Chairman's Address to the TrustPower Annual Meeting
03 Aug 2012
The Group delivered a strong increase in underlying earnings after tax of $135.5 million up 16% on prior year. Your Directors consider this was a very good result given the intense retail competition and a volatile wholesale market in the second half of the financial year.
TrustPower has paid dividends of 40 cents per share for the 2012 Financial Year representing a 2.5% increase over prior year.
Debt (including subordinated bonds) to debt plus equity decreased to 33% at year-end down from 36% the previous year as a result of lower borrowing levels and the independent revaluation of generation assets which resulted in an uplift in generation asset values of just under $200 million.
TrustPower has achieved a significant milestone with the financial close of its Australian wind project - Snowtown II.
This is the result of four to five years of strategic intent – an intent built off recognising that New Zealand is a small market with modest load growth and that TrustPower’s capabilities exceed its New Zealand opportunities.
TrustPower also recognised that wind Power is the lowest cost means for Australia to reduce its dependence on coal. Renewables policy in Australia is designed to see wind not only meet load growth but, when coupled with pricing carbon, this policy is designed to push the closure of the least efficient thermal plants. Carbon prices alone would not achieve this.
For Snowtown II, all key agreements and approvals required for the development have been entered into or secured. Foreign exchange hedging arrangements to cover Euro and USD currency exposure on the Project Capital expenditure have been completed at favourable rates and the expected total project cost (excluding capitalised interest) has reduced from A$465 million to A$439 or $A 1.6 million / MW.
Snowtown Stage 2 represents a very attractive investment for TrustPower. We have locked in lower than expected costs for the construction and we have secured a long term contract with a good counterparty for selling the wind energy at fixed but inflation proof prices.
While no project is without risk, wind farms are at the low end of the scale and TrustPower is not new to wind farm development and has a good track record of contracting well and delivering well. The expected cash flows to TrustPower post commissioning are strong. The expected returns are exceptionally good for a such a low risk project and when you have a good project it is also good that it has some scale.
TrustPower will fund the project via Australian dollar bank facilities provided by its relationship banks. While these facilities will mature in late 2014, it is expected that a proportion of these facilities will be refinanced in the next 12 months with long term Australian dollar debt facilities.
The additional debt required to fund Snowtown Stage 2 will significantly increase the Group’s gearing (debt to debt plus equity) ratio.
However, TrustPower anticipates that the gearing ratio will be comfortably within the upper limit of the Group’s target gearing ratio range of 25-50% and that the Group will operate within its banking covenants during construction of Snowtown Stage 2 and after commissioning of the project.
Your Directors are comfortable with these debt levels but we are also mindful that we wish to have firepower in the tank to be able to take other wind opportunities in Australia. Thus we have positioned to allow a sell down of the southern part of the Project. Such a sale realises the value of the strong returns from the project in the form of a development profit. TrustPower has ensured it has flexibility for this sell down to be pre construction, or at completion, or anytime thereafter.
Directors are confident that modest growth in dividends can be maintained with a high proportion of imputation.
Financial close of the Snowtown Stage 2 project is an important milestone for TrustPower in terms of its wind development aspirations in Australia.
TrustPower holds development options over a further 1,280 MW of wind generation opportunities in South Australia, Victoria and New South Wales and is looking to advance development planning submissions for some of these opportunities over the next 12 months.
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. The Snowtown Stage 2 wind farm development is an excellent example of this focused approach to growth.
On the retail side of the business it is very clear that the market remains very competitive and that customers have choices and can change their supplier if they are not happy with the service, or the price, or 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 fall in customer numbers in the context of the very competitive retail market. The completion of the project to replace the Company’s core customer and information systems has now established a strong foundation from which to improve product offerings and interaction with our customers.
I also wish to comment more broadly on energy matters and climate change. In New Zealand, you could be forgiven for thinking that Climate Change had somehow gone away as a topical issue – certainly we are on a go slow. This is in contrast to countries like the United Kingdom and Australia.
Climate change skeptics are struggling with overwhelming evidence of human induced global warming - the scientific debate is no longer a debate.
What is also clear globally is that to make a difference the electricity sector has to do more than its share as we don't have the technology to make big dents in transport just yet. Europe and the United Kingdom and Australia have realised this. In the United Kingdom the decision has been made to ensure that targets are automatically increased as renewables come on stream – this will force the closure of coal plants or the conversion of these plants to renewable fuels. This is a very long term game with consistency in policy settings necessary for investment in capital intensive projects. The GFC has not been allowed to divert the consistency of these signals, which are specific to renewable electricity and not linked to volatile and immature carbon markets.
What have we done in New Zealand?
We have actually done a good job of getting a framework in place and improving the mechanics of CO2 pricing. Carbon pricing schemes sensibly link CO2 prices to international levels. however, international markets are immature and CO2 prices have collapsed in the last year or so as a result of the fall out following the GFC and the subsequent recessionary impacts on Europe. Thus signals in New Zealand, which had already been halved by the transitional ‘two for one’ allocation are of little influence as we speak. We have got it right with this international linkage but we are wrong to rely on this alone until international markets are more mature. The approach must be pragmatic and realistic in respect to international developments but complementary measures are also needed.
Electricity is typified by very long term capital assets – we are at risk of embedding a higher CO2 asset base if we don’t have the right signals for renewables ahead of fossil fuels and at present we don’t have those signals. Removing the "two for one" allocation in electricity generation would help speed up the closure of inefficient polluting coal plant and also help avoid gas plant being built ahead of wind.