Scheme Design

Q: Clarity on which areas constitute stage 1, which area will follow on from stage one, and when. When can this be guaranteed if shareholders do sign up?

A: CPWL have funding from MPI and SDC to develop the design for 20,000Ha of irrigation in the area between the Rakaia River and south of the Hororata/ Selwyn River. The conceptual pipe reticulation network has been designed to deliver across the full 20,000Ha between the two rivers. CPWL have also developed an ambitious but achievable time-frame for implementing the full 60,000Ha scheme. The key factor that will impact on the success of this programme is farmer uptake. If CPWL get a high level of commitment from ALL shareholders, we can proceed with the construction for Stage 1 while at the same time developing the design and then construction for Stages 2 and 3,

Proposed Timeframe (Earliest):

Stage 1: 23,000Ha Te Pirita (20,000Ha) plus Sheffield (3000Ha); Construction – January 2014 to September 2015.
Stage 2: 10,000Ha Hororata, Greendale, Burnham; Construction – September 2015 to September 2016.
Stage3: 27,000Ha Coalgate, Darfield, Kirwee, Waimakariri; Construction: September 2016 to September 2018.

Q: What level of Reliability will the TrustPower agreement to use stored water from Lake Coleridge provide?

A: CPWL and TrustPower have negotiated an agreement for CPWL to have access to 50Mm3 of stored water from Lake Coleridge. The water will top up the run of river water, to provide a reliability of 95%. This level of reliability allows for a 1 in 10 year drought, with a 14 day maximum period without water in any 10 year period. CPWL water users will have the option to take up TrustPower water, or utilise their existing ground water consent, if they have one.

Q: What are the benefits of using TrustPower’s stored water?

A: The benefits of the agreement with TrustPower are numerous:

  • The contract period expires in Dec 2031, and is renewable by agreement.
  • The price is good – equivalent to the cost of developing our own storage.
  • CPWL are working closely with TrustPower to establish the additional capacity available within the Lake to provide additional water to CPWL for the remainder of the scheme.
  • CPWL are investigating other options with storage to ensure that in the event there is not sufficient additional stored water available in Lake Coleridge, the full development of the scheme would not be compromised.

Q: How confident are you on the costs and time-frames?

A: Our estimates have been built from the bottom up based on the best and latest information we have to hand. These have been benchmarked against similar projects. We have built into our estimates appropriate contingencies to mitigate the known risks at the current stage of design maturity. We are confident that our design and procurement strategies will yield the best value possible from the market. For a project of this scale and nature we are following what is considered good practice in terms of project management and procurement. The greatest challenge to completing this project is ensuring we have the capital and land access to make a start.

Costs will not be confirmed until Contractors are engaged.

Farm Financials & Nutrients

Q: What level of farm management is assumed pre scheme in the farm financial models?

A: In the pre-scheme farm models we have assumed typical district good average management. Where there is irrigation it will be a mix of older and newer technology.

Q:What level of management have you assumed post scheme in the farm financial models?

A: We have used top 20% management. There will be changes in managers from succession within families, sale of some farms, employment of new expertise on farms and new motivation for existing farmers. Newly irrigated farms will have top irrigation technology with pivot or lateral irrigators. New dairy conversions will be set up with all new buildings, pastures and irrigation.

Q: What effect will intensifying land use under irrigation have on the environment and particularly contamination of water with nitrogen.

A: The effect of intensifying land use under irrigation will increase nutrient losses. The implementation of a Farm Management Plan will be required to ensure that any farmer is complying with the nutrient losses, working toward good, and then advanced management practice by 2037.

Q: Will we need a resource consent to change land use under the new ECan Land and Water Regional Plan (LWRP)?

A: Currently under the LWRP, if the change provisions are triggered, then a farmer has to get a land use consent. The current definition of ‘change’ is as follows but is under review as part of the LWRP hearing process:

  1. a resource consent to use, or increase the volume of, water for irrigation on a property; or
  2. an increase of more than 10% in the loss of nitrogen from land used for a farming activity above the average nitrogen loss from the same land for the period between 1 July 2011 and 30th June 2013.  The amount of nitrogen loss shall be calculated using the Overseer TM nutrient model for the 12 months preceding 1 July in any year and expressed as kg/ha/yr.

However, if the farmer is a shareholder in an irrigation scheme with nutrient conditions as part of the consent (CPWL falls into this category), then the use of land for a change to an existing farming activity is a permitted activity.  A nutrient budget and Farm Environment Plan are required.

In the future an annual average loss of nitrogen should not exceed the rate for the relevant farming activity specified in the Sub-regional chapter – Selwyn Waihora Zone Plan.  The rate for Selwyn Waihora catchment is currently being developed with the Selwyn Waihora Zone Committee.

The limits that are currently being established and will be based on a ‘look up’ table for each relevant farming activity/soil type combination, plus an additional percentage improvement in Nitrogen losses over and above current understanding of good management practice (currently 13% is being discussed).

The time frame to comply with the nutrient discharge limits is yet to be confirmed.  However to achieve Good Management Practice (GMP) by 2017; and the target point of half way between GMP and Advanced Mitigation by 2037 is being discussed.  A total of 24 years for farmers to upgrade their existing operation.  Farmers who change land use will be expected to comply with a level half way between GMP and Advanced Management Practice levels immediately, a level to which existing farmers need to comply with by 2022.  Farmers considering changing land use should therefore build into their farm budgets the cost of any additional infrastructure and technology required to enable them to achieve compliance.

A consent will be required if compliance cannot be achieved.

Please note that the detail around this process and nutrient limits is not finalised, and the comments above are our understanding of the current work that is in progress, which could change.

Q: What strategies have you included to keep nitrogen losses as low as possible?

A: We assume good management but have not included any structures such as housing or more drastic strategies such as removing nitrogen fertiliser or reducing stocking rates that involve loss of income.  We assume strategies such fenced waterways, careful cultivation or direct drilling, crop rotations to take advantage of organic nitrogen, careful irrigation management with new technology and nutrient budgeting to decide on optimum fertiliser applications.

Funding

Q: How do you know the cost of Stage 1 of the scheme will not be more than $167 million?

A: That is an estimated cost. The final cost will not be known until we have signed construction contracts in place in November. The $167m has however been reviewed by external consultants and it includes industry standard contingencies for overruns. The cost estimate will continue to be refined as detailed design progresses and we tender and execute construction contracts.

The cost estimates will be externally reviewed again before the Prospectus is issued.

Q: If the cost is higher who pays?

A: We will try to negotiate fixed price contracts. If that can’t be achieved and there is an overrun – ultimately farmers/water users will pay. We will build some headroom into our funding facilities so if there is an overrun any additional cost can be spread over a number of years.

Q: How much has been provided for Stage 2/3 design costs?

A: We have estimated $12M based on the level of expenditure required for the first 20,000Ha with some learnings/savings able to be applied to the next 40,000Ha. We have assumed, again, 50% will be funded by a Ministry for Primary Industries – “Irrigation Acceleration Fund”.

Q: Why have you included external equity of $15M?

A: This has been part of the CPW funding plan for approx two years, and was also included in the 2012 workshops. The objective is to lower the upfront equity required from farmers and therefore make the scheme more affordable to more farmers. Feedback to us has been that this is essential to get enough farmer commitment to be able to start the project.

We will approach the Crown Irrigation Investments Limited to source this equity. CPWL fits the profile for the CIIL and they have realistic expectations.

Q: How confident are you of getting the bank loans required?

A: Our preliminary discussions with the major trading banks have confirmed strong interest in banking the scheme. Bank support is conditional on strong farmer support. However, the banks require cash from water charges to repay their loans.

Q: How will the equity payments be spread?

A: Our intention is to stage the payment to match the construction spend profile over the 18 month period. This profile cannot be confirmed yet, but will be in the September prospectus . Assuming an even spread across the 18 months is the best assumption for now.

Q: What are the benefits of using TrustPower’s stored water?

A: The water charges are our best estimates. The biggest drivers of the annual water charge are the:

  1. loan principal – driven by the capital cost of the project (see Q1)
  2. interest rates – depends on financial markets. Our discussion with banks have confirmed the assumed 6.5% is a reasonable starting funding cost. The company will have to adopt a risk mgt position regarding cost /benefit of locking in interest rates.

Based on long term trends there should be over time positive correlation between increases in funding costs and agricultural commodity prices, but this is a key risk to be considered.

Q: What will happen if you don’t get sufficient farmer uptake to proceed with the scheme?

A: The Company does not have cash reserves and is currently dependent on funding support from Selwyn District Council and the Ministry of Primary Industries. This funding support will not continue if there is not strong indicative support for the scheme.

If the capital raise in September/October is not successful the scheme will not proceed and CPWL will be mothballed.