of farm productively is positive for Canterbury and New Zealand. TrustPower believes that our involvement in the development of irrigation projects is a good fit with our core competencies.
The Australian renewable energy sector provides the third area of strategic focus for TrustPower. In Australia the renewable energy target is the key policy directive that will lead to increased production of electricity from renewable sources. TrustPower is well positioned to grow our business by pursuing wind farm development opportunities.
During the year we have made considerable progress towards our goal to develop up to 1,200MW of wind farm investment.
Early in the year we reached financial close and commenced construction of the 270MW Snowtown Stage 2 project. The project has a 15 year power purchase agreement with Origin Energy and a long term maintenance contract with the wind turbine supplier Siemens Energy. Construction is well advanced, with first production expected in October 2013 and full commissioning completed by November 2014.
Our original plan to complete a partial sell down prior to construction did not eventuate and we will revisit that option after construction.
TrustPower has continued to firm our future pipeline of Australian wind farm options. We have commenced the development approval process for the 270WM Dundonnell project in Victoria and a 300MW project in NSW.
Industry Landscape and Market Development
In New Zealand we are experiencing changes in market structures and the deployment of new electricity infrastructure.
We expect the commissioning of new geothermal and gas peaking plants will drive a reduction in the use of coal and gas for generation whilst the upgrade of transmission infrastructure will reduce constraints between points of supply and points of demand. When combined these investments will increase reliability and security of supply and reduce price volatility.
The introduction of financial transmission rights and the success of the ASX futures market will improve the ability for market participants to manage risk and enter new market segments and geographies. TrustPower is an active participant in these markets and supports their development.
By comparison we remain disappointed with the Electricity Authority's response to transmission pricing. TrustPower believes the Authority's proposal is overly complex and that the cost of implementation does not justify the benefits.
Making a Difference in Our Communities
Over the past 18 years the TrustPower Community Awards have grown to include 25 regions in New Zealand reflecting the geographical spread of both our customers and generation facilities. This year our regional finalists travelled to the Far North where the National Community Awards winners were Kaibosh from Wellington. A clever and innovative concept, Kaibosh is New Zealand's first dedicated food rescue organisation that bridges the gap between businesses that are willing to donate surplus food and charities that can use it in central Wellington. A great win for all with a reduction in food waste benefiting those most in need.
We have also taken our regional kiwi values to our Australian projects. At Snowtown we have partnered with local businesses and the Lions Club to form the Lend a Hand Foundation; this collaborative approach has ensured the community and TrustPower share benefits from our activities.
Our People Make the Difference
It was particularly pleasing that staff engagement increased during the year. The increase of 2.8% reflects the greater connection that our staff feel with the Company strategies and the part they play in our success.
Last year I noted the investment TrustPower is making in our talent management programme. As a result of this programme we have appointed Craig Neustroski as General Manger Trading (Designate). Craig brings almost fifteen years of TrustPower experience to the role and will take over when Therese Thorn retires at the end of May 2013.
Therese has provided more than twenty years of service to TrustPower and is regarded highly throughout the industry. Therese has devoted much of her career to the development of the New Zealand electricity market, always focussing on efficient and pragmatic solutions. We will miss her unique thinking style and wish her well in her future endeavours.
The TrustPower team has a deep understanding of the markets that we operate in. We strongly believe our strategies in New Zealand energy markets, irrigation development and Australian renewable energy will deliver for shareholders, customers and staff.