Port of Tauranga

ANNUAL REPORT

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Matters Relating to the Electronic Presentation of the Audited Financial Statements

In relation to the audit report included in the financial statements of Port of Tauranga Limited for the year ended 30 June 2010 included on the Port of Tauranga Limited's website, the Port of Tauranga Limited's Board of Directors is responsible for the maintenance and integrity of the Port of Tauranga Limited's website. We have not been engaged to report on the integrity of the Port of Tauranga Limited's website. We accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

The audit report refers only to the financial statements named above. It does not provide an opinion on any other information which may have been hyperlinked to or from the financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited financial statements and related audit report dated 19 August 2010 to confirm the information included in the audited financial statements presented on this website.

Legislation in New Zealand governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.
 
Glenn Keaney
KPMG
On behalf of the Auditor-General, Tauranga, New Zealand

CHAIRMAN'S REPORT

INTRODUCTION

Last year, in the light of an international financial market collapse, we made the decision to support our customers by deferring any increase in tariffs during the year. It therefore makes me very proud to be able to report underlying earnings growth in 2010.

FINANCIAL PERFORMANCE
Our underlying earnings after tax for the year ended 30 June 2010 was $49.403 million - an increase of 9.3% on last year's record profit. This was earned on revenue of $148 million, up $4.4 million on the prior year.

However, the Government's recent Budget announcement and subsequent legislation change to reduce the tax depreciation on buildings to zero percent has produced a one-off non cash adjustment to income tax payable of $10.5 million.

There will be no change to the actual tax payable until the 2011/2012 income year, with the additional tax due to the building depreciation change estimated to be approximately $0.4 million per annum resulting in a reported net profit after tax of $38.016 million. This increase in tax will be more than offset by the company tax rate reduction to 28% in 2011/2012 which will reduce tax payable by approximately $1.4 million per annum. Simply put, the Government has taken with one hand and given with the other, with the result being a reduction in tax payable for the Group of $1.0 million per annum from 2011/2012.

In the current climate of declining property values, it is encouraging that our property assets have actually increased by $31 million in the 30 June 2010 revaluation.

The Board's policy is to maintain a strong capital base, so as to maintain investor, creditor and market confidence, and to sustain the future business development of the Group.

Port of Tauranga continues to have one of the lowest costs of funds of any listed company in New Zealand - a reflection of the Company's strong focus on treasury management. We have strong long-term relationships with our banking partners; ANZ, BNZ, and CBA, and this year we have renegotiated our debt out to 2013-2015 at very favourable terms, despite the current economic climate.

The Chief Executive's report will detail changes in cargoes but the positive highlight was a substantial increase in forestry exports.

DIVIDEND
Directors have declared a final dividend of 20 cents per share, on top of the interim dividend of nine cents per share, bringing this year's total dividend to 29 cents per share. This year's total dividend represents an increase of 7.4% over last year's dividend distribution.

DIRECTORS
Messrs Michael Smith and Sir Dryden Spring retire at the Annual Meeting in accordance with the Company's constitution and offer themselves for re-election.

STAFF
Port of Tauranga staff continue to manage the business very prudently with tight cost control while maintaining service levels, and ensuring that maintenance and necessary capital expenditure have not been compromised.

Several senior members of staff retire in 2010 - including Corporate Services Manager Terry James after 13 years' service as a member of our small senior management team, Grant Macvey after 20 years and Geoffrey Thompson after 39 years - and we thank them for their long service and invaluable contribution.

INDUSTRY ENVIRONMENT
Commentators, including the OECD, continue to highlight the need to enhance efficiencies in the New Zealand ports sector. The OECD's 2009 Economic Survey notes that New Zealand should aim to reduce inbound and outbound shipping costs to make it attractive to innovate, locate in or do business with New Zealand. It says that ownership changes and consolidation around fewer port companies are likely to be integral to enhancing efficiency in this sector.

We believe that any future infrastructure investment needs to be based on sound commercial principles. A logical hierarchy of ports will emerge for New Zealand if ports simply apply commercial principles to their investments - and this will happen naturally and rapidly if they do so. In fact, port companies are already required by legislation to act commercially. Ports must price and invest to achieve their cost of capital as required by the Port Companies Act.

Our view of a logical outcome is that there will emerge one major port in the North Island and one in the South with the infrastructure to handle the majority of container cargoes on large vessels, with substantial efficiencies for exporters and importers and lower taxpayer- borne costs in transport infrastructure.

These two hub ports will be supported by a strong network of regional ports linked by coastal shipping, and rail services.

Tauranga is the obvious choice to lead investment, with its ability to do to the necessary expansion at a comparatively low cost, in the timeframe required, and without taking on additional debt.

FUTURE
While this year's profit is very pleasing, we believe the often reported economic recovery is likely to be both slow and patchy. Whatever the shape of the economy over the coming year, we are confident that Port of Tauranga's strong financial position, with a balance sheet capacity to respond to market demands for further infrastructure development, will allow us to capitalise on all opportunities. Our earlier diversification strategies insulate the Company well, with a stable core business in the Parent and further earnings growth forecast in our Associate companies. Based on current trade volumes we expect to maintain earnings growth into the next financial year.

Our continued focus on controlling costs, whilst investing prudently for the coming decades, positions the Company well as a North Island hub port and New Zealand's Port for the Future.

John Parker
CHAIRMAN