Overview
Endeavour Energy is required to submit a Statement of Corporate Intent (SCI) to NSW Treasury. The SCI is an agreement with the NSW Government which documents the objectives, strategies and obligations by which the business is expected to operate. The SCI sets financial targets and sets clear limits on the scope of activities the business may undertake.
In 2010–11, Endeavour Energy maintained a strong performance, through continued focus on business fundamentals, financial discipline and corporate governance. During the year our Retail net assets (including the Integral Energy brand name) were sold, and activities relating to the purchase and sale of electricity ceased.
Endeavour Energy’s 2010–11 SCI financial targets incorporate the impact from the sale of Retail net assets and reflects a network only structure effective 1 March 2011. It should be noted that 2009–10 outcomes reflect the results of Retail operations for the whole year.
Profit results
Endeavour Energy’s profit before tax result was $354.3 million (excluding the gain on sale of Retail net assets amounting to $759.3 million), exceeding the 2010–11 SCI target of $290.9 million (excluding an estimated gain on the sale of Retail net assets amounting to $748.2 million).The better than expected profit result was due to favourable:
- gross margin driven by the recovery of Solar Bonus payments via the Climate Change Fund (with the SCI assuming no recovery of these costs)
- other revenue primarily driven by the recognition of section 20(N) net cost reimbursements in accordance with section 20(N)(3) of the State Owned Corporations Act 1989
- higher capital contributions, and
- lower borrowing costs.
Excluding the impact from the gain on sale of the Retail net assets, Endeavour Energy’s actual profit after income tax in 2010–11 increased by $65.7 million compared to 2009–10. This was primarily driven by an increase in network use of system (NUoS) income of $159.5 million driven by tariff increases in line with regulatory allowances and the recovery of Solar Bonus payments via the Climate Change Fund, and increases in capital contributions of $16.9 million and other income of $28.5 million driven by Transition Services Agreement revenue and the recognition of section 20(N) net cost reimbursements.
These increases were partly offset by increases in operating expenditure totalling $49.6 million, predominantly due to increases in transmission use of system charges, depreciation and amortisation of $14.9 million and finance costs of $5.0 million. In addition, the net contribution from discontinued Retail operations (excluding the gain on sale of the Retail net assets) decreased by $23.6 million compared to the previous year.
Balance sheet
Endeavour Energy’s total assets increased by $218.5 million compared to the previous year. The major contributing factors included an increase of $436.2 million in property, plant and equipment resulting from increased capital expenditure and system asset valuation outcomes. This was partly offset by reductions in trade and other receivables ($100.0 million), estimated revenue from unread meters ($78.6 million) and emission rights ($11.7 million), primarily resulting from the sale of Retail assets.
Return on assets, calculated as EBIT (excluding the gain on sale of Retail net assets) divided by the average asset base, increased from 9.5% in 2009–10 to 10.8% at 30 June 2011. EBIT increased by 24.5% while average assets increased by 9.2% as compared to the prior year.
Total liabilities increased by $139.1 million compared to the previous year driven by an increase in borrowings (inclusive of discounts/premiums) of $203.2 million, primarily due to the need to fund the capital expenditure program. This was partly offset by a reduction in trade and other payables in the amount of $87.5 million primarily resulting from the sale of Retail net assets.
Return on equity, calculated as profit after tax (excluding the gain on sale of retail net assets) divided by average equity, was 20.5%. This result increased from the 2009–10 outcome of 17.3%, with a 36.7% increase in profit after tax compared to an increase of 15.6% in average equity.
Cash flows
Cash and cash equivalents at the end of the financial year decreased by $27.1 million compared to the prior year. Net cash flows provided by operating activities for the year were $353.5 million, a decrease of $46.9 million compared to 2009–10. This decrease was primarily driven by the sale of Retail net assets on 1 March 2011, following which retail business cash flows were no longer realised.
Net cash flows from investing activities for the year were $433.9 million, a significant increase of $841.7 million compared to the prior year, primarily driven by net proceeds from the sale of Retail net assets amounting to $928.7 million.
Net cash flows used in financing activities for the year were $814.5 million, an increase of $840.4 million compared to 2009–10 result, primarily due to payment of the special dividend from the sale of Retail net assets amounting to $863.7 million.
Unused credit facilities as at 30 June 2011 totalled $650.8 million.
Debt
Balance sheet debt increased by $203.2 million compared to the prior year, primarily due to the requirement to fund the capital expenditure program. The gearing ratio, calculated as debt divided by debt plus equity, increased marginally from 67.7% at 30 June 2010 to 68.0% at 30 June 2011. This result was driven by 8.4% increase in debt compared to a 7.9% increase in debt plus equity. Equity increased primarily due to the net impact of movements in the asset revaluation reserve, driven by system asset revaluation outcomes, and recycling of the retail related hedge reserve to comprehensive income as part of accounting for the sale of Retail net assets.
Shareholder return
Endeavour Energy is committed to delivering sustainable and commercial returns to its shareholder, the NSW Government. The directors declared a final dividend of $156.8 million, representing a decrease of $6.3 million or 3.9% compared to the 2010–11 SCI target, but an increase of $14.2 million compared to the prior year.
Dividend distribution is calculated in accordance with TPP 09-06 Financial Distribution Policy for Government Businesses based on a base payout ratio of 70% applied to the post-tax profit adjusted for non cash fair value movements on financial instruments. The post-tax profit on which the dividend is calculated excludes profit on the sale of Retail net assets on which a special dividend amounting to $863.7 million was paid during the year.
The final dividend distribution has also been reduced by estimated net out of pocket tax equivalent liability amounts payable as a result of an unfavourable ATO ruling in relation to tax neutrality with respect to the sale of Retail net assets.
Capital expenditure
Capital expenditure for the 2010–11 financial year was $496.4 million, $12.6 million below the 2010–11 SCI target. The capital program continues to target asset renewals as well as growth-related projects. The capital program is underpinned by Endeavour Energy’s Strategic Asset Management Plan (SAMP). The SAMP reflects plans and strategies which are aligned to customer and technical drivers, improve long-term network asset values and produce optimal returns to shareholders. The plan sets priorities and summarises the investment in the network required to maintain ongoing network capability, consistent with a ‘best in class’ network asset manager.
Credit rating
Moody’s Investors Services assigned a public credit rating of Aa3 with a stable outlook. Organisations rated Aa are judged to be of high quality and are subject to very low credit risk. This rating reflects NSW Government ownership of Endeavour Energy. The modifier 3 indicates a ranking in the lower end of the generic rating category.
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