Orion network profitability offset by write-downs
Orion network profitability offset by investment write-downs
Christchurch based electricity network company Orion New Zealand Limited achieved a $35m surplus on its core electricity network in the financial year to 31 March 2004, $2m ahead of its statement of corporate intent forecast.
However write-downs on the shareholdings of some of the company’s investments resulted in an overall net surplus of $0.2m, $19.6m below forecast.
This was mostly attributable to a $13m write-down in the value of Orion’s 13% shareholding in the Australian listed company Energy Developments Limited (EDL), to $45m.
Due to new financial reporting standards, the EDL valuation was based on its closing Australian stock exchange price on 31 March 2004 of A$2.27 per share, converted at that day’s closing AUD/NZD exchange rate. Given this ‘point in time’ valuation, any increase in the share price of EDL above A$2.27 is likely to result in at least a partial reversal of the write-down and an increase in Orion’s net surplus next year. EDL’s share price this morning was $A2.92 – this represents a $12m gain on investment for Orion since 31 March 2004.
Orion chairman, Linda Constable said “Orion’s $0.2m net surplus should be viewed in the context of Orion’s excellent long term performance and it should be recognised that this year’s write-downs are only a paper loss”.
“We are forecasting dividend payments of $24m in the coming year which will bring total dividends paid to our shareholding councils since 1993 to more than three quarters of a billion dollars. Our investment in Enerco alone generated a net surplus well in excess of $200m. A ‘paper’ write-down of $30m, while significant, does not negate these much larger achievements. Particularly given the write-downs may be reversed in the future.”
Orion has forecasted a surplus after tax of $17.4m for the year ended 31 March 2005. This forecast excludes any possible gains on its investments, such as any increase in the share price of EDL above A$2.27 or any increase in the value of its other well performing investments, such as Whisper Tech.
“EDL took some very hard decisions in the last year”, said Ms Constable. “With a new management team and a refocus on its core capabilities in electricity generation, we expect to see improvements in EDL’s performance and in the value of Orion’s investment. This is already beginning to occur.”
“In the last financial year, Orion made a strategic decision to ‘return to core business’ and to start to move out of peripheral activities such as its smaller technology investments. Our customers’ number one requirement of us is to deliver a reliable electricity network and we are mindful that many of our technology investments require considerable time and resources to manage”, said Ms Constable. “We have however retained our shareholding in the better performing investments such as Whisper Tech and 4RF”.
Transflux was closed in September 2003 and CIC has been sold after balance date. The overall value of Orion’s technology investment portfolio was written down by $17m to $15m in the 2004 financial year. Many of these technology investments were entered into prior to the 1998 Electricity Reform Act at a time when Orion had a wider role within the overall energy industry.
Orion’s 100% subsidiary Connetics again performed above expectations.
During the year, the company paid fully imputed ordinary dividends of $27m ($3m above forecast) plus a fully imputed $40m special dividend to shareholders – Christchurch City Holdings Limited (87.625%), Selwyn Council Trading Enterprises Limited (10.725%) and Banks Peninsula District Council (1.650%).
Orion continues to rank as one of New Zealand’s most reliable and cost efficient electricity distribution networks. “On average our customers were without power for less than three-quarters of an hour last year, when the New Zealand average was about three hours”.
Also, the latest five-year comparative figures available (ending March 2003), show Orion was one of New Zealand’s top-performing lines companies with customers experiencing the fewest interruptions to their electricity supply – an average 0.8 interruptions per year compared with the national average of 2.5.
“Orion’s network reliability results are among the best in New Zealand. They are partly attributable to the absence of extreme weather events in recent years but they also reflect the success of ongoing investments and innovations that mark Orion’s commitment to network improvement” said Ms Constable.
Orion’s pricing also compares very favourably with other New Zealand lines companies.
Looking ahead, significant issues continue to face the electricity industry. Lack of investment in new generation to meet customer load growth and the news that Transpower’s transmission grid, servicing the upper South Island, requires upgrading demonstrate the critical need for ongoing investment at all levels within the electricity industry.
“We have continued to invest strongly in Orion’s distribution network in order to meet growing consumer demand for electricity. However we need a legislative and regulatory environment that encourages investment to ensure that electricity security and reliability is maintained and that other investment in our economy can be confidently undertaken. Continued government initiatives to regulate the distribution sector of the electricity industry potentially compromise this” said Ms Constable.
In the last five years Orion’s prices to domestic consumers have gone down in real terms while the combined prices of retailers and generators have increased dramatically. However, much of government regulation continues to focus on lines companies.
During the year, Orion connected a record 3,500 new customers to its electricity network in Christchurch and Central Canterbury, between the Waimakariri and Rakaia rivers. It distributes electricity from nine Transpower grid exit points to more than 170,000 homes and businesses. Orion charges electricity retailers for this network delivery service, and retailers in turn charge electricity consumers.
Operating revenues 168.8 170.2
Operating surplus before tax 20.8 55.7
Taxation expense 20.6 25.8
Operating surplus after tax 0.2 29.9
Cashflows: 53.9 63.2
Operating activities (35.7) (103.4)
Investing activities (18.5) 40.0
Financing activities (0.3) (0.2)