meeting the current and future financing needs of new

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Investing for TomorrowMeeting the Current and Future Financing Needs of New South Wales

Annual Report 2009

Charter

TCorp is the central financing authority for the New South Wales public sector. The Treasury Corporation Act 1983 states that TCorp’s principal objective is “to provide financial services for, or for the benefit of, the Government, public authorities and other public bodies”.

In pursuing its objectives, TCorp has the same legal capacity, powers and authorities as a company under the Corporations Act 2001 (Cth). Activities in which TCorp can engage include: • provision of finance for the Government

and NSW public authorities;• management or advice on management

of Government and public authority assets and liabilities;

• acceptance of funds for investment from the Government and public authorities;

• investment of funds; and• management of TCorp’s own asset

and liabilities.

TCorp’s powers to borrow, invest and undertake financial management transactions are regulated under the Public Authorities (Financial Arrangements) Act 1987.

Mission statement

TCorp exists to deliver for New South Wales the best that the financial markets can offer.

Corporate objectives

In line with the mission statement, the corporate objectives of TCorp are to: • achieve cost-effective funding; • effectively execute portfolio assignments; • effectively execute risk management and

structured finance assignments; and • meet client and market needs through

enhanced resource management and allocation.

Values

Context

TCorp is the central financing authority for the State of NSW. TCorp provides financial services for the benefit of the NSW Government, public authorities and other public bodies.

TCorp manages the financial markets exposure of the NSW Government, our public sector clients and NSW Treasury.

TCorp is accountable to:• The government of the day, who

determines our mandate;• Our public sector clients; and• NSW Treasury.

TCorp has skilled professionals who deliver on a broad range of specialised financial services. We work as a team and focus on delivering the best outcome for NSW.

TCorp’s Values framework builds on the existing culture that has evolved to reflect where we are now and what our role and strategy requires from our people in the future.

TCorp Values must be lived to be worthwhile. These Values provide a guide to our behaviour and decisions.

• Integrity: Our business is based on trust and integrity, being uncompromised in our delivery of the best possible outcomes for NSW. Integrity must underpin the foundation of all our business dealings; our relationships with our clients, fellow employees, and other stakeholders.

• Results: We exist to add value for NSW and our clients. We strive to achieve the best possible financial outcomes for our clients, TCorp, and NSW.

• Partnership: We see the relationships between TCorp and its external and internal stakeholders as partnerships based on reciprocal obligations and mutual benefits. TCorp aims to create a workplace where people strive, learn, achieve, and build sustainable careers.

• One TCorp: We encourage ownership and take pride in both individual and team success, but never lose sight of the fact that we are ‘One TCorp’ serving NSW.

• Talk Straight: The quality of our communication is key to building a healthy TCorp culture. We are committed to honest and constructive communication in all our external and internal dealings.

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TCorp Annual Report 2009 1

Contents02 Year in Review03 Performance Indicators04 Chairman and Chief Executive’s Review08 Objectives and Results09 Board of Directors10 Structure and Relationships10 Our Business11 Debt Issuance13 Debt Management16 Asset Management20 Advisory and Other Services24 Economic Overview26 Corporate Governance28 Compliance and Risk Management30 Concise Consolidated

Financial Statements39 Investment Facilities Fund Managers

and TCorp Dealer Panels40 Our People44 Contact Details

The financial crisis has presented unparalleled challenges over the past year, a time when access to debt financing has never been more important for New South Wales. Funding the record infrastructure programme relies heavily on TCorp’s standing as a high quality, professional issuer into the capital markets.

In the face of difficult market conditions, TCorp generated exceptional performance for its clients and its shareholder, avoiding the losses that have plagued most in the financial markets. TCorp’s expertise as a manager of financial risk, combined with NSW’s AAA credit rating, sees TCorp well placed to continue to deliver value to its stakeholders.

2 Investing for Tomorrow

Record pre-tax operating profit of $167.4m, in an environment of unprecedented volatility across world financial markets. TCorp was able to take advantage of the opportunities arising from this volatility to generate exceptional financial performance.

A growing and healthy balance sheet which reached $49bn by year end.

Sound risk management of client asset portfolios and Hour-Glass Facilities, with substantial value added against benchmarks.

More than $1bn of very long term funding secured for clients at historically low interest rates, as TCorp continued to diversify funding sources.

Successful launch of a new May 2013 Benchmark Bond, issuing $2.55bn through initial syndication.

Outstanding results on management of $25bn of client debt portfolios, generating interest cost savings of more than $165m for clients.

AAA credit rating for NSW affirmed by rating agencies following the NSW Budget.

Prudent management of risks resulting in no credit losses or expected writedowns on exposures.

Growing role as an adviser to NSW Treasury and government agencies on a range of financial risks, an activity of increasing importance given the volatility and dislocation in markets.

Enhanced risk and debt management methodologies for NSW regulated utility clients, working closely with these clients over the course of the year.

Bond�Issuance

Diverse�Funding

Record�Profit $49bn Value�+

Savings�for�Clients

Sound�Financial�Advice

Partnering�with�Clients

No�credit�losses�or�expected�writedowns

Year in Review

AAA


Performance Indicators

2008/09 $m

2007/08 $m

2006/07 $m

2005/06 $m

2004/05 $m

Profitability

Profit before income tax equivalent expense(1) 167 32 46 59 43

Statement of financial position

Loans to Government clients 37,889 30,333 27,704 26,660 25,361

Other assets 11,131 6,720 4,666 3,048 5,659

Total assets 49,020 37,053 32,370 29,708 31,020

Domestic Benchmark Bonds 30,815 13,790 12,419 12,000 15,457

Global Exchangeable Bonds 7,366 14,275 14,431 11,048 8,104

Due to Government clients 889 539 409 950 1,079

Other borrowings and liabilities 9,875 8,406 5,068 5,667 6,346

Total liabilities 48,945 37,010 32,327 29,665 30,982

Difference represented by equity 75 43 43 43 38

Asset management for State authorities

Funds under management:

- Investment Facilities1 7,478 10,362 11,565 10,451 7,398

- specific fund mandates1 3,811 3,397 4,031 10,793 9,001

Liability portfolio management for State authorities

Liability portfolio management1 25,357 18,900 18,969 18,497 17,757

1 Refer to note 24 – Fiduciary Activities.


Michael Schur (Chairman) and Stephen Knight (Chief Executive)

In this challenging environment, TCorp’s sound risk management practices and business strategies generated outstanding results for our clients and our shareholder, with many aspects of our business generating record value-add and financial outcomes. This has been particularly pleasing given the turbulent and testing market conditions facing TCorp, in a year in which many financial markets participants suffered credit losses or impaired financial performance. Even for high quality AAA government borrowers such as TCorp, funding conditions have been strained to the limit. However, TCorp continued during the year to diversify and deepen access to debt markets to meet our clients’ increased debt funding requirements.

These exceptional financial outcomes resulted from TCorp being well positioned to take full advantage of the extraordinary market volatility over the past year. As such we do not expect to repeat the magnitude of the year’s profit outcome, or the significant gains on managed debt portfolios, in the period ahead.

Environment

The global financial crisis escalated dramatically in the second half of 2008, eliciting widespread and exceptional policy responses from governments around the world. Following the collapse of US investment bank Lehman Brothers in September 2008, government capital injections into household name financial institutions became commonplace. While Australia’s sound regulatory framework ensured that the country’s financial system and institutions fared relatively well, the operation of our capital markets was nonetheless affected by the global maelstrom. The Commonwealth Government’s guarantee scheme to assist the banks in meeting their wholesale funding needs started in December 2008. Although effective, this initiative had knock-on effects for the market in state government bonds, resulting in the Commonwealth extending the guarantee scheme to the States to ensure they could continue to access markets to meet growing infrastructure needs.

The range, and dimension, of policy initiatives from governments across the globe started to gain traction in the first half of 2009. Credit and money markets, which had plunged into dysfunction in late 2008, have gradually continued to heal. Global equity markets, most of which lost more than 50 per cent of their value after peaking in late 2007, are showing tentative signs of recovery from the lows recorded in March 2009.

At the beginning of the 2008/09 year Australia’s official cash rate was at a multi year high of 7.25 per cent and the Reserve Bank of Australia’s (RBA) primary concern was fighting stubbornly high inflation. The financial crisis quickly hit consumer confidence and economic activity in the second half of 2008, and the Reserve Bank joined other central banks in slashing interest rates, with the official rate ending the year at a historical low of 3.0 per cent.

Commonwealth Bond yields were equally volatile and experienced an extraordinary trading range over the course of the year. After reaching cyclical highs last June of more than 6.75 per cent for 10 year bonds, yields by January had plummeted to multi decade lows of 3.85 per cent. Yields then rose sharply towards the end of the year under review as stimulatory monetary and fiscal policy, together with the prospect of far greater supply of government debt into the future, began to influence investors’ expectations.

Chairman and Chief Executive’s Review

The financial crisis which began in 2007 spread across the globe during the past year with extraordinary impact, sparking unprecedented policy responses from governments in Australia and abroad.


Funding

The extreme dislocation in financial markets invoked fresh challenges for TCorp in meeting the funding needs of our clients. Throughout the year, we maintained a proactive and flexible approach towards funding opportunities, and we were successful in keeping ahead of our funding programme and maximising diversification through a number of cost effective transactions.

To fund the requirements of our public sector clients, TCorp needed to raise a total of $5.3 billion from domestic and offshore debt markets over the year. We took advantage of some excellent opportunities to raise $10.9 billion, thereby maintaining a very healthy liquidity position and providing a strong start for the coming year’s funding activities.

In an important move early in 2009, TCorp significantly lengthened the maturity profile of debt; the prevailing very low long term yields enabled us to lock in favourable long term funding for clients. During this period, we completed a landmark 30 year deal in sterling, as well as 30 year funding in yen and continued issuance into our Consumer Price Index Linked (CPI) Bond programme with maturities of 2025 and 2035.

The market for semi government benchmark bonds was severely affected by the bank guarantee scheme and all but closed for lengthy periods between December and March. TCorp’s policy of remaining very liquid was rewarded throughout this time, as we did not have to access the markets during these bouts of uncertainty. The Commonwealth’s announcement in March of the extension of the guarantee scheme to the states delivered a significant improvement in investor sentiment, and towards year end we were able to launch a new Benchmark Bond series with a May 2013 maturity, issuing a very healthy amount of $2.55 billion in the initial syndication.

The confirmation of NSW’s AAA rating following the State Budget in June was pleasing. The State’s strong financial position, together with the Commonwealth Government guarantee, will ensure that TCorp can continue to access the broadest range of cost effective funding opportunities for our clients in the period ahead.

Benchmark Bonds on Issue30 June 2009

Domestic Exchangeable

6.0

4.0

2.0

0.0

2009

2010

2012

2013

2014

2017

2019

2023

TCorp Yield CurvesYield %

30 June 2009 30 June 2008 30 June 2007 30 June 2006

Time to Maturity in Years

8.00

6.00

4.00

2.000 1 2 3 4 5 6 7 8 9 10

Exchangeable

Domestic

Cumulative Hour-Glass ReturnsReturn %

Cash Bond Market Medium Term Growth Long Term Growth

Date

350

300

250

200

150

100

50

0

June

199

2

June

199

3

June

199

4

June

199

5

June

199

6

June

199

7

June

199

8

June

199

9

June

200

0

June

200

1

June

200

2

June

200

3

June

200

4

June

200

5

June

200

6

June

200

7

June

200

8

June

200

9

F9

7

F9

8

F9

9

F0

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F0

1

F0

2

F0

3

F0

4

F0

5

F0

6

F0

7

F0

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F0

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Growth of Benchmark Bonds$ million

0

10,000

20,000

30,000

40,000

Composition of Borrowings Total $43.4 bn

Total Domestic Bonds $30.8bn

Retail $0.2bn

Capital Index Bonds $1.5bn

Global Exchangeable $7.4bn

Euro Medium Term Notes $3.3bn

Non-Benchmark Domestic $0.2bn

Even for high quality AAA government borrowers such as TCorp, funding conditions have been strained to the limit. However, TCorp continued during the year to diversify and deepen access to debt markets to meet our clients’ increased debt funding requirements.

Access


Business trends and performance

TCorp’s profit before tax was $167.4 million. This is an excellent outcome and reflects an outstanding performance in managing the funding programme, and the residual market risks, in a volatile environment. Again, TCorp this year has not suffered any credit losses arising from exposure to financial assets or derivative positions.

In the previous year, TCorp’s reported profit was impacted by an accounting standards requirement to revalue some funding transactions, even though the economic outcomes resulted in the revaluation netting to zero over the life of each transaction. This year saw the impact of the previous period’s negative revaluation more than reversed, which has boosted the reported pre-tax profit. Nevertheless, TCorp’s underlying financial operating result was well in excess of $100m, which is substantially higher than TCorp’s historical operating profit. This strong underlying profit resulted from TCorp being well positioned to take advantage of the extraordinary market volatility, through the execution of our funding task and the management of residual risks. As market conditions normalise we would not expect to repeat the very high level of underlying profitability in the period ahead.

TCorp achieved outstanding results as a manager of client debt portfolios over the year, generating interest cost savings of more than $165 million for clients. TCorp uses a proprietary economic model to identify cyclical patterns for term interest rates, and positions client debt portfolios accordingly. At the start of the year, when 10 year bond yields were at cyclical highs above 6.5 per cent, portfolio durations across the $25 billion of client debt portfolios managed by TCorp were reduced. In December and January, as yields fell to below 4.0 per cent, portfolio durations were significantly lengthened to take advantage of the low interest rates. Towards the end of the year, as yields moved back up above 5.5 per cent, durations were brought back to neutral, thereby locking in the gains for clients. The degree of cyclical volatility in bond yields experienced in the 12 month period is unprecedented, and TCorp’s strategic modelling was well positioned to take maximum advantage of this volatility and generate substantial value for clients.

TCorp also generated excellent outcomes on the cash and fixed income portfolios we manage on behalf of clients. Our conservative approach towards credit has protected clients from credit losses, and ensured that they have had no exposure to riskier quality credits or instruments such as collateralised debt obligations (CDOs). Outright fixed income fund returns, as well as performance against benchmarks, have both been very strong over the year.

Equity markets finished the year in negative territory again, despite a bounce in the last quarter. The negative returns from growth sectors continued to weigh on TCorp’s Medium Term and Long Term Growth Facilities, although comparative performance was strong and consistent with top quartile outcomes. TCorp’s Cash Facility recorded a small underperformance to benchmark for the year because of the revaluation impacts on a pool of highest quality mortgage securities, but the running yield remains very strong and will underpin healthy performance for clients in the period ahead. During the year, we continued to work closely with large clients as they looked to further refine their asset allocation settings. Over the year, value added against benchmarks for clients across managed cash and fixed income portfolios, and the Hour-Glass Investment Facilities, totalled $114 million.

TCorp’s Corporate Finance team continued to expand the breadth and nature of client advisory assignments, reflecting an increased level of capex plans and projects across our public sector client base. The extreme market volatility and changing banking landscape brought an extra dimension to the nature of advisory assignments.

Elsewhere in our client facing activities, it was an extremely busy year as we developed a new framework for analysing the financial risks and optimal debt mix for our regulated utility clients. We worked closely with these clients over the year as these ideas took shape, and this will continue to be a key priority as we implement this framework.

Again, TCorp this year has not suffered any credit losses arising from exposure to financial assets or derivative positions.

No�losses


Operating framework

The year under review was remarkably busy for TCorp as we introduced several key IT initiatives and made significant improvements in our IT infrastructure. A major project running throughout the year was the development of a new IT platform for TCorp’s balance sheet and debt management activities. This project has been running to schedule and is due to go live early in the coming financial year.

TCorp has a strong risk management pedigree and this was further supported during the year as we strengthened the resources of the Risk Management team and further developed our risk management framework. During the year, we reviewed TCorp’s capital needs in light of the growing balance sheet and increase in market volatility. As a result, the Board approved a further increase in TCorp’s capital base to $75 million.

People

Everyone working in financial markets faced challenges during the 2008/09 year. The environment placed very high demands on people’s skills, experience, intuition, judgment and perseverance. TCorp’s staff performed exceptionally well over this period and the outstanding business results are a testament to their efforts. During the year, we added modestly to our staff numbers to meet the growing business needs; however, our efficiency and cost ratios continue to improve.

During the year, we farewelled John Pierce as Chairman of TCorp’s Board, following a period of more than 11 years in the role. As NSW Treasury Secretary and Chairman of TCorp’s Board, John was pivotal in setting the direction for TCorp over the past decade and consolidating TCorp’s position as the central treasury and financial risk manager for the NSW public sector. We thank John for his significant contribution. In November, we welcomed Michael Schur to the role as Chairman of TCorp, commensurate with his appointment as NSW Treasury Secretary.

On 1 September 2009, the Honourable Andrew Rogers will retire from TCorp’s Board after more than 14 years of distinguished service. Andrew has been TCorp’s longest serving director and our sincere gratitude goes to Andrew for his valuable contribution.

We would like to acknowledge and thank the Board for its guidance throughout the year, which has been instrumental in helping TCorp navigate through the testing environment.

We are immensely proud of the efforts and achievements of our staff. At TCorp, we have specialist teams focusing on different aspects of the business, but we aim to maximise the synergies across the organisation to achieve the best for our clients and our shareholder. Our sincere gratitude goes once again to all our staff. They have produced outstanding results in the most challenging of circumstances, and we are confident that the skills and professionalism of our people, combined with TCorp’s positioning and strong risk management philosophy, will continue to serve our clients well into the future.

The degree of cyclical volatility in bond yields experienced in the 12 month period is unprecedented, and TCorp’s strategic modelling was well positioned to take maximum advantage of this volatility and generate substantial value for clients.

Maximise�Value

M A Schur S W Knight Chairman Chief Executive


Objectives and Results

Objectives Performance measures

Results for 2008/09

To achieve cost effective funding for clients through management of TCorp’s funding programme and balance sheet activities.

To ensure a cost effective funding mix through diversification of funding sources and professional implementation of the borrowing plan.

Funding diversification was the key feature of the year. TCorp issued a £250m 30 year bond which raised $558m and a ¥15bn 30 year bond which raised $223m. TCorp was also active in its Domestic Bond programme with 2 large issues via the syndication process. TCorp issued a new 2013 benchmark which raised $2.55bn and increased the 2023 bond to benchmark status and raised $825m. TCorp continued to issue into its CPI Linked Bond programme during the year, issuing over $750m at favourable yields for our clients.

To meet or exceed budgeted revenue from managing TCorp’s Balance Sheet risk activities.

Revenues from managing the market risks inherent in TCorp’s balance sheet were very strong and well exceeded budget. The strong revenues were aided by higher levels of liquidity as well as being well positioned throughout the periods of market turmoil.

To effectively execute portfolio assignments for clients through management of debt and asset management portfolios and Hour-Glass Investment Facilities.

To outperform neutral benchmarks for managed debt portfolios.

TCorp management of debt portfolios in line with client mandates resulted in very strong results. Performance outcomes were significantly ahead of benchmark for the 20 managed debt portfolios, generating over $165mn in value for clients through lower interest costs.

To outperform the general market of fixed interest managers.

TCorp performance from duration management of debt portfolios was equivalent to first quartile performance measured against the broader universe of fixed interest managers.

To achieve the debt interest cost forecast for the General Government sector.

The debt interest outcome was well within the agreed target range.

To generate strong returns for the Hour-Glass Investment Facilities and outperform industry benchmarks.

The Medium and Long Term Growth Facilities outperformed benchmarks for the year and were in the top quartile of the peer universe. The Medium Term Growth Fund delivered an absolute positive return in spite of the market turmoil, although outright returns for the Long Term Growth Fund were negative due to retreating markets on the back of the global financial crisis. The conservatively positioned Cash Facility underperformed its benchmark due to credit spreads widening to unprecedented levels. This underperformance is expected to be written back over the next 12 months as instruments mature. There were no underlying defaults in any securities and no exposure to structured products such as CDOs. The new Strategic Cash facility outperformed its benchmark.The Active Australian Shares Fund was one of the top performing funds over the period, when measured against peers.

To outperform neutral benchmarks for discretely managed fixed income asset portfolios.

Discretely managed cash portfolios performed significantly in excess of their individual benchmarks. The fixed income asset portfolios also generated strong outperformance of benchmarks.Cash and fixed income portfolio performance outcomes were consistent with first quartile or above median comparator rankings.

To effectively execute risk management and structured finance assignments for clients.

To add economic value through TCorp’s involvement in risk management and structured finance projects for clients.

Advice is provided during various phases of procurement and ongoing management of transactions. TCorp had an active year in terms of number of assignments, spread of clients, and type of work. Value add for the State was clearly demonstrated on a number of instances and client feedback was very strong.

To meet client and market needs through enhanced resource management and allocation.

To provide cost efficient services to TCorp’s client base.

Cost-effective lending, investment, portfolio management, reporting and advisory services were provided to a total of about 180 public sector clients, with continued business growth during the year.

To maintain or improve clients’ level of satisfaction measured by an annual survey.

The 2008 survey showed excellent results, evidencing TCorp’s strong reputation and high service standards with clients across our business activities.


Board of Directors

1. Michael Schur MSc (Econ), MCom (Econ)

Chairman (from 1 December 2008)

Secretary, NSW Treasury. Previously, Deputy Secretary, Office of Infrastructure Management, NSW Treasury (3 years); Senior Advisor, The World Bank (5 years); Advisor, South African Ministry of Finance.

2. Kevin Cosgriff M.A, BSc (Hons)

Deputy Chairman

NZ Treasury, UK Treasury – micro, macro policy. Deputy Secretary, Fiscal and Economic NSW Treasury since 2001.

3. Cristina Cifuentes BEc, LLB (Hons)

Economics and investment management for 26 years. Director, FSS Trustee Corporation.

4. Michael Cole BEc, MEc, FFin

Banking and investment management for 36 years. Chairman, Platinum Asset Management Ltd; Chairman, IMB Ltd; Chairman, Indemnified Loans Committee; Chairman, Ironbark Capital Ltd; Director, State Super Financial Services Australia Ltd; Director, OneVue Ltd and Director, Challenger Listed Investments Ltd.

5. Bruce Hogan AM BEc (Hons), FAICD

Finance and industry for 39 years. Former Joint Managing Director, Bankers Trust Australia. Chairman, State Super Financial Services Australia Ltd; Director, Hogan & Company Pty Ltd; and Director, Snowy Hydro Ltd.

6. Stephen Knight BA, FAICD

Banking and public sector financial management for 29 years. Chief Executive, TCorp and Director, TCorp Nominees Pty Ltd. Director, Australian Financial Markets Association Limited.

7. Hon Andrew J Rogers QC, LLB (Hons) D Univ

Barrister and QC for 23 years; Judge then Chief Judge of the Supreme Court of NSW for 13 years; Commercial Arbitrator and Mediator. Director, EnDispute Pty Ltd; Chairman, Capital Markets CRC Ltd; and Probity Advisor to Leighton Holdings Ltd and its operating subsidiaries.

8. Hon Alan Stockdale BA, LLB

Barrister for 12 years. Member of Victorian Parliament for 15 years. Former Treasurer of Victoria and Minister for Information Technology and Multimedia. Former Executive Director, Macquarie Bank Ltd; Chairman, Symex Holdings Ltd; Chairman, Senetas Corporation Ltd; Chairman, Medical Research Commercialisation Fund Pty Ltd; and Federal President, Liberal Party of Australia.


Structure and Relationships

Funding and Balance Sheet Management

Portfolio Management

Economics & Strategy

Information Technology

Operations

Administration

Financial Control

Legal

Strategy

NSW Treasurer / Treasury

Chief ExecutiveBoard

Audit Committee

Human Resources Committee

Client Services

Client Risk Advisory & Execution

Corporate Finance

Treasury and Client Services

Human Resources

Finance and Administration

Legal and Strategy

Investments

Risk and Compliance

DebtIssuance

DebtManagement

AssetManagement

Structured Finance& Advisory Services

NSW General Government Sector

Clients

Market Participants

TCorp Businesses

NSW Government Agencies / Entities State Owned Corporations

Fixed Income Dealer Groups Banks and Investment Banks Investment Management Firms Other Service Providers

Our Business


Strong demand continued for funding of infrastructure investments by State enterprises engaged in electricity supply, water catchment and supply, and rail and ports development. Large projects requiring financing during the year included the Sydney Desalination Plant, expansion of electricity generation capacity and upgrading of the electricity distribution network, the Epping to Chatswood Rail Line (completed during the year), the Rail Clearways project, and the Port Botany expansion. Aggregate loans to clients showed a net increase of $7.6 billion over the year to a total of $37.9 billion.

Under the NSW Government’s infrastructure programme, capital spending over the four years to June 2013 is projected to total $62.9 billion, and this will be the major driver in an estimated $26 billion rise in TCorp’s loans to clients over that period.

A variety of loan products for clients

TCorp provides a range of efficient standard loan products for public sector clients. These include:• medium and long term fixed interest

loans with semi annual interest payments, repayable on a fixed maturity date. Interest coupons and maturity dates normally correspond with those of TCorp Benchmark Bonds issued in the wholesale market;

• floating rate loans with interest rates periodically adjusted in line with market rates on bank bills, again with a fixed maturity date;

• the Come & Go Facility, which provides ready access to short term finance. Clients can draw down or repay funds on same day notice, enabling them to rely on TCorp for short term liquidity, rather than hold substantial investments for liquidity purposes, with associated credit and market risks; and

• long term CPI Linked loans with a fixed percentage interest coupon, but with the capital value adjusted periodically in line with the CPI. This product has been adopted in significant volume in the Government’s Crown debt portfolio, and can also be an appropriate form

of funding for public sector businesses subject to regulatory frameworks in which CPI movements are a major factor.

For individual clients whose funding requirements are not completely met by these standard products, TCorp can consider providing other structures, for example, loans with regularly reducing principal.

TCorp borrows with the benefit of the NSW Government’s guarantee, and from July 2009 the Commonwealth guarantee also applies to funding with maturities in a specified range. Interest rates on loans are therefore finely priced. Rates on new fixed interest loans are based on the current TCorp Benchmark Bond yield curve in the Australian fixed interest market, plus a small margin representing TCorp’s administration fee. From July 2009, an additional yield margin is applied to client loans representing the impost to the State of the Commonwealth guarantee scheme post 1 July 2009.

Most public trading enterprises (PTEs) also pay NSW Treasury an annual guarantee fee based on their average volume of loans, but TCorp is not involved in charging or collecting this fee.

Infrastructure investment changes the pattern of borrowings

As a consequence of the Government’s infrastructure programme, TCorp’s volume of loans to the PTEs – mainly State Owned Corporations (SOCs) – is increasing strongly. The Crown Finance Entity’s volume of borrowings declined for a decade but remains substantial, and it increased in the latest year as the economic downturn affected Government revenues.

TCorp’s largest borrowers at 30 June 2009 were electricity generation and distribution ($14.9 billion) and the Crown Finance Entity ($13.1 billion), followed by water catchment and supply ($6.7 billion), transport ($1.2 billion) and ports ($0.5 billion).

While funding for the NSW public sector constitutes the vast majority of TCorp’s lending book, TCorp also acts as the Government’s agent in providing funds for private sector cooperatives. These loans totalled $36 million at 30 June 2009.

Funding of TCorp’s loans to clients

TCorp funds its lending to the NSW general government and PTEs through successive issues of debt into the domestic and offshore capital markets. We have developed a range of offerings that suit investor requirements and these, backed by the strength of the State’s AAA credit rating, enable us to deliver cost effective funding for our clients.

TCorp recorded another successful year of funding activities, despite an international financial environment which saw world markets undergo a level of disruption not witnessed for some 50 years. Following the collapse of Lehman Brothers in September 2008, TCorp initially benefited from an investor ‘flight to quality’; the funding environment, however, rapidly grew extraordinarily difficult after the Commonwealth Government’s introduction, in December, of its guarantee to assist the banks meet their funding needs. The market for state government bonds virtually shut down for extended periods between December and March, resulting in spreads between TCorp securities and Commonwealth bonds widening by up to 146 basis points in the five year maturity. The Commonwealth’s announcement in March that it would extend the guarantee scheme to state government authorities eased the situation and the spread between five year TCorp bonds and Commonwealth bonds contracted substantially, ending the year at 52 basis points.

While the semi government benchmark market was virtually closed in the first quarter of 2009, TCorp was able to diversify its funding sources through longer dated placements in sterling and yen. These bonds were issued at historically low interest rates and provided an excellent opportunity for TCorp’s clients to lengthen their debt at very cost effective rates. New investor demand for non-A$ placements and, in the last few months of the financial year, strong investor demand for the A$ Benchmark Bonds, enabled us to achieve our required funding.

For the 2008/09 year, TCorp raised nearly $11 billion from debt capital markets, more than double the required borrowing

Debt IssuanceDuring a second consecutive year of unusually tight conditions in credit markets, with severely restricted liquidity worldwide, TCorp again raised substantial new borrowings to fund the infrastructure investment programmes of public sector clients.


programme of $5.3 billion. This reflected the need to finance net client borrowing of $7.2 billion and to refinance existing liabilities of $1.6 billion. TCorp had pre-funded $3.5 billion of the 2008/09 requirement in the previous financial year. Capitalising on strong domestic and offshore investor demand following the credit crunch, TCorp pre-funded a further $5.6 billion of the 2009/10 funding requirement in the 2008/09 financial year.

The year’s funding activities were executed in an environment where Australian interest rates decreased in response to the global financial crisis. The RBA reduced the official cash rate six times during the financial year, from 7.25 per cent to 3.0 per cent per annum. The longer term TCorp interest rates (based on the April 2019 maturity) fell from 7.005 per cent to a low of 4.715 per cent in January, before finishing the year at 6.22 per cent per annum.

Benchmark Bond issuance

TCorp’s Benchmark Bond programme, as provider of price transparency and liquidity to public sector borrowers and institutional investors in TCorp bonds, continues to be the cornerstone of our funding strategy.

Benchmark Bond issuance is concentrated in a small number of maturity dates (Benchmark series), generally over a 12 year period. Benchmark Bonds are marketed to domestic investors, and as Global Exchangeable Bonds to offshore investors. The Benchmark Bond programme is supplemented by a more specifically directed issuance, particularly to offshore investors, under TCorp’s Euro Medium Term Note programme.

Benchmark Bond outstandings rose over the year. Continued strong demand, especially, from domestic investors, led to Benchmark net outstandings increasing by $10.1 billion (fair value).

In December 2008, legislative amendments extended eligibility of the s.128F Interest Withholding Tax exemption to TCorp’s domestic bonds. Subsequently, many investors switched their Exchangeable Bonds to Domestic Bonds, as TCorp encouraged such switching activity through offering a basis point incentive to investors. As a result, outstandings of Exchangeable Benchmark Bonds dropped from $14.3 billion (fair value) at 30 June 2008 to $7.4 billion at 30 June 2009.

Benchmark Bonds outstanding increased by a modest $400 million in the first quarter of 2009, reflecting the adverse impact of the Commonwealth Government’s introduction of a guarantee scheme for banks. The Commonwealth’s announcement that the guarantee would be extended to semi government authorities was very positively received, enabling TCorp to increase the outstandings of Benchmark Bonds by $5.1 billion in the last three months of the financial year.

In May 2009, TCorp issued its first Benchmark Bond through syndication. A total of $2.55 billion of the new 5.25 per cent 1 May 2013 benchmark was issued, and at the time ranked as the largest single deal issued into the Australian market. TCorp used the syndication process again in June to increase the outstandings of the 6 per cent 1 May 2023 bond to Benchmark status. A total of $825 million was issued, taking outstandings to $1.08 billion.

Continuing its commitment to the CPI Linked Bond programme, TCorp during the year lifted issuance of the 2.75 per cent per annum 20 November 2025 series to $1.05 billion from $0.53 billion. Following further issuance, outstandings in the 2.5 per cent per annum 20 November 2035 series increased to $0.61 billion from $0.37 billion over the year.

Offshore issuance

TCorp operates in the international debt capital markets to achieve investor diversification and to provide cost savings to the Benchmark Bond curve; over time, TCorp has used offshore issuance to smooth the maturity profile. During the year, TCorp secured $1.9 billion through the rollover of existing deals in the Japanese market.

Despite the challenging markets in 2009, TCorp was able to take advantage of favourable windows of opportunity. In February, TCorp issued a £250 million 30 year bond, swapping this into Australian dollars, raising A$558 million. This was TCorp’s first sterling bond issue and was one of its largest ever offshore raisings.

In March, TCorp issued a ¥15 billion 30 year bond. TCorp again swapped this deal into Australian dollars, raising A$223 million for 30 years. This was TCorp’s first 30 year bond issuance into the Japanese market.

Attractive investment fundamentals, underpinned by NSW’s AAA credit rating continued to win support, particularly from Japanese and European institutional investors. In August 2008 Standard & Poor’s placed NSW AAA rating on negative outlook, but this outlook was removed in June 2009 immediately following the NSW Budget, and the AAA rating was reaffirmed. Moody's maintained its rating of NSW at AAA (Stable) throughout the year.

TCorp continued to utilise short term promissory note markets to meet cash flow volatility and short term requirements. By 30 June 2009, TCorp had $3.3 billion of domestic promissory notes outstanding. There was no activity in the offshore commercial paper market over the year.

TCorp’s funding strategy constantly evolves in response to changing market dynamics and investor requirements. Maintaining strong relationships with our borrowing clients, dealer panel members, financial markets institutions and investors has been critical in helping us accomplish our funding needs. We thank our dealer groups and investors for their continued support.



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This activity not only contains clients’ debt costs, but also provides debt structures that diversify risk and thus add strength to their balance sheets. TCorp agrees with each client the policies, benchmarks and risk constraints under which debt management is carried out.Initially appointed as debt manager for NSW Treasury’s Crown debt portfolio, TCorp has since built up a debt management clientele representing a large proportion of the State’s major borrowers. At year end, TCorp was managing the debt portfolios of 20 clients with total portfolio volume of $25 billion.

While the largest client portfolio is the $11.1 billion Crown debt portfolio managed on behalf of NSW Treasury, other substantial portfolios are managed for agencies and PTEs, in the energy, ports, roads, transport and water sectors. The large scale of these managed portfolios reflects that the businesses are required by the NSW Government to maintain specified levels of gearing (borrowings) in their capital structure, reinforced by new borrowings to fund infrastructure development.

Innovation in debt management

The extension of the Federal interest withholding tax exemption to NSW domestic bonds during the 2008/09 year has enabled TCorp to significantly spread the range of debt maturities. During the year, TCorp extensively refinanced client debt portfolios using new nominal maturities and CPI Linked Bonds. The refinancing also allowed the Crown debt portfolio to be lengthened substantially, reducing future debt costs.

For regulated utility PTE clients, the main focus was the impact of new regulatory price determinations. Most regulated utilities agreed to a new debt management policy designed to minimise both the risks of the regulatory mechanism and the cost of future debt.

Management techniques and outcomes

In addition to providing cost efficient physical funding that meets individual client benchmarks for maturity and liquidity, TCorp uses derivatives to manage the interest rate risk of the actively managed debt portfolios. The active management style adopted is a low risk approach that seeks to achieve or better, budgeted borrowing costs over the medium term, while taking advantage of shorter term movements in market interest rates.

Strategic portfolio positions are based on TCorp’s modelling of the macroeconomic drivers and fundamental valuations for interest rates. These positions are intended to reduce borrowing costs over an interest rate cycle and are supplemented with tactical management strategies that take advantage of market volatility over shorter timeframes. All active interest rate risk management is conducted using approved derivative products and in line with individual client risk appetites and limits. Positions are implemented within a transparent, disciplined framework that is rigorously monitored and reported to clients.

TCorp is well placed to offer active interest rate risk management, given its expertise in this area and its role in capital markets. The active management of interest rate risk for client debt portfolios is conducted in-house to create economies of scale and provide cost effective outcomes. Active client mandates achieved borrowing costs on average 92 basis points better than benchmarks, representing a significant interest cost saving for clients of more than $165 million for the year.

Other treasury risk management transactions, including foreign exchange and commodity hedging, were executed on behalf of clients during the year.

Debt ManagementIn addition to providing cost efficient funding to the NSW Government and its agencies and PTEs, TCorp performs a key role in managing clients’ portfolios of outstanding debt.



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EnergyAustralia, a State owned regulated utility is one of the largest suppliers of energy in Australia with over a century of experience and provides a wide range of services from electricity and gas supply, to energy management and retailing. EnergyAustralia has a substantial electricity network which distributes electricity to Sydney, Central Coast and Hunter regions, which requires high levels of capital spending in order to maintain and upgrade their asset base.

Every 5 years, the regulatory framework EnergyAustralia operates under, determines their future revenue stream (and return to capital providers) based on financial market variables at the time of the determination. Consequently it is important that debt service costs align with the financial market variables inherent in the regulatory revenue determination. TCorp has a longstanding relationship with Energy Australia through traditional lending activities and the successful active management of their debt.

TCorp enjoys a strong track record of adding value for EnergyAustralia through active debt management. However, recent heightened financial market volatility led TCorp to review the existing debt management approach, and in collaboration with EnergyAustralia developed an alternative which ensures that financial market risks are managed even more effectively.

This new debt management solution will provide enhanced outcomes for EnergyAustralia in the following ways:

• By providing less volatile profit outcomes than under the current debt management approach.

• A debt structure that more closely offsets the revenue risks.

• Borrowings with a longer dated maturity that better matches the economic life of the assets.

The size of EnergyAustralia’s borrowing means this new methodology proposed by TCorp will reduce the risks posed to their balance sheet, allowing management to concentrate on the core business of energy supply.

switchedon

Recent heightened financial market volatility led TCorp to review and enhance its debt management approaches for regulated utilities. For EnergyAustralia this means it can now manage its financial market risks even more effectively.


From left: Colin Weekes, Manager Business Performance & Analysis, and Craig James, Executive General Manager Finance and Corporate, EnergyAustralia


Hour-Glass products and the global financial crisis

In a year that was characterised by the near collapse of the global financial system, TCorp’s Hour-Glass products fared well, with the flagship diversified products, as well as a number of the actively managed sectors, finishing the year ahead of their respective benchmarks.

The robust nature of our product construction ensured that all clients were able to continue transacting without interruption, even though market liquidity was impaired. The Medium Term Growth Facility delivered an absolute positive return, despite one of the biggest market sell-offs in 70 years. Overall, our products compared very favourably with those of competitor organisations and this was reflected in our clients remaining committed to our investment approach.

The declining equity markets, as well as the final wind-up of the Emerging Managers Trust and Alpha International Managers Trust products, led to funds under management falling from $10.4 billion to $7.5 billion.

During the year, TCorp continued to develop a number of strategic initiatives including in-sourcing the management of the Australian Bond portfolio to the TCorp Asset Management team. The change builds on previous initiatives which saw the liquidity and Alpha Cash portfolios within the Cash and Strategic Cash Facilities in-sourced. This move leverages TCorp’s expertise as a domestic fixed interest manager with a risk profile appropriate for the Hour-Glass products. It also enables us to more effectively implement portfolio management strategies.

TCorp’s commitment to positioning its products conservatively was evident in the performance of the flagship Cash Facility, which while modestly underperforming its benchmark, outperformed many of its peers in a market that saw many highly rated enhanced cash funds produce substantial negative returns for the financial year. Importantly, daily liquidity for the clients was maintained throughout the year, a result that many cash fund investors failed to achieve. The features of this product ensured that

there were no underlying defaults in any securities and there were no exposures to structured products such as CDOs. The modest benchmark underperformance is expected to be re-couped over the remainder of calendar year 2009 as many of the residential mortgage-backed securities positions in the portfolio, which have been affected by mark-to-market revaluations, reach maturity or are fully repaid.

Equity markets were on a “rollercoaster” ride over the year as the crisis spread beyond the financial markets to threaten the global economies. The S&P/ASX300 plummeted from its high of 6,867 in November 2007 to a trough of 3,159 in March 2009, then staged a small recovery to finish the year at 3,950. The return for the index over the financial year was -20.3 per cent, the worst financial year return in more than a quarter of a century.

The Hour-Glass Australian Shares Sector is positioned defensively in high quality companies and withstood the market ‘headwinds’ relatively well, outperforming its benchmark by 6.3 per cent after fees and expenses. This satisfying result represents top quartile performance against other multi manager Australian equity products.

Internationally, the MSCI World Index (excluding Australia) suffered a similar fate to that of the domestic equity market with a return of -16.2 per cent. Risk aversion was the dominant theme with the defensive sectors such as healthcare and consumer staples being treated as relative safe havens. Global equity managers, in general, struggled to add value in a market that ignored company fundamentals and traded largely on fear and irrationality. As a result, the median global equity manager was 3.6 per cent behind benchmark for the financial year. The Hour-Glass International Shares product followed this trend, underperforming its benchmark, albeit modestly, which translated to top quartile performance in the Chant West Implemented Consulting International Shares (Unhedged) Survey.

The fixed interest sectors of Australian and International Bonds invest only in highly-rated sovereign-issued or government-guaranteed debt instruments. TCorp has employed this

strategy to protect investors from the higher default risk inherent in corporate credit and highly structured debt instruments. This strategy was well rewarded this financial year as credit spreads widened dramatically, defaults skyrocketed and the credit markets froze. Consequently, the Hour-Glass Bond Sector Trusts were by far the best performing over the year, with returns of 11.2 per cent and 12.3 per cent respectively for domestic and international bonds.

Despite the volatile market conditions, TCorp’s Medium Term Growth Facility and Long Term Growth Facility, which cater to clients’ longer term investment needs, outperformed their benchmarks. This was achieved through tactical asset allocation, such as an underweight position in Listed Property, and active management, particularly in Australian Shares.

The Hour-Glass products remain constructed in a way which targets investments in quality companies with sustainable longer term earnings. This strategy seeks to minimise the risk of large unrecoverable capital losses and positions the products well to deliver solid long term results.

Asset ManagementTCorp continued during the year to develop its asset management services, which comprise two components: the Investment Facilities, through which TCorp outsources the management of funds and acts as manager of managers; and the internally managed cash and bond portfolios, using TCorp’s comparative advantage in managing fixed interest risk.

The Hour-Glass Australian Shares Sector is positioned defensively in high quality companies and withstood the market ‘headwinds’ relatively well, outperforming its benchmark by 6.3 per cent after fees and expenses.

Beating�benchmark


Internally managed cash and bond portfolios

TCorp continued to reinforce the strength of the State balance sheet through internal management of specific cash and bond portfolios for NSW Treasury and other agencies. In addition, TCorp is one of the fund managers for the Hour-Glass Cash Sector (including managing the sector’s day-to-day liquidity) and in March 2009 became the fund manager for the Hour-Glass Core Bond Fund. TCorp was previously appointed manager of the Hour-Glass Liquidity Fund and the Strategic Cash Facility. In carrying out these assignments for the Hour-Glass Investment Facilities, TCorp draws on its long experience in cash and fixed interest markets and its understanding of public sector cash flows.

TCorp’s largest fixed interest management client during 2008/09 was the Treasury Managed Fund (TMF), which is the NSW Government’s self-insurance pool, providing insurance for all general government budget-dependent agencies and those non-budget-dependent agencies that have chosen to use its services. The TMF holds a diversified combination of financial assets to offset its insurance liabilities. TMF fixed interest investments directly managed by TCorp totalled $1.06 billion at year end, and a further $2.8 billion of investments were held in the Hour-Glass Investment Facilities.

Other major agencies whose portfolios have been managed by TCorp for a number of years include the Public Trustee, the Office of Fair Trading and NSW Lotteries.

TCorp also directly manages cash and long term bond investments for the Lifetime Care and Support Authority. The authority’s funds are expected to increase significantly in future years and management of these bond investments draws on TCorp’s expertise in CPI linked assets and liabilities.

The total volume of investment funds managed internally by TCorp rose from $5.2 billion at 30 June 2008 to $6.7 billion at 30 June 2009.

TCorp takes a conservative approach to credit risk for managed portfolios, consistent with the risk profile of client mandates.

TCorp’s ability to add value arises from its flexibility to make judgments about portfolio construction, the timing of investments and security selection. The investment process seeks to add value to client portfolios, using duration and yield curve management allocation between sovereign, semi government and supranational sectors, with credit exposures limited to high quality banks. The issuance of sovereign guaranteed bank debt provided an attractive investment opportunity for a number of TCorp’s managed portfolios.

Over the year, investment returns on managed portfolios were considerably above benchmarks, and consistent with outperforming the broader universe of cash and fixed income fund managers.



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The total volume of investment funds managed internally by TCorp rose from $5.2 billion at 30 June 2008 to $6.7 billion at 30 June 2009.

$6.7bn


J.P. Morgan was appointed as the sole book-runner for the issue. This reflected J.P. Morgan’s capabilities in being able to distribute the bond to a broad range of institutional investors in the United Kingdom. An important criterion in appointing J.P. Morgan to lead the transaction was the capability to price and execute the required currency swap, given TCorp’s need to convert proceeds back into Australian dollars to the time of issuance. J.P. Morgan’s strong reach into the institutional investor market also enabled TCorp to undertake the issue very

quickly and efficiently, without the need to undertake an investor roadshow.

A large number of institutional investors participated in the issue. The feedback from investors was very positive as it provided them with the opportunity to diversify into a high quality AAA credit rated government borrower.

The opportunity to access the Sterling public market was particularly attractive given the February 2039 maturity date of the bond. This provided access to very long dated funding and for a term not normally available

in the Australian government bond market. Proceeds from the issue were used by TCorp clients to meet long term funding needs at very favourable rates, particularly for those undertaking large infrastructure investment projects.

In other global markets, TCorp continued to monitor opportunities to undertake issuance into long-dated maturities. Opportunities to issue into demand for long dated yen bonds were identified and a total ¥15bn was issued into a 30 year bond maturity.

new�dimensions

In February TCorp launched its first issue into the Sterling bond market, the first large non Australian dollar borrowing undertaken over recent years.


From left: Stuart Raynes, Executive Director Debt Capital Markets, and Jeff Herbert-Smith, Head of Fixed Income for Australia, J.P. Morgan


Corporate Finance

Advice is provided during the various phases of procurement and management of transactions. Corporate Finance seeks to ensure that the State achieves value for money, and that results are within acceptable risk parameters.

Corporate Finance staff have considerable financial and commercial experience of public and private sector transactions, and well developed quantitative and financial modelling skills. Their experience covers a wide range of asset types and procurement structures from relatively straightforward tenders to the most complex public-private partnerships (PPP) transactions. In carrying out its activities, the Corporate Finance unit is able to draw on the financial markets expertise of TCorp’s treasury and economic resources.

Corporate Finance also liaises with private sector participants and intermediaries, as part of TCorp’s role as a bridge to the private sector financing community.

The unit had an active year with work widely spread in terms of clients, number of assignments, and type of work. Specific assignments included:• NSW Health/NSW Treasury: participated

in finalising the evaluation and financial close of the $1.1 billion Royal North Shore Hospital PPP during a period of difficult financial market conditions;

• Department of Education and Training/NSW Treasury: participated in the assessment and financial close of the Kariong variation for the New Schools PPP;

• Department of Education and Training: assisted with various aspects of an optimisation initiative in relation to imaging devices;

• Macquarie Generation: assisted in the commercial assessment of an investment and collaboration proposition;

• Roads and Traffic Authority: considered the financial issues associated with a proposal to upgrade the M2 and in reviewing a proposal to refinance the existing project debt;

• State Transit Authority: assisted in the review of responses for a proposed new bus depot in Western Sydney;

• NSW Treasury: participated in four gateway strategic or business reviews covering projects for RailCorp, Department of Corrective Services, and NSW Health.

• NSW Treasury: assisting in the preparation of a Public Sector Comparator for a potential hospital PPP;

• Department of Premier and Cabinet: assisting the Premier’s department in reviewing an unsolicited property development proposal. TCorp’s involvement focused on assessing the capacity of the proponent to undertake the project;

• Housing NSW/NSW Treasury: assisting as financial advisor with the Southern Region, Riverwood North and Kamira Court social housing redevelopment projects;

Advisory and Other ServicesTCorp’s Corporate Finance unit, now more closely integrated into the broader Treasury, Client & Risk Services team, provides advisory services to NSW Treasury and other public sector agencies relating to asset and infrastructure procurement and financing, and other structured finance transactions.

• Participated in finalising the evaluation and financial close of the $1.1 billion Royal North Shore Hospital PPP during a period of difficult financial market conditions.

• Assisting in the preparation of a Public Sector Comparator for a potential hospital PPP.

Health

• Considered the financial issues associated with a proposal to upgrade the M2 and in reviewing a proposal to refinance the existing project debt.

• Assisted in the review of responses for a proposed new bus depot in Western Sydney.

• Providing financial and commercial advice in respect of the CBD Metro project.

• Coordinating the termination of 16 cross-border leases over rolling stock and other assets, with title to NSW entities under TCorp’s ongoing management role.

• Participating as a member of an evaluation team established to review and assess responses to an expressions of interest for a proposed electronic ticketing system for Sydney’s public transport system.Transport


• Housing NSW: assisting with continuing management of existing private sector financing arrangements for social housing;

• Department of Commerce: assessing financial capability of tenderers for supply contracts;

• Sydney Metro Authority: providing financial and commercial advice in respect of the CBD Metro project;

• Public Transport Ticketing Corporation: participating as a member of an evaluation team established to review and assess responses to an expressions of interest for a proposed electronic ticketing system for Sydney’s public transport system;

• RailCorp/NSW Treasury: coordinating the termination of 16 cross-border leases over rolling stock and other assets, with title to NSW entities under TCorp’s ongoing management role; and

• NSW Treasury: funding the arrangements and managing oversight in conjunction with StateFleet for budget sector agencies motor vehicle fleet. TCorp coordinated the termination of the last externally funded leasing facility in January 2009.

In addition to advisory work directly with clients, the unit provided valuable analytical and commercial support to other areas of Treasury, Client & Risk Services.

Advisory ServicesTCorp continues to develop its capacity

to provide financial risk management advice. In many cases, this activity is undertaken as part of TCorp’s role as discretionary debt or asset manager for the general government sector and PTEs. TCorp advises clients on matters such as treasury management policies, benchmarks, portfolio risk constraints and hedging of interest rate exposures. Examples of such activity during the year were advisory services to:• the Crown Finance Entity regarding its

benchmark debt portfolio; • Sydney Ports Corporation in respect to

the hedging of its future loan drawdown requirements, especially in connection with the Port Botany Expansion; and

• clients in the electricity and water industries: debt management approach and benchmarking, with particular reference to the risks arising from the regulatory framework in those industries.

TCorp has a highly experienced economics team which makes regular presentations to debt and asset management clients, as well as emailing a weekly economics and markets brief and providing input to clients’ monthly portfolio management reports.

For clients who have opted for the time being not to use the discretionary management service, TCorp can provide a tailored advisory service. This may entail regular advice, such as recommendations on refinancing of maturing loans, or single projects such as a review of policies.

Guarantees

Several agencies and PTEs require performance guarantees in the course of their operations. TCorp can provide this back-up, supported by NSW Treasury. The largest example of this activity is the substantial guarantees provided to Australian Energy Market Operator Limited on behalf of the State owned electricity retailers.

Another major example is guarantees provided by TCorp to the WorkCover Authority on behalf of SOCs that self insure their obligations under the Workers Compensation Act 1987. In addition, TCorp provides a small number of agencies with performance guarantees for other purposes.

Although a relatively minor part of TCorp business, these guarantee activities are an illustration of the breadth of TCorp’s role in providing financial accommodation to its clients.

• Assisting as financial advisor with the Southern Region, Riverwood North and Kamira Court social housing redevelopment projects.

• Assisting with continuing management of existing private sector financing arrangements for social housing.

Housing


The issuance method used a ‘bookbuild’ process, aimed at placing the bonds directly with investors at point of issue, rather than requiring dealers to sell down inventory over time. This process enabled a large and liquid bond series to be established on day one, ensuring the bonds were purchased by a wide range of domestic and international investors, and facilitating the large volume achieved.

The success of the May 2013 issue reflects the strong level of support from domestic and international investors for this form of issuance mechanism. A key benefit is that pricing transparency is established directly by investors. This provides investors with confidence that the issue is being priced in line with the level of demand from long term holders.

An important aspect of the syndication issuance method is the appointment of dealers to manage the process. For this transaction UBS was appointed as one of two lead managers. This reflects UBS’s strong performance over a long period as a member of TCorp’s benchmark bond panel, and their proven ability to distribute TCorp’s bonds to a wide range of investors, both domestic and international. UBS played an important role in the success of the transaction as they were able to deliver accurate feedback on investor demand and pricing to make sure that the issue was widely placed. This then enabled TCorp to achieve the objective of providing investors with a large and liquid bond issue, whilst at the same time enabling client funding requirements to be met.

This transaction was not only successful in enabling TCorp to secure a substantial volume of funds from a broad range of investors, but it also pioneered the way for this method of issuance across Australian sovereign and semi sovereign issuers. Following TCorp’s 2013 issue, other state governments adopted the syndication method to launch new benchmark bond series, and the Commonwealth Government has recently adopted this approach for its rejuvenated CPI linked issuance programme.

In May, TCorp launched a new May 2013 Benchmark Bond maturity. The initial issue of $2.55 billion was the largest single issue by a borrower in the Australian government bond market and the first benchmark Australian semi government bond to be issued via syndication.

big�issue

Michael Hendrie, Managing Director Head of Fixed Income Sales, UBS Investment Bank


The NSW economy represents about one third of Australia’s gross domestic product. The State has a diversified economic base encompassing the construction, finance, telecommunications, high value manufacturing, business services and transport sectors.

NSW is rated AAA by two leading international rating agencies, Moody’s Investors Service and Standard & Poor’s. These ratings reflect the strong balance sheet of the State and the disciplined fiscal strategy adopted by the Government over the past decade. Total State net debt declined over the decade to 2006 but will increase over the forward estimates. From 11.8 per cent of gross state product (GSP) in 1995 ($19.6 billion), total State net debt declined to 4.9 per cent by June 2006 ($15.5 billion). Over the next four years, however, net debt is expected to increase and peak as a share of GSP at 12.0 per cent ($49.5 billion) by June 2012, largely due to a substantial lift in PTE borrowings to fund infrastructure spending.

Growth in the NSW economy slowed in 2008/09 initially due to higher domestic interest rates and subsequently because of the impact of the global financial crisis. Prospects for the State’s economy changed in parallel with those for the national economy during 2008/09. As the national financial capital, Sydney was particularly affected by global financial developments. Although better than expected agricultural production provided a partial offset, forecasts for growth in state output and employment were revised lower in the Half Yearly Review and again in the 2009/10 Budget.

The largest impact of the global economic recession on state final demand in NSW is expected to be a drop in business investment. The decline in global commodity prices, weaker global and domestic demand, and reduced access to credit have led to an increase in spare capacity and dented investment expectations. State final demand growth in NSW slowed to 1.8 per cent in 2008/09.

Business investment grew by 3.1 per cent in 2008/9, driven by a 1.7 per cent increase in non-dwelling construction and a 2.1 per cent rise in plant and equipment investment. Dwelling investment remained subdued during 2008/09, declining by 5.2 per cent. On the positive side, increased grants to first home buyers in the Australian Government’s October 2008 stimulus package and in the 2008/09 NSW mini-Budget contributed to a 106 per cent increase in loan commitments to first home buyers through the year to the June quarter 2009. Sydney house prices posted a strong 4.9 per cent rise in the June quarter 2009, giving a 0.9 per cent decline through the year. Dwelling investment is expected to record modest gains during 2009/10.

Consumer spending slowed in the first half of 2008/09, with spending constrained by high petrol prices and high interest rates. But both petrol prices and interest rates fell sharply with the global economic downturn. Falling equity wealth and rising unemployment contributed to consumer caution, but these appear to have been partly offset by Australian Government stimulus benefits. Consumer spending growth slowed to 0.4 per cent in 2008-09 from 3.5 per cent in 2007-08. Surveyed consumer confidence improved over the course of 2008/09, returning to above average levels by the end of the financial year.

NSW Government spending was a solid contributor to growth in state final demand in 2008/09. Government spending grew by 7.3 per cent in 2008-09, driven by a 23.4 per cent rise in Government capital expenditure.

NSW agricultural production improved in 2008/09 with Australian Bureau of Agricultural and Resource Economics reporting a 141 per cent increase in winter crops production partly offset by a projected 13 per cent decline in summer crop production. Based on NSW Treasury estimates, the recovery in agricultural production will add around 0.25 to 0.50 percentage points to GSP growth in 2008/09.

As a major gateway for national imports, but a comparatively modest supplier of national exports, NSW usually records a net deficit on overseas trade. NSW Treasury estimates that overseas trade, along with balancing items (interstate trade, inventory and statistical discrepancy), may have detracted around 0.75 percentage points from GSP in 2008/09.

Wage growth in NSW was in line with the national average. The Wage Price Index increased by 3.7 per cent in NSW and nationally in the year to June 2009. Average weekly ordinary time earnings growth was 6.0 per cent in NSW compared with 6.1 per cent nationally in the year to May 2009.

Inflation, as measured by through the year growth in the Sydney CPI, slowed from 4.3 per cent in June 2008 to 1.3 per cent in June 2009. Annual growth in the two RBA measures of underlying inflation for Australia as a whole averaged 3.9 per cent in June 2009, moderately lower than the 4.4% rate recorded in June 2008.

Outlook for 2009/10

The challenges for the NSW economy in the year ahead are likely to be similar to those faced by Australia as a whole.

The global recession is affecting business in every sector of the national and state economies, including the services and manufacturing sectors which are major contributors to NSW output and employment.

The downturn in world commodity markets may directly affect NSW less than the resource rich states, but NSW will be affected by the consequent decline in national real income and the reduction in resource sector demand for NSW services and manufactures. The State will also be directly affected by the significant reduction in thermal coal contract prices for 2009/10. Based on NSW Treasury estimates, commodity prices should improve marginally in 2010/11 as world industrial production begins to recover.

A further illustration of how Sydney, as the nation’s financial centre, has been particularly affected by the global financial crisis, has been the steep downsizing in activity and employment in the financial and related services sectors in 2008/09. With job losses weighted toward the upper end of salary distributions, there has been a substantial secondary impact in related markets such as the higher end segment of the real estate market.

After modest growth of 0.25 per cent in 2008/09, NSW Treasury estimates that economic output (GSP) will decline by 0.5 per cent in 2009/10, with growth resuming at a below-trend pace of 2.25 per cent in 2010/11. With steep falls in import intensive business investment, state final demand growth is expected to fall by more than output growth in 2009/10. In 2010/11, improvements in consumer spending, housing investment and business investment should lead to slightly stronger growth in state final demand than output, based on NSW Treasury forecasts.

Growth in NSW in 2009/10 and 2010/11 is expected to be around the national average. In part this is because the mining investment boom which boosted growth in the resource rich states in recent years is likely to become a drag on their output in 2009/10 and particularly 2010/11. It also reflects NSW households having higher mortgages than those in other states and hence benefiting more from the return to a low interest rate environment. With strong underlying demand, low interest rates and the initiatives announced in the NSW State Budget, a recovery in housing investment is likely to occur earlier in NSW.

Given the unprecedented events that have taken place in the global economy over the past year and with the Australian economy consequently slowing, there is a higher degree of uncertainty than usual in the outlook for the NSW economy.

Factors that might be less favourable to the economic outlook for 2009/10 and 2010/11 include a steeper global downturn and a more protracted global recovery than expected, financial market instability, possible adverse impacts of deteriorating fiscal positions and changes in consumer behaviour. Factors on the upside would include a stronger and faster global and domestic recovery, given the stimulus imparted by many governments and central banks.

Economic Overview


0

2

4

6

8

10

12

14

16

Net Fixed Capital Expenditure (in real 2009/2010 dollars)$ billion

2009-10 Budget

General Government

PTE Sector

1963

-64

1970

-71

1977

-78

1984

-85

1991

-92

1998

-99

2005

-06

2012

-13

Net Financial Liabilities as at 30 June, 1995 to 2013*% of Gross State Product

0

5

10

15

20

25

30

Total State

General Government

1995

Act

1996

Act

1997

Act

1998

Act

1999

Act

2000

Act

2001

Act

2002

Act

2003

Act

2004

Act

2005

Act

2006

Act

2007

Act

2008

Act

2009

Rev

2010

ud

2011

Est

2012

Est

2013

Est

Gross State Product and State Final DemandAnnual % changes

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09 -2

0

2

4

6

8

Gross State Product

State Final Demand

* Series break in 2006 results from the adoption of Australian Equivalents to International Financial Reporting Standards. Net Financial Liabilities include all liabilities such as debt, unfunded superannuation and insurance liabilities.

Source: ABS

Source: NSW Treasury

Source: NSW Treasury

0

5

10

15

20


Approach

The Board of TCorp is committed to high standards of performance, accountability, ethical behaviour and corporate governance.

Role of the Board

The Board, constituted by the Treasury Corporation Act 1983, is to direct management in achieving the TCorp mission and to fulfil the annual agreement between the Board and the NSW Treasurer as set out in the Statement of Business Intent. The Board’s primary responsibilities and corporate governance functions include:• providing strategic direction and reviewing

corporate strategy;• identifying the principal risks of TCorp’s

business and monitoring the risk management processes through rigorous inquiry;

• determining an appropriate policy regime to control those risks within a risk spectrum acceptable to the NSW Government;

• regularly measuring financial performance against the Board approved annual budget;

• monitoring the conduct and the performance of TCorp and its senior management; and

• overseeing management’s succession plans.

Role of management

The Board has established a policy that documents the roles of the Board and the Chief Executive.

The Chairman of the Board is independent of the role of the Chief Executive.

Board composition and appointments

The Board consists of:• two ex-officio members from NSW

Treasury;• the Chief Executive, appointed by the

NSW Governor on the recommendation of the NSW Treasurer; and

• five non-executive directors, appointed by the NSW Governor for a specified term on the recommendation of the NSW Treasurer.

The Chairman of the Board is the

Secretary of NSW Treasury and the other member from NSW Treasury holds the position of Deputy Chairman.

Conduct of Board business

The Board normally holds at least 12 Board meetings each year, and will meet whenever necessary to carry out its responsibilities.

The Board has established a policy and a Code of Conduct & Ethics in relation to how it conducts Board business. The Board aims not only to comply with the requirements set out in the Treasury Corporation Act 1983 (NSW), but also to incorporate practices commonly required by entities regulated by the Corporations Act 2001 (Cth). The Board recognises that corporate governance is not an aspect of business that can be put in place and then forgotten; rather, it involves continuing review and improvement, keeping track of industry trends and, after consideration and where appropriate, embracing them.

Board discussions, deliberations and decisions that are not required to be publicly disclosed are kept confidential by directors.

Corporate GovernanceThe Board of TCorp is committed to high standards of performance, accountability, ethical behaviour and corporate governance.


Conflicts of interest

Directors must monitor and disclose any actual or potential conflicts of interest as these arise. The Treasury Corporation Act 1983 requires any director who has a pecuniary interest in a matter being considered or to be considered by the Board, to declare the nature of the interest. These declared interests are recorded in a publicly available register. Unless the NSW Treasurer determines otherwise, the director is required not to attend Board meetings about matters relating to declared pecuniary interests or to take part in decisions about these matters.

Committees

Two Board committees: the Audit Committee and the Human Resources Committee, assist in decision making, oversight and control; their contributions enable the Board to focus on strategy, planning and performance enhancement.

Audit Committee

The Audit Committee acts as an advisory body to the Board on issues relating to internal and external audit, financial reporting, operational risk management and other accountabilities. The objectives of the Audit Committee are determined by the Board and codified in a charter. Consistent with best practice, all members of the Audit Committee are non-executive directors. The Audit Committee’s primary responsibilities are to:• provide an avenue for communication

between auditors (internal and external), management and the directors of TCorp;

• report to the Board on whether the frameworks used by management for risk management, legal and regulatory compliance and internal controls are suitable and adequate for the needs of the business;

• report to the Board on whether the annual financial statements to be presented to the external auditors have been prepared with care, and to ensure that all relevant information is disclosed and that appropriate accounting policies have been applied; and

• report to the Board on the implications of any significant changes in accounting policies.

The Audit Committee meets a minimum of four times a year. The internal and external auditors have standing invitations to attend these meetings.

Human Resources Committee

The Human Resources (HR) Committee acts as an advisory body to the Board on issues relating to TCorp’s HR policies. The role of the HR Committee is to assure the Board that effective plans are in place to underpin continuous improvement in the return on TCorp’s investment in people.

Attendance at Board and Board committee meetings 1 July 2008 – 30 June 2009

Board Audit Committee HR Committee

Board members Held Attended Held Attended Held Attended

Michael Schur Chairman (since 1/12/08) 7 5

John Pierce Chairman (1/7/08 – 30/11/08) 4 1

Kevin Cosgriff (1) Deputy Chairman 11 9 3 3

Cristina Cifuentes (2) 11 10 5 5

Michael Cole (1) 11 10 3 3

Bruce Hogan (2) 11 11 5 5

Stephen Knight (3) 11 11 5 4 3 3

Hon Andrew Rogers (2) 11 11 5 5

Hon Alan Stockdale (1) 11 10 3 3

(1) Member of Human Resources (HR) Committee. (2) Member of Audit Committee.(3) Observer at both Audit Committee and HR Committee meetings.

The Board aims not only to comply with the requirements set out in the Treasury Corporation Act 1983 (NSW), but also to incorporate practices commonly required by entities regulated by the Corporations Act 2001 (Cth).

Strong�compliance


The risk management framework and key financial parameters are established by the Board and documented in Board policies. This framework includes the establishment and regular monitoring of limits for market, credit and other risks.

The Board’s Audit Committee acts as an advisory body on audit, operational risk management and financial matters. In respect of risk management and compliance, the Audit Committee reports on the adequacy and suitability of the TCorp’s systems, controls and plans. To assist in this process, the Audit Committee receives regular reports from internal audit, external audit and TCorp management.

Executive Risk and Compliance Committee (ERiCC) is a management committee reporting to the Chief Executive. It is charged with ensuring that Board policies are adequately embedded in business practice, and that there are appropriate levels of supervision, controls, procedures, monitoring and training within the business units. ERiCC’s activities are also subject to oversight by the Audit Committee.

The Risk and Compliance department is the centralised function responsible for the day-to-day monitoring of Board policies, client mandates, management procedures and any other risk matters identified as potentially requiring attention. The department is responsible for daily reporting to management, monthly reporting to ERiCC and the Board, and quarterly reporting to the Audit Committee.

In conjunction with the Risk and Compliance department, the individual business units identify risks specific to their areas and develop controls to reduce those risks to acceptable levels. This decentralised approach ensures comprehensive identification of risks and entrenches their management in the most appropriate areas.

This organisation-wide approach to risk management fosters a risk aware culture, with all levels of TCorp contributing to the framework and the detailed systems and processes that identify, control, monitor and report on risk.

Legal and regulatory compliance

TCorp is regulated by several items of NSW legislation, including its own Act, the Treasury Corporation Act 1983, as well as the Public Finance and Audit Act 1983, the Annual Reports (Statutory Bodies) Act 1984 and the Public Authorities (Financial Arrangements) Act 1987. TCorp is ultimately accountable to the NSW Parliament, through the NSW Treasurer.

TCorp is not regulated by the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission, which govern most operators in the Australian financial markets. However, TCorp voluntarily adopts relevant industry practices which impose conventional market constraints.

TCorp’s activities are subject to review and monitoring by a number of external parties including:• the NSW Treasurer, who is a Member of

Parliament and the NSW Government shareholder representative;

• the NSW Treasury, which maintains a shareholder monitoring role through quarterly and annual reporting requirements common to all NSW Government agencies, and by representation on the TCorp Board; and

• the NSW Auditor-General, who reports to Parliament, provides an independent audit of TCorp’s financial reports and expresses an opinion on those financial reports in line with the requirements of the Public Finance and Audit Act 1983.

Compliance is a key element of risk management and TCorp’s compliance framework is structured to ensure adherence to applicable laws, regulations, contracts, industry standards and internal policies. Consistent with TCorp’s risk management approach, compliance measures are subject to continuous monitoring and improvement. Any compliance issues are referred to the Chief Executive, the ERiCC, the Audit Committee and/or the Board as appropriate.

Compliance and Risk ManagementResponsibility for risk management and compliance extends across the entire TCorp organisation.


Use of capital

TCorp does not hold subscribed share capital in the conventional commercial sense. In consultation with its shareholder, the NSW Government, TCorp has retained from past profits an amount of $75 million.

TCorp operates under self-imposed capital requirements based on prudential statements published by APRA. Within these TCorp-specific capital constraints, TCorp manages market, credit and operational risks to ensure that the level of capital is sufficient to cover the financial risks incurred in its daily business.

Capital usage is calculated daily and monitored against Board approved limits. Management reports are produced daily and summary reports are presented monthly to the Board.

Market risk

TCorp uses a Value-At-Risk model based on historical simulation to assess capital requirements arising from market risk. The model captures the potential for loss of earnings or changes in the value of TCorp’s assets and liabilities arising from movements in interest rates and key credit spreads and from fluctuations in the prices of bonds or other financial instruments.

Credit risk

In conducting its business, TCorp invests in high grade financial assets issued by parties external to the whole of the NSW Government grouping. The return achieved on these financial assets must be sufficient to protect against loss in value caused by a decline in the counterparty’s creditworthiness or ultimate default.

Credit exposures are monitored daily against Board approved limits.

Operational risk

Operational risk can arise from events such as settlement errors, system failures, procedure breakdowns and external factors. TCorp reviews all possible risks of this nature, assesses the mitigating factors and controls and evaluates the residual risks. TCorp uses “KnowRisk” software to aid the identification and measurement of risk and implementation of associated internal controls. High risks are managed by improving procedures and process flows, ensuring appropriate segregation of duties, insurance cover and business continuity plans. TCorp allocates capital to cover operational risk.

Auditor independence

TCorp is audited annually by the Audit Office of NSW. The Public Finance and Audit Act 1983 further promotes independence of the Audit Office by ensuring that only Parliament, not the Executive Government, can remove the Auditor-General and by precluding the provision of non-audit services to all public sector agencies.

Deloitte Touche Tohmatsu is engaged by TCorp to undertake internal audit projects as agreed by the Audit Committee under TCorp’s Internal Audit Charter and to report findings independently to the Audit Committee.

Code of Conduct & Ethics

All TCorp staff members sign the TCorp Code of Conduct & Ethics. The code sets out what is expected of staff in their business affairs and in dealings with clients and other parties. It demands high standards of personal integrity and honesty in all dealings and a respect for the privacy of clients and others. By signing the code, staff acknowledge that they have read and understood it and agree to act according to its requirements.

Board

Chief Executive

Internal Audit

External Audit

Audit Committee

Executive Risk & Compliance Committee

Risk and Compliance Department

Business Units

TCorp Risk and Compliance Framework


Concise Consolidated Income Statementfor the year ended 30 June 2009

2009 2008 $m $m

Income from changes in fair value 4,191.3 2,755.6

Less: Expenses from changes in fair value (4,011.8) (2,718.6)

Net income from changes in fair value 179.5 37.0

Fees and commissions 25.8 21.3

Total net income 205.3 58.3

Less: General administrative expenses

Staff costs (16.3) (13.9)

Financial services costs (1.6) (1.2)

Information technology costs (7.9) (4.6)

Premises and administration costs (4.8) (4.9)

Total general administrative expenses (30.6) (24.6)

Transaction issuance fees (4.4) –

Other transaction costs (2.9) (1.9)

Total transaction costs (7.3) (1.9)

Total general administrative expenses and transaction costs (37.9) (26.5)

Profit before income tax equivalent expense 167.4 31.8

Income tax equivalent expense (43.5) (8.3)

Profit after income tax equivalent expense 123.9 23.5

The accompanying discussion and analysis, and notes form part of these concise financial statements.

This concise report is derived from the full financial report for the year ended 30 June 2009.

The concise financial report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of New South Wales Treasury Corporation (TCorp) and its controlled entities as the full financial report.

The full financial report will be sent on request free of charge. Requests can be made on TCorp’s website at www.tcorp.nsw.gov.au or by telephone on 02 9325 9325.

Concise Consolidated Financial Statements

Contents30 Concise Consolidated

Income Statement32 Concise Consolidated

Balance Sheet34 Concise Consolidated

Statement of Changes in Equity35 Concise Consolidated

Statement of Cash Flows36 Notes to and form part of the Concise

Financial Statements37 Directors’ Declaration38 Independent Audit Report


Discussion and Analysis of the Concise Consolidated Income Statement

The last financial year saw an unprecedented amount of turmoil in global financial markets. TCorp was able to take advantage of this volatility on its own account as well as on behalf of its New South Wales Government clients. As a result, TCorp’s profit was exceptional for the last financial year and was its highest on record. In the absence of a repeat of this market volatility, it is unlikely TCorp will achieve such a strong result next financial year.

It is worth noting, particularly in the context of experiences faced by many other institutions operating in the financial markets, that TCorp’s results were not impacted by:

• any credit defaults. TCorp transacts only with highly creditworthy counterparties and as a result has not suffered, nor expects to suffer, any credit losses arising from exposures on its financial assets or derivative positions; or

• increases in lending margins to clients, as these margins remained unchanged over the year.

Net income from changes in fair value

Net income from changes in fair value is a measure of the performance of TCorp’s core balance sheet activities. A number of different variables influence this result, the most significant of which can be explained in two major components.

Firstly, TCorp achieved a strong underlying performance through its core activities in the management of its balance sheet and in undertaking its funding activities. In addition to being able to take advantage of the significant market volatility, TCorp also benefited from a larger balance sheet, with more activity driven by higher volumes of new client loans. TCorp was also able to take advantage of some very favourably priced long dated offshore funding opportunities. These factors all contributed positively to a very strong underlying performance.

Secondly, whereas the net income in the previous financial year was negatively impacted by the valuation requirements of the accounting standards in relation to unrealised gains and losses on certain funding transactions, the current financial year saw these unrealised valuation positions turn into significant positive impacts. These unrealised revaluation impacts net to zero over the life of the transactions where they are held to maturity.

Fees and commissions

Fee income increased primarily due to higher performance fees earned for managing client debt portfolios. TCorp was able to add significant value (interest savings) to its clients’ debt portfolios over the year through its strategic debt modelling process in a period of high market volatility, and as a result also shared in some of these savings through its performance fee arrangements.

General administrative expenses

General administrative expenses increased in line with TCorp’s approved budget. The increase in staff and information technology costs reflects the growth in TCorp’s operating business to support the large actual and future growth in TCorp’s core balance sheet activities. Other general administrative expenses remained broadly in line with those of the previous financial year.

Transaction costs

Transaction costs increased in response to the changing market conditions. TCorp incurred transaction issuance costs to improve its access to the debt markets at both favourable value and volumes. This saw the successful issue of $2.6 billion and $0.8 billion in the 2013 and 2023 benchmark bond series respectively. Other transaction costs increased primarily as a result of TCorp seeking to expand its offshore funding options.

Income tax equivalent expense

TCorp is subject to tax equivalent payments to the New South Wales Government at an amount equal to 26 per cent of profit.


2009 2008 $m $m

Assets

Cash and liquid assets 233.1 447.6

Outstanding settlements receivable 1,054.1 418.5

Due from financial institutions 1,481.8 21.3

Securities held 7,753.1 5,674.5

Derivative financial instruments receivable 572.2 134.5

Loans to New South Wales Government clients 37,888.7 30,333.4

Other assets 33.9 20.4

Plant and equipment 2.9 2.7

Total assets 49,019.8 37,052.9

Liabilities

Due to financial institutions 3,776.5 3,415.8

Outstanding settlements payable 290.1 305.1

Due to New South Wales Government clients 888.9 538.6

Borrowings 43,455.5 31,809.2

Derivative financial instruments payable 425.6 900.4

Income tax equivalent payable 2.8 2.3

Other liabilities and provisions 105.4 38.4

Total liabilities 48,944.8 37,009.8

Net assets 75.0 43.1

Represented by:

Equity

Retained profits 75.0 43.1

Total�equity� 75.0� 43.1


Concise Consolidated Balance Sheetfor the year ended 30 June 2009


Discussion and Analysis of the Concise Consolidated Balance Sheet

The principal asset of loans to New South Wales Government clients of $37,888.7 million represented over 77 per cent of total assets. These comprised of loans to:

2009 2008 $m $m

Crown Entity (New South Wales General Government) 13,055.3 10,641.6

Electricity entities 14,929.4 11,747.6

Transport entities 1,155.9 1,266.2

Water entities 6,728.8 4,943.9

Other entities 2,019.3 1,734.1

� 37,888.7� 30,333.4

Securities, cash and liquid assets and amounts due from financial institutions are held for liquidity management purposes and in total, increased by $3,324.6 million to $9,468.0 million at 30 June 2009.

Borrowings, the principal liability, comprised:

2009 2008 Fair Value Fair Value $m $m

Domestic Benchmark Bonds 30,814.8 13,789.9

Global Exchangeable Bonds 7,366.0 14,275.4

38,180.8 28,065.3

Euro Medium Term Notes 3,340.1 2,400.6

CPI Linked Bonds 1,518.6 980.8

Other borrowings 416.0 362.5

� 43,455.5� 31,809.2

The volumes on issue of both Domestic Benchmark and Global Exchangeable Bonds are:

2009 2009 2008 2008 Maturity Coupon Face Value Market Value Face Value Market Value %p.a. $m $m $m $m

1 October 2009 6.0 2,834.2 2,896.6 2,859.2 2,851.8

1 December 2010 7.0 7,080.3 7,439.4 6,928.7 6,914.2

1 May 2012 6.0 6,955.8 7,198.9 6,435.0 6,232.5

1 May 2013 5.25 2,905.0 2,912.1 – –

1 August 2014 5.5 5,982.4 6,046.9 5,630.0 5,321.1

1 March 2017 5.5 7,021.6 6,914.4 6,147.3 5,659.3

1 April 2019 6.0 3,726.8 3,720.8 989.0 929.2

1 May 2023 6.0 1,084.0 1,051.7 170.0 157.2

37,590.1 38,180.8 29,159.2 28,065.3


2009 2008 $m $m

Total equity at the beginning of the year 43.1 43.1

Profit after income tax equivalent expense 123.9 23.5

Total income and expense 123.9 23.5

Less: Dividends payable (92.0) (23.5)

Total�equity�at�the�end�of�the�year� 75.0� 43.1


Discussion and Analysis of the Concise Consolidated Statement of Changes in Equity

The New South Wales Government is not required under legislation to contribute equity to the TCorp. Retained profits are held in lieu of contributed equity and provide a capital base commensurate with the risks inherent in the TCorp’s business.

Concise Consolidated Statement of Changes in Equityfor the year ended 30 June 2009


2009 2008 $m $m

Cash Inflows (Outflows) from Operating Activities

Interest received 2,371.2 2,460.9

Interest and other costs of finance paid (2,491.2) (2,410.3)

Fees and commission received 17.9 21.3

Payments of tax equivalents (43.1) (8.5)

Receipt of Goods and Services Tax 2.3 1.4

Payments of general administrative expenses (34.5) (22.6)

Loans to Government clients made (11,055.6) (7,166.1)

Loans to Government clients repaid 4,667.0 4,263.3

Net cash used in operating activities (6,566.0) (2,860.6)

Cash Inflows (Outflows) from Investing Activities

Net cash to securities held (3,337.6) (1,853.0)

Purchases of plant and equipment (2.8) (2.9)

Net cash used in investing activities (3,340.4) (1,855.9)

Cash Inflows (Outflows) from Financing Activities

Proceeds from issuance of borrowings and short term securities 59,962.8 35,186.9

Repayment of borrowings and short term securities (50,386.8) (30,340.1)

Net cash used in the purchase or repayment of other short term financial instruments (24.9) (68.2)

Dividends paid (23.5) (33.8)

Net cash provided by financing activities 9,527.6 4,744.8

Net (decrease) increase in cash held (378.8) 28.3

Cash and cash equivalents at the beginning of the year 214.8 186.5

Cash�and�cash�equivalents�at�the�end�of�the�year� (164.0)� 214.8


Discussion and Analysis of the Concise Consolidated Cash Flow Statement

The cash flow statement showed a decrease in cash and cash equivalents as defined by accounting standards.

Cash and cash equivalents at the end of the year comprises the following:

2009 2008 $m $m

Cash and liquid assets 233.1 447.6

Short term borrowings (397.1) (232.8)

Cash and cash equivalents at the end of the year (164.0) 214.8

It is noted that most liquid assets held by TCorp do not meet the technical definition of cash and cash equivalents and hence are not presented as cash or cash equivalents as at balance date. Although cash and cash equivalents is a negative balance at year end, overall TCorp holds a strong liquidity position. TCorp’s other liquid assets are included within the due from financial institutions and securities held asset categories disclosed in the concise consolidated balance sheet and are included within investing activities in the cash flow statement.

Net cash used in operating activities was $6,566.0 million, an increase of $3,705.4 million on the previous year, reflecting a higher net funding requirement for client loans.

Net cash used in investing activities was $3,340.4 million, an increase of $1,484.5 million as TCorp maintained higher liquidity levels.

Net cash provided by financing activities was $9,527.6 million, an increase of $4,782.8 million on the previous year, and arose from higher levels of issuance of borrowings and short term securities over the year. These inflows were used to fund the increase in liquidity and net funding requirement for client loans.

Concise Consolidated Statement of Cash Flowsfor the year ended 30 June 2009


Notes to and forming part of the Concise Financial Statementsfor the year ended 30 June 2009

This concise financial report relates to the consolidated entity of New South Wales Treasury Corporation (‘TCorp’) and its controlled entities at the end of, or during the year ended 30 June 2009.

All amounts shown are in Australian dollars and are rounded to the nearest million dollars unless otherwise stated.

There is no statutory requirement for TCorp to prepare a concise financial report and it does not need to comply with Accounting Standard AASB 1039 Concise Financial Reports. However, this concise financial report has been prepared in compliance with AASB 1039 (April 2005). The revised standard AASB 1039 applicable to annual reporting periods beginning on or after 1 January 2009 has not been early adopted. When applied, this standard will impact only on the presentation of the financial statements and disclosures in the notes.

1. Segment Information

TCorp operates solely within the capital markets, banking and finance industry segment to provide financial services to the New South Wales public sector. Given the nature of its core functions and the legislative intent, TCorp operates within Australia, although it does raise a proportion of its funding from offshore. As such, no geographic location segment reporting is presented within this financial report.

2. Dividends

TCorp is a Statutory Corporation established under the Treasury Corporation Act 1983. Prior financial year profits have been retained in lieu of subscribed capital. Any current financial year profits not required to maintain the New South Wales Government agreed appropriate level of equity are declared as dividends to New South Wales Treasury.

2009 2008 $m $m

Dividends proposed and payable:

31 July 2009 46.0 –

1 December 2009 46.0 –

Dividends paid in previous years:

1 August 2008 – 11.8

1 December 2008 – 11.7

� 92.0� 23.5

3. Contingent Liabilities and Commitments

a. TCorp has on loan to the fixed interest market, under its stock lending facility, Corporation bonds with total market value of nil (2008: $591.6 million). These bonds are not recorded in the TCorp’s financial statements. In the unlikely event of default by the borrowers of bonds, TCorp would obtain ownership of any security pledges held as collateral against stock it has lent. There were no security pledges required to be held at 30 June 2009 or 30 June 2008. The terms and conditions of TCorp’s stock lending facility are governed by standard industry agreements, reflecting current Australian market practice.

b. During the year, TCorp provided a short term liquidity facility to approved client authorities. This facility is offered on a revolving basis. At the year end, the total facilities were $5,325.5 million (2008: $4,802.9 million) and undrawn commitments were $4,498.4 million (2008: $3,291.0 million). Drawn commitments are recognised in the balance sheet.

c. TCorp has issued unconditional payment undertakings on behalf of some New South Wales public sector clients participating in the national wholesale electricity market to pay to the system administrators on demand in writing any amount up to an aggregate maximum agreed with individual participants. TCorp has also issued undertakings on behalf of other New South Wales public sector clients in respect of those clients’ performance under contracts with third parties. Amounts paid under these undertakings are recoverable from the New South Wales public sector agency participants. This financial accommodation is Government guaranteed. At balance date, the aggregate amounts totalled $655.4 million (2008: $1,326.5 million).

d. TCorp has a commitment totalling $650.0 million (2008: $650.0 million) to provide motor vehicle finance to the New South Wales Government. As at year end, the undrawn commitments under these arrangements are $97.9 million (2008: $101.7 million). Drawn commitments are recognised on the balance sheet.


4. Subsequent Events

In June 2009, the Corporation confirmed its intention to access the Commonwealth Government’s guarantee of State and Territory borrowings (“Guarantee Scheme”) for certain of its Benchmark bonds, as listed below:

Benchmark BondsMay 2013August 2014March 2017April 2019May 2023 The amount outstanding of these benchmark bonds at balance date is set out in the discussion and analysis of the concise consolidated balance sheet.

The rules of the Guarantee Scheme require New South Wales (the Crown), rather than the Corporation, to apply for coverage. The Crown will be liable to pay the Commonwealth a fee of 0.15% per annum on the face value of existing borrowings at the time of applying to access the Guarantee Scheme, and 0.30% per annum on the face value of any further (new) borrowings.

The Corporation will manage the Crown’s participation in the Guarantee Scheme. The Guarantee Scheme will not have a material impact on the results of the Corporation.

END OF AUDITED CONCISE FINANCIAL REPORT

The directors declare that in their opinion, the concise consolidated financial report of New South Wales Treasury Corporation complies with Accounting Standard AASB 1039 Concise Financial Reports.

The financial statements and specific disclosures included in this concise financial report have been derived from the full financial report for the year ended 30 June 2009.

This declaration is made in accordance with a resolution of the directors.

M A Schur S W Knight Director Director

Sydney, 4 September 2009

Director’s Declaration


Independent Audit Report

GPO Box 12 Sydney NSW 2001

To Members of the New South Wales Parliament

I have audited the accompanying concise financial report of the New South Wales Treasury Corporation (the consolidated entity), which comprises the balance sheet as at 30 June 2009, the income statement, statement of changes in equity and cash flow statement for the year then ended, and related notes, derived from the audited financial report of the consolidated entity for the year ended 30 June 2009, and the discussion and analysis. The concise consolidated financial report does not contain all the disclosures required by the Australian Accounting Standards. The consolidated entity comprises the Corporation and the entities it controlled at the year’s end or from time to time during the financial year.

Auditor’s Opinion

In my opinion, the concise consolidated financial report, including the discussion and analysis, of the consolidated entity for the year ended 30 June 2009 complies with the Accounting Standard AASB 1039 ‘Concise Financial Reports’.

My opinion should be read in conjunction with the rest of this report.

Board’s Responsibility for the concise Financial Report

The Board of New South Wales Treasury Corporation is responsible for the preparation and presentation of the concise consolidated financial report in accordance with Accounting Standard AASB 1039 ‘Concise Financial Reports’. This responsibility includes establishing and maintaining internal control relevant to the preparation of the concise consolidated financial report; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

My responsibility is to express an opinion on the concise consolidated financial report based on my audit. I conducted my audit, in accordance with Australian Auditing Standards, on the full financial report of the consolidated entity for the year ended 30 June 2009. My audit report on the full financial report for the year was signed on 7 September 2009 and was not subject to any modification. The Australian Auditing Standards require that I comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

My procedures in respect of the concise consolidated financial report included testing that the information in the concise financial report is derived from, and is consistent with, the full financial report for the year, and examination on a test basis, of evidence supporting the amounts, discussion and analysis, and other disclosures which were not directly derived from the full financial report for the year. These procedures were undertaken to form an opinion whether, in all material respects, the concise consolidated financial report and the discussion and analysis complies with Accounting Standard AASB1039 ‘Concise Financial Reports’.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

My opinion on the concise financial report does not provide assurance:

• about the future viability of the consolidated entity,• that it has carried out its activities effectively, efficiently and economically, or • about the effectiveness of its internal controls.

Independence

In conducting this audit, the Audit Office of New South Wales has complied with the independence requirements of the Australian Auditing Standards and other relevant ethical requirements. The Public Finance and Audit Act 1983 further promotes independence by:

• providing that only Parliament, and not the executive government, can remove an Auditor-General, and• mandating the Auditor-General as auditor of public sector agencies but precluding the provision of non-audit services, thus ensuring the Auditor-

General and the Audit Office are not compromised in their role by the possibility of losing clients or income.

Peter Achterstraat Auditor-General

Sydney, 7 September 2009


Investment Facilities fund managersAberdeen Asset Management LtdAllianceBernstein Australia LtdAQR Capital Management LLCAxiom International Investors LLCBarclays Global InvestorsCapital International Inc Dimensional Fund Advisors Australia LtdFranklin Templeton Investments Australia LtdMacquarie Investment Management LtdNSW Treasury CorporationPerennial Investment Partners LtdPerpetual Investment Management LtdRogge Global Partners plc.Schroder Investment Management (Aust) LtdSolaris Investment Management LtdState Street Global Advisors (Aust) Ltd

CustodianBNP Paribas Fund Services Australasia Pty Ltd, trading as BNP Paribas Securities Services

TCorp dealer panels

Domestic�fixed�income�dealersAustralia and New Zealand Banking Group LtdCitigroup Global Markets AustraliaCommonwealth Bank of AustraliaDeutsche Bank AG, Sydney BranchJ.P. Morgan Australia LimitedMacquarie Bank LtdNational Australia Bank LtdRoyal Bank of CanadaRBS GroupThe Toronto-Dominion Bank, Australia BranchUBS AG, Australia BranchWestpac Banking Corporation

Euro�medium�term�note�dealers�CitiDaiwa Securities SMBC Europe LtdGoldman Sachs InternationalHSBCMerrill Lynch InternationalMitsubishi UFJ Securities International plcMizuho International plcNational Australia Bank LtdNomura International plcRBC Capital MarketsTD SecuritiesUBS Investment Bank

Global�exchangeable�bond�dealersAustralian and New Zealand Banking Group LtdCitiCommonwealth Bank of AustraliaDeutsche Bank J.P. Morgan Securities LimitedMacquarie Bank LtdNational Australia Bank LtdRBC Capital MarketsRoyal Bank of ScotlandTD SecuritiesUBS Investment BankWestpac Banking Corporation

Investment Facilities Fund Managers and TCorp Dealer Panelsat 30 June 2009


Our People

Adam AjkicCorporate Analyst

Michael AllenGeneral Manager Treasury, Client & Risk Services

Delwyn BentonExecutive Assistant

Rory BridleSenior Business Manager Client & Risk Services

Katherine BurkeManager Administration

Darren CarrNetwork Administrator

David ChoiPortfolio Dealer

Prescilla DennisPortfolio Administrator

Roy DiproseMarket Risk Officer

Kathryn ElliottHead of IT

Christine EversBusiness Manager – Client Services

Margaret FahyLegal Counsel

Morris FarahAssistant Financial Controller

Belinda FinocchiaroRecords Administration Officer

Jason FredmanDealer – Client & Risk Services

William FreemanSettlements Officer

Victoria GibsonHead of Portfolio Management

Lynn GoodyerGeneral Manager Human Resources

Jonathan GreenSenior Manager Investment Facilities

Diana GreenhillCompliance Officer

Lillian HamiltonReception Administration Officer

Jasmine HeckenbergAnalyst Corporate Finance

Timothy HextHead of Balance Sheet & Funding

Kim HoUnix Systems Administrator

Adam HunterSettlements Officer


Gede Nyoman-IndrajayaSystem Support Analyst

Sriya JonnalageddaHelp Desk Coordinator

Fiona KarpinskyPortfolio Administrator

Stephen KnightChief Executive

Teddy LaiInfrastructure Manager

Alexandra LambCommunications Officer

Wendy LeungGraduate Analyst, Corporate Finance

Ming Tak LoSecurity & Network Manager

Suzanne LongManager Balance Sheet & Funding

Kelly MaiCompliance Officer

Scott MannixGeneral Manager Legal & Strategy

Sally MitchellFinancial Controller

Christopher MoranInfrastructure Manager

Gavin MorkSenior Investment Specialist

Andrew MoysePortfolio Manager

Mark MulcahyPayroll Manager

Simon MurphySenior Portfolio Manager

Fiona NashProject Coordinator

Ivan NobiloLiquidity Manager

Hannah ParkerTeam Administrator

Kevin PughSenior Manager Corporate Finance

Ram RamanathanDatabase Administrator

Michael ReddickSenior Risk Analyst, Risk Advisory

Mark Rocyn-JonesSystem Support Analyst

Alex SchumanChief Economist


Jenny SillarEconomist

Paul SmithGeneral Manager Finance & Administration

Katherine SneddonTreasury, Client & Risk Services Coordinator

Glenn SolomonOperational Risk Analyst

Enrico SorianoSenior Lotus Notes/ Web Application Programmer

Mark SwanGeneral Manager Risk

Glenn TeasdaleSettlements Officer

Tin Tran Business Services Manager Corporate Support, Risk & Financial Control

Fiona TrigonaManager Funding

Suzanne TweedExecutive Assistant to Chief Executive (Maternity Leave)

Denby CaseyBusiness Manager Client Services

Maria VetsikasBusiness Services Manager Asset Management

Lorna VirataPortfolio Administrator

Mark VuInvestment Analyst

Cameron WardFacilities Administration Officer

Kylie WillmentSenior Investment Specialist

David WilsonManager Operations

Holly WilsonHR Advisor

Simon WilsonSenior Manager Corporate Finance

Mark WyllieMarket Risk Analyst

Cynthia XuAccounts Administrator

Ida YeePortfolio Administrator

Ben ZhaoGraduate Analyst Risk Advisory

Shelly ZvezdakoskaAccounts Administrator


Postal address

Level 22 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000

GPO Box 17 Sydney NSW 2001

Telephone ..............................61 2 9325 9325Facsimile ...............................61 2 9325 9333Email [email protected] ...................... www.tcorp.nsw.gov.au

Dealing desk

TelephoneBonds ................................61 2 9247 5211Money market ....................61 2 9247 5633Authority deposits ..............61 2 9247 5488Stock lending .....................61 2 9247 5501Client transaction line .........61 2 9247 5501

Facsimile ...............................61 2 9325 9344

Operations – settlements

Telephone ..............................61 2 9325 937061 2 9325 9380

Facsimile ...............................61 2 9325 9355

Registry services

TCorp inscribed stock registries are operated by:

Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Telephone ..............................61 2 8280 7915Email ... [email protected]

The reporting requirements of the Annual Reports (Statutory Bodies) Act 1984, and related regulations are dealt with in the separate document, the Twenty-seventh Annual Report of New South Wales Treasury Corporation, tabled in the NSW Parliament.

Contact Details

Online report

Visit our website to access this annual report in convenient HTML, along with other useful company information.

www.tcorp.nsw.gov.au

TCorp has chosen the Australian made paper Impress Gloss for the 2009 Annual Report. Impress is manufactured under the international environmental standard ISO 14001. Pulps used are bleached using Elemental Chlorine Free technology and are sourced from suppliers who practice sustainable management of forests in line with strict international standards.

Charter

TCorp is the central financing authority for the New South Wales public sector. The Treasury Corporation Act 1983 states that TCorp’s principal objective is “to provide financial services for, or for the benefit of, the Government, public authorities and other public bodies”.

In pursuing its objectives, TCorp has the same legal capacity, powers and authorities as a company under the Corporations Act 2001 (Cth). Activities in which TCorp can engage include: • provision of finance for the Government

and NSW public authorities;• management or advice on management

of Government and public authority assets and liabilities;

• acceptance of funds for investment from the Government and public authorities;

• investment of funds; and• management of TCorp’s own asset

and liabilities.

TCorp’s powers to borrow, invest and undertake financial management transactions are regulated under the Public Authorities (Financial Arrangements) Act 1987.

Mission statement

TCorp exists to deliver for New South Wales the best that the financial markets can offer.

Corporate objectives

In line with the mission statement, the corporate objectives of TCorp are to: • achieve cost-effective funding; • effectively execute portfolio assignments; • effectively execute risk management and

structured finance assignments; and • meet client and market needs through

enhanced resource management and allocation.

Values

Context

TCorp is the central financing authority for the State of NSW. TCorp provides financial services for the benefit of the NSW Government, public authorities and other public bodies.

TCorp manages the financial markets exposure of the NSW Government, our public sector clients and NSW Treasury.

TCorp is accountable to:• The government of the day, who

determines our mandate;• Our public sector clients; and• NSW Treasury.

TCorp has skilled professionals who deliver on a broad range of specialised financial services. We work as a team and focus on delivering the best outcome for NSW.

TCorp’s Values framework builds on the existing culture that has evolved to reflect where we are now and what our role and strategy requires from our people in the future.

TCorp Values must be lived to be worthwhile. These Values provide a guide to our behaviour and decisions.

• Integrity: Our business is based on trust and integrity, being uncompromised in our delivery of the best possible outcomes for NSW. Integrity must underpin the foundation of all our business dealings; our relationships with our clients, fellow employees, and other stakeholders.

• Results: We exist to add value for NSW and our clients. We strive to achieve the best possible financial outcomes for our clients, TCorp, and NSW.

• Partnership: We see the relationships between TCorp and its external and internal stakeholders as partnerships based on reciprocal obligations and mutual benefits. TCorp aims to create a workplace where people strive, learn, achieve, and build sustainable careers.

• One TCorp: We encourage ownership and take pride in both individual and team success, but never lose sight of the fact that we are ‘One TCorp’ serving NSW.

• Talk Straight: The quality of our communication is key to building a healthy TCorp culture. We are committed to honest and constructive communication in all our external and internal dealings.

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Investing for TomorrowMeeting the Current and Future Financing Needs of New South Wales

Annual Report 2009

NEW SOUTH WALES TREASURY CORPORATION

FULL FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2009

meeting the current and future financing needs of new

Documents