v2 Report - Additional Information Supplement
KCE King Country Energy Limited
Press releases
25 May 2007
TAKEOVER OFFER FROM TODD
ENERGY LIMITED – UPDATE
The Todd Energy partial takeover offer for 14.72% of the
shares in King Country Energy is scheduled to close on 8 June 2007. Todd
Energy requires acceptances for 2,760,704 shares for the offer to succeed.
To date, it has received acceptances for 462,961 shares, representing a
substantial shortfall to the level required.
The Independent Directors reiterate their recommendation
that shareholders DO NOT ACCEPT the offer for the reasons
previously outlined, namely:
• the offer price is too low
and an inadequate premium is being offered to compensate you for passing
control to Todd Energy;
• if control passes to Todd
Energy, no further takeover premium may be available to shareholders; and
• the offer is not a full
takeover offer, and accepting shareholders may be left with small,
unmarketable parcels of King Country Energy shares with a lower value.
The Independent Directors have been advised that the King
Country Electric Power Trust has purchased the Waitomo Energy Consumer
Trust’s 8% shareholding in the company and is prepared to purchase
additional shares on a first-come-first-served basis at $5.00 per share,
for up to 2% of the total shares on issue.
King Country Energy shareholders who have already accepted
the offer are now locked in until 8 June 2007. They may not withdraw their
acceptances (unless Todd Energy defaults under the offer). Shareholders
will not be paid unless and until the offer is unconditional and the
extent of any required scaling becomes clear. As accepting shareholders
cannot withdraw their acceptances, they are prevented from dealing with
their shares in the meantime (including in respect of any offer from the
King Country Electric Power Trust).
The Independent Committee
advises shareholders NOT TO ACCEPT the Todd Energy offer.
Yours sincerely
KING COUNTRY ENERGY LIMITED
AJ PALMER
Chairman
Media Release 18.06.07
Another strong year for King Country Energy
The Board of King Country Energy today announced a fully imputed dividend
of 12 cents per share. Together with the interim dividend of 12 cents per
share (also fully imputed) the result provides shareholders with a gross
annual return of some 36 cents per share or 7.5% based on the share price
of $4.80 at the end of March 2007.
The dividend represents 96% of King Country Energy Group’s audited full
year Net Profit After Tax (NPAT) of $4.67 million for the year ended 31
March 2007. The result is well ahead of budget and builds on the very good
half year performance. The record profit (excluding extraordinary items)
has been achieved despite writing off $0.96 million of costs associated
with the Resource Management Act consent application for the Mokau Hydro
scheme.
Earnings before interest, tax, depreciation and amortisation (EBITDA) for
the year were $9.12 million – also ahead of forecast.
”The company was able to obtain a significant sales volume increase
from new out of area contract customers and this has helped to provide a
good second half performance. Mr Palmer advised that “a significant
amount of Board and management effort was being invested in the
Environment Court hearing for the Mokau Hydro scheme.”
He noted that “a number of objectors to the first application are
likely to now support the proposed scheme in the Environment Court giving
the Board greater confidence the appeal will succeed. The company is also
actively looking at a promising wind farm proposal in keeping with its
emphasis on operating renewable generation.”
“Given the prospect of significant capital construction early in the
new calendar year Directors felt it prudent to hold the dividend at last
year’s level”, said Mr Palmer. “The return of the dividend to the
substantial shareholding base in the King Country together with the
Company’s investment in communities within its service area means the
company remains an important part of community wellbeing,” stated Mr
Palmer.
Mr Palmer said “the Directors were optimistic that a consented Mokau
Hydro scheme would bring further economic and social benefits particularly
to the northern supply area.
“The Board is very pleased with the performance of the Company in
the 2006/07 year and expects to build on this to deliver increased profit
results and returns to shareholders into the coming year,” confirmed Mr
Palmer.
Subject to ratification at the King Country Energy Annual General
Meeting, the dividend is due to be paid on 7 August 2007 with the Record
Date being 30 July 2007. The King Country Energy Annual General Meeting
will be held at The Little Theatre on Miriama Street in Taumarunui, at
1:30pm on 26 July.
ENDS
For further information, please call: Kit Wilson, General Manager Tel:
(07) 896-0135 or King Country
Chairman's report
Overview of results
The King Country Energy Group achieved an audited net profit
after tax (NPAT) of $4.67 million for the year ended 31 March 2007. This
equates to a return of 6.9% on opening shareholder’s funds. The result
is ahead of budget and includes the write off of $0.95 million of
expenses for the Mokau project.
Earnings before interest, tax depreciation and amortisation (EBITDA)
for the year was $9.12 million which is an increase of $1.40 million on
the $7.72 million recorded last year and ahead of our forecasts after
allowing for the Mokau write off. This financial year began with high
wholesale electricity prices and low levels and inflows in the South
Island lakes but prices dropped from mid year as inflows increased and
were very low in the autumn/summer period.
The graph below shows the historic North Island wholesale
electricity prices.
Sales volumes have increased 8% during the year as a consequence
of growth in sales to existing customers and by the addition of a number
of out of area contract customers, acquired through competitive tenders.
This business has been won without compromise to our margins. A very
good ski season has helped our results and the continued development of
facilities on Mt Ruapehu hold the promise of improved sales during
future winters.
Above average local generation volumes (+11.5%) and favourable
hedge cover has allowed the company to service the growth in demand in
electricity at an acceptable cost. Some growth in margin occurred when
prices were adjusted for a small band of customers during the year.
These adjustments
“The steady progress of our company over the past four years can
only be attributed to the ongoing development of our staff whose
commitment to service for our customers and community is deeply
appreciated”
were made to reflect differences in the cost to supply.
The result for the year has been affected by the write off of
the costs associated with the unsuccessful application for resource
consents for the proposed Mokau hydro scheme. These costs are
considerable as they include not only our costs but also the costs of
the district and regional councils.
Costs of this magnitude have a disproportionate impact on
smaller projects making large high impact projects where the potential
rewards are great the most likely to be taken through the consent
process. Cash flow for the year has been strong and the company has
maintained a debt free position while paying tax and fully imputed
dividends. The company is very well placed to fund the construction of
new generation projects once consents have been obtained.
Competitive Market
Nationally, rainfall in the main storage catchments increased in
April/May and then stayed at slightly below average levels until
November/December when there was a further increase in rainfall. A
comparison of lake storage levels for 2006 against historic lake levels
is depicted below. As a result of this lake storage situation, the
average wholesale electricity price at the North Island reference node (Haywards)
was down at $59.91/ MWh for the financial year compared to $89.92/MWh
for last year.
To counteract the hydro variability King Country Energy
purchases electricity hedges, which effectively fix the price of
electricity purchases, to manage the risk of the volatility of wholesale
electricity prices. Electricity hedges are purchased from other
electricity market participants and the liquidity of the current hedge
market in New Zealand continues to be a concern although King Country
Energy has always been able to secure sufficient cover.
The Electricity Commission appointed a Hedge Market Development
Steering
Group in 2004 who reported back in July 2006 with a number of
recommendations. These were open to submission until late October 2006.
Their key initiatives included;
• Compulsory web-based publication of key terms and conditions
in contracts over a minimum quantity.
• Requesting EnergyHedge to further develop its services.
• Hedge AC transmission costs by changing allocation of loss
and constraint rentals.
• Model master agreement for purchase and sale of financial
contracts relating to electricity.
• The commission promoting greater understanding of planned
outage and fuel stock information.
• A regular survey of participants to ensure that improvements
are on track.
We believe that these initiatives are generally positive but the
rate of development appears to be very slow. One potentially significant
event was the announcement by ANZ Bank that they intended to join
EnergyHedge and trade on that facility for other market participants.
Despite the ongoing difficult hedge market conditions, King Country
Energy has continued to acquire adequate hedge cover, through bi-lateral
negotiations with other market participants. This allows King Country
Energy to cover our expected exposure to the wholesale electricity
market under dry-year conditions, when we expect lower output from our
hydro based generation.
Regulatory Issues
Regulatory problems continue to plague the industry in many
guises. King Country Energy has been impacted signifi cantly by the
Resource Management Act (RMA) in its application for consents to build a
new hydroelectric power scheme on the Mokau River. This application was
notified by the councils in March 2005 and a prehearing meeting was held
in June 2005. Following a plethora of requests for additional
information being made by the Regional Council the hearing was finally
scheduled for August 2006. Environment Waikato (EW) appointed three
councillors to hear our application.
In our renewal of existing consents (and for Mighty River Power)
they appointed an experienced Commissioner to support councillors and
ensure due process. King Country Energy believes that this would have
been a fairer process for our Mokau hearing. We are now awaiting the
date for the appeal hearing in the Environment Court which is expected
in September. The costs of these delays are very signifi cant with the
impact of excessive time delays increasing capital costs and incurring
replacement hedging costs to off set the lost generation.
TrustPower in their media release of the financial results also
commented on these RMA issues. In particular “The 2004 and 2005
amendments to the
Resource Management Act have been ineffective. Barriers which
presently exist within the RMA consenting process need to be removed.”
King Country Energy supports the position that TrustPower has taken. The
Electricity Commission continues to be active across a broad, and
growing, front.
While the staff and the working groups aim to be fair we still
believe that there is an inherent bias that appears in a number of its
recommendations. The large industry players have wide representation on
the Electricity Commission’s working groups and are of great
assistance; however, their preference is for nationwide standards that
make it hard for
“Despite the ongoing difficult hedge market conditions, King
Country Energy has continued to acquire adequate hedge cover, through
bi-lateral negotiations with other market participants”
smaller players and new entrants to create a niche in which they
can compete effectively and thus, the impact does not promote
competition. One example of this is in the Government desire for all
industry participants to be members of an “approved complaints
scheme”. King Country Energy has worked with the King Country Electric
Power Trust to create a locally based scheme that is relevant to our
consumers and have submitted it for approval.
The Electricity Commission finally put out a discussion paper
and consultation request on whether they should approve multiple
schemes. This issue has been on the table for over two years now without
a decision and there are three independent schemes operating in
competition with the Government monolith the Electricity and Gas
Complaints Commission. These three cover King Country Energy, BoPE and
TrustPower.
The Electricity Commission is also undertaking a review of the
operation of the wholesale electricity market which is scheduled for
completion by the end of 2007. Also the Commerce Commission began a
review of the market behaviour of generator/retailers in early 2006.
This has no published completion time frame. These reviews add to the
uncertainty that is endemic within the electricity sector.
Generation
Total generation from our own plant amounted to 143.8GWh for the
year
(66.9GWh from our local sites and 76.9GWh from our half of
Mangahao Hydro Station), which was well ahead of our budget of 128.9GWh
largely due to the fortuitous rainfall conditions in our local area when
the South Island lakes were low. The generation income was lower than
budget because of the significant dropping in average price to $59.91/MWh
from $89.92/MWh last year.
The renewal of our Mokauiti station consent has finally been
completed with the written decision signed off by the Court in April
2007, a period of six years since the original hearing and ten years
from the original application. These delays are very costly because of
the consultant time involved but are not as critical for a consent
renewal as we are still operating.
As previously reported the saga of our application to create a
dam on the
Mokau River is still continuing. We are hopeful that the
Environment Court appeal will resolve the issue favourably in September
2007. This proposal would add an annual average 44GWh to our generation
which is about 20% of our current requirement. The excellent result from
Mangahao this year has been enhanced by the output of the Mini hydro
which is making a steady contribution to our generation. The first full
year of generation from the Mangahao mini hydro unit contributed 4.8GWh
to our share.
Retail
Retail sales for the year were above our budget (223GWh) at
239GWh with good growth in domestic and contract volume throughout the
year. This was enhanced by the long ski season that bolstered sales
around the mountain in the first half of the financial year. Our
position as a niche player in the market
FINANCIAL CALENDAR
Final dividend announced 8 June 2007
Annual General Meeting 7 August 2007
Final dividend record date 10 August 2007
Final dividend payment 17 August 2007
Half-year results November 2007
Interim dividend paid December 2007
has reinforced our reputation as a dependable and trustworthy
service provider. The above budget growth has shown the demand for our
service. Our customer services team continues to provide excellent
service to our customers and management continually works to further
improve efficiencies and streamline meter reading, billing and call
centre processes. The Lines Company (TLC) continued to experience
difficulties with their billing operation through out the financial year
and this caused many problems for our customers and staff.
People
The steady progress of our company over the past four years can
only be attributed to the ongoing development of our staff whose
commitment to service for our customers and community is deeply
appreciated. The team is working together in ways which ensure that they
deliver best in class service.
Governance
The Board has confidence in the operation of the Corporate
Governance framework that has been set up to monitor the management of
the Group and compliance with all statutory obligations. The monthly
Finance and Audit Committee meetings and informative monthly Board
reporting maintains this confidence level.
Your Directors are seeking an increase in the amount available
to be disbursed as Directors’ fees. It has been four years since there
was an increase in the size of the pool from which fees are paid.
Directors believe an increase in the size of the pool is necessary to
accommodate the appointment of a further director if that is found
necessary, to allow additional fees to be paid when significant
unforeseen work, such as has been required by recent takeover activity
is required of directors and to recognise the significant improvement in
the earnings and dividends achieved in recent years. It does not
automatically follow that individual directors will benefit from an
increase in the size of the fee allocation.
Dividends
The Board’s policy is to return not less than 60% of NPAT to
shareholders.
Over recent years we have returned well above this minimum. The
Board proposes to pay a fully imputed (tax paid) final dividend of 12
cents per share (which is equivalent to a gross taxable dividend of 17.9
cents per share). The interim and final dividend represent 96% of NPAT.
Together with the interim dividend of 12 cents per share (fully imputed)
this will provide shareholders with a gross return of 35.8 cents per
share or 7.5% based on the share price of $4.80 at the end of March
2007.
“Our customer service team continues to provide excellent service
to our customers”
Share Price
This year the share price moved between $3.70 and $4.30 until
December when Todd Energy made their first offer of $4.40 per share for
all the shares in the company. This offer was not successful and a
second offer of $5.00 per share to take their holding to 50.1% was
lodged in March. This activity took the share price to a high of $5.00
per share and the year ended with the price at $4.80 per share.
The attached graph shows the King Country Energy share price
history since inception. The Board has continued to allow the
Company’s shares to be traded on the Unlisted market.
The Board regularly reviews the market information and aims to
ensure that shareholders are not disadvantaged.
Outlook
The Board is very satisfied with the performance of the Company
in the 2007 year and expects to grow from this base in the coming years
and provide similar levels of return to shareholders. We expect to
deliver an NPAT similar to the 2007 year. The benefits of increasing
sales are likely to be off set by a return to more normal generation
patterns.
Thank you
Once again the Directors would like to express their
appreciation for the support and efforts of the King Country Energy
team. We are proud of our people and their performance. I would also
like to thank our customers for their loyalty and support.
Tony Palmer
Director's Report
MANAGER REPORT
Weather conditions have been interesting this year with low
South Island lake inflows and levels and high prices initially while we
had good generation in our own stations. In May 2006 the water levels
began to rise and prices fell to average levels while we had good early
snowfalls on the mountain creating a long ski season. Then in late autumn
the rains came with a vengeance to the catchments of the main hydro
storage lakes and electricity market prices fell well below average. The
average price for the year was below average ($59.91/MWh at Haywards) and
our generation was well above budget at both Mangahao and our local
stations.
Retail Operations
Over the year, we grew our retail customer sales significantly
ahead of our budget targets. The focus of this growth has been in
providing professional and personal service to customers in our local area
and in the central North Island. King Country Energy has positioned itself
as a niche player in the market and our service levels distinguish it from
other participants. While we continue to pride ourselves on service there
remain in the market large numbers of customers who will select an energy
supplier on price alone.
During the year King Country Energy has been able to secure a
number of such customers without compromising its margins showing that its
relative lack of size in the market is no barrier to gaining new
customers. During the year King Country Energy made a promise to its
domestic customers that it would hold it prices until at least the end of
March 2008. This means domestic customers will not receive a price
increase for a period of at least 30 months despite a generally rising
trend in wholesale prices.
Adjustments were made to the prices of contract, commercial and
farming customers as the last step in a phased programme to remove pricing
anomalies. Pricing to all customers now fairly reflects their cost of
supply.
“During the year
King Country Energy made a promise to its domestic customers that it would
hold it prices until at least the end of March 2008”
Our call centre continues to receive numerous calls from our
customers seeking our assistance with resolving the problems they are
having with their network charges bills received from The Lines Company.
We believe these calls to be recognition from our customers of our ability
to politely and promptly solve their problems. Unfortunately we have not
been able to render the assistance customers have sought. We have also
suffered from the very same billing problems and struggled just as hard to
get them resolved.
Wholesale Trading
We have continued to purchase hedges from other market
participants to cover our expected exposure to the wholesale electricity
market costs under dry year conditions. To ensure that we are able to give
ourselves the most opportune time to select the most appropriately priced
hedge cover, we aim to purchase our hedges one to two years ahead of
requirements. The hedge market remains undeveloped with generators
appearing to treat hedges as a fixed price, fixed volume supply contracts
rather than a financial instrument.
This makes it difficult to balance hedge cover and electricity
demand over a year. Although the excess hedge can limit our returns when
prices are low, as in the latter part of the financial year, the risk when
prices are high and our generation low is much higher and must be covered.
The financial return achieved in this past year again demonstrated the
efficacy of our strategy.
King Country Energy is pleased to report that we receive a good
response to our requests for hedge coverage from almost all participants
in the electricity market. It would appear that the market recognises we
are a serious and trustworthy participant who will be here for the long
term.
Generation
Overall generation from our local stations and half share of the
Mangahao station was 11.6% ahead of budget, with Mangahao up 11.9% and the
local stations up 11.1%. This was largely due to favourable rainfall
patterns but also to the first full year of the mini hydro at Mangahao. Of
more importance was the timing of the rainfall. The periods of high
rainfall have coincided periods of high prices while dry periods and low
spot prices have coincided. As a result the financial impact of own
generation this year has been significantly greater than would be normal.
Major works maintenance this year included the installation of a
tipping gate at Wairere as part of our Resource Consent conditions and
renewing the main seal on the #1 generator at Mangahao. Both of these
works went to plan although the guide vanes for Mangahao G1 were found to
be significantly worn and will have to be replaced early in the 07/08
year. The new online blade adjustment facility at Piriaka is being
specifically engineered for purpose. The unique approach to resolving
technical issues has not been without its problems, but these are being
addressed.
With the cost of new generation and the uncertainty of resource
consent applications we will continue to ensure that the equipment in our
older hydro stations is updated to take advantage of new technologies that
will improve generation efficiencies. Mokauiti station consent has finally
been received from the Environment Court some six years after the initial
hearing. The delays while not as expensive as for a new application are
still significant due to the need to keep consultants on the payroll to
check on progress.
This will require the installation of a tipping gate next summer
and further work on alternative fish passage options both up and down
stream. The proposed hydro scheme on the Mokau River went to a hearing by
Environment Waikato (EW) and Waitomo District Council (WDC) in August.
Rather than use an expert commissioner experienced in hearing complex
planning applications EW chose to appoint three councillors to the panel.
This was particularly disappointing as EW had appointed a commissioner to
head the renewal consent application for Wairere and Mokauiti.
Our analysis of the rejection of the application indicated that
the decision was based upon loss of amenity to a small number of
infrequent users of the gorge to be flooded by the proposed lake. Many of
those users are not locals and bring no economic benefit to local
communities.
Community
King Country Energy has continued to support community
initiatives that benefit everyone in the region. We are delighted with the
growth of King Country Energy KiwiCan in the southern region and many
other similar projects throughout the whole community. We are also very
happy with the Customer Complaints Scheme launched in conjunction with the
King Country Electric Power Trust.
Kit Wilson
