28 Jul 2011
The Company delivered earnings in line with the prior year result. Your Directors consider this a ‘solid’ result given that the company also maintained retail customers despite intense competition and the effects of the low wholesale prices over periods when TrustPower had surplus power to sell into the wholesale market.
Overall, our New Zealand generation was up a little on long term averages while our Australian wind production was down some 16% on our long term expectations. A review of long term production expectations for our Snowtown wind farm has confirmed our view that it was an abnormally low wind year and there is no reason not to expect reversion to long term averages.
TrustPower has paid dividends of 39cents per share for the 2011 Financial Year.
It is worth noting that while our dividend payout ratio is close to 100% of net profit after tax, it is only around 80% of our operating cashflow, reflecting that the accounting depreciation charge considerably exceeds our stay in business capital spend on existing assets. In the absence of major new projects, balance sheet strength is forecast to improve somewhat each year.
Debt (including subordinated bonds) to debt plus equity was 36 per cent at year end up from 34% the previous year as we funded the 36 MW Mahinerangi Wind farm and the Highbank irrigation facility.
The recent pause in rising wholesale prices is a natural outcome of the recent period of low growth and also the Christchurch earthquake – we have had new generation projects come on with no load growth. With the economy now starting to recover we expect to see the current surplus absorbed and also to see wholesale prices come back into alignment with the need for investment in new plant – and, with carbon pricing now well established, we are confident it will be renewable generation.
With Australia now embracing carbon pricing as a key driver for change, we see this as reinforcing the commitment to carbon pricing in New Zealand. Australian carbon prices are to be at a higher level than New Zealand’s current pricing – this provides good support for New Zealand carbon prices to move up from their current introductory levels. There is no doubt these strengthening carbon price signals also point to the earlier closure of inefficient aging thermal units – with current surplus supply these units are not needed and this is the opportunity to move towards the goal of a renewable energy future.
TrustPower therefore anticipates wholesale prices will recover from the near term weakness and prices will move to the levels compatible with delivering New Zealand a renewable energy future.
Your Company continues to work hard at building a range of growth options in New Zealand and in Australia and we are positioning the balance sheet to support execution if and when we get excited about the shareholder value gain from that investment. Exclusively we have targeted low impact hydro developments and wind projects in locations with good wind resource, low connection costs and a high level of community acceptance.
Your Company’s approach is simple – to identify good sites for projects, to secure the consents and development rights and then to execute selectively when market conditions reflect that more energy is needed and when we can get good competitively priced contracts and warranties from suppliers. Our aim is not to get bigger but to add shareholder value. Mahinerangi is an excellent example of this - the Company successfully completed the 36 MW stage 1 of the Mahinerangi wind project – ahead of schedule and under budget. Stage 2 remains a fully consented option in the development pipeline as does TrustPower’s nearby Kaiwera Downs wind project. TrustPower currently has consents for around 400MW of wind farm development and 120MW of hydro generation in the South Island.
On the retail side of the business it is very clear that the market is competitive and that customers have choices and can change their supplier if they are not happy with the service, or the price, or not happy with the corporate responsibility of their retailer. Your company has never seen retail as a route to market for its generation schemes, it has always strived for service excellence, low costs to serve and relevance to its customers. TrustPower’s retail business is performing well despite the aggressive repositioning going on at present as the SOEs rebalance the geographic spread of their mass market businesses.
Again, as in previous years, I want to touch on wider industry efficiency. In my view we are one step away from being confident we have the lowest possible sustainable cost structures in the industry and that efficient and competitive prices are available for consumers. The main missing step is capital efficiency. There is no sustainable gain for the country from inefficient capital investment by state owned entities – as a country we cannot be better off with taxpayers subsidising electricity prices through investing too much capital in expensive generation projects while lower cost projects get squeezed out.
All companies in the sector need to be under relentless pressure to use capital well (or investors should put it elsewhere) and under relentless pressure to have low operating costs.
Given the now solid structure and competitiveness of the market, it is my view that there is a lot to be gained and no downside from supporting the proposed mixed ownership model for the SOE generators.
To conclude, I believe TrustPower is well positioned to be able to continue to add value to customer experiences and also to add shareholder value in this evolving market place. Thank you
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