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Power to the people

By Jenny Ruth

Thursday 8th December 2005

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 Jenny Ruth
TrustPower evolved out of the former Tauranga Electric Power Board in 1994 when it distributed shares in itself to its customers and raised $10.2 million from a share placement to infrastructure investor -Infratil. The company was an active participant in the subsequent rationalisation of the electricity industry, buying both generation assets and retail customers. In 1998 - after the government decreed industry participants had to choose whether they would be lines companies, simply providing and maintaining the lines over which electricity is transmitted, or energy trading companies - TrustPower sold its lines business for $485 million, a transaction which almost doubled its net asset backing per share.

The numbers: After being caught out badly by the 2001 drought and the flaws in the wholesale electricity market it exposed, TrustPower reported a $12.2 million net loss for the six months ended September 2001. Essentially, TrustPower suffered from its customers using more electricity than it generated and it was forced to buy power on the spot market at grossly inflated prices. By year's end, March 2002, it managed to eke out a $1.3 million net profit but only after a $6.7 million -one-off profit resulting from switching retail customers with Mighty River -Power. Since then, profit has grown significantly and looks set to do so again this year. In July, the company reported a $24.4 million first quarter net profit, up 60% on the previous first quarter.

Management: Former chief executive Jeff Williams retired in mid-2001 after nine years at the helm. Then energy sales manager Keith Tempest was appointed acting chief executive and his permanent -appointment was confirmed the following April. Tempest has been with TrustPower for 19 years.

Current strategy: The company's main emphasis is now on -increasing its hydro and wind generation assets with a number of -notable successes, the latest of which are resource consents for its $15 million -Waipori power scheme enhancement and for its $175 million third stage of its Tararua wind farm. Because TrustPower's assets use renewable energy, it will be a major beneficiary from the Kyoto agreement and both these projects were made possible by it being granted internationally tradeable tax credits. These successes were achieved while other power companies' proposals have run into high-profile stoushes with the communities -affected. Tempest says that's because "we do it differently". In particular, TrustPower starts talking to those likely to be affected long before it makes any decisions, he says. "It's easy to go in quickly with a team of consultants and upset people. If you go in with a suit and tie and your business cards, they show you the farm gate. But, most Kiwis, if you sit down with them and have a cup of tea and a chat, they will understand things quite well." The company is also careful in designing hydro projects to provide for environmental values and recreational facilities, he says. By the time the Tararua farm has been completed (expected by the end of 2006) TrustPower will have balanced the amount of power its retail customers consume with its generation capacity. While droughts are always a possibility, Tempest says many of the flaws which resulted in the 2001 debacle have now been corrected so there's unlikely to be a repeat. "We've changed our transmission configurations and Transpower's done some work. Systems are seriously more robust than they were. They needed to be."

Recent track record: The latest quarter's result included a $3.7 million payment from other retailers. Before the Electricity Commission took over running the wholesale market from March 2004, the system had worked through retailers stating the amount of electricity they had used in each area. What they didn't claim to have used was deemed to have been used by the incumbent, in this case TrustPower. But many retailers didn't have appropriate systems in place and had previously -understated the amount of electricity they used, meaning the incumbent had to overpay. That situation that has now been rectified and Tempest says the company has recouped most of its 2001 losses through the new process.

Analysts' recommendations: Forsyth Barr's Greg Main -recommends investors accumulate TrustPower shares, which he values at $6.10. James Miller at ABN Amro recommends investors add to their stakes and values them at $6.81.

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