ANNUAL BNZ Income Securities 2 Limited

Transcription

1 ANNUAL 2011 BNZ Income Securities 2 Limited Annual Report and Financial Statements for the year ended 30 September 2011

2 Directory Directors Andrew Gregory Thorburn Nicolette Lisa Fowler Timothy John Main Registered Office Level 4 80 Queen Street Auckland 1010 New Zealand Auditor Ernst & Young Ernst & Young Building 2 Takutai Square Britomart Auckland 1010 New Zealand Share Registrar Computershare Investor Services Limited 159 Hurstmere Road Takapuna North Shore City 0622 New Zealand Managing your shareholding online: To change your address, update your payment instructions and to view your registered details including transactions, please visit: computershare.co.nz/investorcentre General enquiries can be directed to: Private Bag Auckland 1142 New Zealand E: enquiry@computershare.co.nz T: F: Please assist our registrar by quoting your CSN or shareholder number.

3 BNZ Income Securities 2 Limited (the Company ) was incorporated on 12 January 2009 and commenced operations in May This annual report is for the year ended 30 September 2011 with comparative results for the year ended 30 September Introduction The Directors of the Company are pleased to announce a net profit after tax of $16,562,000 for the year ended 30 September Each perpetual non-cumulative share issued by the Company (each, a Share ) carries a non-cumulative dividend calculated at the Dividend Rate (payment being subject to certain dividend payment conditions). The Dividend Rate for the five-year period from (and including) 26 June 2009 to (but excluding) 30 June 2014 (as 28 June 2014 is not a business day) is 9.10% per annum, payable in arrears in equal quarterly instalments. Dividends are expected to be fully imputed (so that the imputation ratio of the dividend is the maximum imputation ratio permitted by law) and the cash amount of dividends will therefore be a proportion of the amount calculated using the Dividend Rate. On 29 December 2010, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 17 December On 28 March 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 18 March On 28 June 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 17 June On 28 September 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 16 September The Directors have declared a quarterly dividend of cents per Share (including cash and imputation credits), to be paid on 28 December 2011 to holders of the Shares registered on the share register at 5pm on 16 December Andrew Gregory Thorburn Director 8 December 2011 Annual Report 30 September 2011 BNZ Income Securities 2 Limited 1

4 Income statement For the year ended 30 September 2011 Note $000 $000 Interest revenue 2, 6 23,678 23,675 Other operating revenue Total operating revenue 23,996 24,052 Interest expense Operating expenses 3, Operating profit before income tax expense 23,660 23,660 Income tax expense 4 7,098 7,098 Net profit attributable to shareholders of BNZ Income Securities 2 Limited 16,562 16,562 The accounting policies and notes form part of, and should be read in conjunction with, these financial statements. 2 BNZ Income Securities 2 Limited Annual Report 30 September 2011

5 $000 $000 Net profit attributable to shareholders of BNZ Income Securities 2 Limited 16,562 16,562 Other comprehensive income, net of taxation - - Total comprehensive income attributable to shareholders of BNZ Income Securities 2 Limited 16,562 16,562 Statement of comprehensive income For the year ended 30 September 2011 The accounting policies and notes form part of, and should be read in conjunction with, these financial statements. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 3

6 Statement of changes in equity For the year ended 30 September 2011 Year ended 30 September 2011 Perpetual non- Ordinary cumulative Retained capital capital profits Total Note $000 $000 $000 $000 Balance at beginning of year 6, , ,136 Comprehensive income Net profit attributable to shareholders of BNZ Income Securities 2 Limited ,562 16,562 Total other comprehensive income Total comprehensive income ,562 16,562 Dividends paid on perpetual non-cumulative shares (16,562) (16,562) Balance at end of year 6, , ,136 Year ended 30 September 2010 Balance at beginning of year 6, , ,136 Comprehensive income Net profit attributable to shareholders of BNZ Income Securities 2 Limited ,562 16,562 Total other comprehensive income Total comprehensive income ,562 16,562 Dividends paid on perpetual non-cumulative shares (16,562) (16,562) Balance at end of year 6, , ,136 The accounting policies and notes form part of, and should be read in conjunction with, these financial statements. 4 BNZ Income Securities 2 Limited Annual Report 30 September 2011

7 Assets Note $000 $000 Call balances due from related entity 6 2,318 2,310 Other amounts due from related entity Loan to related entity 6 260, ,000 Balance sheet As at 30 September 2011 Total assets 262, ,624 Liabilities Amounts due to related entity Current tax liability 2,365 2,365 Other accounts payable Total liabilities 2,492 2,488 Net assets 260, ,136 Shareholders equity Contributed equity ordinary shareholder 7 6,936 6,936 Contributed equity perpetual non-cumulative shareholders 8 253, ,064 Retained profits Total shareholders equity 260, ,136 The accounting policies and notes form part of, and should be read in conjunction with, these financial statements. For and on behalf of the Board, who authorised the issue of these financial statements on 8 December Nicolette Lisa Fowler Director Timothy John Main Director Annual Report 30 September 2011 BNZ Income Securities 2 Limited 5

8 Cash flow statement For the year ended 30 September 2011 Cash flows from operating activities before income tax Cash was provided from: Note $000 $000 Interest revenue 23,678 23,675 Other operating revenue Cash was applied to: Interest expense (2) (2) Operating expenses (330) (372) Net cash flows from operating activities before income tax 23,668 23,675 Cash was applied to: Income tax payments 10 (7,098) (6,619) Net cash flows from operating activities 16,570 17,056 Cash flows from financing activities Cash was applied to: Dividends paid on perpetual non-cumulative shares 9 (16,562) (16,562) Net cash flows applied to financing activities (16,562) (16,562) Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year 2,310 1,816 Cash and cash equivalents at end of year 2,318 2,310 Cash and cash equivalents at end of year comprised: Call balances due from related entity 6 2,318 2,310 Total cash and cash equivalents 2,318 2,310 Reconciliation of net profit attributable to shareholders of BNZ Income Securities 2 Limited to net cash flows from operating activities $000 $000 Net profit attributable to shareholders of BNZ Income Securities 2 Limited 16,562 16,562 Changes in assets and liabilities Net movement in accrued operating expenses (4) (4) Net movement in non-cash amounts due from related entity 4 (2) Net movement in current tax liability Net movement in non-cash amounts due to related entity 8 21 Net cash flows from operating activities 16,570 17,056 The accounting policies and notes form part of, and should be read in conjunction with, these financial statements. 6 BNZ Income Securities 2 Limited Annual Report 30 September 2011

9 1. Principal accounting policies Reporting entity The Company is a company with limited liability incorporated in New Zealand on 12 January 2009 and commenced operations in May The Company is a wholly owned controlled entity of National Equities Limited and a 100% indirectly owned controlled entity of National Australia Bank Limited. The Company is a special purpose company incorporated for the purpose of issuing the Shares to the New Zealand public, and lending the proceeds to BNZ Income Management Limited ( BNZIM ). Basis of preparation and Statement of compliance These financial statements are general purpose financial reports prepared in accordance with the Companies Act 1993 and the Financial Reporting Act The Company is an issuer for the purposes of the Financial Reporting Act Notes to and forming part of the financial statements The financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand ( NZ GAAP ). They comply with New Zealand equivalents to International Financial Reporting Standards ( NZ IFRS ) and other applicable Financial Reporting Standards as appropriate for profit-oriented entities. The financial statements comply with International Financial Reporting Standards ( IFRS ). The following new standards and amendments to standards relevant to the Company are not yet effective and have not yet been applied in preparing these financial statements: > > NZ IFRS 9 Financial Instruments was issued in November 2009 and is applicable for accounting periods beginning on or after 1 January It is intended to replace New Zealand International Accounting Standard ( NZ IAS ) 39 Financial Instruments: Recognition and Measurement with NZ IFRS 9 in three phases. It currently establishes the classification and measurement of financial assets and liabilities. Changes to impairment provisioning and hedge accounting are still being debated. The Company is in the process of evaluating the potential impact of this standard. In August 2011, an Exposure Draft was issued to propose a change in applicable date to periods beginning on or after 1 January > > NZ IFRS 13 Fair Value Measurement was issued in June 2011 and is effective for annual reporting periods beginning on or after 1 July It explains how to measure fair value of assets and liabilities and expands the disclosure requirements for all assets or liabilities carried at fair value. The Company is in the process of evaluating the potential effect of this standard. > > NZ IAS 1 Amendments to NZ IAS 1 Presentation of Financial Statements was issued in August 2011 and is effective for periods beginning on or after 1 July It requires entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss in subsequent periods (reclassification adjustments). The Company is in the process of evaluating the potential effect of this standard. > > Harmonisation Amendments is effective for annual reporting periods beginning on or after 1 July This amends multiple standards to harmonise NZ IFRS with IFRS and Australian Accounting Standards and is read in conjunction with FRS-44 NZ Additional Disclosures. The Company is in the process of evaluating the potential effect of these amendments. The Company has also considered all other standards issued but not yet effective and determined that they have no impact on the financial statements. There have been no material changes in accounting policies during the annual reporting period. No new standards or amendments to standards relevant to the Company that have a material impact on the financial statements have been adopted from 1 October 2010 and applied in the preparation of the financial statements. The preparation of the financial statements requires the use of certain estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Assumptions made as at each reporting date are based on estimates at that date. Although the Company has internal control systems in place to ensure that estimates can be reliably measured, actual amounts may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the reporting period in which the estimates are revised and in any future periods affected. It is not anticipated that such differences would be material. Historical cost The financial statements have been prepared on a historical cost basis, modified by the application of fair value measurements. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 7

10 Notes to and forming part of the financial statements continued 1. Principal accounting policies continued Currency of presentation Unless otherwise stated, all amounts are expressed in New Zealand dollars, which is the Company s functional and presentation currency. Fair value measurement Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Where a financial asset or liability is to be stated at fair value, the best evidence is independently quoted market prices in an active market. Where such prices are unavailable then, depending on the circumstances, alternative evidence may be used, including the price of recent transactions, prices for similar instruments or prices obtained utilising component parts (which when aggregated form the price of the whole instrument). Where no active market exists for a particular asset or liability, the Company uses standard market valuation techniques to arrive at the estimated fair value, utilising observable market-sourced inputs wherever possible. Depending on the circumstances, the same alternative evidence (as described above) may be used in the valuation techniques. The valuation techniques address factors such as interest rates, liquidity and credit risk. Fair value asset or liability prices defined above generally represent the present value of all future cash flows including those relating to interest, dividends or other cash flows as appropriate. Assets Cash and cash equivalents Cash and cash equivalents consist of cash and short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value and are held for the purpose of meeting short-term cash commitments. Financial assets Under New Zealand Equivalent to International Accounting Standard ( NZ IAS ) 39 Financial Instruments: Recognition and Measurement, financial assets are required to be classified as: > > fair value through profit or loss; > > available for sale; > > held to maturity; or > > loans and receivables. Financial assets consist of Call balances due from related entity, Other amounts due from related entity and Loan to related entity, all of which have been classified as Loans and receivables for the purposes of NZ IAS 39. The aggregate carrying amount of Loans and receivables as at 30 September 2011 was $262,628,000 (30 September 2010: $262,624,000). Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently recorded at amortised cost, using the effective interest method, adjusted for impairment losses and deferred income. Under the effective interest method, fee income and costs directly related to the origination of the loan are incorporated in the effective interest rate. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired. Loans and receivables are derecognised when the rights to receive cash flows have expired or the Company has transferred substantially all of the risks and rewards of ownership. The fair value of Call balances and Other amounts due from related entity was approximately equal to the carrying amounts on the balance sheet due to the short term nature of the accounts. Loan to related entity consists of a loan to BNZIM. The interest rate receivable from time to time on the loan is fixed five-yearly, with the initial rate continuing from (and including) 26 June 2009 to (but excluding) 30 June 2014 (as 28 June 2014 is not a business day), being the rate reset date. As at 30 September 2011, the fair value of Loan to related entity was $280,800,000 (30 September 2010: $306,346,000). The method of calculating the fair value was revised as at 30 September 2011, and is now based on observable market prices. In the previous year a discounted cash flow methodology was applied. 8 BNZ Income Securities 2 Limited Annual Report 30 September 2011

11 1. Principal accounting policies continued Impairment of financial assets Financial assets are individually reviewed as at each reporting date to determine whether there is any objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of loss is measured as the difference between the asset s carrying value amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through an allowance account and the amount of the loss is recognised in the income statement. Derecognition of financial assets Financial assets are derecognised either when the rights to receive the cash flows from the financial assets have expired or have been transferred, or when the Company has transferred substantially all the risks and rewards of ownership. In transactions where substantially all the risks and rewards are neither retained nor transferred, the Company would derecognise assets if control is no longer retained, or if control was retained the assets would be recognised to the extent of the Company s continuing involvement. Notes to and forming part of the financial statements continued Liabilities Financial liabilities Financial liabilities may be held at fair value through profit or loss or at amortised cost. Financial liabilities comprise Amounts due to related entity and Other accounts payable, which are measured at amortised cost using the effective interest method. The aggregate carrying amount of financial liabilities measured at amortised cost as at 30 September 2011 was $127,000 (30 September 2010: $123,000). The fair value of the financial liabilities measured at amortised cost is approximately equal to the carrying value due to the short-term nature of these financial liabilities. Derecognition of financial liabilities Financial liabilities are derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of the new liability and the difference in the respective carrying amounts is recognised in the income statement. Other accounts payable Other payables are carried at amortised cost. Due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Company prior to the end of the reporting period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. The payables rank ahead of the claims of the perpetual non-cumulative shareholders. Shareholders equity Shareholders equity consists of ordinary share capital, perpetual non-cumulative share capital, and retained profits. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of any applicable tax, from the proceeds. Revenue and expense recognition Interest revenue Interest revenue is recognised in the income statement using the effective interest method. The effective interest method is a method of calculating amortisation using the effective interest rate of a financial asset or financial liability. The effective interest rate is the rate that exactly discounts the estimated stream of future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, the cash flows are estimated considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) excluding future credit losses. The calculation of the effective interest rate includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments) are used. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 9

12 Notes to and forming part of the financial statements continued 1. Principal accounting policies continued Other operating revenue Other operating revenue is recognised in the income statement on an accruals basis when a service has been provided. Other operating revenue represents the reimbursement of operating expenses incurred by the Company. Dividend distribution Dividends distributed in respect of equity instruments are recognised as a liability in the financial statements in the reporting period in which the dividend distribution is approved. Income tax Income tax expense is the income tax charge/(benefit) incurred on the current reporting period profit or loss and is the aggregate of the movements in deferred tax and the amount of income taxes payable/(recoverable) in respect of taxable profit/(loss) for the reporting period at the applicable tax rate. Portfolio Investment Entity ( PIE ) The Company is a listed PIE under the Portfolio Investment Entity regime. A listed PIE is taxed at the corporate rate and is required to attach imputation credits to dividends to the extent imputation credits are available. Please refer to note 4 for further details. 2. Interest revenue $000 $000 Interest revenue from BNZIM 23,660 23,660 Interest revenue from Bank of New Zealand Total interest revenue 23,678 23, Operating expenses $000 $000 Administration fee Audit fees Facility fee Legal fees - 2 Other professional fees Total operating expenses Ernst & Young is the appointed auditor of the Company. Fees for other assurance-related services paid to the auditor for the year ended 30 September 2011 included in Audit fees in the table above totalled $6,036 (year ended 30 September 2010: $6,190). Other assurance-related services performed during the year ended 30 September 2011 were the issuance of an Auditor s Independent Review Report in relation to the Company s Half-Year Report and Interim Financial Statements dated as at 16 June No employee remuneration was paid for the year ended 30 September 2011 as the Company has no employees (year ended 30 September 2010: nil). 4. Income tax expense $000 $000 Income tax expense charged to the income statement Current tax expense 7,098 7,098 Total income tax expense charged to the income statement 7,098 7,098 Reconciliation of income tax expense shown in the income statement with prima facie tax payable on the pre-tax accounting profit Total operating profit before income tax expense 23,660 23,660 Prima facie income tax at 30% 7,098 7,098 Tax expense on operating profit 7,098 7,098 Effective tax rate 30% 30% 10 BNZ Income Securities 2 Limited Annual Report 30 September 2011

13 4. Income tax expense continued Tax changes On 21 May 2010 the Government passed legislation to reduce the company tax rate from 30% to 28%, effective from the 2011/12 year. For the Company, this took effect from 1 October This change means that dividends paid after 1 October 2011, to perpetual non-cumulative shareholders will contain a higher cash component, with a correspondingly lower imputation credit attached. 5. Other accounts payable $000 $000 Notes to and forming part of the financial statements continued Accrued operating expenses Total other accounts payable Related party transactions The Company is a wholly owned controlled entity of National Equities Limited whose ultimate parent company is National Australia Bank Limited. National Equities Limited is the parent entity of National Australia Group (NZ) Limited ( NAGL ) which owns all the issued ordinary share capital of BNZIM and Bank of New Zealand ( BNZ ). During the reporting period ended 30 September 2009, the Company issued Shares to investors and, using the proceeds therefrom, made a loan to BNZIM. The Company receives interest (subject to certain interest payment conditions) on the loan to BNZIM on a quarterly basis. The Company applies the whole interest revenue, net of tax, as dividends to the perpetual non-cumulative shareholders, which are payable quarterly, subject to certain dividend payment conditions. The interest rate payable from time to time on the loan is the aggregate of a rate based on the five-year mid-market swap rate (adjusted as necessary to a quarterly rate) plus a margin of 4.09% per annum. The interest rate is fixed five-yearly, with the initial rate, from (and including) 26 June 2009 to (but excluding) 30 June 2014 (as 28 June 2014 is not a business day), being 9.10% per annum. The loan from the Company to BNZIM is a perpetual loan with no scheduled repayment date, although, following the occurrence of certain events, BNZIM has an obligation to repay the loan (which in some cases may be satisfied by transferring to the Company the perpetual preference shares issued by BNZ in 2009 ( BNZ PPS ) held by BNZIM). In addition, BNZIM may repay the loan (in whole but not in part) on or after the fifth anniversary of the date on which the loan was advanced by the Company (being 30 June 2014, as 28 June 2014 is not a business day), or on or after the occurrence of certain specified events. The loan from the Company to BNZIM is limited in recourse to the BNZ PPS held by BNZIM. BNZIM has invested the proceeds of the loan from the Company in the BNZ PPS. The BNZ PPS carry the right to a dividend payable quarterly in arrears which is calculated and payable generally on the same basis as the dividends payable on the Shares. Other principal related entity transactions comprise the supply, as required, of settlement, accounting, tax, regulatory compliance and legal services from BNZ. The Company pays a quarterly administration fee to BNZ as consideration for the services received. BNZ has provided the Company with a $5 million committed cash advance facility for its liquidity management in the course of its normal activities. BNZ continues to provide, at the Company s request, a payment bond to NZX Limited of an amount in aggregate of $75,000. These transactions with BNZ were entered into at arm s length on normal commercial terms and conditions. Interest expense paid to BNZ is disclosed on the face of the income statement and included within the Transactions with related parties table on page 12. BNZIM reimburses the Company for all operating expenses incurred by the Company. Reimbursement from BNZIM is shown as Other operating revenue in the income statement. Amounts in respect of such operating expenses charged to, and to be reimbursed by, BNZIM are unsecured, with cash settlement occurring regularly. Key management personnel are defined as being Directors of the Company and their related parties. During the year ended 30 September 2011 key management personnel received dividends (including cash and imputation credits) of $455 on Shares (year ended 30 September 2010: $1,820). As at 30 September 2011 key management personnel held no Shares (30 September 2010: 20,000 Shares). No compensation was paid by the Company to key management personnel during the year ended 30 September 2011 (year ended 30 September 2010: nil). Annual Report 30 September 2011 BNZ Income Securities 2 Limited 11

14 Notes to and forming part of the financial statements continued 6. Related party transactions continued The following tables provide information on the transactions with related parties for the relevant reporting period: Receivables and payables with related parties $000 $000 Related party receivables BNZ 2,318 2,310 BNZIM 260, ,314 Related party payable BNZ There is no expected loss on the loan to BNZIM, other receivables due from BNZIM and bank account balances with BNZ. No provision has been made against the value of these assets. Transactions with related parties $000 $000 Revenue from related parties BNZ BNZIM 23,978 24,037 Expenses to related party BNZ Both BNZ and BNZIM are classified as Other related parties of the Company. 7. Contributed equity ordinary shareholder $000 $000 6,935,531 fully paid ordinary shares (30 September 2010: 6,935,531 shares) 6,936 6,936 Total contributed equity ordinary shareholder 6,936 6,936 Each of the 6,935,531 ordinary shares entitles the shareholder to one vote at any meeting of shareholders and has no rights to dividends and surpluses on winding up. Shares do not have a par value. Ordinary share capital is not actively managed by the Company. 8. Contributed equity perpetual non-cumulative shareholders $000 $ ,000,000 fully paid perpetual non-cumulative shares (30 September 2010: 260,000,000) 260, ,000 Deduct: Issue expenses* 6,936 6,936 Total contributed equity perpetual non-cumulative shareholders 253, ,064 * The issue expenses were incurred during the reporting period ended 30 September Each Share carries a non-cumulative dividend calculated at the Dividend Rate (payment being subject to certain dividend payment conditions). The Dividend Rate for the five-year period from (and including) 26 June 2009 to (but excluding) 30 June 2014 (as 28 June 2014 is not a business day) is 9.10% per annum, payable in arrears in equal quarterly instalments. Dividends are expected to be fully imputed (so that the imputation ratio of the dividend is the maximum imputation ratio permitted by law) and the cash amount of dividends will therefore be a proportion of the amount calculated using the Dividend Rate. Holders of the Shares have no right to receive notice of, attend, participate in or vote at the meetings of shareholders of the Company, except in respect of amendments relating to the rights, privileges, limitations and conditions attaching to the Shares, meetings convened in relation to the commencement of the liquidation of the Company in certain circumstances, and meetings convened to consider a resolution proposed to be passed for a purpose referred to in the security trust deed entered into by the Company, BNZIM and New Zealand Permanent Trustees Limited on 19 May 2009 or the deed entitled Deed Poll (BNZIS 2 Deed Poll) issued by the Company on 19 May BNZ Income Securities 2 Limited Annual Report 30 September 2011

15 8. Contributed equity perpetual non-cumulative shareholders continued On liquidation of the Company, each perpetual non-cumulative shareholder will have the right to participate in all of the surplus assets of the Company after all creditors of the Company have been repaid, in priority to, and to the exclusion of, the holders of other classes of shares of the Company (including any ordinary shares), other than shares expressed to rank equally in a liquidation of the Company with the claims of perpetual noncumulative shareholders. Perpetual non-cumulative shareholders rank equally with each other upon liquidation of the Company. Call option With the prior consent of the Australian Prudential Regulation Authority ( APRA ), any member of the NAB Group (other than the Company) has the right to acquire the Shares for their issue price (plus any accrued but unpaid distributions) on any dividend payment date on or after 28 June 2014, or at any time after the occurrence of certain specified events. Notes to and forming part of the financial statements continued Capital management When managing capital, management s objective is to ensure the Company continues as a going concern and to maintain optimal returns to perpetual non-cumulative shareholders. Please refer to the Liquidity risk section in note 16 for how the Company manages dividend payments. As the market is constantly changing, management may change the capital structure through the issue of new shares. 9. Retained profits $000 $000 Balance at beginning of year Net profit attributable to shareholders of BNZ Income Securities 2 Limited 16,562 16,562 Dividends on perpetual non-cumulative shares (16,562) (16,562) Balance at end of year On 29 December 2010, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 17 December On 28 March 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 18 March On 28 June 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 17 June On 28 September 2011, a quarterly dividend of $5,915, ( cents per Share), comprising $4,140, cash ( cents per Share) and $1,774, imputation credits ( cents per Share) was paid on the Shares held by the holders of such Shares registered on the share register at 5pm on 16 September There is no dividend or distribution reinvestment plan in place. For the year ended 30 September 2011, there were no foreign sourced dividends or distributions (year ended 30 September 2010: nil). 10. Imputation credit account $000 $000 Balance at beginning of year (2,307) (1,828) Income tax payments during the year, net of refunds 7,098 6,619 Imputation credits attaching to dividends paid during the year (7,098) (7,098) Balance at end of year (2,307) (2,307) The Company s current imputation credit account period ends at 31 March The Company will ensure that sufficient income tax payments are made before the end of the imputation credit account period to ensure that it has a positive imputation credit account balance at this time. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 13

16 Notes to and forming part of the financial statements continued 11. Interest rate repricing schedule The table below represents a breakdown of the balance sheet, by repricing dates or contractual maturity, whichever is the earlier. As at 30 September 2011 Assets Non Over 1 interest Total months months year bearing $000 $000 $000 $000 $000 Call balances due from related entity 2,318 2, Other amounts due from related entity Loan to related entity 260, ,000 - Total assets 262,628 2, , Liabilities Amounts due to related entity Current tax liability 2, ,365 Other accounts payable Total liabilities 2, ,492 As at 30 September 2010 Assets Call balances due from related entity 2,310 2, Other amounts due from related entity Loan to related entity 260, ,000 - Total assets 262,624 2, , Liabilities Amounts due to related entity Current tax liability 2, ,365 Other accounts payable Total liabilities 2, , BNZ Income Securities 2 Limited Annual Report 30 September 2011

17 12. Maturity profile The table below presents the Company s cash flows by remaining contractual maturities as at reporting date. The gross cash flows disclosed in the table below are contractual undiscounted cash flows and therefore will not agree to the carrying values on the balance sheet. Actual cash flows can differ significantly from contractual cash flows as a result of future actions of the Company and its counterparties. Information on the management of liquidity risk is included in note 16. Gross cash Carrying inflows/ amount (outflows) On demand months months years $000 $000 $000 $000 $000 $000 Notes to and forming part of the financial statements continued As at 30 September 2011 Financial assets Call balances due from related entity 2,318 2,318 2, Other amounts due from related entity Loan to related entity (1) 260,000 64,871-11,636 11,830 41,405 Total financial assets 262,628 67,499 2,318 11,946 11,830 41,405 Financial liabilities Amounts due to related entity (81) (81) - (81) - - Other accounts payable (46) (46) - (46) - - Total financial liabilities (127) (127) - (127) - - As at 30 September 2010 Financial assets Call balances due from related entity 2,310 2,310 2, Other amounts due from related entity Loan to related entity (1) 260,000 88,531-11,636 11,830 65,065 Total financial assets 262,624 91,155 2,310 11,950 11,830 65,065 Financial liabilities Amounts due to related entity (73) (73) - (73) - - Other accounts payable (50) (50) - (50) - - Total financial liabilities (123) (123) - (123) - - Remarks: (1) The gross cash flows in relation to the Loan to related entity comprise quarterly interest receipts, which are subject to certain interest payment conditions. This loan is a perpetual loan with no scheduled repayment date. Please refer to note 6 for further details on this loan. 13. Impaired assets No provision has been made against the value of assets reported on the balance sheet. There are no expected losses on the loan to BNZIM, other receivables due from related entity or bank account balances with BNZ. 14. Segment information The Company operates in New Zealand in one industry segment. Its primary business is funding. Financial information for the segment is available to the Board of Directors of the Company for the purpose of evaluating performance and resource allocation, and is the same information presented in these financial statements. The Company derives over 98% of its revenue from interest earned from the loan to BNZIM. Please refer to note 6 for further details. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 15

18 Notes to and forming part of the financial statements continued 15. Contingent liabilities and commitments The Company had no contingent liabilities and commitments as at 30 September 2011 (30 September 2010: nil). 16. Risk management policies The Board of Directors of the Company is committed to the management of risk and has identified the following risks: Credit risk Credit risk is the potential risk of financial loss resulting from the failure of a counterparty to settle its financial and contractual obligations to the Company as they fall due. The Board of Directors has identified the key risk being the unlikely event of BNZIM not being able, or required, to pay interest on or repay the loan, which may occur if BNZ fails to pay dividends on the BNZ PPS held by BNZIM. However, the payment of dividends to the perpetual non-cumulative shareholders is subject to certain dividend payment conditions which are set out in the Company s constitution. The deteriorating sovereign debt position in Europe has become a major concern across global financial markets. However, as noted in BNZ s most recent Disclosure Statement, BNZ s Directors are of the opinion that BNZ has a strong funding and capital base to manage through this period of uncertainty. The maximum exposure to credit risk arising from the Loan to related entity, Call balances due from related entity and Other amounts due from related entity is equal to the carrying amount of each class of receivable. The credit quality of these financial assets is deemed as excellent based on BNZ s current credit rating. These balances as at 30 September 2011 represented 100% of the Company s credit exposures (30 September 2010: 100%). As at 30 September 2011, BNZ and BNZIM represented the only group of closely related counterparties to which the Company had a credit exposure which exceeds 10% of equity, with an exposure within the range of 100% to 109% of equity (30 September 2010: 100% to 109%). Security over the BNZ PPS held by BNZIM has been granted by BNZIM to secure certain of BNZIM s obligations under its loan from the Company. Interest rate risk Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates and credit spreads. The Company s exposure to cash flow interest rate risk is managed through fixing the interest rate on the loan to BNZIM for a five-year period. Liquidity risk Liquidity risk arises from the mismatch in the maturity of financial assets and liabilities, in addition to their settlement characteristics. Maintaining adequate liquidity to meet the current and future payment obligations at a reasonable cost is a core objective of the Company. The Company manages the liquidity risk associated with dividend payments to perpetual non-cumulative shareholders by aligning the dividend rate on the Shares to the interest rate on the loan to BNZIM. The timing of quarterly interest receipts is also matched with the timing of the quarterly payments of dividends. Furthermore, the Company has obtained a $5 million committed cash advance facility from BNZ to further enhance its liquidity management capability. In addition, operating expenses incurred by the Company are reimbursed to the Company by BNZIM. 16 BNZ Income Securities 2 Limited Annual Report 30 September 2011

19 Credit rating As noted in the Company s Half-Year Report for the period ended 31 March 2011, as of 14 January 2011, Moody s Investors Service announced that all ratings of hybrids, including those issued by banks, would have the hybrid indicator (hyb) appended. On 27 May 2011, Moody s Investors Service downgraded the credit rating of the Company s Shares from A3(hyb) to Baa1(hyb). Other information During the year ended 30 September 2011, there was no change to the Standard & Poor s credit rating of the Shares of A+. Subsequent to the reporting date, the Standard & Poor s credit rating of the Shares was downgraded from A+ to BBB on 1 December This has resulted from a global review of bank credit rating methodology by Standard & Poor s. NZX Limited ( NZX ) The Shares are listed on the NZDX Market. NZX has not exercised against the Company any disciplinary actions under Listing Rule NZX has ruled that the Shares are not Equity Securities as defined in, and for the purposes of, the Listing Rules. The effect of this ruling is that the Company is not required to comply, in respect of the Shares, with the provisions of the Listing Rules (including those set out in Appendix 5 of the Listing Rules) applying to Equity Securities. NZX has also ruled that no announcement under Listing Rule is required to be made for routine dividend payments made by the Company to perpetual non-cumulative shareholders. NZX has provided a waiver in respect of certain of the restrictions on transfers of Shares. The effect of this waiver is to enable the minimum amount invested in Shares, and the minimum holding of Shares (as defined in Appendix 2 of the Listing Rules), to be 5,000 Shares. This means that the Company may decline to register a transfer of Shares if registration of the transfer (together with registration of any further transfer or transfers then held by the Company and awaiting registration) would result in less than 5,000 Shares standing in the name of either the transferor or the transferee (provided that this does not prevent any holder of Shares transferring all of his, her or its Shares). NZX has also provided a waiver in respect of the inclusion of provisions in the constitution of the Company (the Constitution ) restricting the issue, acquisition or transfer of Shares. The effect of this approval is that the Company is permitted to incorporate provisions in the Constitution relating to investor interest size requirements, in particular clauses 6.16(c) and (d), 6.17 and 6.18 of the Constitution. The Company has been given a Non-Standard designation by NZX as a consequence of the Constitution incorporating provisions relating to maximum investors interests requirements. Directors The Directors of the Company as at 30 September 2011 were Andrew Gregory Thorburn, Nicolette Lisa Fowler and Timothy John Main. Nicolette Lisa Fowler and Timothy John Main were appointed as Directors on 11 March Hugh Alexander Smith and Neil Watson Bradley resigned as Directors on 11 March Corporate governance statement This section outlines the corporate governance policies of the Company. The key features of the Company s corporate governance are: > > the Board is responsible for the overall corporate governance of the Company; > > the appointment of any new Directors is governed by established approval procedures and criteria; > > the Board may delegate certain powers to a committee of Directors. In view of the size and nature of business of the Company, the Board has not established an audit committee or remuneration committee to date. However, the Company follows the governance framework established by the New Zealand Regional Audit Committee of National Australia Bank Limited, the Company s ultimate parent company; > > the Company has in place risk management policies to ensure all relevant risks are effectively monitored; > > the business or activity of the Company is governed by the Constitution, including, but not limited to, the use of proceeds of interest on, or repayment of, the loan to BNZ Income Management Limited; and > > the Directors also ensure that all relevant laws and regulations are complied with at all times. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 17

20 Other information continued Distribution of Shares Size of holding No. of Holders as at 31 October 2011 Shares held as at 31 October 2011 % of issued Shares as at 31 October ,000 to 9, ,208, ,000 to 49,999 2,209 44,856, ,000 to 99, ,736, ,000 to 499, ,048, ,000 to 999, ,366, ,000, ,786, Total 3, ,000, Substantial security holder At 30 September 2011, there were no substantial security holders of the Company, as there were no listed voting securities in the Company (30 September 2010: nil). Directors interests As at 30 September 2011, the Directors had the following relevant interests in securities issued by the Company or by a related body corporate of the Company: (a) no director had a relevant interest in the ordinary shares in the Company (all of the ordinary shares in the Company are held by National Equities Limited); (b) 50,101 ordinary shares issued by National Australia Bank Limited were held in Trust for Andrew Gregory Thorburn; (c) Nicolette Lisa Fowler was the legal owner of 79 ordinary shares issued by National Australia Bank Limited; (d) 308 ordinary shares issued by National Australia Bank Limited were held in Trust for Nicolette Lisa Fowler; (e) Timothy John Main was the legal owner of 202 ordinary shares issued by National Australia Bank Limited; (f) 5,715 ordinary shares issued by National Australia Bank Limited were held in Trust for Timothy John Main; (g) Andrew Gregory Thorburn had options to acquire 223,777 ordinary shares in National Australia Bank Limited; (h) Nicolette Lisa Fowler had options to acquire 8,108 ordinary shares in National Australia Bank Limited; and (i) Timothy John Main had options to acquire 3,385 ordinary shares in National Australia Bank Limited. During the year ended 30 September 2011, entries were made in the Company s interests register kept under section 189(1)(c) of the Companies Act 1993 in respect of each notice given by each of the current Directors, being Andrew Gregory Thorburn, Nicolette Lisa Fowler and Timothy John Main, and former Directors Neil Watson Bradley and Hugh Alexander Smith (both of whom resigned on 11 March 2011) that, if the Company entered into a transaction with one or more companies or trusts listed in the relevant notice (primarily being subsidiaries of National Australia Bank Limited), the applicable Director would be interested in that transaction. Directors and Officers insurance and indemnity The Company has Directors and Officers liability insurance to cover, to the extent normally covered by such policies, the risk arising out of acts or omissions of Directors of the Company in their capacity as such. Donations The Company has not made any donations during the year ended 30 September 2011 (year ended 30 September 2010: nil). Tangible assets As at 30 September 2011, the Company had financial assets of $262,627,803 (30 September 2010: $262,624,384) comprising Call balances due from related entity, Other amounts due from related entity and a Loan to related entity. As at 30 September 2011, the Company had no tangible assets in the form of property, plant, equipment or inventory (30 September 2010: nil). 18 BNZ Income Securities 2 Limited Annual Report 30 September 2011

21 Directors remuneration The Directors did not receive any remuneration or other benefits from the Company during the year ended 30 September 2011 (year ended 30 September 2010: nil). Employee remuneration No employee remuneration was paid for the year ended 30 September 2011 (year ended 30 September 2010: nil) as the Company has no employees. Other information continued Auditors fees The amount paid or payable as audit fees by the Company to the firm holding office as auditor of the Company for the year ended 30 September 2011 amounted to $22,598 (year ended 30 September 2010: $22,510). The amount paid to the auditor for other assurance-related services during the year ended 30 September 2011 was $6,036 (year ended 30 September 2010: $6,190). Annual meeting The annual meeting of the Company will be by way of resolution in writing of the holder of the Company s ordinary shares in lieu of an annual meeting. Annual Report 30 September 2011 BNZ Income Securities 2 Limited 19

22 Independent auditor s report To the Shareholders of BNZ Income Securities 2 Limited Report on the Financial Statements We have audited the financial statements of BNZ Income Securities 2 Limited on pages 2 to 16, which comprise the balance sheet of BNZ Income Securities 2 Limited as at 30 September 2011, and the statement of comprehensive income, income statement, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. This report is made solely to the company s shareholders, as a body, in accordance with section 205(1) of the Companies Act Our audit has been undertaken so that we might state to the company s shareholders those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Directors Responsibility for the Financial Statements The directors are responsible for the preparation of the financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand). These auditing standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected, depend on our judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we have considered the internal control relevant to the company s preparation of the financial statements that give a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements. We believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion. Other than in our capacity as auditor we have no relationship with, or interest in BNZ Income Securities 2 Limited. Partners and employees of our firm may deal with the company on normal terms within the ordinary course of trading activities of the business of the company. Opinion In our opinion, the financial statements on pages 2 to 16: XX XX comply with generally accepted accounting practice in New Zealand; comply with International Financial Reporting Standards; and XX give a true and fair view of the financial position of BNZ Income Securities 2 Limited as at 30 September 2011 and its financial performance and cash flows for the year then ended. Report on Other Legal and Regulatory Requirements In accordance with the Financial Reporting Act 1993, we report that: XX XX We have obtained all the information and explanations that we have required. In our opinion proper accounting records have been kept by BNZ Income Securities 2 Limited as far as appears from our examination of those records. 8 December 2011 Auckland 20 BNZ Income Securities 2 Limited Annual Report 30 September 2011