10 May 2013
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 earnings 1 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 3%.
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.
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 and over NZD equivalent 800 million of undrawn debt facilities.
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.
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.
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, and the North site completed in September 2014 with 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. 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 to 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.
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 fifty one of the fifty four 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 lead 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 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.
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.
1. Underlying Earnings is a non GAAP (Generally Accepted Accounting Principles) financial measure. TrustPower believes that this measure is an important additional financial measure to disclose as it excludes movements in the fair value of financial instruments which can be volatile year to year depending on movement in long term interest rates and or electricity futures prices. Also excluded in this measure are items considered to be one off and not related to core business such as changes to the company tax rate or impairment of generation assets.
A full reconciliation between profit after tax attributable to the shareholders of the Company and underlying earnings after tax is provided in Note 3 to the consolidated Financial Statements.
2. EBITDAF is a non GAAP financial measure but is commonly used within the electricity industry as a measure of performance as it shows the level of earnings before impact of gearing levels and non-cash charges such as depreciation and amortisation. Market analysts use this measure as an input into company valuation and valuation metrics used to assess relative value and performance of companies across the sector.
© Copyright Infratil