LineTrust South Canterbury	:	40.0%
Timaru District Holdings Ltd	:	47.5%
Waimate District Council	:	7.54%
Mackenzie District Council	:	4.96%

The shareholding mix reflects the Timaru District Council’s previous sole ownership of Timaru Electricity Limited prior to the merger, the role of LineTrust South Canterbury (“Trust”) as a trustee of consumer interests, and the desire for broad community ownership by the allocation of shares to Waimate and Mackenzie District Councils. In 1993 it was anticipated that the South Canterbury Power Trust (and its potential successor) would have a maximum combined existence of 15 years. However, in 2002 the South Canterbury Power Trust was resettled on the Trust. The Trust has a perpetuity period of eighty years from 19 July 1993.

2.0  Performance Analysis

There are three key measures of performance for an electricity lines business being reliability, price of services and profit.

2.1  Reliability 

The Commerce Commission has devised several reliability measures, some related to length, type or voltage of lines, and others related to customer service. The need for any business to focus on customer service is paramount and so the best performance parameter to consider is SAIDI, being the System Average Interruption Duration Index. This gives outages in terms of minutes per year. Alpine Energy continues to be a reliability leader with amongst the best internal statistics in New Zealand.

Year Ending 31 March	SAIDI
	Minutes p.a.	NZ Ranking	NZ Average
1999	67	6th	214
2000	46	3rd	171
2001	75	7th	176
2002	69	7th	156
2003	182¹	18th	184
5 year average	88	8th	180
2004	119²	N/A	N/A

¹ This includes 102 minutes resulting from a heavy snowstorm in June 2002.
² This includes 37 minutes resulting from a cable fault / fire in the Grasmere Street Substation in December 2003.

2.2  Price of Services 

Alpine’s price of services, especially line charges, continues to be amongst the lowest in New Zealand, although with different companies having a different mix of fixed and variable charges and different structures for off peak controlled supply, comparisons are difficult. A simple measure is the line revenue per unit sold on the network:

Year Ending 31 March	Line Revenue ¢/kWh	NZ Ranking	NZ Average
1999	4.1	10th	4.6
2000	4.4	8th	5.1
2001	4.0	6th	5.0
2002	4.3	6th	5.2
2003	4.2	6th	5.2
2004	4.3	N/A	N/A

2.3  Profitability 

The profitability of the company is a little more difficult to consider because we have the effects of the lines business which is the regulated part of the company, and the wider Alpine Energy Group which includes investments in other companies such as Networks South and NetCon, Opuha Dam, and Rockgas Timaru. Rankings of the lines business part of the company are possible from MOC statistics, however no comparative statistics are available for the Group which is the true extent of the Trust’s investment.

Year Ending 31 March	Lines Business Profit		Group Profit on Shareholder Funds
	Return on Equity (ROE)	Ranking
1999	7.2%	9th	9.8%
2000	6.5%	11th	7.1%
2001	8.3%	8th	5.8%
2002	10.6%	6th	9.9%
2003	11.7%	7th	10.3%
2004	N/A	N/A	9.6%

2.4 Conclusion

The above performance statistics show that Alpine Energy Ltd, despite the disadvantages of a network spread across a sparsely populated provincial region, consistently meets the highest standards of operational and financial performance.

3.0 Continued Trust Ownership

3.1  Strategic Ownership Issues

Alpine Energy, as owner and operator of a regional infrastructure asset, is often under pressure by some groups as a means to achieve a specific agenda. For example it is clear that a percentage of the South Canterbury community is financially disadvantaged and therefore argue that low line charges will help them budget their income. Such a broad brush approach to social needs also means that the better off part of the community also benefits from a social subsidy, and that the discounted cost of electricity prevents other commercial energy sources such as coal, gas (LPG) and firewood from competing on a level playing field.

Alpine Energy Ltd is a strong business entity and puts the sustainable interests of the company and its shareholders ahead of specific agenda and sectional interests. Furthermore it is considered that the restructuring and centralisation of the New Zealand economy has left South Canterbury with few companies with the financial strength and commitment to invest and therefore make a real economic difference to the region as a whole.

Government has expressed its desire to continue the process of gaining industry efficiencies in order to minimise operating costs, return the full cost of capital to shareholders, enable corporate taxation and thereby create efficient pricing of services.

Alpine Energy has chosen to retain ownership of the infrastructure assets while forming an asset management company (Networks South Limited) with a contracting subsidiary (NetCon Limited) jointly with Network Waitaki Limited. This has resulted in a more efficient and effective delivery of services in South Canterbury and North Otago. However, Network Waitaki Limited has advised the Company that it will not be renewing the Joint Venture Agreement relating to Networks South Limited upon expiry on 30 June 2005.

3.2 Advantages of Continued Trust Ownership

The Trust is a single purpose organisation, directly elected by all consumers and representing no specific consumer segment. It is in a unique position to be focussed on the company, its sustainability and performance. While it is possible for a small vocal group to catch the Trustees attention, the 3 yearly election process for Trustees ensures they remain accountable to all consumers, and the needs of the community at large.

The Trustees therefore have a unique opportunity to develop a vision for the future of Alpine Energy that will benefit the whole South Canterbury region and ultimately the consumers. Should the Trust shareholding be distributed it would be more difficult for many individual shareholders to exert such influence over the other major Council shareholders who are perhaps more focussed on a vision for their specific district and ratepayers.

The Trust as a single entity is therefore a strong and influential shareholder able to negotiate equally with the District Council shareholders.

The consequential advantage to the company of continued ownership is that 27,300 beneficial interests in the Trust are co-ordinated by the Trustees into a single strategic vision, rather than many thousands of shareholders having a diverse range of views, and the attendant potential administration costs.

 3.3  The Disadvantages of Continued Trust Ownership

There is a cost in operating the Trust, reflecting Trustee fees, administration and 3 yearly election costs. However, this needs to be balanced with the potential costs to the company should the 27,300 consumers hold the shares. This would include the servicing of the shareholders with interim reports, dividends, the annual report, the election or appointment of the two directors the Trust presently appoints and the costs of the annual meeting and extraordinary meetings. Beneficiaries of the Trust, as the future shareholders, are unable to arrive at an informed view on whether the cost to them as individuals of the present situation is greater or lesser than the cost to them of alternative arrangements.

There is a risk that the 3 yearly Trust elections might focus on populist issues and circumvent the genuine legal and commercial responsibilities of the company, as these are much too complex to be represented and comprehended in a public debate. This could create the opportunity for political capture of the legitimate commercial responsibilities of Trustees and the potential for conflict between Directors and Trustees.

Some would consider that rather than a common vision, there is a strong case for widespread shareholding and diversified views as this will bring a broader partnership between individual investors and collective bodies such as District Councils. Continuation of the Trust as a single holder of 40% of Alpine Energy’s shares prevents this opportunity from arising.

Continued Trust ownership deprives the individual beneficiaries of the Trust of control and access to their assets. It assumes the individuals in the community cannot manage their personal affairs in a responsible manner.

3.4   Options Arising From This Review

After considering the issues in this review, the Trustees will have a number of options. These include:

·        Immediately commence a process of share sale or distribution involving consultation with the public.

·        Continue to hold the shares and distribute the dividend proceeds each year.

The Trust in reaching its decision on the preferred option will need to consider the issues outlined above and in addition, a number of further issues including:

The ongoing change in the regulatory environment for line businesses makes sustainable decision making uncertain if the best interests of the consumers are to be preserved.

Local Government Reform is requiring Local Bodies such as District Councils to operate their commercial investments in an increasingly transparent manner. This places the wish of individual Councillors to meet social goals through the pricing of electricity line services in conflict with the corporate responsibility of Councils to avoid cross subsidies.

The high level of misunderstanding in the wider community about the intent and form of the industry reforms makes it difficult for consumers to make informed decisions on their personal options.

An early share distribution would likely see widespread cashing up by consumers and dissipation of the community wealth accumulated by the Company and Trust.

Alpine Energy Ltd, which under the requirements of the Energy Companies Act 1992 operates as a successful business, is well equipped and positioned to make informed commercial decisions on expansion and development investments, and brings to those decisions a financial ability to ensure they proceed.

While Timaru District Council no longer includes a target to increase its shareholding in Alpine Energy Limited in its Annual Plan, a distribution of shares by the Trust would easily enable the Council to achieve control of the Company by purchasing freely traded shares.

Successive Local Government Reforms, and the spectrum of views on commercial development amongst elected members of the Council would tend to prevent Alpine Energy operating as a normal business with a normal commercial risk profile. Local Government demands tend to ensure elected Councillors operate in a risk averse environment.

Opportunities to add value to the business by reducing operating and management costs are better investigated and implemented by commercial directors who are able to consult fully with owner representatives who have a detailed knowledge of a very technical industry.

If a distribution of Trust shares occurs it is better to be done as a single event rather than a progressive trickle. This will ensure that any selling shareholders are able to maximise sale price and value through the creation of an active market for resale of shares.

The sale of shares as a block may realise a “control” premium which would be reflected in the subsequent cash distribution to shareholders.

The share distribution should, if it occurs, follow the following process:

Valuation of shares.

Identification of and notification to Trust beneficiaries of their entitlement value.

Trust beneficiaries elect to receive shares or cash.

Trust beneficiaries and existing shareholders can elect to preferentially purchase more shares from the pool created by those electing the cash option.

Based on the size of the pool the then shareholders should consider whether the company buys the remaining shares or offers them for sale to the market at large.
This proposal gives preference to ongoing local share ownership in the medium term and ensures the company retains shareholder loyalty through strong performance.

The current Trust dividend distribution policy reflects the level of line charges paid, and therefore the contribution of the various consumer groups to the profit and accumulated value of the company.

It needs to be noted, however, that the traditional political arguments for community ownership and control are not easily justified as it is considered there is appropriate protection against abuse of the natural monopoly. The traditional arguments that should not be accepted as relevant to the debate on Trust ownership include:

That a share distribution will lead to foreign control and therefore irresponsible management of prices and reliability.

Collective ownership with zero profit targets solely in order to avoid taxation is a proper use of community assets.

Low prices through low profit will encourage economic development in the region. There is however, a widely held view that low prices generated by business efficiency and reasonable company profits are helpful in assisting economic growth.

4.0 Options for Company Development

4.1  Water Supply & Irrigation

Alpine Energy at present has most of its assets in the electricity network and support services covering South Canterbury, together with investments in Opuha Dam (50%) and Rockgas Timaru (50%).

These external investments have demonstrated that there are business growth opportunities in South Canterbury that can lead to economic growth and energy choices in the region.

Electricity network growth is entirely demand driven and has occurred in South Canterbury in recent years as a direct result of new on-farm irrigation systems, and the down-stream effects of processing the increased agricultural outputs resulting from that irrigation. To create continuing growth we need a vision of the future and of opportunities such as investment in water supply and irrigation as demonstrated by the Opuha Dam project.

4.2  Generation

The opportunity to invest in distributed generation projects in South Canterbury using renewable energy sources is somewhat limited. However, there are prospects for wind generation that are being considered.

5.0 Other Matters

5.1 This report has been prepared by professional staff employed by Networks South Limited.

5.2 The directors have given regard to the public consultation undertaken in 2001 that resulted in the resettlement of the South Canterbury Power Trust on LineTrust South Canterbury with a perpetuity period of eighty years from 1993.

6.0 Recommendation

After considering the main outcomes of the above discussions, being:

Alpine Energy’s strong performance and efficiency

The desire of consumers to continue with Trust ownership

The vision of current trustees that ensures Alpine Energy contributes to the growth of South Canterbury

The Directors have discussed the matter of LineTrust South Canterbury and its ongoing role.

The following recommendation represents the Board’s view:

That the Directors of Alpine Energy recommend that LineTrust South Canterbury continues with its current shareholding in Alpine Energy Limited, and continues to support the Company’s initiatives to invest in projects and developments which bring profitable returns to the company and economic growth to the region.

Directors

Alpine Energy Limited

Attachment

LineTrust South Canterbury Review Terms of Reference (extract from the Trust Deed)

LineTrust South Canterbury Review

Terms of Reference

The Trust Deed requires the Directors to prepare a report considering proposals and available options for the future ownership of the shares owned by the Trust.

The Trust Deed gives the Trustees three (broad) options:

retain the shares in the Trust; or

dispose of a portion of the shares and retain the remainder of the Trust; or

dispose of all of the shares

The report is to contain:

(a)         an analysis of the performance of the Company to the date of the report, together with a discussion of the advantages and disadvantages of continued Trust ownership;

(b)         if a distribution of shares is recommended, a draft Share Allocation Plan detailing:

the manner in which and the Consumers to whom the shares (if any) and assets constituting the Trust Fund are to be distributed and such shares and assets may be distributed to a greater or lesser extent to some or all of the Consumers;

the manner in which and the Consumers to whom the proceeds of the sale of shares (if any) received as a result of a disposal of shares are to be distributed and such proceeds may be distributed to a greater or lesser extent to some or all of the Consumers;

(c)         a summary of the professional advice (if any) obtained in respect of the preparation of the report.

(d)         a statement as to whether or not the directors have had regard to any views expressed by the public with respect to ownership.

The Trustees shall comment on the report to the Directors and upon completion of their review of the report, the Trustees shall make the report available to the public together with a summary of their comments. [‘available to the public’ means making the information available for inspection at any office of the Trust or any office of the Company or at any other place in the District on normal business hours on any business day, after giving 3 days notice of the place(s) and times in a newspaper].

The Trustees and the Directors shall in respect of the report and no later than 1 month after the date of the report, implement the Special Consultative Procedure set-out in Schedule 2 of the Trust Deed.

Following completion of the Special Consultative Procedure and not later than 6 months after the report date, The Trustees and the Directors shall meet and, after taking due account of the view expressed by the public and the Directors, the Trustees shall decide whether to:

retain the shares in the Trust; or

dispose of a portion of the shares and retain the remainder of the Trust; or

dispose of all of the shares

If the shares are to be retained by the Trust, the Trustees shall notify the public by making the information available for inspection at any office of the Trust or any office of the Company or at any other place in the District on normal business hours on any business day, after giving 3 days notice of the place(s) and times in a newspaper.

If the shares or any portion of them are to be distributed, the Trustees shall prepare a Share Allocation Plan in terms of Schedule 3 of the Trust Deed.