The adoption of new accounting standards in 2006 has dramatically changed the appearance of the Corporation’s financial statements. A number of financial assets and liabilities that were previously disclosed by way of note to the accounts have been recognised on the Balance Sheet at fair value. Changes in the fair value of the assets and liabilities between years are reported as gains or losses in the Income Statement. These fair value gains and losses have the potential to be volatile as their valuations are dependent on inputs such as forward energy prices and interest rates which have their own inherent volatility. The Income Statement for 2007 reports a result before the net fair value gains which provides an indication of our results from normal operations and which is more closely aligned to cash flow.

Short Term

Profit before fair value movements and the Bell Bay sale for 2006/07 was $19.5 million. This was considerably lower than our 2006/07 target, primarily due to the impact of low inflows on our hydro generation and the substantial costs of meeting demand by running Bell Bay Power Station and importing electricity across Basslink. The impact of import costs was partly offset by high market prices captured in June after receiving rain in May.

Profit before tax for the year was $113.5 million. This includes $82.8 million in fair value movements and a gain on the Bell Bay sale agreements of $11.2 million.

Our cash flow, measured as receipts from customers less payments to suppliers and employees (presented in the Cash Flow Statement) was $134.5 million, a drop of $87.1 million from the previous year. Again, this was primarily attributable to the low inflows received during the year. The tough operating conditions and reduced cash flow had a significant impact on our debt levels.
Our net debt increased over the year from $1.061 billion to $1.141 billion. Despite this, the Corporation has adequate standby facilities available to draw on in the event they may be required in the future.
With the market interest rates rising over the year, the Corporation’s weighted average cost of debt at 30 June 2007 was 6.46 per cent, an increase of 31 basis points over the 2006 level.

Our operating costs, including labour, came in under target for the year. We did see increased costs of operating Bell Bay and from Basslink. The Basslink facility fee payments include a variable element that follows market electricity prices. With market prices moving higher and faster than predicted this element of the facility fee increased. Normally, the higher prices would present additional revenue opportunities through export across the link. However, due to the low inflows and the impact on our storages these opportunities were constrained in order to hold our storage position and maintain the energy supply to the State.

During the year, the Corporation launched the Get Competitive Program. This initiative came about as a result of the need to ensure that the business operated from a competitive cost base in the NEM. The program identified target areas for reduction of recurrent expenditure, established savings of $7.7 million in 2006/07 and has targeted $20 million in cost reductions by 2009. The low inflows during the year heightened the need to control our costs and there was a sharp focus on our discretionary spend during the year.

	Table 8 Distribution to Government

The dividend of $21.2 million paid during the year was declared from the 2006 profit. The low inflows for the year, and their flow-on impact to the operating result and debt levels, place the Corporation in a position where it will not be recommending that a dividend be paid to the State. This is the first time since the disaggregation of the Hydro-Electric Corporation in 1998 into three separate utility businesses that Hydro Tasmania has not declared a dividend. Funds that would have been applied to payment of a dividend will be utilised to keep debt levels down and rebuild storages.

For subsequent years, Hydro Tasmania’s weak Balance Sheet and its need to improve the capital structure will result in moderate returns to Government and until our capital structure improves, a low fixed dividend of $10 million per annum is planned, although this will be reviewed to take account of revenue outcomes, inflows and our storage position.

Income tax payments also reflect the 2006 result. Lower payments are expected in 2007/08 as a result of a lower taxable income in 2006/07.

Capital expenditure

The capital program was largely maintained during the year with our capital expenditure of $54.2 million being on target. In addition, further investment of $10 million was made in the Roaring 40s joint venture.

Long Term

In 2006/07, the drought conditions and low inflows had a significant, adverse impact on our financial position. Our recovery from this position will continue in the medium term, and even if inflows return to “average” levels, we will still have a financial burden due to the need to invest in rebuilding our storage position. Despite the disappointing short-term financial results, Hydro Tasmania believes that the long-term financial outlook remains positive.

The outlook is partly influenced by the business opportunities presented by global responses to climate change. As Australia’s leading renewable energy generator, Hydro Tasmania is in a position to respond to opportunities as they arise. The development of a carbon market in Australia has the potential to provide a significant boost to the revenues of both Hydro Tasmania and Roaring 40s. We recognise that there are areas to develop and to improve in our response to climate change. Investigation is currently under way into how best to position the business in the current debate and leverage maximum benefit from our competitive advantage.

Strategies to maximise revenue, improve our capital structure and reduce costs are in place to contribute to long-term financial health.

Hydro Tasmania faces business risks from the trend in the NEM toward vertical and horizontal integration and the overall rise in electricity prices as a result of drought, particularly while we rely on imports over Basslink to assist with the low storage position. In the short run this also reduces the extent to which Hydro Tasmania can benefit from the overall price rise in the NEM. However, in the medium to long term, as our storages rebuild, Hydro Tasmania will be able to access significant upside from the higher prices, influencing the positive long-term value of the business.

	Gordon Power Station refurbishment

Hydro Tasmania regularly reviews its capital structure. The 2007 review indicated that our Balance Sheet has too much debt to withstand significant negative impacts to our profit generating capability, including unfavourable hydrological or market events. The review recommends that Hydro Tasmania should reduce its debt level by between $300 million and $450 million to improve its sustainable financial resilience. Discussions have continued with our Shareholder regarding a $300 million equity injection. Our financial strategy is to reduce the level of borrowings by paying down debt with free cash, carefully assessing the merits of competing demands on funds.

Basslink hedging

Costs associated with the initial phase of Basslink are incorporated into ongoing hedging contracts of 24 years duration, at an effective fixed interest rate of 7.41 per cent. The fair value of the Basslink hedges has been recorded as a financial liability. Further detail is available in notes 14 and 17 of our financial statements.

Government financial assistance

The Tasmanian Government provides financial assistance to Hydro Tasmania through Community Service Obligation funding, grants and supplying guarantees to our financiers.

Hydro Tasmania has a formal agreement with the Department of Treasury and Finance to provide concessional arrangements to electricity customers on the Bass Strait islands, with net costs of the activity funded by the State Government as a declared Community Service Obligation of $6.4 million in 2006/07.

Hydro Tasmania Consulting and the Department of Primary Industries and Water (Tasmania) received a grant for $8.7 million over three years from the Australian Government National Water Commission for the Tasmanian Water Use Management Project. The project will provide licensed water users across Tasmania with reliable water use data for management and planning purposes. The project utilises the innovative telemetry system, Ajenti, which has been developed by Hydro Tasmania Consulting.