Against a backdrop of a challenging and ever-changing market environment, we are pleased to report that TCorp continued to perform well over the past year.

Operating results were again sound, with a pre-tax profit of $45.7m generated from activities. During the year we added new clients across all our areas of activity, and helped clients manage substantial cash flow and risk management projects throughout the course of the year. With the announcement by the NSW Government of a significant infrastructure investment program over the coming period, much of the effort over the past year has been geared towards positioning TCorp to ensure we can meet the increased and diverse borrowing needs of our public sector clients into the future.

Environment

The year in review was characterised by strong global economic growth, led by the booming Asian economies, whilst Australia recorded its 15th consecutive year of growth. Economic growth rates varied from state to state, reflecting the strong influence of the mining boom on the overall economy.

The Reserve Bank of Australia continued its gradual tightening of monetary policy over the course of the year, raising official rates twice in the first half to the 6.25% level. In this environment 10 year bond yields traded in a very narrow range for most of the year between 5.5% and 6.0%, before spiking up in June to finish around 6.25%.

Against a background of benign interest rates and strong corporate results, equity markets posted another very strong performance over the year. Locally, the share market added around 29% for the year, representing the best 1 year performance in the past two decades, and the fourth consecutive year of returns in excess of 20%. Increasing concerns regarding the US sub prime market started to impact local financial markets towards the end of the year, signalling an end to the five year run of benign credit conditions.

Funding

The funding environment, and TCorp’s ultimate demand from the debt markets, changed markedly over the course of the year. By year end TCorp had raised a total of $2.9bn to fund the needs of our public sector clients, which was substantially down on earlier estimates of the size of the borrowing program. This reduction was due to a significantly improved cash position for the NSW Government than earlier budget projections, due to a strong budget surplus and very healthy returns on investment portfolios, including portfolios managed by TCorp. As a result the debt financing needs of our clients were substantially reduced from earlier estimates, and we were able to take advantage of favourable funding opportunities to pre-fund part of our sizeable 2007-08 borrowing task.

The major theme for the majority of the year was the continued demand from offshore investors for TCorp’s benchmark bonds. Outstandings in our Global Exchangeable Bonds continued the trend of recent years, rising by over $3bn to a level of $14.4bn by year end. A strong A$ and healthy interest rate differential to the US$ have helped fuel demand from offshore fund managers and central banks.

Coincident with the NSW Government’s announcement of a $50bn infrastructure investment commitment over the next 4 years, TCorp will continue to grow its debt on issue to meet a proportion of this commitment. This enables TCorp the opportunity to explore alternative funding sources which have been dormant or otherwise unavailable over recent years.

Business Trends and Performance

Profitability from TCorp’s core activities of borrowing and lending, liability and asset management and corporate finance continued to be sound. During the year we added new clients across all business activities, and continued to work actively with clients to assist in the management of their financial risks.

Very tight trading ranges for local bond yields throughout the year resulted in few opportunities for positioning client debt portfolios. As a result performance of managed debt portfolios was in line with benchmark for the year, though during the year we continued to work actively with a number of clients in reviewing their benchmarks in light of forecast changes to their debt levels and capital expenditure initiatives.

TCorp’s role as a fund manager continued to generate strong results for clients over the year. The principal vehicles, the Hour-Glass Investment Facilities, again generated healthy growth, finishing the year with a total of $11.5bn in funds managed on behalf of over 130 public sector clients. Investment markets experienced another strong year, with local equity markets returning around 29%, representing the fourth consecutive year of returns in excess of 20%.

In addition to funds managed through the Hour Glass products, TCorp also directly manages cash and fixed income monies for specific clients. Over recent years the volume of directly managed funds has grown dramatically, peaking at $11.7bn last year, due largely to the build up of funds in the General Government Liability Management Fund. This fund was earmarked to be paid over to SAS Trustee Corporation prior to 30th June 2007, which resulted in a total of $7.1bn being transferred over in a number of tranches. TCorp worked actively to ensure the maturity structure of investments matched the payout schedule, and that the transition provided a smooth outcome for all parties.

TCorp’s Corporate Finance Team had another busy year, working closely with NSW Treasury and individual agencies on a range of projects and financing proposals. There was a steady stream of work surrounding public-private partnership projects, where TCorp works with agencies on evaluating the financial risks involved in proposals. During the year TCorp also continued to work with a number of agencies on a range of leasing and financing arrangements.

Our Client Services team had another very busy year. We continued to work closely with large investor clients to ensure their mix of investments was appropriate for their objectives. We were also very busy with a number of our debt clients, reviewing their benchmarks and the construct of their debt portfolios in preparation for the projected increased capital expenditure program.

Operating Framework

During the year TCorp continued to build on the strength of its operating framework, in response to the growing business needs and continuous changes in the operating environment.

A key project that commenced during the year involves a replacement system for TCorp’s core balance sheet and debt management systems, which have served TCorp well over the past decade but are now approaching the end of their useful life. During the year we specified and tendered for a replacement system, with a view to providing a platform for real-time data capture and reporting, pre-trade compliance and straight through processing. After an extensive review and tender process, TCorp selected the Reuters Kondor solution, which is due to be fully implemented in 2008.

During the year a great degree of effort was involved in extending and improving TCorp’s robust risk management framework. As the manager of financial markets risk on behalf of the NSW Government and Government owned businesses, TCorp prides itself on having a strong risk management culture and framework, and sound compliance practices. Notwithstanding, the industry is constantly changing and with that comes a need for us to continuously review and build on our capabilities. During the year we continued to enhance our processes across a number of activities, including Business Continuity Planning, Capital Adequacy and Market Risk Analysis, and Anti Money Laundering.

The strength of the State’s financial position was again evidenced during the year, with both major rating agencies, Moody’s and Standard and Poors reaffirming NSW AAA rating. Importantly, the balance sheet strength and very low net debt ratios were seen as supportive to the upcoming capital investment program for the State, consistent with maintenance of the AAA rating.

People

We welcomed Kevin Cosgriff onto the TCorp Board in October 2006, filling the role vacated by Dr Kerry Schott following her appointment as Chief Executive of Sydney Water Corporation. Kevin occupies the role
of Deputy Secretary, Fiscal & Economic at NSW Treasury.

Following substantial changes in the line-up of TCorp’s Executive team in 2005 and early 2006, the last year saw a consolidation period for this new team, and a period of fresh ideas and initiatives to build further on TCorp’s core strengths and capabilities. During the year a number of initiatives around staff training, development and teamwork were introduced, to further enhance the effectiveness of our teams, and the opportunities for our people.

Our staff produced another professional and thorough effort over the past year, working diligently to achieve strong outcomes for clients and the organisation. The growth and changes to TCorp’s businesses have seen many of our staff involved in specific projects associated with these changes, and we thank them sincerely for their efforts over the course of the year.

TCorp has worked hard over the past year to position itself for the period ahead, which will be characterised by increasing borrowing requirements from clients (both in terms of quantity and potentially, type of funding required), and an increase in degree of complexity of risk management issues facing our clients. We are confident that we are well placed to meet the challenges and the opportunities that lay ahead so that we can maximise the results for our clients and our shareholder.

Risk Philosophy

As the central financing body and manager of financial markets risk for the NSW Government and its constituent businesses, TCorp must ensure that it maintains a risk profile appropriate for the State and its range of Government clients. Integral to our risk philosophy is an embedded conservatism, particularly with respect to exposures to credit risk, highly leveraged or opaque investments, and reputational risk. Our approach to managing financial risks manifests itself in a number of ways:

• The sheer size of TCorp’s activities means we are a substantial manager of market risk (particularly interest rate risk), which we seek to manage through utilising liquid, well defined market instruments, and dealing only with well rated and reputable counterparties.
• As a AAA-rated Government issuer, TCorp seeks to combine the strength of its credit with sound liquidity, to provide a value proposition for local and offshore investors.
• As an investor of funds, we manage to a very conservative credit framework; TCorp will not invest in products where the underlying risks are unclear or not well understood.

Focusing on investment markets, over recent years the benign credit environment has spawned tremendous growth in a range of highly structured instruments with opaque risk characteristics, which frequently embody significant leverage. TCorp’s risk philosophy has meant that we do not support such products and we also advise our clients against investing in such instruments. Instead, by occupying the more conservative end of the investment spectrum we seek to generate solid investment performance over the full economic cycle.

Whilst in recent years much of the leveraged product sector has outperformed the general markets, towards the end of the year a new phase of the credit cycle began to emerge. This was demonstrated by significant spread widening and, in some cases, resulted in substantial capital losses on seemingly secure investments. In this environment TCorp has continued to perform well with respect to its own funds and its clients’ monies, avoiding the higher risk areas that have hurt many investors throughout the financial markets.