annual report 2006 - trustpower.co.nz/media/files/financial reports/tp... · annual report...
TRANSCRIPT
LET US INVEST IN YOUR FUTURE
aNNUaL REpORT 2006
HIGHLIGHTS 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
DIRECTORS’ REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
TARARUA STAGE I I I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
GETTING IT RIGHT FIRST TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT TEAM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CHIEF EXECUTIVE’S REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
WAIPORI AREA DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PROPOSED ARNOLD VALLEY HYDRO SCHEME . . . . . . . . . . . . . . . . . . . . . . 16
COMMUNITY RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EMPLOYER RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ENVIRONMENTAL EXCELLENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ECONOMIC PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CORPORATE GOVERNANCE STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FINANCIAL STATEMENTS 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
AUDITORS’ REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
STATUTORY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECURITY HOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
DIRECTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
INVESTmENT IN OUR ELEcTRIcITY INFRaSTRUcTURE IS cRITIcaL FOR OUR NaTION’S FUTURE SUccESS.aT TRUSTpOwER wE UNdERSTaNd ThE paRT wE caN pLaY IN cONTRIbUTINg TO ThIS SUccESS. hOwEVER, UNLESS ThEREd TapE caN bE RIppEd awaYbY REdUcINg ThE bURdEN OF INEFFIcIENT LEgISLaTION aNd REgULaTION, ELEcTRIcITY cONSUmERS, ShaREhOLdERS aNd ThE NaTIONS FUTURE SUccESS wILL bE SIgNIFIcaNTLY dISadVaNTagEd.
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aNNUaL REpORT hIghLIghTS - 2006 FINaNcIaL YEaR
• Audited after tax operating surplus grew 11 per cent to $81.4 million.
• Earnings before interest, tax, depreciation and amortisation grew 7 per cent to $185.6 million.
• Risk management systems contributed to the strong financial result through a long period of lower than average hydro inflows causing the Company’s own generation production to be down 14 per cent on previous year and 8 per cent down on long term average.
• Obtained resource consent approval for 93MW Tararua Stage III Wind Farm expansion. Negotiation of key contracts completed and construction on schedule.
STRaTEgIc FOcUS - 2007 FINaNcIaL YEaR
• Ensure construction of Tararua Stage III continues to be on time and within budget.
• Pursue successful resource consenting outcomes for the Wairau and Arnold hydro projects and Waipori wind project.
• Actively contribute to industry and government debate with respect to carbon policy and transmission investment and pricing.
• Protect and grow TrustPower’s premium retail brand.
INVESTmENT IN OUR ELEcTRIcITY INFRaSTRUcTURE IS cRITIcaL FOR OUR NaTION’S FUTURE SUccESS.aT TRUSTpOwER wE UNdERSTaNd ThE paRT wE caN pLaY IN cONTRIbUTINg TO ThIS SUccESS. hOwEVER, UNLESS ThEREd TapE caN bE RIppEd awaYbY REdUcINg ThE bURdEN OF INEFFIcIENT LEgISLaTION aNd REgULaTION, ELEcTRIcITY cONSUmERS, ShaREhOLdERS aNd ThE NaTIONS FUTURE SUccESS wILL bE SIgNIFIcaNTLY dISadVaNTagEd.
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“good progress is being made, despite the challenging
environment, towards securing a range of renewable generation options, the stepping stones for
future development.”
The Directors of TrustPower are pleased to report the Company’s results for the year ended 31 March 2006.
FinanCial PerForManCe
TrustPower’s consolidated operating surplus
after tax was $81.4 million for the year ended
31 March 2006, representing an 11 per cent
increase on the result for the 2005 financial year. Earnings before interest, tax, depreciation and amortisation
grew by 7 per cent to $185.6 million from $173.3 million in the previous year.
Operating revenue of $677.0 million increased 11 per cent on the previous year as a result of substantially
higher energy prices charged to those customers paying spot market prices. Total volume sold was
4,724 GWh compared with 5,873 GWh in the year to 31 March 2005, a decrease of close to 20 per
cent. This reduction is primarily due to a major industrial customer trading directly
through the wholesale market rather than using TrustPower as its agent.
Customer numbers reduced slightly to 220,000 at 2006 year end versus
225,000 a year ago.
The New Zealand electricity environment for most of the 2006
financial year was characterised by lake storage levels and inflows
well below average leading to significantly higher spot electricity prices
particularly during the last half of the financial year.
dIREcTORS’REpORT
HarolD TiTTer CMG, B Com, FCa
CHairMan
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TrustPower’s successful wind generation development program achieved another milestone this year with the approval in november 2005 of the construction of Stage iii of the Tararua Wind Farm.
An order for the wind turbines was placed in November with Vestas Wind Technology, the world’s leading wind turbine manufacturer, supplying 31 of its flagship V90 – 3 MW turbines. The V90 turbines will be the largest installed in New Zealand. The project was awarded 1,075,000 internationally tradable emissions units under the New Zealand Government’s Projects to Reduce Emissions programme.
This third stage of the wind farm, located on the Tararua ranges near the city of Palmerston North in the North Island of New Zealand, will be developed over an 18 month
period, with resource consents being secured to add 93 MW to the existing 68 MW capacity, making the wind farm TrustPower’s single largest generation facility. This site is already recognised as one of the best performing wind farms in the world and the third stage will further enhance that performance.
Construction of the civil work began on site in January 2006 and the first turbine is expected to be erected in February 2007. The $180 million project will result in the construction of more than 15km of new road (up to 10m wide to accommodate the crane required to erect the turbines), the placement of more than 10,000 cubic meters of concrete, the forming of 1,000 tonnes of reinforcing steel and the installation of 90 km of 33kV cable.
The final turbine is scheduled to be commissioned in July 2007.
TaRaRUa STagE IIICivil roaD anD
FounDaTion Work
unDerWay aDjaCenT
To THe exiSTinG WinD
TurBineS
Generation production of 1,791 GWh for the year was down 14 per cent on the previous year and 8 per cent on long term average. Lower generation production was primarily driven by low hydro catchment inflows over the course of the year which became more pronounced during the last two quarters. Lower hydro production was partially offset by a strong performance from the Tararua Wind Farm which produced 268 GWh during the year representing 45 per cent of capacity utilisation and slightly above long term expected production.
Operating expenses including energy and line costs increased 10 per cent on the previous year, again primarily driven by higher wholesale electricity spot prices together with material increases in wholesale market fees and increasing costs relating to a number of project developments and resource consent applications the Company has been progressing in relation to its generation development programme.
Net profit after tax return on average shareholders’ funds was 9.2 per cent (last year 8.4 per cent).
Group operating cash flow was $118.9 million for the 2006 financial year versus $110.0 million in the previous year.
The financial result for the year to March 2006, as was the case for the 2005 financial year, was achieved from the combination of superior customer service, disciplined risk management and active use of the Company’s generation portfolio.
FinanCial PoSiTion
TrustPower’s balance sheet as at 31 March 2006 remains strong. Shareholders’ funds have increased to $896.5 million from $882.8 million. Net debt (including subordinated bonds)
to net debt plus equity was 28.6 per cent at year end 2006 being slightly lower than 2005.
Debtors and creditors levels at year end were significantly higher than the previous year end due to high wholesale electricity prices. The Company also had $16 million of cash placed on deposit with The Market Company to support its wholesale market prudential requirements.
TrustPower continues to maintain high levels of bank credit lines. Including subordinated bonds the Company now has $710.9 million of committed debt funding in place. These debt facilities were drawn to $366.8 million as at 31 March 2006.
CaPiTal STruCTure
In April 2006 the Company announced that it had completed the negotiation of a $110.9 million long term debt facility to partially fund the Stage III expansion of the Tararua Wind Farm. This facility will be drawn down over the next twelve months as the wind farm construction is progressed. The facility will be repaid in six monthly instalments through to its maturity in January 2021. The establishment of this term loan has enabled the Company to lengthen the maturity profile of its debt facilities as well as diversify its sources of funding.
Given TrustPower’s current strong balance sheet position, the Company is confident that additional debt can be efficiently arranged to accommodate investment opportunities over the medium term. However, as outlined in the Notice of Annual Meeting, the Company is seeking shareholder approval to issue further tranches of subordinated bonds. At this stage, the approval is sought solely to give the Company flexibility to access this funding source if required and in particular for
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combination of superior customer service, disciplined risk management and active use of the company’s generation portfolio.”
OPERATING REVENUE AND EBITDA
$ M
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2002 2003 2004 2005 2006EBITDA OPERATING REVENUE
0
100
200
300
400
500
600
700
800
TOTAL ASSETS AND DEBT RATIO
$ M
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2002 2003 2004 2005 2006GENERATION ASSETS OTHER ASSETS DEBT TO DEBT + EQUITY
0
200
400
600
800
1000
1200
1400
1600
25%
27%
29%
31%
33%
35%
the relatively longer terms that can be achieved in the retail market for this type of funding.
GeneraTion DeveloPMenT
Good progress is being made, despite the challenging environment, towards securing a range of renewable generation options, the stepping stones for future development.
The 93 MW Stage III expansion of the Tararua Wind Farm is progressing well with civil work well advanced and all key project contracts finalised. Target dates for commissioning of first turbines and final completion remain scheduled for February 2007 and July 2007 respectively. All foreign exchange commitments with respect to the project have been hedged at favourable rates.
The Board has recently approved a 5 MW enhancement to the Waipori Hydro Scheme subject to finalisation of landowner arrangements and satisfactory tenders for key
contracts. This scheme will take water from Deep Stream and divert it into a small lake before discharging it through two small power stations and into Lake Mahinerangi, the lake created by the Waipori dam. The enhancement is expected to cost around $20 million and produce 22 GWh per annum. Target completion is October 2007.
A resource consent hearing for the proposed 72 MW Wairau Hydro Scheme in Marlborough has been confirmed to start in mid June.
A resource consent application for a revised 46 MW Hydro Scheme at Arnold on the West Coast was lodged at the end of March 2006. The Arnold scheme has received a great deal of public interest and support over the years, as the power supply to the West Coast has become increasingly limited.
The revised scheme will involve the replacement of TrustPower’s existing 3 MW station on the Arnold River, and the diversion of approximately two thirds of the
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gETTINg IT RIghT ThE FIRST TImEas consumers of a variety of products and services, we
have all had good and bad experiences with suppliers and
service providers. often the most frustrating experiences
involve suppliers that make basic service errors and then
struggle to fix the resulting problems that are created for
us as consumers.
TrustPower has developed a reputation for quality service
over a number of years, but we’re never content to rest
on our laurels, and over the past two years we have
implemented a service excellence program right across our
customer service functions.
That program has two major themes - “Right First Time”
and “First Time Resolution”, which means firstly doing all
we can to eliminate service errors, but when things do go
wrong, we fix the problem the first time we encounter it.
Service excellence has to combine high quality processes
with competent, enthusiastic people who are accountable
for delivering high quality service.
Our Right First Time program has involved thoroughly
investigating and documenting our service processes,
and the identification of the points in the processes where
things can go wrong. We have then developed measures
current water flowing in the Arnold River through 7 km of canals running down the left side of the Arnold Valley. The diversion will allow water to flow down to a storage pond to be constructed on private land above a new power station. This pond will allow water to be stored on a daily basis when demand for electricity is low and to be used for electricity generation when demand is high.
The Company expects to lodge a resource consent application shortly for a wind farm at Waipori in Otago for up to 300 MW. It is likely that development of this project will be completed in stages. Initial wind modelling indicates that the wind resource could rival the Tararua site, and perhaps more interestingly, deliver maximum energy during months when water inflows have historically been low thus allowing increased security of supply for the Otago region. The advantage of having a wind farm adjacent to TrustPower’s largest hydro power station and storage lake is that water can be held for use when it is calm.
TrustPower has recently announced that it is not progressing identified wind farm opportunities in Marlborough any further due to marginal wind resource assessments and unattractive project economics.
Progress in Australia remains slow, however, TrustPower is focused on ensuring that its options for the Myponga and Snowtown wind sites are preserved, in particular through the extension of existing landowner arrangements and the pursuit of a suitable turbine supplier for Snowtown.
TrustPower recently concluded the purchase of the development rights to the wind farm site immediately adjacent to TrustPower’s Snowtown site. The combined site could accommodate a 335 MW wind farm. The acquired site is at the same stage of development as TrustPower’s existing site with design, planning consents and other regulatory requirements jointly obtained.
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and reports so that on a daily basis our customer service
managers can monitor progress and potential errors and
intervene before things go wrong. Coupled with that, all of
our service staff have, as part of their monthly reviews, an
“error check” so that everyone is accountable for getting it
Right First Time.
Our First Time Resolution program involves our customer
service management listening to a sample of calls from
all of our service agents each month, and measuring how
effectively the customer’s problem was resolved first time by
the agent. Each agent then gets monthly feedback on their
performance, and expert coaching on how they can do it
better. As a result of this program, we are now consistently
delivering over 95% first time resolution - and we won’t be
satisfied until its 100%!
To help us get there we’ll soon be adding a weekly customer
survey across a sample of each agent’s calls so that our
customers can tell us how well they think our people are doing.
“OVER ThE paST TwO YEaRS wE haVE ImpLEmENTEd a SERVIcE ExcELLENcE pROgRam RIghT acROSS OUR cUSTOmER SERVIcE FUNcTIONS.”
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A number of other New Zealand wind and hydro projects are in the early planning stages as part of the rolling five year development programme.
Expensed generation development costs for the year were $15.0 million compared with $5.1 million in 2005. This reflects the number of opportunities being progressed, the preliminary design, environmental investigations and resource consent application costs, as well as expenditure incurred on the Australian wind farm opportunities.
environMenT
Environmental sustainability and performance are fundamental drivers for how TrustPower functions and operates.
TrustPower takes its environmental obligations very seriously and has detailed systems and focused resource in place to help manage compliance with its ever increasing level of consent conditions.
Pleasingly, TrustPower continues to report only a very small number of minor non-compliance events and none of these events have resulted in any adverse environmental consequences or are the subject of any enforcement proceedings.
CoMMuniTy relaTionS
TrustPower continues to be an active sponsor of the regional Community Awards Programme. The Awards provide recognition for the efforts and achievements of voluntary organisations which are the lifeblood of communities and whose members can be fairly categorised as “unsung heroes” in our communities. The programme includes 19 annual awards covering 21 regions where TrustPower has a significant retail or generation presence. The regional awards culminate each year in a National Award ceremony which was this year held on the West Coast and was a wonderful success.
In addition to the Community Awards Programme, TrustPower has an impressive portfolio of other sponsorship initiatives regionally targeted at assisting communities though support of school music festivals, youth orchestras,
photographic competitions and significant regional events that are of benefit to the wider community.
reGulaTory iSSueS
Despite actively pursing its New Zealand generation development programme, the Company is becoming increasingly concerned and frustrated with the regulatory environment particularly with respect to renewable generation investment.
The uncertainty created by the withdrawal of the Government’s carbon tax policy and lack of any further policy direction on carbon emission pricing makes it difficult for many generation development proposals currently under consideration to be progressed.
The recent decision by the Electricity Commission to maintain the status quo with respect to pricing of the HVDC linking the North and South Islands is also concerning, particularly for developers of new South Island generation as the implication from the decision is that new investment will be charged for HVDC costs on the same basis as existing generation.
If this outcome occurs, South Island generation projects will be challenged economically. This is not an encouraging policy signal for the numerous renewable generation projects located in the South Island that have been identified by TrustPower and others.
Given the ongoing debate over security of supply in the sector, TrustPower believes that a more encouraging policy response on the above matters is necessary to create the right investment environment for renewable generation development.
our PeoPle
TrustPower has the advantage of having a talented group of employees with impressive diversity and depth of skills across the key disciplines required by the Company for it to be successful. In the past twelve months significant resource has been allocated to improving the Company’s training and development with the objective of lifting employee capability across the Company.
“ Trustpower has the advantage of having a talented group of employees with impressive diversity and depth of skills”
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Effectiveness Programme for around thirty senior staff. The aim is to ensure that TrustPower’s leadership capability is strongly aligned with the needs of a high performance organisation and culture.
Earlier this year the Directors agreed that the Company progress to a detailed planning stage, the development of an Early Childhood Education Centre at TrustPower’s Head Office site, as a demonstration of commitment to work life balance and employee support at TrustPower.
The Directors enjoy a strong working relationship with the TrustPower management team and the strength of this relationship is an important contributor to the Company’s success and future strategic direction.
The Directors would like to extend their thanks to Keith Tempest, Chief Executive and his management team for their leadership and operational success over the past year and to all TrustPower staff for their contribution to another excellent financial performance for the year to March 2006.
DireCTorS
In accordance with the Company’s Constitution Messers HM Titter, BJ Harker, and Sir Ron Carter will retire at the 2006 Annual Meeting and being eligible offer themselves for re-election.
auDiTorS
PricewaterhouseCoopers has indicated its willingness to continue in office.
DiviDenD
The Directors were pleased to announce a fully imputed final dividend of 12 cents per share paid 9 June 2006. This together with an interim dividend of 11 cents per share provided a total payout of 23 cents per share relating to the 2006 financial year. This represents growth in dividend payout of 18 per cent when compared with the 2005 financial year.
ouTlook
By the time this report is published, TrustPower expects that it will have resource consent applications pending for over 400 MW of hydro and wind generation projects in New Zealand. While the Company is confident that it has the capacity to fund these projects it is less certain that the regulatory environment provides a signal that is positive enough for the Company to invest in such significant renewable opportunities.
TrustPower is working extremely hard to ensure that it is in a position to complete these renewable projects should the Company conclude that shareholder value is likely to be created. However, should this conclusion not be able to be reached due to regulatory uncertainty or negative policy impacts, then the Company will aim to protect the value of its development rights as longer term options.
TrustPower has a significant capital expenditure programme for the 2007 financial year including the majority of the $166 million committed at year end 2006 to be spent on Tararua Wind Farm Stage III but for which payment is not yet due.
Generation development costs expected to be expensed in the 2007 financial year are about $7 million.
While it is too early to make predictions about the 2007 financial year, it is worth noting that the Company is currently well positioned to meet its customers’ needs this winter. Good inflows into TrustPower’s hydro catchments during late April have improved the Company’s storage levels and, together with contracted electricity hedges, should enable the Company to meet its electricity sales obligations within comfortable spot market purchasing risk parameters. At time of writing, the results for the first quarter have started strongly.
H M TiTTer
CHairMan
OPERATING SURPLUS AND DIVIDENDS
$ M
ILLI
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2002 2003 2004 2005 2006OPERATING SURPLUS DIVIDEND DECLARED
0
10
20
30
40
50
60
70
80
90
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�0
1: HarolD TiTTer
CMG, B Com, FCaCHairMan
2: Sir ron CarTer knZM
Be(Hons), Me, DistFiPenZ, FiCe, MaSCe, FnZiM, FCiTDireCTor
3: lloyD MorriSon
llB (Hons)DireCTor
4: BruCe Harker
Be (Hons), PhD (elect.eng), MiPenZDePuTy CHairMan
5: MiCHael Cooney
llB, aaMinZDireCTor
6: SiMon younG
M.Phil.(econ), M.ScDireCTor
bOaRd OF dIREcTORS
1
2 3
4
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��maNagEmENT TEam
1: keiTH TeMPeST
BBSCHieF exeCuTive
2: CHriS o’Hara
BagrSc, Dip. BusenerGy SaleS ManaGer
3: PeTer CalDerWooD
Be(Hons), Me, MiPenZSTraTeGiC BuSineSS
DeveloPMenT ManaGer
4: Mike keDian
BSc(Mecheng), MSc(eng), MBa
GeneraTion ManaGer
5: karen BoyTe
BBS, nZDBS, nZiM Dip. Mgnt.,MHrinZ
HuMan reSourCe ManaGer
6: THereSe THorn
Be(Hons)TraDinG anD riSk
ManaGer
7: roBerT Farron
BBS, Ca, CFiPCHieF FinanCial oFFiCer anD CoMPany SeCreTary
1
2 3
4 5
6 7
“Trustpower recently commenced construction of the third stage of the Tararua wind
Farm which when completed, will add 93 mw of capacity at a
capital cost of $180 million.”
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chIEF ExEcUTIVE’S
REpORTAt a time when the level of investment in electricity infrastructure continues to lag behind the economic growth of our country, consumers could reasonably expect the regulatory handbrake on new generation
development to be eased.
Last year TrustPower highlighted the narrowing
gap between electricity supply and demand and
the significant hurdles to secure resource consents necessary for new generation investment. Regrettably
the situation has further deteriorated and new investment has become increasingly more difficult.
It was fortuitous that TrustPower recently commenced construction of the third stage of the Tararua Wind
Farm which when completed, will add 31 turbines and a combined output of 93 MW at a capital cost of $180
million. Tararua Stage III in some respects piggybacked off the existing wind farm and had a smooth run
through to gaining resource consent. It was also fortunate to have been successful in securing tradable
carbon credits from the Government’s climate change initiative and as a matter of
fortunate timing, the wind turbines from Europe were ordered when the NZD / Euro
exchange rate was the most favourable it had been for many years.
In just a few months the situation has changed.
The legislation designed to allow recognition of the national importance
of electricity infrastructure and the climate change benefits that renewable
electricity generation provides has not found its way into environmental practices.
keiTH TeMPeST BBS
CHieF exeCuTive
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Local Councils often only consider the impact of new
electricity generation on the local community without
any regard for the future of our nation as a whole. This,
by its very nature, means any local environmental impact
is highly weighted to the disadvantage of the applicant.
All communities in New Zealand receive much of their
electricity supply from generation from other parts of the
country so current legislation reinforces the ‘not in my
backyard’ attitude. Many people say, “as long as my power
supply stays on and it is produced somewhere else, why
would I want a power scheme built near me”, and these
people have excessive influence on their local Council.
Immediately after the last election the Government decided
to not only cancel the proposed carbon tax scheme due
to commence in April 2007, but also to cease offering
further tenders for tradable carbon rights on new carbon
reducing investments. This has produced a double blow
for new renewable generation. The Kyoto commitment
internationally has been priced by most participants
and those prices have been factored into retail prices of
products from CO2 emitting industries. Without a market
price for CO2 emissions in New Zealand new renewable
generation developments must compete on the same
basis as fossil fuel burning generation, although we all
know that someone, possibly the taxpayer, will have to
front up with hundreds of millions of dollars to meet our
2012 Kyoto liabilities. TrustPower is working closely with
the Government and Climate Change Office to assist in the
establishment of a climate change policy that provides for
the price of carbon to be factored into electricity costs.
TrustPower’s southern most generation asset is the Waipori Hydro Scheme, west of Dunedin. The first stage of this scheme is nearly 100 years old and includes TrustPower’s largest storage lake, lake Mahinerangi. This area will also soon be the site of TrustPower’s newest hydropower development, the 5MW Deep Stream Project.
This project, which has all required resource consents, will utilise an existing water diversion which falls more than 300m from Deep Stream into Lake Mahinerangi. There will be no increase in the water diverted from Deep Stream but
rather the water will be channelled via a new canal through two small power houses before arriving at the lake.
This project is an excellent example of the efficiency gains TrustPower is constantly researching and implementing at its existing sites, some based on minor design changes and some the result of new technologies becoming available.
During the investigation of the Deep Stream Project, it became apparent to TrustPower’s generation development team that there is a healthy wind resource available in the area. Therefore TrustPower is now pursuing a wind
THe ouTlook For THe
PoTenTial WaiPori
WinD FarM.
“ a robust transmission network is the cornerstone of an efficient and competitive electricity market.”
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06A key issue for the Electricity Commission at present is
deciding on new transmission investment and the way in
which Transpower charges for this. A robust transmission
network is the cornerstone of an efficient and competitive
electricity market. The autumn of 2006 again, after 2001 and
2003, illustrated that when South Island hydro inflows are
low and lake levels are at less than 50 per cent of average
the national grid is unable to be configured to utilise the full
capacity of the High Voltage Direct Current (‘HVDC’) link
between the islands. Southward energy flow was restricted
to around 420 MW when the HVDC could take 624 MW. This
means that more South Island hydro generation is used
rather than saving the water for winter when it is likely to
be needed most.
In March this year the Electricity Commission published
its final decision on the HVDC charging methodology.
It concluded that both existing and new South Island
generators should pay for the link. At present the link
costs about $70 million per year. In addition, Transpower
has recently presented a new investment proposal to the
Electricity Commission to refurbish and upgrade the HVDC
link at a cost of over $500 million, approximately doubling
the annual charges.
The logic behind charging South Island generators for the
HVDC link has eluded most. The link is a core part of the
national grid backbone, as is the high voltage AC systems,
providing both North and South Island generators a way of
getting their production to market. At present the AC system
costs are charged mainly to local network companies who
on charge it to consumers by way of line charges.
The decision to charge only South Island generators for the
HVDC means that new South Island generation is penalised
relative to the North Island.
Most of TrustPower’s proposed new generation
developments are in the South Island. In particular the
Wairau hydro scheme in Marlborough and the Arnold hydro
scheme on the West Coast will supply local demand and
farm development with a potential 300 MW capacity at the western end of the Eldorado Track.
Initial wind modelling indicates the wind resource could rival the Tararua site and perhaps more interestingly, could deliver maximum energy during months when water inflows have historically been low, thus allowing increased security of supply for the Otago region.
Locating the wind farm near a large storage lake provides a natural benefit of retaining water when the wind is blowing
and using it when the wind is not blowing, thus effectively storing wind power in the lake.
The design for the Waipori Wind project has been completed. Input from our environmental technical experts and environmental studies undertaken thus far indicate that the environmental impact of a wind farm in this vast landscape will be less than minor.
TrustPower expects to apply for resource consents for this wind farm during 2006.
waIpORI aREa dEVELOpmENTS
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06 not be trading energy over the HVDC link, although both
will be liable for the current charges and any future HVDC
upgrade charges. This will have a huge impact on the
potential viability of these projects.
Last, but not least, there has been a recent significant
depreciation in the NZ dollar compared to the Euro and US
dollar. The cost of wind turbines and imported hydro plant
has, as a consequence of the change in the foreign currency
exchange rates, escalated by around 15 per cent. This
and the exchange rate flow on costs of many other major
construction costs, particularly fuel, will put increasing
pressure on the viability of new generation developments.
These increasing regulatory and economic hurdles facing
investors in new electricity infrastructure will necessitate
further significant electricity price increases for much
needed new investment to occur.
GeneraTion oPeraTionS
Our generation assets have performed particularly well
over the last year reflecting not only the level of operations
and maintenance planning expertise the Company has in
house, but also the quality of the assets. When wholesale
spot electricity prices are volatile the hydro plant is subject
to a large number of stops and starts. This places additional
stress on vital plant components, but also allows greater
revenue to be generated. During the year a total of 18,032
plant starts were actioned with a start failure rate of just
0.4 per cent.
Each year the Ten Year Asset Management Plan is reviewed
and refined to ensure that the plant is maintained to its
optimal operating level and the effects of changing plant
workloads are correctly modelled into the maintenance plan.
DOWNSTREAMSREGULATION POND
R
STINGTT GGOLD DAMD
MA
DOWNSTREAMREGULATION POND
MIDLAND RAILWAY
ARNOLD VALLEY ROAD
ARNOLD VALLEY ROAD
STORAGE POND
MIDLAND RAILWAY
ARNOLD RIVER
ARNOLD RIVER
EXISTINGARNOLD DAM
MAORI GULLY ROAD1
42
3
5
67
8
2
TrustPower owns an existing small 3 MW Hydro Scheme on the arnold river near Greymouth on the West Coast of the South island.
A new much larger 46 MW scheme is now being proposed to replace the existing power station with a planned output of approximately 220 GWh’s per annum (enough to supply around 27,000 typical New Zealand households).
The new scheme will consist of a single power station housing two turbines, fed by a series of canals running down the left side of the Arnold Valley.
Approximately two thirds of the current water flowing in the Arnold River will be drawn into a canal at the existing Arnold dam and will flow down to a storage pond above the proposed power station. This pond will allow water to be stored when demand for electricity is low and to be used for electricity generation when energy demand is high.
A regulation pond where the scheme discharges back to the Arnold River will act as a ‘buffer’ to reduce the level of flow fluctuations experienced within the Arnold River down stream.
The scheme will provide a significant boost in both quantity and reliability of electricity supply for the West Coast where demand is predicted to almost double in the next few years.
Resource consent applications for the scheme were lodged with the Grey District Council and the West Coast
Regional Council in late March 2006. TrustPower and its consultants put considerable effort into designing this new scheme to minimise environmental effects. The new Arnold scheme replaces TrustPower’s previous proposed “Dobson” project which has been abandoned after failing to gain the necessary approvals to utilise an ecologically sensitive area.
The project is currently well supported by the local community and enjoys both local and central government support. TrustPower looks forward to expediting the RMA consent process at the earliest possible time.
pROpOSEd aRNOLd VaLLEY hYdRO SchEmE
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DOWNSTREAMSREGULATION POND
R
STINGTT GGOLD DAMD
MA
DOWNSTREAMREGULATION POND
MIDLAND RAILWAY
ARNOLD VALLEY ROAD
ARNOLD VALLEY ROAD
STORAGE POND
MIDLAND RAILWAY
ARNOLD RIVER
ARNOLD RIVER
EXISTINGARNOLD DAM
MAORI GULLY ROAD1
42
3
5
67
8
2
exaMPle oF STreaM CroSSinG Canal
NORTh
aRNOLd hYdRO SchEmE aSSESSmENT OF ENVIRONmENTaL EFFEcTS
Proposed Scheme with Alternatives
Date: 23.02.06
Scale: 1:15,000 (A1) 1:30,000 (A3)
exaMPle oF roaD CroSSinG Canal
1 OUTLET GATE STRUCTURE
2 POSSIBLE EXCESS CUT STOCKPILE AREA
3 AqUADUCT FOR ARNOLD BRANCH OVER CANAL
4 POWER STATION
5 CANAL OUTLET GATE STRUCTURE FOR
RELEASE INTO STORAGE POND
6 EXISTING ARNOLD POWER STATION
7 EXISTING ARNOLD TUNNEL
8 EXISTING ARNOLD DAM
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The Asset Management Plan establishes the basis for both
operational maintenance and capital expenditure budgeting
for the years ahead.
Managing more than 3,000 resource consent conditions
relating to the 33 hydro stations TrustPower owns and
operates is a challenging task. The compliance record
is exceptionally good. An audit was commissioned by
TrustPower to review and make recommendations for
improvements to the processes in place to manage the
resource consents. The audit results were very pleasing
with only a few minor suggested improvements proposed,
endorsing the commitment and skills TrustPower applies to
this critical area of generation operations.
The long term future of TrustPower’s existing and new
renewable generation is significantly dependent on achieving
excellence in environmental citizenship. During the year
significant resources were applied to ensure that not only
were the existing resource consent conditions efficiently
managed, but development of plans and programmes with
the numerous environmental agencies and stakeholders
were implemented. It is the quality of relationships that
TrustPower builds with these agencies and stakeholders that
allows the natural resources to be utilised and enhanced for
the benefit of all New Zealanders.
reTail oPeraTionS
Superior service and a strong and close working relationship
with our customers and their communities continues as the
key retail focus. Market research and published results from
the Electricity and Gas Complaints Commission continue to
show TrustPower is setting the standard for the Industry.
The low level of wholesale market liquidity has meant any
available electricity is sold into the most profitable market.
For the third year running the small to medium commercial
markets throughout most of New Zealand continue to offer
the best opportunities. With TrustPowers competitors’ offering
low or often negative net margins on domestic retail prices
at current wholesale buying costs, TrustPower will actively
pursue growth in the commercial markets. As a consequence
the number of customers supplied by TrustPower has dropped
about 2 per cent over the year to 220,000.
With the new 365 MW gas fired generation at Huntly likely
to be commissioned late in 2006, there is some expectation
that wholesale prices over the next couple of years may come
under some downward pressure. This is the first large scale
generation plant commissioned since full retail competition
started in 1999. In anticipation of this TrustPower is further
enhancing offers to customers across all market segments
with superior service and new innovative loyalty benefits.
TrustPower continues to offer wholesale market services to
several large industrial and nationally significant customers.
One such customer chose from April last year to become
a market participant in their own right, and although this
resulted in a significant reduction in sales volume the impact
on financial performance has been minimal.
“ Our generation assets have performed particularly well over the last year reflecting not only the level of operations and planning expertise the company has in house, but also the quality of the assets.”
SOURCE OF GENERATION
GW
H’S
PR
OD
UC
ED
2002 2003 2004 2005 2006SOUTH ISLAND HYDRO NORTH ISLAND HYDRO WIND GENERATION
0
500
1000
1500
2000
2500
SALES VOLUME COMPOSITION
GW
H’S
SO
LD
2002 2003 2004 2005 2006MASS MARKET HALF HOURLY METERED
0
1000
2000
3000
4000
5000
6000
7000
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06enerGy TraDinG anD riSk ManaGeMenT
The results this year have again highlighted the importance
to TrustPower of maintaining trading and risk management
as a key business focus. The wholesale price volatility
especially during the second half of the financial year,
coupled with the historically low inflows and hydro
generation production, provided for TrustPower a reality
check in extreme conditions, to see if the risk management
policies and practices developed since 2001 work in
practice. It has been gratifying for the highly skilled trading
and risk management team to know that their efforts over
the previous years were not only correctly focused, but
produced positive financial results for the Company.
The monthly reconciliation of energy between competing
retailers has been of concern to TrustPower since full
competition commenced. TrustPower has had significant
exposure to other retailers under-reconciling the energy
they buy with TrustPower picking up the energy cost
difference. TrustPower has led the charge and committed
significant resources at an industry level to establish
reconciliation protocols to assist its competitors to build
systems to do the job properly. Many millions of dollars
have been recovered and the accuracy of reconciliation
across the market has improved hugely to a point where
the potential on-going cost risk to TrustPower is likely
to be less than half of one percent of energy purchased
in its incumbent areas. In addition, TrustPower has
promoted a radical change in the way reconciliation
‘differences’ are applied. From 2007, instead of the
incumbent retailer having to absorb these differences,
they will be allocated amongst each retailer trading in
each specific area on the basis of market share. This
will provide the incentive for each retailer to reconcile
their electricity purchases accurately.
our PeoPle
As the electricity market matures the requirement for a highly
skilled workforce increases. Not only does the generation
plant need to meet the increasing physical demands of
greater and more reliable dispatch but customers continue
to demand improved and additional services. To meet
this increasing sophistication employees are required to
continue to develop their knowledge and skills.
TrustPower is committed to the training and development
of people at all levels in the Company, and retaining those
people who aspire to delivering improved performance.
A specific programme has been implemented whereby
key functions previously carried out by contractors or
consultants are being brought in house. This not only
provides further career opportunities for employees, but
more importantly develops and retains the knowledge and
expertise in house.
Leadership development training is a major focus for 2006 to
ensure that the quality of management and performance of
the Company is second to none. TrustPower has developed
a culture of openness, fairness, integrity and innovation.
Employees are continually encouraged to participate in
the many programmes offered, whether a secondment to
another business unit, a specific project work group, an
industry work group or participation in the many and varied
community, marketing and customer service activities.
Again, I would like to acknowledge the nothing short of
inspiring relationship that the Board of Directors and
management enjoy. I have always said, that to discover the
reasons why a company seems to always be a top performer,
look first at the Board – Management relationship. These
people establish the strategy and maintain the overall
governance responsibilities but it is the other TrustPower
employees who have, during what has been another huge
year, delivered fantastic customer service, operated and
nurtured our generation plant, progressed major new
generation opportunities and efficiently taken care of a
multitude of day to day business requirements. And for that
I thank them.
keiTH TeMPeST
CHieF exeCuTive
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“It’s important that sponsorship initiatives are balanced, and
reflect good corporate citizenship and the company’s place in
modern society.”
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cOmmUNITY RELaTIONSOne of the most visible aspects of many companies, outside core business, is sponsorship, which can range from a mechanism to simply promote a company’s goods and service, to pure philanthropy.
As an electricity generator and retailer, TrustPower’s business is supplying an essential of modern life. In that environment it is important that sponsorship initiatives reflect good corporate citizenship and the Company’s place in modern society.
A cornerstone of TrustPower’s sponsorship is the Community Awards Programme, which now directly includes 19 annual awards covering 21 regions where TrustPower has a significant presence. Indirectly, the programme includes a further two regions where local awards, sponsored by Wellington International Airport and Infratil, feed into TrustPower’s annual National Community Awards. The Awards, which recognise the efforts and achievements of voluntary organisations, are funded by TrustPower, but run in partnership with local Councils.
They touch many people in many ways. For TrustPower they present an opportunity to meet with people who are key stakeholders in their communities and, in most cases, unsung heroes in respect of their achievements. TrustPower learns more about communities where it operates, and develops enduring community relationships. For Councils, TrustPower’s Community Awards present a new opportunity to meet and interact with constituents. As one mayor commented: “These people are not the usual suspects – we never hear from or get to interact with them normally, and the Community Awards have huge value in that they provide a wonderful opportunity
for us to do that.” In addition to providing recognition for volunteer contributions to their community, the Awards provide volunteers with an opportunity to meet with their local mayor, councillors, senior Council staff and like-minded people, to network and learn more about their own community.
On a wider scale, TrustPower’s annual National Community Awards provide an opportunity for mayors and volunteers from 23 regions to network, share ideas, and learn from each other. As an extension to that, TrustPower has recently launched a new web-site www.communityconnect.co.nz. This provides information about TrustPower’s Community Awards and the many recipients and also allows community organisations nation-wide to register on a database accessible by anybody. Despite being launched as recently as March 2006, this site is already populated with information about a large number of community organisations, and is growing weekly.
In a departure from its otherwise strictly regional approach to community involvement, TrustPower in early 2006 embarked on a magical journey to help schools nation-wide promote key values such as respect, honesty, cooperation, and caring and support for others by the supporting the “Kool Kids Care Show”. The show theme is “You’ve Got The Power To Make A Difference” – run by well known and respected magician Greg Britt (Elgregoe) and his son Nicholas (Nickleby). One school principal wrote: “A positive interactive and highly entertaining presentation that addresses the big issues affecting children inside and outside the classroom”.
Reaching some 20% of all of New Zealand’s primary and intermediate school students each year, this programme
SUSTaINabILITYREpORTS
proves yet another opportunity for TrustPower to make a power of difference in communities, not only where we operate, but all over New Zealand.
As one mayor wrote after the March 2006 National Community Awards in Greymouth, “You are to be congratulated for your
decision to provide sponsorship of the community in the form you do when there are so many tempting alternatives available”.
We like to think we’ve got our support for community’s right, and it is extremely pleasing to have feedback like this confirming that others feel likewise.
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EmpLOYER RELaTIONSThe best advertisement for any business is what people say about it. Last year a number of staff were asked why they work at TrustPower and here is what they said:
“It’s a mixture of culture and people. You can do different things in this Company and it’s a lot more flexible than others.”
“Promotional opportunities! I’ve changed role every eighteen months. I feel empowered, with my opinions taken seriously, and the quality of my manager is important. I believe in this Company. I want to be top in customer services and it’s in the hearts and minds of everyone.”
“My job keeps changing; I have more and new challenges all the time. I like the people
and that the Company is progressive and high achieving. I have a lot of autonomy, and the flat structure means I can bounce ideas with all levels. At TrustPower you can make mistakes, face up to them, and then receive encouragement and support to fix them.”
“I have loyalty to those who put faith in me. I enjoy the support from my immediate manager, and the friendly safe environment. There are the rules but they are flexible. I gain understanding of and respect for decisions made because they are explained to me. I feel valued and I’m not expendable. I also have opportunities to exhibit innovation and creativity.”
During 2005 TrustPower implemented a range of strategies designed to lift employee performance. These included a new performance management system aligning employee objectives to Company goals and linking remuneration to the achievement of those goals, resulting in significant improvements in business unit key performance indicators. Additionally a market related remuneration policy including merit based increases, was implemented to align with the performance management system, and ensure staff are rewarded commensurate with their performance.
Each TrustPower employee now has an active personal development plan reflecting a continued commitment to employee growth and talent management. A number of training
and development initiatives have also been implemented to assist lifting employee capability across the Company.
During the year three new apprentices were employed at regional generation schemes and production staff were assessed against National qualifications. Within the Customer Services area, Contact Centre staff commenced traineeships linked to the New Zealand qualifications Authority Level Three National Certificate in Contact Centre Operations. National Certificates in Business Administration and Credit Management will also be introduced over coming months.
The TrustPower Graduate Programme continues to attract high calibre applicants with seven graduates currently in the programme. Graduates spend three years in the programme undertaking a number of different roles to develop an extensive business overview. During the year past graduates, who had completed three years, accepted management and business analyst roles within the Company.
A further focus this year has been the continued marketing of TrustPower’s employment brand. To ensure TrustPower continues to be the leading employer of choice in the Bay of Plenty, the Company has continued to build strong relationships with local tertiary and secondary education providers, careers advisors, recruitment consultants and students. TrustPower managers are accessible to students for assignment interview purposes and we provide on job work experience where possible.
The impact of these and other initiatives are clearly demonstrated in annual engagement survey trends which continue to improve year on year, a sample of the outputs being shown on the graph below. TrustPower continues to identify and implement key strategies required to deliver a quantum leap in employee performance, to match the business growth of the Company.
2004 2005
EMPLOYEE ENGAGEMENT SURVEY RESULTS
RAT
ING
: 1
TO
5
LEADERVISION
LIVING COMPANYVALUES
CLEAREXPECTATIONS
TEAMMORALE
WORK/LIFEBALANCE
0
1
2
3
4
5
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06ENVIRONmENTaL ExcELLENcE
Environmental sustainability and performance are fundamental drivers for how TrustPower functions and operates, evidenced by the Company’s leadership in this field and its continued strong performance. TrustPower’s key accomplishments for the year were:
AVOIDING NON-COMPLIANCE EVENTSTrustPower aims to have zero non-compliance events. This goal has recently been made more difficult because new consents for a number of existing hydro schemes have hundreds of conditions where there were previously few, or in some instances none. Additionally, conditions imposed on new hydro schemes and wind farms have significantly increased TrustPower’s compliance burden.
Pleasingly, TrustPower only recorded and reported 19 non-compliance events in 2006 despite the significant increases in consent conditions. Notably, none of those non-compliance events resulted in adverse environmental consequences or are the subject of enforcement proceedings.
MANAGING CONTAMINANT RELEASESThe term ‘contaminant release’ refers to the uncontrolled or accidental release of a hazardous substance. One very minor contaminant release (which had no environmental consequence and for which TrustPower was commended for proactively notifying the consent authority) occurred in 2006.
MANAGING ENVIRONMENTAL EFFECTS TrustPower continually seeks to identify innovative ways to maximise positive effects caused by its generation plant, while minimising adverse effects. While many measures implemented arose out of consenting programs associated with existing and new schemes, a number of voluntary measures were also identified and implemented. Some of the more notable measures included:
• TrustPower working with Tangata Whenua at its Matahina Hydro Scheme to facilitate the up and down stream migration of native eel species. Similar initiatives are being advanced at the Patea, Branch, Waihopai, Waipori and Arnold schemes.
• A substantial screen installation in the tailrace of the Highbank power station to prevent salmon entrapment, and ensure that migrating salmon are not lost to the Rakaia fishery.
• A trust established by TrustPower in Otago, to award
funds to environmental enhancement initiatives at Lake Mahinerangi. TrustPower is also providing expertise and equipment for initiatives around Palmerston North, funding for eel enhancement initiatives in Canterbury, a riparian tree planting program in Taranaki, and environmental enhancement initiatives around Nelson.
• TrustPower continues to work with Fish and Game New Zealand and the Marlborough District Council to improve fish passage above the weir of the Branch Hydro Scheme to the upper catchment of the Branch River. Similar initiatives are underway with the Taranaki Regional Council for the operation of the Company’s Motukawa and Mangorei schemes.
REDUCE, RECYCLE, REUSEIn mid 2005, TrustPower launched a far reaching program to, wherever possible, reduce, recycle and reuse the resources it uses. This program stemmed from an audit which identified that the Company could do much to reduce its waste. Consequently initiatives are now in place to minimise the use of paper, and to recycle what paper is used. Plastic and glass products are treated in a similar fashion, and following the success of this program at head office, it will now be rolled out to all of TrustPower’s regional offices and generation stations.
PROMOTING EFFICIENT RESOURCE USEThe Company promotes efficient resource use in two key ways:
1. TrustPower promotes demand side efficiency by applying strategic efficiency measures and encouraging its customers to use electricity more conservatively. A TrustPower energy efficiency guide that identifies 33 practical ways to save energy has been widely publicised and distributed to tens of thousands of households throughout New Zealand. As an ongoing service, TrustPower’s account management team helps large commercial customers identify ways that they can improve their energy efficiency.
2. TrustPower actively seeks to improve the efficiency of its power schemes through a continuing plant improvement process and a series of optimisation projects. During 2006 optimisation projects were completed at the Waipori (Otago), Motukawa (Taranaki) and Kaimai (Bay of Plenty) schemes. The Waipori and Motukawa projects were awarded carbon credits by the New Zealand Government. TrustPower will launch further optimisation projects in Canterbury during the coming year.
AUDITING ENVIRONMENTAL PERFORMANCEAs part of its commitment to continuous improvement, TrustPower commissioned two audits of its operations in 2006. The first, by consulting firm Tonkin and Taylor, reviewed TrustPower’s compliance with its consent conditions. The second audit reviewed the manner in which TrustPower stores hazardous substances and was undertaken by consulting firm Kingett Mitchell. Both audits confirmed that TrustPower’s procedures were sound and appropriate and that TrustPower has a very high level of compliance.
YEAR
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 . . . . . . . . . . . . . . . . . . . . . . . . . . 0
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 0
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
NUMbER OF CONTAMINANT RELEASES
NUMbER OF NON-COMPLIANCE EVENTS
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06 EcONOmIc pERFORmaNcE
UNDERSTANDING TRUSTPOWER’S SHAREHOLDERS AND RETURNS
TrustPower has three large shareholders, nearly 13,000
small shareholders and around 8,000 bond holders. Both
Infratil Limited and the Tauranga Energy Consumer Trust
(TECT) were cornerstone shareholders in TrustPower on
its establishment in 1994. Alliant Energy has been a major
shareholder since 1999. The remaining shareholders are a
mixture of institutional and private investors including many
of the original shareholders granted shares in 1994.
A $1 share invested in 1994 has grown around 25 times
over the period to 31 March 2006 (assuming dividends were
reinvested). Capital gain and cash dividend returns are
shown below.
Dividend growth has been a feature of ownership in TrustPower
shares as the Company has sought to provide an increasing
level of cash return to shareholders.
UNDERSTANDING TRUSTPOWER’S ASSETS
TrustPower is a generator and retailer of electricity. The
generation of electricity is an asset intensive activity and as
shown below the Company has invested substantially in hydro
and wind generation assets. These assets are revalued to
estimated market value on a three yearly cycle with the last
revaluation resulting in a significant uplift in value as at March
2004. The next revaluation will occur in March 2007.
Electricity retailing relies on a reliable source of electricity and
the infrastructure and systems to administer large quantities
of data and contracts. TrustPower sells more electricity than
it generates with the balance coming from other generation
suppliers and competitors. The customer base values are
disclosed in the financial statements at historic cost and
amortised over 20 years. The Bay of Plenty customers that
TrustPower has served historically and any subsequent
customers acquired by marketing efforts are not reflected in
the amortised customer base values.
Retailing a commodity like electricity can be a low margin high
throughput business and consequent profitable operation
relies heavily on cost control. Below are the customer
numbers and overhead costs to serve per customer for the
last five years.
ANNUALISED CAPITAL GAIN AND GROSS DIVIDEND RETURN
0
1
2
3
4
5
6
$ C
HA
NG
E O
N P
RIO
R Y
EA
R
SHARE VALUE CAPITAL GAIN GROSS DIVIDEND YEILD2002 2003 2004 2005 2006
CURRENT SHAREHOLDERS
OTHERS 12%
INFRATIL 35%
TECT 29%
ALLIANT 24%
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
DIVIDEND (excl Special) DIVIDEND GROWTH
DIVIDENDS
$ M
ILLI
ON
S
% G
RO
WTH
2002 2003 2004 2005 2006
COMPOSITION OF NON CURRENT ASSETS
$ M
ILLI
ON
S
HYDRO GENERATION WIND GENERATION2002 2003 2004 2005 2006
OTHER CUSTOMER BASES
0
300
600
900
1200
1500
0
20
40
60
80
100
120
0
50
100
150
200
250
300
OVERHEADS PER CUSTOMER CUSTOMER NUMBERS
OVERHEAD COSTS AND CUSTOMER NUMBERS
$ P
ER
CU
STO
ME
R
CU
STO
ME
RS
000’
s
2002 2003 2004 2005 2006
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06UNDERSTANDING TRUSTPOWER’S EARNINGS
TrustPower’s operating revenue predominantly comes from
the sale of electricity to customers. Operating performance
can vary year to year and within reporting periods due to
a number of factors both within the control and outside of
the control of the Company. Key drivers to individual period
profitability include weather patterns (affecting market
prices and generation levels) and the Company’s trading risk
position (the degree to which it is affected by exposure to spot
electricity prices).
The adjacent graph shows an Earnings Before Interest Tax
Depreciation and Amortisation (EBITDA) measure by quarter
over the last five years. While on a quarter to quarter basis
EBITDA can move significantly the Company aims to produce
sustainable EBITDA growth year after year.
EBITDA - NET OF ASSET ADJUSTMENTS
$ M
ILLI
ON
S
2002 2003 2004 2005 2006JUNE QTR DECEMBER QTRSEPTEMBER QTR MARCH QTR
0
10
20
30
40
50
60
FIVE YEAR ECONOMIC SUMMARY MAR 02 MAR 03 MAR 04 MAR 05 MAR 06
GWh Energy Self Generated 1,522 1,672 1,738 2,071 1,791
GWh Energy Sold 5,833 6,495 5,656 5,873 4,724
000’s Customers 280 274 224 225 220
$M $M $M $M $M
oPeraTinG revenue 604 663 632 612 677
eBiTDa 38 110 140 173 186
Amortisation and Depreciation (21) (22) (23) (28) (28)
Net Interest Paid (16) (15) (29) (33) (29)
Tax Expense 0 (26) (26) (39) (48)
oPeraTinG SurPluS 1 47 62 73 81
Shareholders’ Equity 563 604 866 883 896
Convertible Notes 35 0 0 0 0
ToTal CorPoraTe oWnerSHiP 598 604 866 883 896
Current and Other Assets 69 131 63 78 133
Fixed Assets 731 812 1,273 1,257 1,263
Intangible Customer Base Assets 56 52 45 42 39
ToTal aSSeTS 856 995 1,381 1,377 1,435
Current and Other Liabilities 63 117 95 88 131
Deferred Tax Liability 16 35 40 46 48
Term Debt 179 239 380 360 360
ToTal liaBiliTieS 258 391 515 494 539
neT aSSeTS 598 604 866 883 896
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role oF THe BoarD oF DireCTorS
The Directors are elected by the shareholders and are responsible to the shareholders for the performance of the Group. Their focus is to enhance the interests of shareholders and other key stakeholders and to ensure the Group is properly managed. The Board draws on relevant corporate governance best practice principles to assist and contribute to the performance of the Group.
The Board had developed a charter that outlines responsibilities that encompass the following:
• Set the strategic direction of TrustPower and monitor management's implementation of that strategy.
• Select and appoint (and, if appropriate, remove from office) the Chief Executive, determine his/her conditions of service and monitor his/her performance against established objectives.
• Ratify the appointment (and, if appropriate, remove from office) the Chief Financial Officer and Company Secretary.
• Ratify the remuneration of senior management consistent with their employment agreements.
• Monitor financial outcomes and the integrity of reporting, and, in particular, approve annual budgets and longer-term strategic and business plans.
• Set specific limits of authority for management to commit to new expenditure, enter contracts or acquire businesses without prior Board approval.
• Ensure that effective audit, risk management and compliance systems are in place to protect the Company's assets and to minimise the possibility of the Group operating beyond legal requirements or beyond acceptable risk parameters.
• Monitor compliance with regulatory requirements (including continuous disclosure) and set ethical standards and then monitor compliance with those standards.
• Review, on a regular basis, senior management succession planning and development.
• Ensure effective and timely reporting to shareholders.
The Board has 12 scheduled one day meetings, an extended strategic planning meeting at least once a year, at least four Audit Committee meetings and several unscheduled meetings to consider and/or review substantial projects and any other special circumstances that may arise from time to time.
The full Board determines the Board size and composition, subject to limits imposed by the Company's Constitution which is required to comply with the NZX Listing Rules. The Constitution provides for a minimum of three Directors and a maximum of six. For the time being, the Board has determined there shall be six Directors, all of whom are non-executive Directors.
The Constitution and NZX Listing Rules also require that while there are a total of six Directors, two must be independent Directors. The Board has determined TrustPower’s independent Directors. As at 31 March 2006, the independent Directors of TrustPower are Mr HM Titter and Sir Ron Carter and the non-independent Directors of TrustPower are Mr MJ Cooney, Mr BJ Harker, Mr HRL Morrison and Mr SV Young.
The Board has established two Subcommittees being; the Audit Committee and the Remuneration Committee
auDiT CoMMiTTee
The Board has constituted a standing Audit Committee consisting of three Board members. The Committee meets at least four times a year. Members of the Committee are: Mr BJ Harker (Chairman), Mr HM Titter, and Sir Ron Carter.
The role of the Audit Committee is formally recorded in a charter document approved by the Board of Directors. The primary objective of the Committee, as set out in the charter, is to assist the Board in fulfilling its responsibilities relating to accounting and reporting practices of the Group. In particular, the Committee’s main responsibilities are to:
• Review and report to the Board on the annual report, the quarterly financial reports and all other financial information published by the Group or released to the market.
• Assist the Board in reviewing the effectiveness of the organisation’s internal control environment.
• Determine the scope of the internal audit function and ensure that its resources are adequate and used effectively, including co-ordination with external auditors.
• Oversee the effective operation of the risk management framework.
• Recommend to the Board the appointment, removal and remuneration of the external auditors, and review the terms of their engagement, and the scope and quality of the audit.
cORpORaTE gOVERNaNcE
STaTEmENT
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• To review and approve, within established procedures, and before commencement, the nature and scope of non-audit services being provided by the external auditors. These procedures include quantitative and qualitative thresholds for the review, and include all relatively significant projects.
In fulfilling its responsibilities, the Audit Committee receives regular reports from management and the internal and external auditors. It also meets with the internal and external auditors at least three times a year – more frequently if necessary. The internal and external auditors have a clear line of direct communication at any time to either the Chairperson of the Audit Committee or the Chairperson of the Board.
THe reMuneraTion CoMMiTTee
The Board has established a Remuneration Committee which has two Directors as members, Mr HM Titter and Mr BJ Harker. The role of the Remuneration Committee is formally recorded in a charter document approved by the Board of Directors.
The primary objectives of the Remuneration Committee are to:
• Help enable the Company to attract, retain and motivate executives and Directors who will create value for shareholders.
• Fairly and reasonably reward executives having regard to the performance of the Company, the performance of the executives and the general pay environment.
• Help the Company comply with the provisions of the Employment Relations Act 2000, the Companies Act 1993, the NZSX Listing Rules and any other relevant legal requirements.
The responsibilities of the Committee include:
• Review and recommend to the Board for approval the remuneration policy for Directors and senior executives and ensure that the structure of the policy allows the Company to attract and retain Directors and senior executives of sufficient calibre to facilitate the efficient and effective management of the Company's operations.
• Annually review and recommend to the Board for approval the remuneration packages of all Directors and senior executives of the Company.
• With reference to the Board, manage the employment or deployment of the Chief Executive and negotiate employment terms.
• Participate in the process of employment of the Chief Financial Officer and recommend to the Board their confidence in any appointment.
• Establish appropriate performance criteria, from time to time, for the Executive Share Option Plan and make recommendations to the Board.
revieW oF BoarD PerForManCe
An annual review of the performance of the Board and individual Directors is undertaken by the Chairman. The Institute of Directors on-line survey is currently utilised as a mechanism for undertaking this review.
CoMPlianCe WiTH nZx CorPoraTe GovernanCe BeST PraCTiCe CoDe anD oTHer GuiDelineS
As a listed issuer TrustPower is required to disclose in its annual report whether, and to what extent, its corporate governance principles materially differ from the NZX Corporate Governance Best Practice Code.
TrustPower believes that it complies in all material respects with the Code. However, it should be noted that the TrustPower Board has chosen not to constitute a Nominations Committee as recommended by the Code. The Board has decided that Director nominations are able to be handled more effectively by the full Board.
CoDe oF eTHiCS
A Code of Ethics has been developed and approved by the Board.TrustPower is committed to maintaining the highest standards of honesty, integrity and ethical conduct and has adopted a Code of Ethics to deter wrongdoing and to:
• Promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.
• Promote full, fair, accurate, timely and understandable disclosure in reports and documents filed by the Company and in other public communications made by the Company.
• Promote compliance with applicable laws, rules and regulations.
• Prompt internal reporting to the Board of Directors of violations of the Code of Ethics.
• Promote accountability for adherence to the Code of Ethics.
The Code of Ethics is not an exhaustive list of acceptable or non-acceptable behaviour, rather it is intended to guide decisions so they are consistent with TrustPower's values, business goals and legal and policy obligations.
Failure to follow the Code of Ethics may lead to disciplinary action being taken, which may include dismissal. The Code of Ethics applies to the Board of Directors and the Company’s employees.
inTernal ConTrol
The Group has adopted a system of internal control. The system is based upon written procedures, policies and guidelines, organisational structures that provide an appropriate division of responsibility, sound risk management, a programme of internal audit, and the careful selection and training of qualified personnel.
While the Board acknowledges that it is responsible for the overall control framework of the Group, it recognises that no cost effective internal control system will preclude all errors and irregularities.
riSk ManaGeMenT
The Group has developed a comprehensive, enterprise-wide risk management framework. Management actively participate in the identification, assessment, and monitoring of new and existing risks. Particular attention is given to the market risks that could impact on the Group. Management undertake regular reporting to appraise the Audit Committee and the Board of the Company’s risks and the treatment of those risks.
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The Audit Committee reviews and if considered satisfactory, recommends for approval by the Board annually, the Company’s insurance programme.
WHoleSale eleCTriCiTy TraDinG PoliCy
The Group has adopted a Wholesale Electricity Trading Policy to manage the risk from the purchasing of electricity from the wholesale electricity market. Derivative instruments can be used to set the price of electricity at a future nominated time.
The Wholesale Electricity Trading Policy allows wholesale electricity trading to occur within risk limits set by the Board.
TreaSury PoliCy
The Group has a Treasury Policy to manage finance, interest rate, foreign exchange and foreign investment risks. The Policy approves the use of certain instruments for risk management purposes, and it prohibits any activity that is purely speculative in nature.
It also sets out exposure limits, delegated authorities and internal controls.
DeleGaTeD auTHoriTieS PoliCy
The Group has a Delegated Authorities Policy in place that has been approved by the Board. The Policy provides limited authority to certain Group executives to purchase goods and services, sign deeds, indemnities and guarantees, and sign other contracts and documents. The Policy is reviewed annually.
environMenTal PoliCy
The Group recognises the importance of environmental issues and is committed to the highest levels of performance. To help meet this objective the Group has developed and is proactively implementing both environmental policies and a comprehensive environmental management system.
These have been established to facilitate the systematic identification of environmental issues and to ensure that they are managed in a structured manner. These measures allow the Group to:
• Monitor its compliance with all relevant legislation.
• Continually assess and improve the impact of its operations on the environment.
• Encourage employees to actively participate in the management of environmental issues.
• Use energy and other resources efficiently.
• Encourage the adoption of similar standards by the Group’s principal suppliers, contractors and distributors.
• Ensure procedures are in place to deal appropriately should an adverse environmental event take place.
GrouP inForMaTion PoliCy
The following is the Group’s policy regarding the disclosure of Group information:
No Director of the Group may disclose information which that Director has received in his or her capacity as a Director or employee of the Group, being information that would not
otherwise be available to the Director, to
(a) a person whose interests that Director represents; or
(b) a person in accordance with whose directions or instructions the Director may be required, or is accustomed to act in relation to the Director’s powers and duties,
without the prior consent of a Subcommittee of the Board that would be established to authorise the disclosure.
ConFliCTS oF inTereST
Where any TrustPower Director has a conflict of interest or is otherwise interested in any transaction, that Director is required to disclose his or her conflict of interest, and thereafter neither participate in the discussion nor vote in relation to the relevant matter. The Company maintains a register of disclosed interests.
inSiDer TraDinG
In order to protect TrustPower’s reputation and safeguard employees who may want to buy or sell TrustPower securities, the Insider Trading Policy requires an approved procedure to be followed by all staff and Directors.
Certain employees of the Company are required to make additional disclosures under the Securities Markets Act 1988.
WHiSTleBloWinG PoliCy
TrustPower has a Whistleblowing Policy to facilitate the disclosure and impartial investigation of any serious wrongdoing. This policy advises employees of their right to disclose serious wrongdoing, and sets out TrustPower’s internal procedures for receiving and dealing with such disclosures. The policy is consistent with, and facilitates, the Protected Disclosures Act 2000.
oTHer CorPoraTe PoliCieS
The Group has a number of other policies covering but not limited to human resource activities, health and safety, buildings and security, sales and granting credit, contracting and disaster recovery planning. These policies are regularly reviewed and approved by senior management and where appropriate the Board.
inTernal auDiT
The Group has established an outsourced internal audit function that is responsible for monitoring the Group’s system of internal financial control and the integrity of the financial information reported to the Board. Internal audit operates independently from the Board and reports its findings directly to the Audit Committee. Internal audit liaises closely with the external auditors, who review the internal audit work undertaken to the extent necessary to support their audit opinion.
THe role oF SHareHolDerS
The Board aims to ensure that shareholders are informed of all major developments affecting the Group’s state of affairs. Information is communicated to shareholders in the annual and quarterly reports, and various announcements to NZX. The Board encourages full participation of shareholders at the annual meeting to ensure a high level of accountability and identification with the Group’s strategies and goals.
financialstatements 2006
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of the Company and the Group as at 31 March 2006 and their financial performance and cash flows for the year ended on that date.
The Directors consider that the financial statements of the Company and the Group have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed.
The Directors believe that proper accounting records have been kept that enable, with reasonable accuracy, the determination of the financial positions of the Company and the Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993.
The Directors consider they have taken adequate steps to safeguard the assets of the Company and the Group to prevent and detect fraud and other irregularities.
The Directors have pleasure in presenting the financial statements of TrustPower Limited for the year ended 31 March 2006.
Harold Titter Chairman Bruce Harker Deputy Chairman
Company Registration Number HN604040 12 May 2006
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PricewaterhouseCoopers188 Quay StreetPrivate Bag 92162Auckland, New ZealandTelephone +64 9 355 8000Facsimile +64 9 355 8001www.pwc.com/nzWe have audited the financial statements on pages 31 to 43. The financial statements provide information
about the past financial performance and cash flows of the Company and Group for the year ended 31 March 2006 and its financial position as at that date. This information is stated in accordance with the accounting policies set out on pages 34 and 35.
Directors’ responsibilities
The Company’s Directors are responsible for the preparation and presentation of the financial statements which give a true and fair view of the financial position of the Company and Group as at 31 March 2006 and its financial performance and cash flows for the year ended on that date.
AuDitors’ responsibilities
We are responsible for expressing an independent opinion on the financial statements presented by the Directors and reporting our opinion to you.
bAsis of opinion
An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing: (a) the significant estimates and judgements made by the Directors in the preparation of the financial statements; and (b) whether the accounting policies are appropriate to the circumstances of the Company and Group, consistently applied and adequately disclosed.
We conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.
We have no relationship with or interests in the Company or any of its subsidiaries other than in our capacities as auditors, tax advisors and providers of financial advisory services.
unquAlifieD opinion
We have obtained all the information and explanations we have required. In our opinion: (a) proper accounting records have been kept by the Company as far as appears from our examination of those records; and (b) the financial statements on pages 31 to 43: (i) comply with generally accepted accounting practice in New Zealand; and (ii) give a true and fair view of the financial position of the Company and Group as at 31 March 2006 and its financial performance and cash flows for the year ended on that date.
Our audit was completed on 12 May 2006 and our unqualified opinion is expressed as at that date.
Chartered Accountants Auckland
auditors’ report to the shareholders of trustpower limited
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31
statements of financial performance GROUP HOLDING COMPANY
2006 2005 2006 2005FOR THE YEAR ENDED 31 MARCH 2006 NOTE $000 $000 $000 $000
Electricity sales 667,249 602,443 667,249 602,443 Interest received 992 516 1,378 751 Meter rental revenue 3,105 2,586 3,105 2,586 Other customer fees and charges 3,824 4,176 3,824 4,176 Other operating revenue 538 316 538 316 Sundry product sales 1,328 2,308 1,328 2,308 OPERATING REVENUE 677,036 612,345 677,422 612,580
Energy costs 225,314 195,736 225,314 195,736 Fixed, intangible and investment asset charges 2 28,615 29,203 30,947 24,827 Generation production costs 17,415 18,350 17,415 18,350 Interest paid 3 29,864 33,455 29,864 33,455 Line costs 181,202 172,926 181,202 172,926 Market fees and costs 15,144 9,151 15,144 9,151 Meter rental costs 2,421 2,366 2,421 2,366 Other customer connection costs 1,036 1,516 1,036 1,516 Other operating expenses 4 27,074 18,533 25,352 22,983 Salary and wage costs 19,209 16,960 19,209 16,960 Sundry product costs 1,251 2,151 1,251 2,151 OPERATING EXPENSES 548,545 500,347 549,155 500,421
Operating surplus before income tax 128,491 111,998 128,267 112,159 Income tax expense 5 47,061 38,844 47,245 39,573OPERATING SURPLUS ATTRIBUTABLE TO THE SHAREHOLDERS 81,430 73,154 81,022 72,586
statements of moVements in eQuitY GROUP HOLDING COMPANY
2006 2005 2006 2005FOR THE YEAR ENDED 31 MARCH 2006 NOTE $000 $000 $000 $000
Operating surplus attributable to the shareholders 81,430 73,154 81,022 72,586 TOTAL RECOGNISED REVENUES AND EXPENSES 81,430 73,154 81,022 72,586
Dividends on ordinary shares 6 (67,754) (56,610) (67,754) (56,610)
MOVEMENTS IN EQUITY FOR THE YEAR 13,676 16,544 13,268 15,976
EQUITY AT BEGINNING OF YEAR 882,792 866,248 817,047 801,071EQUITY AT END OF YEAR 896,468 882,792 830,315 817,047
The accompanying notes form part of these financial statements
statements of financial position GROUP HOLDING COMPANY
2006 2005 2006 2005AS AT 31 MARCH 2006 NOTE $000 $000 $000 $000
Shareholders’ equity Share capital 7 173,504 173,504 173,504 173,504 Revaluation reserve 8 475,541 474,615 412,626 411,700 Retained earnings 9 247,423 234,673 244,185 231,843 TOTAL SHAREHOLDERS’ EQUITY 896,468 882,792 830,315 817,047 Represented by:
Current assetsCash and short term deposits 3,805 388 3,754 249 Bond deposits on trust 3,000 3,031 3,000 3,031 Electricity market security deposits 16,000 - 16,000 - Accounts receivable and prepayments 10 110,697 74,449 110,697 74,419 Taxation receivable 5 - - - 918 TOTAL CURRENT ASSETS 133,502 77,868 133,451 78,617
Non current assetsInvestments in subsidiaries 11 - - 170,797 166,211 Investments in other companies 30 30 30 30 Fixed assets 12 1,262,910 1,257,438 1,006,494 1,009,613 Intangible customer base assets 39,022 42,085 39,022 42,085 TOTAL NON CURRENT ASSETS 1,301,962 1,299,553 1,216,343 1,217,939 TOTAL ASSETS 1,435,464 1,377,421 1,349,794 1,296,556
Current liabilitiesAccounts payable and accruals 13 127,271 88,211 120,748 88,033 Taxation payable 5 3,469 403 3,469 - TOTAL CURRENT LIABILITIES 130,740 88,614 124,217 88,033
Non current liabilitiesUnsecured bank loans 14 63,233 64,000 63,233 64,000 Unsecured subordinated bonds 15 296,743 295,928 296,743 295,928 Deferred tax liability 5 48,280 46,087 35,286 31,548 TOTAL NON CURRENT LIABILITIES 408,256 406,015 395,262 391,476
TOTAL LIABILITIES 538,996 494,629 519,479 479,509
NET ASSETS 896,468 882,792 830,315 817,047
The accompanying notes form part of these financial statements
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statements of cash flows GROUP HOLDING COMPANY
2006 2005 2006 2005FOR THE YEAR ENDED 31 MARCH 2006 NOTE $000 $000 $000 $000
Cash flows from operating activities Cash was provided from: Receipts from customers 631,538 582,371 631,538 582,371 Interest received 992 516 992 516 632,530 582,887 632,530 582,887 Cash was applied to: Payments to suppliers and employees 442,031 409,458 437,301 411,637 Interest paid 29,766 33,332 29,766 33,332 Taxation paid 41,802 30,092 41,802 30,092 513,599 472,882 508,869 475,061 NET CASH FLOW FROM OPERATING ACTIVITIES 20 118,931 110,005 123,661 107,826
Cash flows from investing activities Cash was provided from: Repayment of advances to subsidiaries - - - 792 Sale of fixed assets 104 113 104 113 Sale of investments - 917 - 917 104 1,030 104 1,822 Cash was applied to: Advances to subsidiaries - - 19,631 - Interest capitalised in construction of fixed assets 491 85 491 85 Net movement in bond deposits on trust (31) 1,022 (31) 1,022 Net movement in electricity market security deposits 16,000 - 16,000 - Purchase of fixed assets 30,637 19,800 15,648 18,534 47,097 20,907 51,739 19,641 NET CASH FLOW FROM INVESTING ACTIVITIES (46,993) (19,877) (51,635) (17,819)
Cash flows from financing activities Cash was provided from: Bank loan proceeds 100,800 26,600 100,800 26,600 100,800 26,600 100,800 26,600
Cash was applied to: Bank loan repayments 97,983 47,600 97,983 47,600 Bank loan facility establishment costs 3,584 - 3,584 - Dividends paid 67,754 72,348 67,754 72,348 169,321 119,948 169,321 119,948
NET CASH FLOW FROM FINANCING ACTIVITIES (68,521) (93,348) (68,521) (93,348) NET INCREASE /(DECREASE) IN CASH HELD 3,417 (3,220) 3,505 (3,341)CASH AT BEGINNING OF YEAR 388 3,608 249 3,590 CASH AT END OF YEAR 3,805 388 3,754 249
The accompanying notes form part of these financial statements
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34
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notes to the financial statementsFOR THE YEAR ENDED 31 MARCH 2006
NOTE 1: STATEMENT OF ACCOUNTING POLICIES
The financial statements presented here are for the reporting entity TrustPower Limited (the Holding Company or Company) and the consolidated financial statements of the Group comprising TrustPower Limited and its subsidiaries.
The financial statements have been prepared in accordance with the requirements of the Companies Act 1993 and the Financial Reporting Act 1993. The reporting entity is an issuer under the Financial Reporting Act 1993.
The financial statements have been prepared on the basis of historical cost with the exception of certain items for which specific accounting policies are identified.
principles of consoliDAtion
The Group financial statements consolidate the financial statements of subsidiaries, using the purchase method, and include the results of associates using the equity method. All intercompany transactions, balances and unrealised profits and losses on transactions between Group members have been eliminated.
receivAbles
Receivables are stated at their estimated realisable value after adequate provision for doubtful debts. Bad debts are written off in the year in which they are identified.
investments
All investments are recorded at the lower of cost or estimated net realisable value.
fixeD Assets
All fixed assets are initially recorded at cost less accumulated depreciation where applicable. Generation assets were revalued to their estimated market value as at 31 March 2004 as assessed by independent qualified valuers. Assets in this class will be revalued on a systematic basis every three years.
DepreciAtion
Depreciation is provided on all fixed assets, other than freehold land, at rates calculated to allocate each asset’s cost over its estimated useful life. Depreciation is charged on a straight line basis as follows:Freehold buildings 2% Generation assets 1-10%Metering equipment 5% Plant and equipment 10-33%Gains and losses on disposal of fixed assets are taken into account in determining the operating surplus for the year.
cArbon emission units
The Group receives tradeable emission units from Governments that are conditional on specific energy production levels of certain renewable generation facilities. The revenue arising from the sale of these emission units is a key matter in deciding whether to proceed with construction of the generation facility and is considered to be part of the value of the generation assets recorded in the statements of financial position. Proceeds received on the sale of emission units are recorded as deferred income in the statements of financial position until the committed energy production levels pertaining to the emission unit sold has been generated.
intAngible customer bAse Assets
Costs incurred in acquiring customers from other electricity supply companies are recorded as a customer base intangible asset. The customer bases are amortised on a straight line basis over the period of expected benefit. This period has been assessed as 20 years. The carrying value of the customer bases is reviewed annually by the Directors and adjusted where it is considered necessary.
revenue recognition
Customer consumption of electricity is measured by calender month for half hourly metered customers and in line with the meter reading schedules for non half hourly metered customers. Accordingly revenues from electricity sales include an estimated accrual for units sold but not billed at balance date for non half hourly metered customers.
employee entitlements
Employee entitlements to salaries and wages, non monetary benefits, annual leave and other benefits are recognised when they accrue to employees. This includes the estimated liability for salaries and wages and annual leave as a result of services rendered by employees up to balance date.
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foreign currencies
Transactions denominated in a foreign currency are converted to New Zealand dollars at the exchange rate on the date of the transaction, except where forward currency contracts are taken out to cover the commitment in which case the transaction is translated at the rate contained in the contract. Monetary assets and liabilities arising from foreign currency transactions are translated at closing rates. Gains or losses from currency translation on these items are included in the statements of financial performance.
generAtion Development expenDiture
The Group incurs costs in the exploration, evaluation, consenting and construction of generation assets. The costs incurred are expensed in the statements of financial performance unless a particular project has a high likelihood of proceeding to successful development in the foreseeable future. Where a particular project meets this criteria and the costs are capitalised they will ultimately be amortised over the estimated economic life of the project. The Directors review the status of capitalised development expenditure on a regular basis and in the event that a project is abandoned, or if the Directors consider the expenditure to be impaired, a write off or provision is made in the year in which that assessment is made.
gooDs AnD services tAx (gst)
The statements of financial performance and statements of cash flows have been prepared so that all components are stated exclusive of GST. All items in the statements of financial position are stated exclusive of GST, with the exception of billed receivables and payables which include GST invoiced.
income tAx
The income tax expense charged to the statements of financial performance includes both the current year’s provision and the income tax effects of timing differences calculated using the liability method. Tax effect accounting has been applied on a comprehensive basis to all timing differences with the exception of certain potential differences on revalued fixed assets.
eArnings per shAre
Earnings per share is calculated by dividing the operating surplus attributable to the shareholders by the weighted average number of ordinary shares on issue during the year.
finAnciAl instruments
Electricity Price RiskThe Group has entered into a number of electricity hedge contracts to reduce the risk from price fluctuations on the electricity spot market. These hedge contracts establish the price at which future specified quantities of electricity are purchased. Any resulting differential to be paid or received is recognised as a component of operating expenses upon maturity of the contract. Where the underlying transaction for which the financial instrument is taken out no longer exists and is not expected to recur in the foreseeable future, then the derivative contracts are marked to market and any gain or loss arising is reflected in the statements of financial performance.
Interest Rate RiskThe Group has various financial instruments to manage exposure to fluctuations in interest rates. Any resulting differential to be paid or received is accrued as interest rates change and is recognised as a component of operating revenue or expenses. Where the underlying transaction for which the financial instrument is taken out no longer exists and is not expected to recur in the foreseeable future, then the derivative contracts are marked to market and any gain or loss arising is reflected in the statements of financial performance.
Exchange Rate RiskThe Group has entered into a number of forward exchange contracts to reduce the risk from price fluctuations of foreign currency costs associated with the construction of generation assets. Any resulting differential to be paid or received is recognised as a component of the cost of the project. Where the underlying transaction for which the financial instrument is taken out no longer exists and is not expected to recur in the foreseeable future, then the derivative contracts are marked to market and any gain or loss arising is reflected in the statements of financial performance.
compArAtive informAtion
Where necessary comparative information has been reclassified in order to provide a more appropriate basis for comparison.
chAnges in Accounting policies
There have been no significant changes to the accounting policies.
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NOTE 2: FIXED, INTANGIBLE AND INVESTMENT ASSET CHARGES
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Depreciation on freehold buildings 182 170 182 170 Depreciation on generation assets 19,909 19,843 13,360 13,261 Depreciation on metering equipment 2,243 2,316 2,243 2,316 Depreciation on plant and equipment 2,800 2,986 2,800 2,986 Total depreciation 25,134 25,315 18,585 18,733 Amortisation of intangible customer base assets 3,063 3,063 3,063 3,063Capitalised generation development written off - 1,005 - - Loss/(gain) on sale of fixed assets 418 (85) 418 (85)Gain on sale of investments in other companies - (95) - (95)Provision against advances to subsidiaries - - 8,881 3,211 28,615 29,203 30,947 24,827
NOTE 3: INTEREST PAID
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Amortisation of bond issue costs 815 815 815 815 Interest paid on unsecured subordinated bonds 25,226 25,311 25,226 25,311 Interest paid on unsecured loans 4,314 7,414 4,314 7,414 Interest capitalised in construction of fixed assets (491) (85) (491) (85) 29,864 33,455 29,864 33,455
NOTE 4: OTHER OPERATING EXPENSES
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Audit fees and expenses 125 104 125 104 Fees paid for other services provided by the auditors 125 184 125 184 Bad debts written off 850 1,173 850 1,173 Directors’ fees 414 414 414 414 Directors’ retirement provision - 15 - 15 Donations 602 556 602 556 Generation development expenditure 14,977 5,097 6,483 3,224 (Gain)/loss on foreign exchange (432) 33 (432) 33 Other administration costs 10,270 10,755 10,494 10,595 Rental and operating lease costs 143 202 6,691 6,685 27,074 18,533 25,352 22,983
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NOTE 5: INCOME TAX
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Income tax expense Operating surplus before income tax 128,491 111,998 128,267 112,159 Tax on operating surplus @ 33% 42,402 36,959 42,328 37,012 Tax effect of permanent differences 4,910 2,655 5,007 2,547 Adjustments from previous year (251) (770) (90) 14 Total income tax expense 47,061 38,844 47,245 39,573 Represented by: Current tax 44,868 32,900 43,507 36,251 Deferred tax 2,193 5,944 3,738 3,322 47,061 38,844 47,245 39,573
Taxation payable/(receivable) Balance at beginning of year 403 (2,405) (918) (3,145)Net transfer from subsidiaries - - 2,682 (3,932)Current tax 44,868 32,900 43,507 36,251 Foreign investor tax credits paid (4,862) (3,096) (4,862) (3,096)Tax paid - New Zealand (36,900) (26,957) (36,900) (26,957)Tax paid - Overseas (40) (39) (40) (39)Balance at end of year 3,469 403 3,469 (918)
Deferred tax liability Balance at beginning of year 46,087 40,143 31,548 28,226 Current year timing differences 2,193 5,944 3,738 3,322 Balance at end of year 48,280 46,087 35,286 31,548
The tax effect of timing differences relating to revalued fixed assets has not been recognised in the financial statements where it is not expected to reverse in the foreseeable future. The unprovided liability that would crystallise only in the event where all revalued fixed assets were disposed of for consideration equivalent to or exceeding their revalued amounts is: 43,520 38,666 33,092 30,266
The deferred tax asset relating to timing differences and tax losses in Australia not recognised in the financial statements due to lack of certainty over the recoverability of the asset is: (4,827) (2,070) - -
Imputation credit accountBalance at beginning of year 816 6,397 816 6,397 Tax paid 36,900 26,957 36,900 26,957 Allocated to dividends (28,468) (32,560) (28,468) (32,560) Other movements (41) 22 (41) 22 Balance at end of year 9,207 816 9,207 816
NOTE 6: DIVIDENDS ON ORDINARY SHARES
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Final dividend prior year 33,049 28,328 33,049 28,328 Dividends reinstated/(forfeited) 82 (46) 82 (46)Interim dividend paid 34,623 28,328 34,623 28,328 67,754 56,610 67,754 56,610
Supplementary dividends of $4,862,000 (2005: $3,096,000) were paid to shareholders not tax-resident in New Zealand for which the Company received a foreign investor tax credit entitlement. Subsequent to balance date the Directors have approved a final fully imputed dividend of 12 cents a share representing $37,770,000 payable 9 June 2006 to all shareholders on the register at 26 May 2006.
NOTE 7: SHARE CAPITAL
There are 314,751,872 (2005: 314,751,872) ordinary shares on issue at balance date.
NOTE 8: REVALUATION RESERVE
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Balance at beginning of year 474,615 471,409 411,700 408,495 Revaluation of generation assets - - - - Transfer from retained earnings 926 3,206 926 3,205 Balance at end of year 475,541 474,615 412,626 411,700
NOTE 9: RETAINED EARNINGS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Balance at beginning of year 234,673 221,335 231,843 219,072 Operating surplus attributable to the shareholders 81,430 73,154 81,022 72,586 Transfer to revaluation reserve (926) (3,206) (926) (3,205)Dividends on ordinary shares (67,754) (56,610) (67,754) (56,610)Balance at end of year 247,423 234,673 244,185 231,843
NOTE 10: ACCOUNTS RECEIVABLE AND PREPAYMENTS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Billed debtors and unbilled sales 65,432 57,095 65,432 57,095 Provision for doubtful debts (1,800) (1,800) (1,800) (1,800)Electricity market receivables 43,551 15,020 43,551 15,020 Other receivables 811 344 811 314 Prepayments 2,703 3,790 2,703 3,790 110,697 74,449 110,697 74,419
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NOTE 11: INVESTMENTS IN SUBSIDIARIES
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Shares at cost - - 63,719 63,719 Net advances to subsidiaries - - 123,205 109,737 Provision against advances to subsidiaries - - (16,127) (7,245) - - 170,797 166,211
Significant subsidiaries (31 March balance dates) Country of incorporation % owned Principle activity Cobb Power Limited New Zealand 100 Asset holding Tararua Wind Power Limited New Zealand 100 Asset holding TrustPower Australia Holdings Pty Ltd and subsidiaries Australia 100 Generation development TrustPower Metering Limited New Zealand 100 Asset holding
NOTE 12: FIXED ASSETS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Freehold land (at cost) 1,070 1,122 1,070 1,122 1,070 1,122 1,070 1,122 Freehold buildings (at cost) 9,711 8,584 9,711 8,584 Accumulated depreciation (2,317) (1,898) (2,317) (1,898) 7,394 6,686 7,394 6,686
Generation assets (at cost) 85,338 61,365 14,091 5,108 Generation assets (at valuation) 1,174,100 1,174,100 975,900 975,900 Accumulated depreciation (39,646) (19,744) (26,614) (13,260) 1,219,792 1,215,721 963,377 967,748 Metering equipment (at cost) 53,850 51,150 53,850 51,150 Accumulated depreciation (25,999) (23,756) (25,999) (23,756) 27,851 27,394 27,851 27,394 Plant and equipment (at cost) 26,633 25,490 23,087 22,282 Accumulated depreciation/impairment (19,830) (18,975) (16,285) (15,619) 6,803 6,515 6,802 6,663 1,262,910 1,257,438 1,006,494 1,009,613
Generation assets include freehold land and buildings which are not separately identifiable from other generation assets. Generation assets were revalued as at 31 March 2004 to their estimated market value as determined by Beca Valuations Limited.
The Group has received 340,000 (2005: 340,000) carbon emission units from the New Zealand Government in relation to completed capital projects and 1,248,000 (2005: 1,248,000) units for generation facilities not yet constructed. All units are contingent upon specified levels of generation output from the new facilities for the period 1 January 2008 to 31 December 2012 and the ongoing support of the Kyoto protocol within the international community. This potential revenue source is taken into consideration in the evaluation of generation development projects.
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NOTE 13: ACCOUNTS PAYABLE AND ACCRUALS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Customer bond deposits 3,091 3,033 3,091 3,033 Electricity market payables 75,011 40,305 75,011 40,305 Employee entitlements 3,694 3,225 3,694 3,225 Interest accruals 2,451 3,168 2,451 3,168 Net GST payable 715 2,496 715 2,496 Other accounts payable and accruals 9,706 5,716 3,183 5,538 Trade accounts payable 32,603 30,268 32,603 30,268 127,271 88,211 120,748 88,033
NOTE 14: UNSECURED BANK LOANS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Repayment terms: One to two years 63,900 64,000 63,900 64,000 Two to five years - - - - Over five years 2,917 - 2,917 - Facility establishment costs (3,584) - (3,584) - 63,233 64,000 63,233 64,000 Weighted average interest: One to two years 7.6% 7.1% 7.6% 7.1%Two to five years - - - - Over five years 7.7% - 7.7% - 7.6% 7.1% 7.6% 7.1% The Company has the following loan facilities with interest priced at between call and 180 day rates:(i) $100,000,000 revolving loan expiring in one to two years (ii) $100,000,000 revolving loan expiring in three to five years (iii) $100,000,000 revolving loan expiring in over five years (iv) $110,909,000 table loan maturing in fifteen years
NOTE 15: UNSECURED SUBORDINATED BONDS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Repayment terms and interest: Maturing in September 2007, 8.3% p.a. fixed coupon rate 86,182 86,182 86,182 86,182 Maturing in December 2008, 8.3% p.a. fixed coupon rate 50,511 50,511 50,511 50,511 Maturing in September 2012, 8.5% p.a. fixed coupon rate 108,592 108,592 108,592 108,592 Maturing in March 2014, 8.5% p.a. fixed coupon rate 54,713 54,713 54,713 54,713 Bond issue costs (3,255) (4,070) (3,255) (4,070) 296,743 295,928 296,743 295,928 At maturity the bonds can be converted at the option of the Company to ordinary shares based on the market price of ordinary shares at the time.
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NOTE 16: FINANCIAL INSTRUMENTS
An explanation of the Group’s policies regarding the role of derivatives and other financial instruments in creating and changing the risks of the Group in its activities is detailed in note 1. The Directors estimate that the carrying amounts of all financial instruments are equal to their fair values except where disclosed below.
Credit Risk
The Group minimises its credit risk by limiting transactions to counterparties with high credit ratings and limiting the amount of funds placed with any party at one time. The Group does not require collateral or other security to support financial instruments with credit risk with the exception of bond deposits on trust held for customers not meeting credit policy requirements. While the Group may be subject to credit losses up to the notional principal or contract amounts in the event of non-performance by its counterparties, it does not expect such losses to occur. At balance date the Company had a concentration of credit risk to four groups of companies which represented 38% (2005: 30%) of billed debtors and unbilled sales. Management monitors this exposure on a monthly basis within established guidelines.
Electricity Price Risk
The Company has entered into a number of electricity hedge contracts in order to reduce the risk from price fluctuations on the electricity spot market. The total contracted at balance date was 2,143 GWh of electricity (2005: 1,079 GWh) at a contract value of $128,226,000 (2005: $54,177,000). In 2005 a further 623 GWh was contracted with a variable price mechanism. The contract expiry dates range from one to four years. The fair value of the contracts can vary day to day as the spot market for electricity varies. The secondary market for the contracts is not sufficiently active in order to obtain a reliable market based measure of their fair value.
Interest Rate Risk
The Company has entered into a number of interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate unsecured bank loans. The total underlying value of debt subject to these agreements at balance date amounted to $70,000,000 (2005: $60,000,000). The agreement expiry dates range from one to four years with a weighted average interest rate of 6.6% (2005: 7.5%). The unrecognised fair value of these agreements is a loss of $243,000 (2005: loss of $716,000).
The Company has issued unsecured subordinated bonds with fixed coupon and maturity dates. The bonds are recorded at face value. Applying the market value of the bonds at balance date would result in an increase in the total bond liability of $7,713,000 (2005: $9,502,000). In the 2005 year the Company had entered into a number of interest rate swap agreements effectively converting fixed interest bond rates into floating rates. The total underlying value of bonds subject to these agreements in 2005 amounted to $50,000,000 with a weighted average interest rate of 6.6% and an unrecognised fair value loss of $789,000.
Exchange Rate Risk
The Company has entered into a number of forward exchange contracts to reduce the impact of changes in exchange rates on its capital commitments for the construction of generation assets. The total contracted face value at balance date was $114,811,000 (2005: nil). The contracts all expire within one year. The unrecognised fair value of these agreements is a gain of $16,804,000 (2005: nil). NOTE 17: CONTINGENT LIABILITIES, OPERATING LEASES, SUBSEQUENT EVENTS AND CAPITAL COMMITMENTS
The Group is not aware of any material contingent liabilities at balance date (2005: nil). The Group is not party to any material operating leases at balance date (2005: nil). The Group is not aware of any significant events occuring subsequent to balance date that have not been disclosed. The Group has announced that it is expanding the Tararua Wind Farm. Contractual agreements for the supply of the significant components of this expansion have been entered into and the expected total cost of the project is $180,410,000. At balance date $14,517,000 has been spent on the development. The Group is not aware of any other material capital commitments. NOTE 18: RELATED PARTY TRANSACTIONS.
No material transactions took place with related parties during the year except for transactions with H.R.L. Morrison & Co Limited and related entities and Finlaysons. All transactions with related parties take place on an arms length basis. No related party debts were forgiven or written off during the year.A related entity of H.R.L. Morrison & Co Limited manages Infratil Limited and Mr HRL Morrison, a Director of TrustPower Limited, is the Chief Executive of H.R.L. Morrison & Co Limited and a Director of Infratil Limited. Infratil Limited is a significant shareholder in TrustPower Limited and $80,000 (2005: $176,000) was paid to H.R.L. Morrison & Co Limited and related entities during the year for consultancy services. Mr JG Schultz is a Director of the TrustPower Australian subsidiary companies and is a Partner in the Adelaide based law firm of Finlaysons. $198,000 (2005: $381,000) was paid to Finlaysons during the year for legal services.
NOTE 19: SEGMENTAL REPORTING
The Group operates within the electricity generation and retail trading industry. All significant operations take place within New Zealand.
NOTE 20: RECONCILIATION OF NET CASH FLOW FROM OPERATING ACTIVITIES WITH OPERATING SURPLUS ATTRIBUTABLE TO THE SHAREHOLDERS
GROUP HOLDING COMPANY
2006 2005 2006 2005 $000 $000 $000 $000
Operating surplus attributable to the shareholders 81,430 73,154 81,022 72,586 Non cash items: Amortisation of bond issue costs 815 815 815 815 Fixed, intangible and investment asset charges 28,615 29,203 30,947 24,827 Intercompany charges - - 6,315 6,334 Increase in deferred tax liability 2,193 5,944 3,738 3,322 31,623 35,962 41,815 35,298 (Increase)/decrease in working capital: Accounts receivable and prepayments (36,248) (20,387) (36,278) (20,382)Taxation payable/receivable 3,066 2,808 4,387 2,227 Accounts payable and accruals 39,060 18,468 32,715 18,097 5,878 889 824 (58)
Net cash flow from operating activities 118,931 110,005 123,661 107,826
NOTE 21: EARNINGS PER SHARE
GROUP HOLDING COMPANY
2006 2005 2006 2005
Earnings per share (cents per share) 25.9 23.2 25.7 23.1
NOTE 22: EMPLOYEE SHARE OPTION SCHEME
NUMBER EXERCISE PRICE
2006 2005 2006 2005 $ $
Options issued November 2003, expiring February 2009 520,000 580,000 3.03 3.11 Options issued May 2004, expiring August 2010 60,000 60,000 4.47 4.43 Options issued November 2004, expiring February 2010 480,000 520,000 5.40 5.24 1,060,000 1,160,000 4.18 4.13
The Company has issued share options to certain employees. Each option issued under the Scheme converts to one ordinary share on exercise when employees are required to pay a non-refundable amount for the issue of the option (the exercise price). The options may be exercised any time after three years from issue date up until expiry, are non-transferable and conditional on the individual employees continued employment through this period. The exercise price will be adjusted by an equity rate of return, dividends paid and capital structure changes from balance date up until the point at which the employee exercises the option.
The Company is required to fair value options at the point of issue and to expense this value over the issue date to first exercise date period. The fair value of the tranche of options issued in the 2005 financial year was determined to be 40 cents. $121,000 (2005: $81,000) has been recognised as an expense in the statements of financial performance resulting from the allocation of the determined cost of all tranches of options for the year.
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NOTE 23: ADOPTION OF NEW ZEALAND EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (NZIFRS)
The Group is required to adopt NZIFRS by 31 March 2008 and financial reporting under NZIFRS will therefore commence 1 April 2007. To comply with NZIFRS for the first time, TrustPower will restate the comparative financial statements previously issued under New Zealand Financial Reporting Standards and Statements of Standard Accounting Practice (NZGAAP) to NZIFRS. A full reconciliation of the differences between the two different Reporting Standards will be provided.
TrustPower is well advanced in its program of reviewing the impact of NZIFRS on its financial statements. The final impact will not be determined however until the reporting period commencing 1 April 2007 occurs as NZIFRS are still subject to change and some of the more technical differences continue to be worked through by the Group. In order to assist with interpretation the table below provides a summary of the more significant items affecting what will be the opening comparative position, however the actual impact of adopting NZIFRS may materially vary from the information presented below:
GROUP RECONCILIATION OF NZIFRS TO NZGAAP AS AT 31 MARCH 2006 ASSETS LIABILITIES EQUITY(excluding electricity hedge contracts*) $000 $000 $000
Total reported under NZGAAP 1,435,464 538,996 896,468 NZIFRS adjustments:- Deferred tax (A) - 150,884 (150,884)- Foreign exchange contracts (B) 16,804 - 16,804 - Interest rate swap agreements (B) - 243 (243)Total NZIFRS adjustments excluding electricity hedge contracts (B) 16,804 151,127 (134,323)Total restated under NZIFRS 1,452,268 690,123 762,145
* The fair value of electricity hedge contracts has not been finalised.
(A) Deferred TaxUnder NZIFRS TrustPower is required to recognise a deferred tax liability in respect of all differences between the Group book values and the taxation authority book values with the exception of differences in relation to non depreciating assets. This “balance sheet” approach effectively creates an additional deferred tax liability on the revaluation amounts and other historic base differences of the generation assets. NZGAAP uses a “profit and loss account” approach to deferred tax recognition where a partial recognition of these differences is made through assessing historic timing differences that have occurred.
Upon NZIFRS implementation, any individual assets where their revaluation reduced the revaluation reserve will have their associated reduction on revaluation transferred to retained earnings. Full adoption of NZIFRS will coincide with the three yearly revaluation cycle for generation assets and will determine the actual classification of the movement between revaluation reserve and retained earnings for these individual assets.
(B) Financial InstrumentsAs disclosed in the notes above, TrustPower is party to a number of financial instrument contracts. Under NZIFRS these contracts will need to be valued and recognised “on balance sheet” as cash flow hedges. Resulting movements in the fair value of the financial instruments will be reported in the statements of financial performance each reporting period unless the Group can prove that a financial instrument qualifies for hedge accounting where it will be recorded as a movement in equity. NZGAAP allows for note disclosure of quantities and values of financial instruments rather than recognition on the face of the primary financial statements.
As the financial instrument contracts of the Group are entered in to protect the Group’s risk position and not for speculative purposes, the majority of instruments will qualify for hedge accounting. NZIFRS details specific requirements for hedge accounting and the Group intends meeting these requirements for material transactions. Valuation methodology development for the electricity hedge contracts is not expected to be completed until the first interim financial statements are issued following adoption of NZIFRS on 1 April 2007.
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statutorY information
INTERESTS REGISTER
The Group is required to maintain an Interests Register in which particulars of certain transactions and matters involving the Directors must be recorded. The following matters were recorded in the Interests Register.
DIRECTORS’ INTERESTS
The Directors have declared interests in the following identified entities.
DIRECTOR INTEREST ENTITY
Harold Mervyn Titter Director Port of Tauranga Limited Director Guilford Investments Limited Director Tararua Wind Power Limited Director Cobb Power Limited
Michael James Cooney Trustee Tauranga Energy Consumer Trust Partner Cooney Lees & Morgan
Sir Ronald Powell Carter Director Air New Zealand Limited Director Auckland Chamber of Commerce and Industry Director Rural Equities Limited Director Cabletalk Limited
Bruce James Harker Director TrustPower Metering Limited Director Te Maunga Power Limited Director Morrison Capital Limited Director Energy Developments Limited Director Victoria Electricity Pty Ltd Director Infratil Energy Australia Pty Ltd
Hugh Richmond Lloyd Morrison Director Wellington International Airport Limited Director Infratil Limited Director Infratil Energy Australia Pty Ltd Director Morrison Capital Limited Director H.R.L Morrison & Co (Australia) Pty Ltd Chairman H.R.L. Morrison & Co Limited Chairman Morrison & Co. Infrastructure Management Limited Simon Venn Young Director Alliant Energy New Zealand Limited Director Te Maunga Power Limited Director Jimmi Interests Limited
INFORMATION USED BY DIRECTORS
There were no notices from Directors of the Company requesting to disclose or use Company information received in their capacity as Directors which would not otherwise have been available to them.
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DIRECTORS HOLDING OFFICE AND THEIR REMUNERATION
The Directors holding office during the financial year are listed below. The total amount of the remuneration and other benefits received by each Director during the year, and responsibility held, is listed next to their names.
DIRECTOR REMUNERATION RESPONSIBILITY HELD
Harold Mervyn Titter $112,000 Chairman of Board Member of Audit Committee Member of Remuneration Committee Independent Director Director of Cobb Power Limited Director of Tararua Wind Power Limited
Bruce James Harker $84,000 Deputy Chairman Non-executive Director Chairman of the Audit Committee Member of Remuneration Committee Director of TrustPower Metering Limited
Sir Ronald Powell Carter $66,000 Independent Director Member of the Audit Committee
Hugh Richmond Lloyd Morrison $56,000 Non-executive Director
Simon Venn Young $56,000 Non-executive Director
Michael James Cooney $40,000 Non-executive Director
INDEMNIFICATION AND INSURANCE OF EXECUTIVES AND DIRECTORS
During the year the Company paid insurance premiums in respect of Directors’ and certain executive employees’ liability insurance. The policies do not specify the premium for individuals.
The Directors’ and executive employees’ liability insurance provides cover against costs and expenses involved in defending legal actions and any resulting payments arising from a liability to persons (other than the Company or a related body corporate) incurred in their position as Director or executive employee unless the conduct involves a wilful breach of duty or an improper use of inside information or position to gain advantage.
The Company has entered into deeds of indemnity in respect of each Director, the Chief Executive, Company Secretary, Strategic Business Development Manager and Generation Manager, whereby each such Director and executive employee is indemnified against the types of liability and costs described above, as permitted by the Company’s Constitution and the Companies Act 1993.
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SUBSIDIARY COMPANY DIRECTORS
Set out below are details of the Directors of TrustPower’s subsidiaries as at 31 March 2006.
DIRECTOR TRUSTPOWER GROUP COMPANY
Keith Neville Tempest Tararua Wind Power Limited Cobb Power Limited TrustPower Metering Limited TrustPower Australia (New Zealand) Limited Bay Energy Limited Kaimai Wind Power Limited Paehinahina Mourea Geothermal Limited Taheke Geothermal Limited Waikaremoana Power Limited TrustPower Australia Holdings Pty Ltd Snowtown Wind Farm Pty Ltd Sellicks Hill Wind Farm Pty Ltd Sellicks Hill / Myponga Wind Farm Pty Ltd
Harold Mervyn Titter Tararua Wind Power Limited Cobb Power Limited
Bruce James Harker TrustPower Metering Limited
Jeremy Graeme Schultz TrustPower Australia Holdings Pty Ltd Snowtown Wind Farm Pty Ltd Sellicks Hill Wind Farm Pty Ltd Sellicks Hill / Myponga Wind Farm Pty Ltd
Rangi Tumoana Manuel Waikaremoana Power Limited
Tamaroa Raymond Nikora Waikaremoana Power Limited
No Directors’ fees or other benefits were paid in relation to these Directorships. The remuneration of employees acting as Directors of subsidiaries is disclosed in the relevant bandings for employee remuneration.
Mr JG Schultz is a Partner in the Adelaide based law firm of Finlaysons. Finlaysons has acted for the Australian based subsidiaries in certain legal related matters and received $198,000 during the year to 31 March 2006 for legal services provided.
GENERAL NOTICE OF INTERESTS BY DIRECTORS OF SUBSIDIARY COMPANIES
DIRECTOR INTEREST ENTITY
Keith Neville Tempest Chief Executive TrustPower Limited Director GAP Business Solutions Limited
Harold Mervyn Titter*
Bruce James Harker*
Jeremy Graeme Schultz Partner Finlaysons Adelaide
*Refer to Directors’ interests for the Group.
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EMPLOYEE REMUNERATION
During the year the number of employees or former employees (including employees holding office as Directors of subsidiaries) who received remuneration and other benefits in their capacity as employees of the Company, the value of which was or exceeded $100,000 per annum was as follows:
REMUNERATION RANGES EMPLOYEES
$100,000 – 109,999 7 $110,000 – 119,999 1 $120,000 - 129,999 3 $130,000 – 139,999 2 $140,000 – 149,999 5 $150,000 – 159,999 3 $160,000 – 169,999 1 $170,000 - 179,999 1 $190,000 - 199,999 1 $210,000 – 219,999 1 $290,000 – 299,999 1 $310,000 – 319,999 1 $360,000 – 369,999 1 $390,000 – 399,999 1 $430,000 – 439,999 1 $730,000 – 739,999 1
DIRECTORS’ TRANSACTIONS IN SECURITIES OF THE HOLDING COMPANY
There were no transactions by Directors in securities of the Company during the year. The relevant interests of Directors in securities of the Company as at 31 March 2006 are listed below:
DIRECTOR NUMBER OF AMOUNT DATE CLASS OF HELD AT HELD AT SHARES PAID/ SECURITY BALANCE BALANCE ACQUIRED/ (RECEIVED) DATE 2006 DATE 2005 (DISPOSED) $
RP Carter Family Trust - - - Bonds 200,000 200,000BJ Harker - - - Bonds 50,000 50,000Guilford Investments Limited - - - Shares 20,000 20,000Guilford Investments Limited - - - Bonds 50,000 50,000MJ Cooney (beneficial) - - - Shares 1,000 1,000MJ Cooney (non beneficial) - - - Bonds 150,000 150,000MJ Cooney (non beneficial) - - - Shares 89,878,838 89,878,838SV Young (non beneficial) - - - Shares 74,820,446 74,820,446HRL Morrison (non beneficial) - - - Shares 110,744,942 110,744,942
The non beneficial shares recorded for Mr MJ Cooney are held in his capacity as a Trustee of the Tauranga Energy Consumer Trust.The non beneficial bonds recorded for Mr MJ Cooney are held in his capacity as Trustee for an estate and a private trust.The non beneficial shares recorded for Mr SV Young are held in his capacity as a Director of Alliant Energy New Zealand Limited.The non beneficial shares recorded for Mr HRL Morrison are held in his capacity as a Director of Infratil Limited.Guilford Investments Limited is a company owned by Mr HM Titter and Mrs ME Titter.
The Company was not advised of any other security transactions by any Director during the year.
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securitY holder information
SUBSTANTIAL SECURITY HOLDERS
The Company’s register of substantial security holders, prepared in accordance with Section 26 of the Securities Markets Act 1988 recorded the following information at 1 May 2006.
SECURITY HOLDER CLASS OF SECURITY NUMBER
Alliant Energy New Zealand Limited Shares 185,565,390Infratil Limited Shares 185,565,390Tauranga Energy Consumer Trust Shares 89,878,838Te Maunga Power Limited Shares 185,565,390
The above holdings refer to both beneficial and non beneficial interests. In some cases the interests relate to the same parcels of securities. As at 1 May 2006 TrustPower Limited had 314,751,872 shares on issue.
SPREAD OF HOLDERS (AS AT 1 MAY 2006)
HOLDERS SHARES SHARES NUMBER % NUMBER %
1 to 999 703 5.46 295,417 0.091,000 to 1,999 1,353 10.49 1,621,497 0.522,000 to 4,999 9,918 76.91 22,376,977 7.115,000 to 9,999 597 4.63 3,881,996 1.2310,000 to 49,999 288 2.23 4,530,905 1.4450,000 to 99,999 13 0.10 895,844 0.28100,000 to 499,999 18 0.14 4,076,073 1.30500,000 to 999,999 2 0.02 1,628,937 0.521,000,000 plus 3 0.02 275,444,226 87.51 12,895 100.00 314,751,872 100.00
HOLDERS BONDS BONDS NUMBER % NUMBER %
1 to 1,999 1 0.02 1,000 0.002,000 to 4,999 9 0.11 28,000 0.015,000 to 9,999 1,142 14.24 6,384,000 2.1310,000 to 49,999 5,361 66.87 108,266,000 36.0950,000 to 99,999 1,037 12.94 60,278,000 20.09100,000 to 499,999 424 5.29 60,836,000 20.28500,000 to 999,999 21 0.26 12,392,000 4.131,000,000 plus 22 0.27 51,813,000 17.27 8,017 100.00 299,998,000 100.00
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DOMICILE OF HOLDERS (AS AT 1 MAY 2006)
HOLDERS SHARES SHARES NUMBER % NUMBER %
New Zealand 12,706 98.53 314,341,104 99.87Australia 131 1.02 285,580 0.09Great Britain 17 0.13 31,184 0.01United States of America 14 0.11 49,091 0.02Other 27 0.21 44,913 0.01 12,895 100.00 314,751,872 100.00
HOLDERS BONDS BONDS NUMBER % NUMBER %
New Zealand 7,952 99.20 297,707,000 99.23Australia 22 0.27 482,000 0.16Great Britain 9 0.11 346,000 0.12United States of America 9 0.11 485,000 0.16Other 25 0.31 978,000 0.33 8,017 100.00 299,998,000 100.00
VOTING RIGHTS
Every shareholder present in person, by proxy or by representative, on a vote by voices or a show of hands has one vote, and on a poll has one vote for each fully paid share held.
STOCK EXCHANGE LISTING
The Company’s shares and bonds are listed on the NZSX and NZDX, respectively.
CURRENT CREDIT RATING STATUS
TrustPower does not currently have an external credit rating.
CURRENT NZX WAIVERS
NZX has granted a waiver dated 23 March 2006 from NZX Listing Rule 8.1.7 (change of option exercise price or number of underlying securities) to enable the Company to issue options under the Company’s Executive Share Option Plan dated 28 February 2006 in accordance with the exercise price formula contained in the Rules of the Plan. That exercise price formula permits the exercise price to be recalculated on a daily basis which may not be permitted by Listing Rule 8.1.7. The waiver has been granted on the condition that options outstanding issued under the Plan do not exceed 1% of the total shares of the Company.
NZX has granted a waiver dated 2 June 2005 from NZX Listing Rule 7.3.1(a) (prohibition on issue) to enable the Company to obtain approval from shareholders at its annual meeting in July 2005 to issue further series of bonds under its Bond Programme within specified key terms
and conditions, notwithstanding that the precise terms and conditions of the Bonds as required by Listing Rule 7.3.1(a) could not be provided.
NZX DISCIPLINARY ACTION
There has been no action taken by NZX in relation to the Company under Listing Rule 5.4.2.
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LARGEST VOTING SECURITY HOLDERS (AS AT 1 MAY 2006)
RANK HOLDER NAME SHARES %
1 Infratil 110,744,942 35.182 Tauranga Energy Consumer Trust 89,878,838 28.563 Alliant Energy New Zealand Limited 74,820,446 23.774 Citibank Nominees (New Zealand) Limited* 939,887 0.305 Custodial Services Limited A/C 3 689,050 0.226 AMP Life Limited* 497,620 0.167 NZ Superannuation Fund Nominees Limited* 416,640 0.138 NZGT Nominees Limited - AIF Equity Fund* 349,915 0.119 ASB Nominees Limited - 100652 MI A/C 345,938 0.1110 Custodial Services Limited A/C 2 324,970 0.1011 ASB Nominees Limited - 800074 MI A/C 236,000 0.0712 AMP Superannuation Investment Trust* 188,627 0.0613 Brett Anthony Hart & Lynn Marion Fitness & Kevin John Gilligan 180,000 0.0614 TEA Custodians Limited* 177,434 0.0615 Custodial Services Limited A/C 9 176,774 0.0616 Custodial Services Limited A/C 1 169,200 0.0517 First NZ Capital Custodians Limited 132,883 0.0418 AMP Superannuation Tracker Fund* 119,300 0.0419 Helmuth Ebner 115,000 0.0420 Brett Anthony Hart 100,000 0.03 280,603,464 89.15
*These names are registered in the name of New Zealand Central Securities Depository Limited
LARGEST BOND HOLDERS (AS AT 1 MAY 2006)
RANK HOLDER NAME BONDS %
1 Custodial Services Limited A/C 3 5,650,000 1.88 2 Sterling Holdings Limited 4,922,000 1.64 3 First NZ Capital Custodians Limited 4,167,000 1.39 4 Private Nominees Limited 3,981,000 1.33 5 Investment Custodial Services Limited 3,564,000 1.19 6 TEA Custodians Limited* 3,385,000 1.13 7 Custodial Services Limited A/C 2 3,033,000 1.01 8 TSB Bank Limited 3,000,000 1.00 9 FORBAR Custodians Limited 2,742,000 0.91 10 Eastern Central Community Trust Inc 2,250,000 0.75 11 Citibank Nominees (New Zealand) Limited* 1,950,000 0.65 12 Presbyterian Savings & Development Society of New Zealand Incorporated 1,700,000 0.57 13 Brycharl Corporation Limited 1,500,000 0.50 14 NZ Guardian Trust Investment Nominees Limited* 1,343,000 0.45 15 Custodial Nominees Limited A/C 1 1,315,000 0.44 16 FORBAR Custodians Limited 1,311,000 0.44 17 Carter Holt Harvey Retirement Plan 1,000,000 0.33 18 Fidelity Life Assurance Company Limited 1,000,000 0.33 19 New Zealand Methodist Trust Association 1,000,000 0.33 20 Palmerston North City Council 1,000,000 0.33 49,813,000 16.60 *These names are registered in the name of New Zealand Central Securities Depository Limited.
directorY
BOARD OF DIRECTORS
Harold M Titter – ChairmanSir Ronald P CarterMichael J CooneyBruce J Harker – Deputy ChairmanHR Lloyd MorrisonSimon V Young
REGISTERED OFFICE
TrustPower BuildingTruman RoadTe MaungaMount Maunganui
WEBSITE
www.trustpower.co.nz
EMAIL ADDRESS
POSTAL ADDRESS
Private Bay 12023TaurangaTelephone: 07 574 4800Facsimile: 07 574 4825 [email protected]
AUDITORS
PricewaterhouseCoopers188 Quay StreetAuckland
SHARE REGISTRAR
Computershare Investor Services Limited159 Hurstmere RoadTakapunaPrivate Bag 92119AucklandTelephone: 09 488 8700Facsimile: 09 488 8787
Shareholders with enquiries about transactions, change of address or dividend payments should contact the Share Registrar.
STOCK EXCHANGE LISTING
New Zealand Exchange LimitedLevel 2 NZX Centre11 Cable StreetWellington
financial calendar
Annual General Meeting 27 July 2006First quarter result announced 27 July 2006Payment September bond interest 15 September 2006Second quarter result announced 26 October 2006Record date of interim dividend 1 December 2006Payment of interim dividend 15 December 2006Payment December bond interest 15 December 2006Third quarter result announced 25 January 2007Payment March bond interest 15 March 2007Full year result announced 11 May 2007Record date of final dividend 25 May 2007Payment of final dividend 8 June 2007Payment June bond interest 15 June 2007
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