Managing Director's Report
The Company is well placed to meet challenges and take advantage of opportunities.
Overview
Our primary areas of focus during the year were:
- To work with the Commerce Commission to achieve agreement on a commercially acceptable price path for Marlborough Lines in the future.
- To meet customer expectations in relation to a reliable supply of electricity and to meet increased customer demand.
- To maintain a programme of continuous improvement in all areas of our operations.
- To provide increased shareholder value.
We are about to embark on the new Commerce Commission regulatory regime including the application of ‘exempt status'*. Advice received from the Commission during the financial year confirmed that the Commission would not be pursuing the price path breaches up to 31 March 2008.
* Network companies that are consumer owned and that offer voting rights and benefits to at least 90% of their customers will be exempt from price regulation going forward.
The Company – by virtue of its previous price increases and substantially higher levels of transmission loss rental rebate income – did breach the price path regulations as at 31 March 2009 and will be in a similar position in relation to the 2010 financial year. From that point on the Company will be exempt from price/quality regulation but subject to an as-yet-to-be defined process of information disclosure.
From 1 April 2008, Marlborough Lines' network charges were increased by an average of 17.6% to provide for additional capital expenditure funding. Late in the 2009 financial year the Company resolved to hold network charges for the impending financial year on the basis of the current economic recession, and having regard to the additional unbudgeted transmission loss rental rebates received in the current year.
Financial Reporting
The Group operating revenue for the year was up 3.0% to $48.355m, giving rise to a Group surplus after discount but before interest, taxation and depreciation of $20.400m. The surplus prior to discount and taxation was $17.830m.
Whilst Group turnover increased, there was a significant reduction in income arising from vested assets ($6.587m in 2008 and $3.416m in 2009).
Group earnings before interest and taxation increased from $10.848m to $13.574m, mainly as a result of increased network charges and also increased dividends and cashflows from the investment companies.
Last year it was noted that the Company's reporting workload had increased significantly in volume due to the adoption of International Financial Reporting standards. A number of the additional and transitional statements are not required for the second year of reporting and have thus now been excluded from the financial statements.
For the 2009 financial year the Directorate budgeted the amount of $14.410m for capital expenditure projects. The actual expenditure was $10.576m, with the shortfall arising predominantly from delays in the delivery of major items for two large substation projects and from a significant number of steel poles being delivered in an unacceptable condition. The balance of this work will flow through into the 2010 year.
Demand Statistics
The Company's total network system length grew by some 35 kilometres and the addition of 286 customer connection points. The Company – and indeed the province – has been fortunate to be involved in the substantial expansion of the wine industry in recent years. As can be seen in the graph in Our Network, electricity consumption during vintage (the wine processing season) has again increased over the previous year, although with the combined effects of the recession and the previous year's over-supply of grapes, it is clear there is some slow down currently taking place in the wine industry.
We have noted in previous reports that network extensions are necessary to provide electricity to new wineries which are commonly being sited away from industrial areas. Despite the effects of the recession, it is projected that the volume of the grape harvest in the Marlborough region will increase further in coming years and therefore winery capacity must keep pace. This trend has continued in the past 12 months with notifications being received for new wineries off State Highway 63 in the Wairau Valley and also in the Waihopai Valley. Fortunately recent system upgrades in both areas will enable the Company to handle these loads. Our Case Study - Meeting Wine Industry Demand considers the requirements in relation to one of these new wine processing facilities.
Energy volumes injected into the network for the year were at a similar level to 2008 primarily as a result of the Government call for energy conservation during the autumn and early winter of 2008. This constraint was based around the lack of water (stored generation) in the southern hydro lakes. It is inevitable with unrestricted supply, that energy consumption will increase.
Our Environment
Having an environmental ISO certification means that environmental matters are never far from our thoughts. We demonstrate our attention to the environment in various ways, one example is the provision of 33kV to 11kV zone substations which operate with zero noise emission.
During the year we commissioned a further suburban zone substation at Springlands in Blenheim and the resulting building has a similar appearance to any typical house in the same street.
Within the past two years the Company has joined a Marlborough based initiative undertaking trial plantings of durable Eucalypts, with the eventual aim of being able to provide a renewable resource for power pole cross-arm timber. It is intended longer term, that we phase out the use of imported cross-arm timber in favour of locally grown sustainably sourced hardwood. Our participation in the local venture is described in greater detail in our Case Study – Timber Supply.
Early in 2008 we measured the Company's carbon footprint and noted at the time, that aside from electricity losses within the network the Company's carbon emissions were more than offset by the Company's ownership of native forest. In conjunction with our involvement in the trial plantings of durable Eucalypt hardwood, the Company intends to undertake our own parallel planting using recommended Eucalypt varieties. Our aim is to bring forward usable timber production and also increase the Company's carbon sequestration.
Quality Improvement
We have for a long time adopted ISO quality improvement programmes in relation to management, occupational safety and health and the environment. The regular auditing process involved provides an opportunity for continual improvement of our systems and we remain open to the concept that there are always better ways to undertake our work.
The Company's financial reporting has been benchmarked against the best Annual Reports in Australasia – Marlborough Lines again achieved Silver status (for the fifth consecutive year) with the 2008 Annual Report at the Australasian Annual Reporting Awards.
The 2008 Annual Report was also determined by the New Zealand Institute of Chartered Accountants to be the best in New Zealand for companies with a turnover of less than $100m.
We are committed to using all relevant benchmarks as a means of refining our performance, as along with ongoing staff training, they are catalysts for improvement and continuous improvement is our overriding philosophy.
Marlborough Lines in the Community
We have a tradition of supporting youth development and education and the Company's current major sponsorship is a five year programme with naming rights for the Marlborough Lines Stadium 2000, which is the largest indoor sporting facility in Marlborough. Our independent surveys indicate that the Company's sponsorships are well received by our community.
We provide further information in relation to our community assistance programmes in a later section of this report in Our Community.
Our Staff
Our industry is complex and technically demanding and qualified experienced personnel are in worldwide demand.
We are committed to training – typically some 15% of our staff are trainees. We also assist current and future engineering and accounting personnel to upskill by providing supported tertiary study.
Our ‘grow your own' policy of securing professionals by helping to train them has paid dividends for the Company.
We appreciate that our staff are the life blood of the business and quality staff must be maintained.
Looking into the Future
Overall I am confident about the future of this company.
Marlborough Lines continues to maintain a solid foundation from which it can plan and build for the future.
With the current electricity industry reviews, we recognise a further period of uncertainty lies ahead – particularly in relation to the Commerce Commission's information disclosure requirements and also to constraints which may remain around capital expenditure. Taking up exempt status under the revised ‘light handed regulation' will be a journey into uncharted waters, with the requirements of the Commission yet to be determined. The details of the regulatory criteria for the price paths of our investment companies are also yet to be established.
In any event, the Company will continue to work constructively with the Commerce Commission and other Government agencies, with the objective of meeting regulatory requirements and achieving revenues that are sufficient to sustain necessary capital expenditure and furnish our shareholder with a commercial return.
We will continue to improve the quality of our network and with the significant expenditure undertaken in recent years, can expect the reliability of our network to increase and overall performance to continue to improve.
Acknowledgement
I am pleased to extend my appreciation to all of the Company's employees, and the employees of our investment companies, who have individually and collectively contributed to the Group's success, often without regard to clock or calendar.
I am also pleased to acknowledge the support of the Company's advisors and the contribution and assistance of the Company's Chairman, Mr David Dew, and my fellow Directors throughout the year.
KEN FORREST
Managing Director