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Directors' Report

Financial Performance

TrustPower produced a solid operating performance for the 2013 financial year. Good progress was made in implementing the Group's growth agenda demonstrated by the Group's commitment to invest in the 270MW Snowtown Stage 2 Wind Farm in South Australia. 

TrustPower's consolidated profit after tax was $123.4 million for the year ended 31 March 2013. This represents a decrease of 6% compared with $131.7 million for the same period last year. 

Underlying earnings1 after tax excluding fair value movements on financial instruments and one-off impairment charges were $127.3 million compared with $135.3 million in the previous year, a decrease of 6%.

Earnings before interest, tax, depreciation, amortisation, fair value movements of financial instruments and asset impairments (EBITDAF)2 were $294.8 million, compared with $300.1 million achieved in the previous year representing a decrease of 2%. As reported in the half year result approximately $3.9 million was included in other operating expenses during the year relating to the cost of transacting currency options to hedge currency exposure prior to the Group committing to the Snowtown Stage 2 Wind Farm investment. 

The Group operating performance was considered satisfactory given lower New Zealand generation production and a challenging retail environment, where pressure on margins and lower customer demand was experienced.

Operating revenue was in line with prior period at $805.5 million. Operating expenses including energy and line costs increased 1%.

Total electricity volume sold by the Company in New Zealand through mass market retailing and time of use sales was 3,683GWh, compared with 3,960GWh in the year to 31 March 2012. This 277GWh reduction in sales volume was partially offset by 199GWh of sales through ASX (67GWh in the prior year) which was considered the most effective sales channel during certain periods of the financial year.

Customer numbers decreased from 209,000 at 31 March 2012 to 206,000 as at 31 March 2013. While the retail market remained highly competitive throughout the year, TrustPower continued to experience lower levels of customer churn than the market overall and in the final quarter achieved modest customer gains.

The Group's New Zealand generation production of 2,330GWh was down 352GWh (10%) on the previous year and 4% below the expected long term average. Total hydro production was down 243GWh (13%) on the previous year due to lower than average inflows into both North and South Island catchments particularly during the first and final quarters but was only 1% below the expected long term average. TrustPower actively used its South Island storage lakes to support generation output. New Zealand wind production ended 10GWh lower than the previous year following a poor final quarter and was down 11% on expected long term average.

The Snowtown Wind Farm in South Australia produced 386GWh which was 10GWh (3%) higher than the previous year and within 1% of expected long term average.

Underlying return on average equity, adjusted for fair value movements on financial instruments and impairment charges, was 8.2% (9.6% in the previous year). 

Group operating cash flow remained solid at $241.1 million for the 2013 financial year versus $268.3 million in the prior year.

Financial Position

TrustPower's balance sheet as at 31 March 2013 remains in good shape, with shareholders' funds of $1.56 billion and total assets of close to $3 billion. 

Net debt (including subordinated bonds) to net debt plus equity increased to 37.0% from 33.3% at prior year end, as a result of increased borrowing levels to finance the development of the Snowtown Stage 2 Wind Farm. TrustPower continues to maintain conservative levels of committed credit facilities. As at 31 March 2013 Group net debt was $911.4 million. TrustPower has recently accepted offers to refinance A$180 million of bank facilities due to mature in July 2013. These facilities will be increased to A$200 million and extended in two tranches to July 2016 and July 2018. 

The Group has recently completed documentation for A$171.9 million of Danish Export Credit Agency guaranteed amortising loan facilities with a final maturity of November 2032. These loan facilities will be progressively drawn down over the next eighteen months and will assist with the funding of the Snowtown Stage 2 Wind Farm development. This long term unsecured loan facility will also assist in lengthening the Group's debt maturity profile.

Following the completion of these financing activities the Group will have close to NZD equivalent 1.8 billion of committed debt facilities of which over NZD equivalent 800 million will be undrawn.

It is expected that A$194 million of bank facilities maturing in July 2014 will be cancelled following completion of the refinancing of the A$180 million bank facilities maturing in July 2013.

Capital Structure

Modest purchases of TrustPower's shares have continued under the Company's share buyback programme for which a three year extension was approved at the Annual Meeting in July 2011. The approval allows the Company to purchase up to 5 million shares over a three year period. 37,000 shares were purchased at an average cost of $7.07 during the year to 31 March 2013. It is expected that the share buyback programme will continue to operate over the next twelve months.

Generation Development

Construction of the 270MW Snowtown Stage 2 Wind Farm in South Australia is progressing well and is on track in terms of budget and schedule. Civil works including wind turbine foundations are around 50% complete and the 28km 275kV transmission line is approximately 70% complete. The first shipments of blades, towers and nacelles are expected to arrive during May and June. The first wind turbine on the Snowtown Stage 2 South site is expected to be generating in October 2013 with the South site completed in April 2014, the North site completed in September 2014 and final handover of the total site targeted for November 2014. NZD equivalent $159 million has been included in capital work in progress in the Group balance sheet as at 31 March 2013.

TrustPower is actively progressing other wind development options in Australia with the aim of developing further wind projects to help meet the Australian Renewable Energy Target over the course of the next five years.

A development approval application for up to 270MW at the Dundonnell wind farm site in Western Victoria has been lodged. Another development approval application for a wind farm of up to 300MW in New South Wales has also recently been lodged.

The Group has close to a further 1000MW of identified wind options in South Australia, Victoria and New South Wales which it is continuing to assess.

In New Zealand commissioning of the 3.8MW Esk Valley Hydro project in Hawkes Bay is expected to be completed in July, a few weeks behind schedule but in line with budget at around $13 million. Once commissioned it is expected to add around 15GWh of hydro production to TrustPower's generation portfolio.

Given the current generation oversupply situation in New Zealand, TrustPower will look to maintain its existing 520MW of consented wind and hydro development options. TrustPower will continue to look at small high return enhancement options on existing hydro generation assets.

Following Government approval of the variation to the Rakaia River Water Conservation Order, TrustPower is now in a position to store and distribute consented water from Lake Coleridge to improve irrigation reliability to various irrigator groups. TrustPower has recently concluded a long term storage and release agreement with Barrhill Chertsey Irrigation Limited ("BCIL") and expects to conclude further agreements with other parties in the near future.

First release of stored water for BCIL is expected to occur in the final quarter of 2013. Timing of release to other parties will require final decisions on additional off take infrastructure which could involve TrustPower investment. It is expected that initial agreements will result in an additional irrigation supply area in mid Canterbury of around 40,000ha. 

Retailing and Customers

TrustPower continues to achieve growth in the sale of telecommunication services (increase of 13% on prior year) and this is assisting with overall electricity customer retention.

Following the implementation of a new customer billing system twelve months ago, TrustPower's focus has turned to further enhancements that will improve our customer online experience and also ensure the Company is well positioned to offer multiple products across energy and telecommunications. The ability to successfully offer a bundled suite of utility products creates the opportunity to grow market share and customer life time value.

TrustPower is aiming to have this enhanced retail capability in place over the next six months which we hope will see a return to customer number growth but more importantly delivery of a service and product proposition that our customers value and are prepared to pay a premium for.

Over the next twelve months TrustPower intends to invest more heavily in its retail proposition including its brand and this will have a modest impact on near term earnings.

On 15 May 2013 TrustPower announced that it had reached a conditional agreement to purchase the key assets of Energy Direct New Zealand (EDNZ) for $13.65 million (subject to a post-completion working capital adjustment).

The agreement will see TrustPower taking over the assets of EDNZ including approximately 15,000 electricity customers and 10,000 gas customers and will take effect from 1 July 2013.

Existing EDNZ staff will be employed by TrustPower but the EDNZ business will continue to serve customers from its Wanganui base.

We see this as an exciting opportunity for TrustPower to grow its customer base in the lower North Island and to be involved in the retailing of gas for the first time which we expect will enhance TrustPower's multiproduct proposition over time.

Regulatory Issues

There have been two significant events over the last twelve months that have given TrustPower cause to reflect on the level of regulatory risk that the Group is exposed to in New Zealand. TrustPower recognises that regulatory regimes need to evolve over time to ensure markets remain competitive and efficient, however policy changes need to be carefully managed.

The first of these was the Electricity Authority's proposal to significantly revise the current transmission pricing framework. TrustPower in its last quarterly announcement stated its view was that much of what was being proposed was unnecessarily complex and was likely to lead to unintended consequences for the electricity industry and on-going regulatory uncertainty for investors. Following completion of a detailed submission, TrustPower's view is unchanged. It would seem that this view is shared by a wide cross-section of the electricity industry including industrial users, consumer groups, generators, retailers, distribution companies and Transpower. In fact 51 of the 54 submissions received by the Electricity Authority opposed its proposal and of the three that supported, two were heavily caveated.

Secondly, the Labour/Green proposal to abolish the current competitive wholesale and retail market model and replace it with a single buyer model, should it form a government at the next election, had immediate impact. The combined fall in the market value of TrustPower, Contact Energy and Infratil in the twenty four hours following the announcement was close to $600 million. The potential for significant unintended consequences and risk transfer to tax payers together with the likelihood that future private sector investment will be discouraged by such a proposal have already been highlighted in subsequent media reaction. It is clear from analysis undertaken by a Labour led Government of the same proposal in 2006 that implementation would be complex, challenging, costly and fraught with risk, and that in fact the proposal may not offer marked improvements overall.

TrustPower believes that a detailed facts based analysis of the issues raised by the proposal needs to be undertaken so that New Zealanders are better informed of the issues at stake. This is challenging for an industry that has a high level of complexity.

Governments the world over do not have good track records of efficient allocation of investment capital or risk management through the electricity supply chain. Single buyer models perform poorly when future electricity requirements turn out differently to the planners expectation. Single buyers enter long term contract obligations and these must inevitably be underwritten by electricity consumers and tax payers.

In contrast, the current market framework has, for the last twenty years, managed the transition away from dwindling low cost Maui gas and reliance on high carbon emission thermal plant to renewables without risk to electricity consumers or taxpayers. New Zealand is the only country in the world that has achieved unsubsidised wind generation through efficient and timely investments by market participants.

Companies such as TrustPower have also invested huge effort and resources to establish a solid pipeline of potential new renewable projects. In aggregate New Zealand has an enviable resilience in its power sector with diversified low cost options for renewable power.

However, TrustPower and the electricity industry need a workable regulatory environment to continue to deliver these outcomes. New Zealand can ill afford dramatic regulatory and policy interventions that cast aside the framework on which investors have made long term investment decisions. The consequent impact on private property values will surely deter continued domestic and foreign investment in New Zealand's future infrastructure. 


TrustPower is firmly committed to sustainability principles, and continues to make good progress in terms of stretching and achieving its sustainability goals.

TrustPower's approach to environmental obligations and responsibilities is reflected in the detailed systems and focussed resources it has put in place to manage compliance with an ever increasing number of resource consents conditions.

Pleasingly, TrustPower continues to report only a very small number of minor non-compliance events, and again in the past year, none of these events have resulted in any significant adverse environmental consequences.

TrustPower has established a diversity policy during the year and disclosure of TrustPower's gender breakdown across its business can be found in the sustainability section of the Annual Report.

The Board is satisfied that the Company is recognising the objectives of its diversity policy in all its decision making.

Over recent years, TrustPower has been increasing its focus away from regional event type sponsorship, towards more enduring long term initiatives that build and sustain relationships and are of greater long term benefit to the wider communities in regions where we operate.

This has seen a steady growth in our Community Awards programme, particularly in terms of participation by community organisations, and the addition of our Youth Spirit Award programme which has allowed us to engage with and recognise young people who will go on to be future leaders in their communities.

Our Lend a Hand Foundation, run in partnership with Rotary Clubs and local business supporters covers four regions in New Zealand, and with the local Lions Club in Snowtown, South Australia, continues to provide a "hand-up", as distinct from a "hand-out", to needy individuals, families and community organisations. 

Nationally, TrustPower supports "Elgregoe", magician Greg Britt (NZOM) and his wife Sue, with a magic-based and values-focussed anti-bullying programme delivered to primary and intermediate schools from the Far North to Southland.

Our long standing approach to community engagement and support is certainly different to the corporate norm, but has proven its worth time and time again in terms of both the well-being of communities, and the health of TrustPower as a business. 


In accordance with the Company's Constitution, Mr M Bogoievski and Mr GJC Swier will retire at the 2013 Annual Meeting and being eligible offer themselves for re-election.


PricewaterhouseCoopers has indicated its willingness to continue in office.


The Directors are pleased to announce a final dividend of 20 cents per share, partially imputed to 16 cents per share, payable 14 June 2013 (record date of 31 May 2013). This together with an interim dividend of 20 cents per share, provides a total pay-out of 40 cents per share for the 2013 financial year, in line with the prior year.


Despite the current challenging New Zealand electricity environment which includes intense retail competition, an oversupplied generation market and regulatory uncertainty, the Board is confident that TrustPower is well placed to regain earnings momentum once the Snowtown Stage 2 Wind Farm is completed and other quality renewable generation and irrigation development opportunities are able to be progressed.