Chair & Chief
Last year was a challenging one for the energy and telecommunications markets on many fronts. At the time of writing, the economic impact of COVID-19 is still unfolding and the effect on the local and global economies is uncertain. Trustpower is a lifelines utility, with our business deemed an essential service, and our response has focused on ensuring we continue to provide gas, electricity and telecommunications services to our customers. A separate section follows, providing a more detailed update on our response so far.
There were a number of other significant events in the 2020 financial year, which unfortunately contributed to our financial result being down on the prior year. These included:
- Reduced customer demand for electricity due to a very mild autumn/early winter.
- Below average power generation due mostly to reduced hydrology in the North Island.
- A material, unplanned outage at our Highbank Generation scheme.
- The flow on effect of a number of accounting changes made in FY19.
- Reduced meter asset revenue following the successful sale of those assets.
- Increased costs as we develop capability.
Despite this, we continued to grow and strengthen our business and enjoyed a number of highlights throughout the year including:
- Establishing wireless broadband as a new product.
- A significant strengthening of our Internet Service Provider (ISP) network to meet the demands of the Rugby World Cup.
- The continued success of our bundled strategy both in terms of acquiring customers and reducing the number of customers we lose.
- Reaching the milestone of 100,000 broadband customers during the year.
- Several significant overhauls and upgrades to our generation stations.
As signalled in our report last year, the Interim Climate Change Committee (ICCC) report on Accelerated Electrification was delivered in April 2019. The report recognised that the use and growth of renewable electricity is a crucial step and requires significant policy action if New Zealand is to move towards a low carbon future. The ICCC further recommended that the Government ensures the value of existing hydro generation is given sufficient weight when decisions about freshwater use are made.
Following this, the Climate Change Response (Zero Carbon) Amendment Act was passed into legislation in late 2019 which, among other things, provides new domestic greenhouse gas emissions reduction targets for New Zealand. There are significant opportunities for Trustpower in this, which we are taking into account in our ongoing growth strategy.
The report on the Government-initiated Electricity Price Review (EPR) was also released in 2019. A number of Trustpower’s recommendations were picked up, particularly with respect to the options aimed at strengthening the consumer voice and reducing energy hardship.
“Last year was a challenging one for the energy and telecommunications markets on many fronts. At the time of writing, the impact of COVID-19 is still unfolding and the effect on the local and global economies is uncertain."
COVID-19 has been unprecedented in terms of its impact on health, wellbeing, the economy and quite simply the way we go about daily life. Like all businesses, Trustpower has been significantly impacted. However, through the successful deployment of our business continuity plans during the COVID-19 Level 4 shutdown, there has been virtually no impact on generation capacity or services to customers.
Most Trustpower staff have been able to work remotely from home, supported by our recent investments in technology and capability. These investments, made over the last few years, enabled us to respond quickly and get our people working from home on stable and secure systems immediately from lockdown. Exceptions to this include the emergency faults team, our hydro-station site staff, the 24 hour generation operations centre, and some of our customer operations staff. In these situations, workstation separation distances and other measures were quickly implemented.
Our customers and their connectivity remain a priority. In the week prior to the lockdown we were already working with those customers facing hardship due to the pandemic. We also employed other measures, such as adding additional days to our prompt payment discount system and zero charges on exceedance of customer internet data caps. Our customer experience team proactively completed more than 10,000 wellness checks on our critical customers and those who are the most vulnerable.
We successfully arranged for the vast majority of the customer experience team to work from home, with around 60 team members continuing to come onto our sites in Tauranga and Oamaru. In the first two weeks of lockdown, the team helped keep the lights on and broadband connected for our customers, dealing with 251,000 customer interactions, the highest number of enquiries on record. We have invested over the past two years in customer-centred digital channels, and 85% of these interactions were able to be serviced by virtual agents, bots, the Trustpower app and our website. Payments and invoices have been processed remotely with no delays and we continue to monitor and assess all metrics across the business, including cash collection and credit.
Our generation stations continue to perform well and our focus remains on turning around both planned and unplanned outages, which are at expected levels, while working within the appropriate restrictions. We are also working through our critical planned maintenance and compliance activities as scheduled, with minimal impact from COVID-19.
During the Level 3 and 4 lockdown, domestic electricity demand significantly increased, however this was more than offset by decreases in commercial and industrial usage. Total national demand was down by around 11%. We have also seen a reduction in wholesale electricity prices, particularly in the short-term. Early indications suggest that post Level 3 lockdown national demand has recovered to about the same levels as the same time last year.
Our ISP has seen significant increases in data demand and continues to provide reliable and consistent service. As a prudent step, we increased our Trans-Tasman cable bandwidth for the ISP network.
We will continue working with Government departments, the National Crisis Management Centre, Civil Defence and other agencies as we support New Zealand’s response to risk presented by COVID-19. This includes involvement with the telecommunications and utilities forums to address relief for households in hardship, and consideration for education and broader community needs.
Our people’s wellbeing remains a key focus at this time and we have active support programmes in place to ensure we can respond to any needs they may have. On behalf of the Board and Management, we would like to express our gratitude and acknowledge the dedication and hard work of all our people as we continue to support our customers over the coming months.
The economic consequences of COVID-19, both as a result of the Level 3 and 4 lockdown and the continuing subdued economic performance, will affect the New Zealand economy and New Zealanders for a number of years. Trustpower is likely less affected than some others in our community, but that doesn’t absolve us from contributing. We have and will increase the credit support for our customers, we will help those in need access Government support, we will advocate for consumers in need, our directors have reduced their directors fees for the 2021 financial year by 10% and senior staff have agreed to a reduction in the 2021 bonus pool. We will also maintain our community sponsorship levels and from the savings in director and senior staff remuneration create an additional fund to help in the community.
Trustpower continues to pursue its ambition to be the company that New Zealand trusts to keep it energised and connected. Our four strategic pillars – bundling utility services, valuing and retaining our electricity customers, optimising our generation portfolio and focusing on new and emerging market opportunities – continue to drive the success of our business.
To support the above, our teams will continue to focus on five strategic capabilities:
- Building, maintaining and leveraging strong partnerships with our stakeholders.
- Delivering products, services, propositions and service that meet our customer needs.
- Considering sustainability in our decision making and reporting on our progress.
- Adopting digital mindsets to deliver platforms, actionable insights and continuously improving processes.
- Fostering an open organisational culture with a collective learning focus.
These five strategic capabilities have been invaluable in responding to the pandemic and will be even more important as the company moves to the new world post COVID-19.
In the 2020 financial year, Trustpower’s generation volumes were 1,759GWh. This was below the long-term average of 1,917GWh, and 11.8% below last year.
Hydro inflows were low in the last half of the year with generation in the North Island particularly impacted by the drought conditions. Other factors influencing generation volumes included planned maintenance at some of our schemes (such as Waipori scheme outage and Matahina repair work) and unplanned plant outages such as at Highbank.
Wholesale prices remained elevated for the first eight months of the year, before high inflows and wind saw a material reduction from December. The average price received by Trustpower generation was $106/MWh, compared to $125/MWh in the previous year.
Last year also saw a number of significant milestones reached in our customer business and now more than 116,000 customers are buying two or more products from us. We continue to successfully grow our telecommunications business, which now serves more than 100,000 broadband customers. We also continued to expand the range of products and services available to our customers, such as the addition of wireless broadband. This allows us to serve customers just outside the current fibre footprint and enables our customer service teams to tailor a package that best suits our customer needs. We also completed the capability build of our mobile resale offer, which has gone well, but are reviewing the launch at this stage to focus on our core business.
Across our generation assets, we have identified a pipeline of opportunities that could add an estimated 60GWh per year to our annual output by augmenting our existing generation asset base for a modest investment. These opportunities include turbine or generator upgrades that improve efficiency and capacity, and improved water capture to maximise generation and reduce spill.
We undertook an eight-week full scheme outage at Waipori late last year to complete a comprehensive programme of planned routine and preventative maintenance, as well as preparatory inspection work for some upcoming generator replacement projects.
Across our generation assets, we have identified a pipeline of opportunities that could add an estimated 60 GWh per year to our annual output by augmenting our existing generation asset base for a modest investment.
Net profit after tax (NPAT) of $97.6 million is broadly in line with last year’s NPAT of $92.7 million. However this year includes a one-off gain of $16.4 million resulting from the sale of our legacy meter business. Underlying profit after tax (refer note A2 of the financial statements for a full definition) was $75.5 million or 26% below last year. Earnings Before Interest, Tax, Depreciation, Amortisation and Fair value movements in financial Instruments (EBITDAF) was $186.4 million or 16% below last year’s EBITDAF of $222.2 million.
The reduced financial performance occurred across both the retail and generation sectors. In retail we experienced a $29.1 million decline in EBITDAF driven mainly by sharply increased energy costs that were not able to be passed through to retail customers in one year, a very mild autumn/early winter that caused below average electricity consumption, an increase in the provision of doubtful debts to reflect the uncertainty of COVID-19 and the flow through effect of accounting adjustments made to the treatment of customer acquisition costs last year.
In generation we saw increased energy prices largely offset by reduced generation volumes, a material unplanned outage at our Highbank scheme, reduced revenue from Avoided Cost of Transmission (ACOT) and reduced revenue following the sale of the meter assets.
A presentation for shareholders explaining these changes in more detail is available on our website.
We have a strong balance sheet with relatively low levels of gearing. The reduced EBITDAF has resulted in a net debt to EBITDAF ratio of 3.3 which, while well within the Board’s approved funding range, is higher than the preferred level of around 2.8. We expect this will improve next year if we experience normal hydrology and temperatures, but this depends significantly on the economic impact of COVID-19. We have successfully refinanced the bank facilities maturing in 2020 and are now well positioned to meet our obligations, even under the most adverse conditions.
Investment and regulatory certainty will remain of high importance if we are to support the transition to a low emissions economy. The Select Committee recommendations on the Resource Management Amendment Bill suggest that climate change policy will soon be taken into greater account by all councils and consenting processes. By offering renewable energy generation, Trustpower is well placed to support this national direction.
The regulatory environment for business is also changing. The proposed mandatory climate-related financial disclosures for listed companies adds further impetus, and means Trustpower will identify, assess, take action, and disclose material climate-related financial risks to our stakeholders and investors.
Freshwater policy reform and the Resource Management Amendment Bill remain areas of particular interest to Trustpower, and we will continue to lobby government to take heed of the ICCC recommendations, and also to strengthen the National Policy Statement for Renewable Energy Generation. Any changes to access to freshwater, and the related planning and governance responsibilities, should be applied even-handedly across all hydroelectricity operators and rivers, and not favour some over others.
On a separate note, we are expecting to continue work with regulators and officials as the recommendations from the Electricity Price Review are further developed and implemented.
Finally, we support the Government rethinking its legislative and regulatory programme as a result of COVID-19, and assisting infrastructure spending, including by fast tracking consenting processes for certain projects. The economic recovery from COVID-19 will require careful consideration and direct Government assistance, with strong leadership from the infrastructure sector.
We have successfully refinanced the bank facilities maturing in 2020 and are now well positioned to meet our obligations, even under the most adverse conditions.
We continue to make good progress in our desire to learn from both adverse incidents and successes. Allowing our people to show pride in their work by learning from things that don’t go as well as planned, as well as the things that go better than planned, is an important element to our safety culture. Pleasingly, reporting on both is on the increase across the company.
Total Injury Frequency rate for the year ending 31 March 2020 was 0.72 compared to 1.5 for the year ending 31 March 2019.
Our people strategies continue to focus on delivering the capabilities we have identified as essential to our strategic intent. Key to this is fostering an open organisational culture with a collective learning focus.
In the last year, we also saw a successful process of engagement in redesigning our values to better represent our culture. We also enjoyed success in shifting our approach to community engagement, with the team partnering with our generation teams to do meaningful work in our local communities. Our involvement in the Tauranga STEM Festival – a celebration of science, technology, engineering and mathematics – was a particular highlight.
Our response to COVID-19 really highlighted the benefits of our long-term investment in our people, who showed amazing adaptability and resilience as we navigated the impacts of the pandemic. In two days, we shifted the majority of the workforce to work from home and required many of our people to flex into different roles. We fully expect the strong support and commitment from our people to continue as we move forward.
Our response to COVID-19 really highlighted the benefits of our long-term investment into our people, who showed amazing adaptability and resilience as we navigated the impacts of the pandemic.
Vince Hawksworth left Trustpower on 24 January 2020 after approximately 10 years as Chief Executive. During his tenure, Vince was instrumental in leading the growth of Trustpower. He supported the transition of our retail business from a retailer predominantly supplying electricity to our incumbent provincial customer base, to a true multi-product energy and telecommunications business.
Vince also cared passionately about the development of talent and capability within the business and the need to have an open collaborative culture and work environment to support and nurture that.
There is no doubt that Trustpower is a very different place than it was when Vince first started as Chief Executive. On behalf of all stakeholders, the Board wishes to acknowledge and thank Vince for the significant contribution he has made to the success of Trustpower.
There have been a number of governance changes this year. At the annual meeting, Alan Bickers (who joined the Board in 2014) and Richard Aitken (who joined in 2010) both retired. We thank Alan and Richard, on behalf of the Board and Management, for their service and contribution to creating value for all our stakeholders.
At the same meeting, Keith Turner and David Prentice were appointed to the Board as new directors. Following these changes, the composition of the standing Board committees was reviewed and updated. The Board took this opportunity to revise the fees paid to directors and committee members, resulting in an overall reduction in fees.
In December 2019, Vince Hawksworth resigned as Chief Executive effective 24 January 2020. David Prentice was appointed Acting Chief Executive while remaining on the Board as a director. This resulted in David resigning from all committees leading to a further review of the committee memberships.
More latterly the Board has established weekly meetings to oversee the company’s response to COVID-19.
PricewaterhouseCoopers has indicated its willingness to continue in office.
There remains considerable uncertainty around the COVID-19 situation and what impact it will have on Trustpower’s financial position. However, it is important that the Board takes a prudent position with respect to capital management and ensures we maintain a strong balance sheet and funding availability. Given the uncertainty and likely impact from COVID-19, the Board has decided to declare a fully imputed, final dividend of 15.5 cents per share.
Together with the interim dividend of 17 cents per share announced in June 2019, this provides a total fully imputed dividend of 32.5 cents per share for the 2020 financial year, a reduction of 4%.
Trustpower produces 99% of its electricity through hydroelectric power generation. We recently re-examined our operational activities to identify potential actions to address climate change and further minimise environmental impacts.
In 2020, Trustpower intends to refresh our asset management strategy, policy and plan to incorporate climate change adaptation and risk assessment. We believe Trustpower’s geographically diverse portfolio will help us manage this risk. We are well positioned to support a decentralised energy system and regional development. There are positive opportunities for Trustpower to invest in renewable and low carbon technologies – and become an even more attractive and responsible investment proposition.
With our new offering of wireless broadband we expect to be able to offer customers even more value through our bundled retail offers and see this part of our business as a positive growth opportunity.
The months, and possibly years, ahead will clearly be dominated by the impacts of the COVID-19 pandemic and at present are challenging to predict with any accuracy. However, we are in a strong position and will continue to remain vigilant and proactive in responding to the environmental, regulatory or societal changes that may impact or create opportunities for our business.