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Trustpower trims guidance on weak first half

Thursday 7th November 2019

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Trustpower has trimmed its full-year earnings guidance after low hydro inflows and repair costs to a power station cut the company’s underlying first-half profit by 25 percent.

The company is expecting earnings before interest, tax, depreciation, amortisation and changes in financial instruments of $200-to-$215 million, based on expected hydro storage and current electricity pricing. The firm had previously said ebitdaf would likely be at the bottom of a $205-225 million range.

Trustpower, the country’s fifth-largest electricity retailer and the fourth-largest broadband provider, says its hydro storage has recovered well, putting it in a good position to benefit from high wholesale electricity prices.

But a drop in inflows for its North Island power stations – down 23 percent from the year before – and the failure of one of the generators at the Highbank power station – meant generation volumes in the six months ended Sept. 30 were down 15 percent from the same period a year ago.

Chief financial officer Kevin Palmer said planned gas field maintenance and several months’ work that Transpower plans on the high-voltage link across Cook Strait early next year makes it hard to forecast second-half earnings accurately.

“But we are more confident of having a better second half than the first half – or at least as good,” he told analysts and journalists on a conference call.

Shares in the Tauranga-based company fell 1.9 percent to $8.10, trimming their gain so far this year to about 33 percent so far this year.

Group ebitdaf fell to $107.1 million, from $129.6 million a year earlier and first-half net profit dropped to $38.7 million from $64.9 million a year earlier. Underlying net profit, which excludes $12.2 million of fair value losses on interest rate swaps and electricity futures and a $2.4 million impairment, dropped 25 percent to $49.2 million.

Extra generation costs and lower revenue stripped about $12.5 million from the group’s earnings in the six months ended Sept. 30. That, and an extra $4.8 million spent on customer recruitment, more than offset gains from a change in accounting standards for leases and a higher gross margin from its broadband business.

While lost generation had a big impact on the result, chief executive Vince Hawksworth said “purposeful investment” in the firm’s internet service and continued growth also had an impact.

“Trustpower is a multi-layered business with generation, retail and a growing ISP; we are committed to investing in these platforms to create a robust future-focused business,” he said in a statement on NZX.

Trustpower – half owned by Infratil - operates more than 30 power stations around the country, constituting about 8 percent of the national hydro capacity. It uses them to complement electricity it buys from the wholesale market and other, mostly smaller, generators.

Ebitdaf from the generation business fell 12 percent to $94.6 million. The company noted that the three-month unplanned shutdown at Highbank in Canterbury had cut supply by about 43 gigawatt-hours – or about 2 percent of the firm’s typical annual output.

With demand now picking up, Trustpower is looking at a range of potential upgrades at some of its bigger plants – such as Highbank, Cobb and Matahina – to deliver another 60 GWh of production annually.

Should all those potential projects proceed, that could increase the firm’s capital expenditure by $5-to-$6 million a year over five years, Palmer said.

Trustpower has offered phone services since 2007 and expanded into gas in 2013. It is rapidly building a broadband business so that it can gain more value from each customer through a bundled offer that also reduces the risk of them moving to rival suppliers.

It is also investing in new technology to keep driving down the cost of serving those customers.

Trustpower noted that it now has more than 100,000 telecommunications customers, from 91,000 a year earlier. Electricity connections fell to 266,000 at Sept. 30 from 270,000, while gas accounts increased to 40,000 from 38,000.

Trustpower said more than 110,000 customers now buy two or more services from the company and more than 80 percent of new customers are signing up for two or more products.

Ebitdaf from the retail business dropped to $13.9 million from $27.9 million a year earlier, reflecting higher wholesale power costs, reduced volumes due to mild weather, and the expansion of the broadband business.

Changes in accounting standards accounted for about $5.6 million of the decline, while the gross margin from the telecommunications business improved by $1.9 million. Spending on the firm’s data networks increased by about $500,000.

During the period, the company formed a new relationship with submarine cable operator Hawaiki and also opened two new data centres in the US to help improve management of data flows onto its network.

Hawksworth said the firm is not a builder of telco infrastructure but does need to invest to ensure its customers have a good experience. Its internet service has ranked first on the Netflix speed index for 19 of the past 22 months.

Trustpower has just started offering wireless broadband, particularly aimed at its rural electricity customers who don’t have a fixed-line fibre option. It is also preparing a mobile phone offering.

The wireless broadband offer was deliberately slowed before the Rugby World Cup and the company won’t forecast growth for the service until it has run its first big campaign, Hawksworth said.

But he said the service could be a big driver of activity for the firm, potentially accounting for up to 20 percent of its total customers.   

Trustpower will pay an interim 17-cent dividend, unchanged from a year earlier. It will be paid on Dec. 6 to shareholders registered at Nov. 22.



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