ANNUAL REPORT POWERCO HAS GROWN TO BECOME NEW ZEALAND’S LARGEST GAS DISTRIBUTION COMPANY A N D SECOND LARGEST CONTENTS 1 HIGHLIGHTS OF 2003-2004 39 FINANCIAL STATEMENTS 2 FINANCIAL PERFORMANCE AND KEY RATIOS 40 STATEMENT OF FINANCIAL PERFORMANCE 4 CHAIRMAN’S LETTER 40 STATEMENT OF MOVEMENTS IN EQUITY 10 CHIEF EXECUTIVE’S REVIEW 41 STATEMENT OF FINANCIAL POSITION 18 NEW ZEALAND AND AUSTRALIA BUSINESS PROFILES 42 STATEMENT OF CASH FLOWS 20 LINE CHARGES 44 RECONCILIATION OF OPERATING SURPLUS AFTER TAXATION WITH CASH INFLOW FROM OPERATING 21 NEW PRICE REGULATIONS ACTIVITIES 22 NETWORK RELIABILITY 45 STATEMENT OF ACCOUNTING POLICIES 24 FEBRUARY STORMS 47 NOTES TO FINANCIAL STATEMENTS 25 TASMANIAN NETWORK 63 AUDITOR’S REPORT 26 BOARD OF DIRECTORS 64 STATUTORY INFORMATION 28 EXECUTIVE MANAGEMENT TEAM 73 DIRECTORY 30 CORPORATE GOVERNANCE 35 DIRECTORS’ INFORMATION FINANCIAL CALENDAR 18 June 2004 2003-04 final dividend payment Mid December 2004 2003-04 interim dividend payment 29 June 2004 Guaranteed bond interest payment 29 December 2004 Guaranteed bond interest payment 27 July 2004 Shareholders’ annual meeting 22 February 2005 Capital bond interest payment 23 August 2004 Capital bond interest payment 1 March 2005 Redeemable fixed coupon bond 1 September 2004 Redeemable fixed coupon bond interest payment interest payment 29 March 2005 Guaranteed bond interest payment 29 September 2004 Guaranteed bond interest payment This Annual Report is dated 16 June 2004 and is signed on Mid November 2004 2003-04 interim report behalf of the Board by: 22 November 2004 Capital bond interest payment Barry Upson Ian Lobb Chairman Deputy Chairman EBITDA and dividend increased in 2003-04 ELECTRICTY DISTRIBUTOR. Powerco is a strongly performing energy distribution company. POWERCO LIMITED Powerco owns and operates major electricity and gas networks in New Zealand, and has a new-opportunity gas network under development in Tasmania. It also has energy network and utility services businesses in 1 New Zealand and Queensland and operates its asset management in ANNUAL REPORT 2004 New Zealand. Powerco has grown to become New Zealand’s largest gas distribution company and second largest electricity distributor. Powerco is a NZX-listed company with total assets of $1.71 billion. Powerco is focused on the safe, reliable and economically-efficient distribution of energy and on sustained growth in value to shareholders. HIGHLIGHTS OF 2003-04 • EBITDA of $190 million. • Annual dividend increased to 16 cents per share. • Tasmanian gas network rollout on track – agreement reached for stage 2 growth. • Operating efficiencies across the enlarged group – progress from successful business acquisitions. • Debt refinancing successes – bond issues oversubscribed in United States and New Zealand. • Rapid and effective response to February 2004 storms – Powerco praised for strength in systems, people and approach. • New electricity regulations – Powerco input contributed to improved outcome. • Comprehensive update in corporate governance – Powerco demonstrates best practice. POWERCO LIMITED ANNUAL REPORT 2004 FINANCIAL PERFORMANCE AND KEY RATIOS FOR THE YEAR ENDED 31 MARCH 31 MARCH 31 MARCH 31 MARCH 2004 2003 2002 2001 $000 $000 $000 $0001 Total operating revenues 324,446 228,305 162,652 141,862 Total operating expenses 201,976 147,215 103,151 99,073 EBITDA 190,000 127,200 89,700 67,400 Net interest expense 2 79,542 53,714 28,482 15,849 Net earnings before tax 42,928 27,376 31,019 26,940 POWERCO LIMITED POWERCO LIMITED Total tax expenses (credit) 15,358 (10,678) (1,958) 3,294 Net profi t after tax 27,570 38,054 32,965 23,646 Net cash fl ow from operations 106,487 71,176 61,794 N/A Total dividends payable 50,589 38,641 29,139 27,805 2 Balance Sheet 3 AS AT 31 MARCH 31 MARCH 31 MARCH 31 MARCH ANNUAL REPORT 2004 ANNUAL REPORT 2004 2004 2003 2002 2001 $000 $000 $000 $000 Total assets 1,706,095 1,716,815 867,576 740,744 Shareholders’ equity 3 558,779 578,523 420,956 418,277 Net interest bearing debt 2 1,094,624 1,091,241 423,081 306,202 Total liabilities 1,147,316 1,138,292 446,620 319,817 Ratios FOR THE YEAR ENDED 31 MARCH 31 MARCH 31 MARCH 31 MARCH 2004 2003 2002 2001 Net senior debt to total capital 60.0% 60.0% 48.8% 41.3% Earnings per share 3 8.72c 14.6c 14.8c 10.6c Free cash fl ow per share 3 14.5c 12.3c 15.8c N/A Dividends declared per share 16c 14c 13.1c 12.5c Net tangible asset backing per share 3 $1.75 $1.83 $1.88 $1.88 Pretax interest coverage 1.7x 1.7x 2.1x 1.4x Funds from operations interest coverage 2.6x 2.7x 3.1x 2.6x Funds from operations to total debt 19.1% 17.8% 20.9% 19.9% 1 Figures for the 2001 year are pro forma after adjustments to eliminate one-off costs associated with the amalgamation of Powerco and CentralPower. 2 During the 2004 year, Powerco issued US$175 million (NZ$294.3 million) in long term senior debt to institutional investors in the United States and $250 million in medium and long term senior tradeable bonds to New Zealand investors. The issues were part of a programme to refi nance existing debt. 3 Total issued capital at 31 March 2004 was 316,186,775 ordinary shares, including 93,750,000 new shares issued in December 2002. POWERCO LIMITED ANNUAL REPORT 2004 ��������� ����� ������� ��������� �� ����� ��� ������� ��� ��� ������� ��� � � ������� � � � ������� � � ��� � ��� �� � POWERCO LIMITED ���� ���� ���� ���� POWERCO LIMITED ��������� ��������� ������ ����� ���� ��������� ��� ����� �� ���� ���������� ��� �� ������ 2 3 ����� ANNUAL REPORT 2004 ����� ANNUAL REPORT 2004 ��� �� ����� ������ ����� � � � � � ��� �� � ����� � � � � � � � ����� �� � � � ���� ���� ���� ���� ���� ���� ���� ���� ��������� ����� ������ ������������� ���� �������� �������� ���� � � � ���� � � � ������� � � ������� ��� � ���� ���� ���� ���� 5 POWERCO LIMITED ANNUAL REPORT 2004 CHAIRMAN’S LETTER POWERCO LIMITED 4 ANNUAL REPORT 2004 “We have consolidated our position at the forefront of electricity and gas distribution.” Barry Upson POWERCO LIMITED POWERCO LIMITED 4 5 ANNUAL REPORT 2004 ANNUAL REPORT 2004 Dear Shareholders I am pleased to report on another year of strong performance by Powerco. During 2003-04, the Company consolidated its position at the forefront of electricity and gas distribution in New Zealand, and delivered on growth objectives. It was also a year of achievement on behalf of energy users, especially when Powerco’s network areas were battered by the worst storms in decades during February 2004. Net profit after tax for the year was reported on 27 April at $55.1m. It was particularly pleasing to note that this was ahead of the $53.6m forecast issued by the Company at the time of our new equity raising in November 2002. However, since that date, the three major shareholders, holding a combined 53.64% in the Company have announced that they are considering divesting their shares and are seeking offers for their shares. The consequence of this announcement was discussed with the Company Auditor, Deloitte, who advised that the previous practice of recognising the future tax benefit arising from tax losses as an asset in the Statement of Financial Position was no longer appropriate. The Income Tax Act requires 49% shareholder continuity for tax losses to be carried forward from one accounting period to the next. Current accounting practice requires “virtual certainty” that future income tax benefit assets are realisable, which requires “virtual certainty” that there will be sufficient shareholder continuity to satisfy the Income Tax Act test. We restored power to nearly 100,000 affected customers T H E FEBRUARY 2004 STORMS HAD A MAJOR IMPACT ON POWERCO AND, OF COURSE, DISRUPTED THE LIVES OF THOUSANDS OF CUSTOMERS ON OUR NETWORKS. SHAREHOLDERS CAN B E P R O U D OF HOW THEIR COMPANY RESPONDED. POWERCO LIMITED POWERCO LIMITED The Board has concurred with Deloitte that there over 40 years will never materialize, a position is no longer virtual certainty that the shareholder that has not changed at this time. The proposed continuity threshold will be maintained and thus international accounting standards, to be had to reflect this impact in the current year’s implemented for the 2007 annual accounts, will 6 result and advise the market. The full impact was require Powerco to account for deferred taxation 7 ANNUAL REPORT 2004 to reverse the cumulative benefit arising from tax on a total liability basis (comprehensive method) ANNUAL REPORT 2004 losses to 31 March 2004 previously calculated which will have the effect of reducing accounting amounting to $27.6m. This reduced our previously profits but will have no effect on cash earnings. announced net profit after tax result from $55.1m The Company is currently preparing for the impact to $27.6m as well as reducing total assets and arising from these new accounting standards. shareholders’ equity by the same amount. If Powerco’s strong performance was achieved Powerco’s three major shareholders do not sell despite pressure on costs and revenues from their shares or sufficient shareholder continuity a number of adverse events during the course is maintained, Powerco will not lose the future of 2003-04. The year started with an electricity income tax benefit asset and the above accounting supply crisis, followed by a national electricity adjustment will be reconsidered when the next set conservation campaign, which had the effect of of financial statements are prepared. reducing our volumes. It is important to note that this change had no Revenue and earnings were under budget for the effect on the cash earnings of the Company. first quarter ended 30 June 2003, but recovered On the strength of the company result, Powerco during subsequent quarters. declared a final dividend of 8.8 cents per share (cps) payable on 18 June 2004 to all shareholders The February 2004 storms, described by NIWA on the register as at 4 June. This will bring to to be “one for the record books” and judged an 16 cps the full dividend for 2003-04, up from “extreme event” by the Commerce Commission, the previous year 14 cps and consistent with our had a major impact on Powerco and, of course, November 2002 forecast.