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Review of Investments

Moving beyond our own backyard

Since the corporatisation of the previous Marlborough Electric Power Board in 1993, the Marlborough Lines Board has taken a very pro-active view to investing beyond our immediate regional boundary - beginning with the acquisition of Nelson Electricity Ltd (owner of the central Nelson electricity network) in 1996.

Following the ‘Bradford' industry restructuring in 1998 and the subsequent sale of Marlborough Lines generating and electricity supply businesses in 1999, the Directors of the day were strongly of the view that the capital of the Company should remain intact. They reasoned that sale proceeds would be best applied in seeking further electricity industry investments to build a stronger, more valuable asset for the existing and future customer/owners. The alternative was to distribute the capital back into the community.

In 2002 a consortium comprising Marlborough Lines, Electricity Invercargill Ltd and The Power Company Ltd (both Southland based) was successful in bidding for the assets of Otago Power Ltd based in Balclutha. As part of the purchase of the Otago Power assets, the parties were also able to acquire the contracting business known as Otago Power Services Ltd. The Otago Power network business is now known as the OtagoNet Joint Venture.

Today, the Directors still consider that adding shareholder value to the business through investment in similar businesses is in the best long term interests of the owners. The acquisition of additional electricity network and contracting businesses is seen as complementary to the Parent company operations and a good investment fit with the Company's management experience and staff competencies.

This section of the report provides some additional information on investments in the Nelson and Otago regions; their vital statistics, operational results and the basis by which Marlborough Lines must include the results from the investments in the Group financial statements.

Investments in separate companies and joint ventures, inevitably add complexity to ownership structures and accounting and taxation requirements. On page 49 we disclose the various accounting treatments required for the investment companies. We have also included separate financial tables to give readers perspective on the scope of these operations.

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Nelson Electricity Ltd

The Nelson Electricity network delivers electricity to the city of Nelson, it has been owned and operated jointly by Marlborough Lines and Network Tasman Ltd since 1996. Each company owns 50% of the issued shares. The objectives of ownership in Nelson Electricity are to deliver a reliable supply of electricity at reasonable cost and to furnish the shareholders with a commercial rate of return.

Nelson Electricity has a management staff of four and all maintenance and capital work is undertaken on a contract basis by independent contractors. The two shareholding companies provide additional financial and technical resources to assist the operation and draw management fees on a commercial scale. Nelson Electricity has continued to perform strongly and to provide financial benefits by way of dividends to its shareholders.

The Board of Nelson Electricity comprises five directors; two of whom are appointed by Marlborough Lines, two by Network Tasman, plus an independent Chairman. The directors appointed by Marlborough Lines are Messrs David Dew and Ken Forrest.

Nelson Electricity:

In the year to 31 March 2009, Nelson Electricity recorded a surplus after taxation of $2.076m ($1.524m in 2008). Dividend payments totalling $1.8m were paid to the two shareholding companies (2008 $1.8m).

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OtagoNet Joint Venture

Networks owned by the OtagoNet Joint Venture deliver electricity to the wider Otago region excluding Dunedin and Central Otago. Shares in the joint venture are beneficially held by Marlborough Lines 51%, Electricity Invercargill Ltd 24.5%, and The Power Company Ltd 24.5%, through their respective investment holding companies: Southern Lines Ltd, Pylon Ltd and Last Tango Ltd. The joint venture is managed on a commercial basis by the Invercargill based management company, PowerNet Ltd. PowerNet also manages networks for Electricity Invercargill and The Power Company.

OtagoNet:

The Board of OtagoNet comprises four directors with one each being appointed by Electricity Invercargill and The Power Company and two being appointed by Marlborough Lines. The Marlborough Lines representatives on the Board are Messrs Ken Forrest and Terry Shagin.

In the year to 31 March 2009 the joint venture recorded a net surplus of $11.19m ($10.693m in 2008). Distributions to the joint venture parties in 2009 totalled $10.45m compared to $8.30m for the previous year.

The OtagoNet Joint Venture is unincorporated and the tax liability on net income is transferred to the joint venture partners on a proportional basis in relation to their respective shareholdings.

Otago Power Services Ltd

Otago Power Services provides electrical contracting services, network construction and maintenance throughout the Otago and Southland regions.

Otago Power Services has a staff of 80, and is based in the Otago town of Balclutha with additional branches in Gore, Palmerston and Ranfurly. The company is managed by Marlborough Lines in conjunction with its own contracting business.

The board of Otago Power Services has two directors, Mr Ken Forrest of Marlborough Lines (Chairman) and Mr Greg Buzzard of PowerNet.

In the 2009 financial year the company's turnover reduced slightly from $9.210m in 2008 to $9.098m. Net profit after tax fell from $982,000 to $897,000 in 2009. The company was able to distribute dividends at the same level as the previous year (total $600,000).

Given the declining trading conditions, together with winter weather conditions which severely disrupted the work programme, the directors of Otago Power Services are pleased with these results.

Investments Generally

The Marlborough Lines Directors continue to be very satisfied with the results achieved by all of the investment companies whose investments are projected to increase in profitability and benefit shareholders through increased dividends and growth in capital value.

Total cash flows generated from the investment companies for the year were $6.968m inclusive of management fees, compared to $5.984m for the 2008 year. Significant in this total was the increase in cash flow from the OtagoNet Joint Venture of $1.096m.

Accounting for Investments

  1. Marlborough Lines acquired a 50% share in Nelson Electricity in June 1996. Nelson Electricity is defined under the Financial Reporting Standards (FRSs) as an associate company. That is a company in which an interest in the equity is held and significant influence is exercised but control is not established. In such cases equity accounting is applied in accord with NZ IAS 28. This requires Marlborough Lines to carry the investment at cost, less any impairment in the Parent accounts, and to equity account its share of Nelson Electricity's undistributed surplus or deficit in the consolidation process to arrive at the Group position.
  2. The investments in the OtagoNet joint venture and Otago Power Services occurred in July 2002 and are held by Marlborough Lines' fully owned subsidiary Southern Lines Ltd. The investment in Otago Power Services is equity accounted in Southern Lines' parent and group accounts on the same basis as that described for Nelson Electricity above. The investment in the OtagoNet Joint Venture, also held by Southern Lines, was previously accounted for through a proportionate line-by-line consolidation of 51% of revenues, expenses, assets and liabilities of OtagoNet into Southern Lines group numbers. With the introduction of NZ IFRS (in the 2008 financial statements) the company was required to equity account the joint venture on a similar basis to Otago Power Services, in accord with the requirements of NZ IAS 28.
  3. Southern Lines, being a fully owned subsidiary of Marlborough Lines, is consolidated into the Marlborough Lines Group financial statements in accord with NZ IAS 27.
  4. An outline of the formal relationship between the Parent company Marlborough Lines, and its investments and investment partners is shown in the diagram in About Marlborough Lines.