2016 Annual Report Highlights

Infratil's businesses

Finding opportunities for growth and seeking to maximise shareholder value.

Trustpower

Trustpower has hydro and wind generation in New Zealand and Australia and a very innovative retailing operation in New Zealand. It’s been exceptional in finding growth and investment opportunities which have played to its strengths. In the last few years that has meant building wind farms in Australia, providing water for irrigation schemes in Canterbury and offering a convenient cost effective bundle of energy/utility services to a growing number of households in New Zealand.

Trustpower’s EBITDAF was flat on last year, while its overall financial performance saw a 5% dividend increase. As always, Trustpower is the sum of its parts: Australian generation on the one hand and New Zealand generation and utility retailing on the other.

Australian generation benefited from CPI escalation of the price on its long-term electricity sales contracts and higher prices for Renewable Energy Certificates (RECs) on output not sold through the contracts. Average revenue per GWh of generation was $96,800 from $88,300 the previous year (EBITDAF/GWh was $72,600 from $66,600).

Approximately 90% of Trustpower’s Australian generation is sold under medium/ long term contracts and fluctuations in the market price of electricity and RECs only impacts the value of uncontracted sales.

Most Australian energy users are obliged to have a percentage of RECs per unit of power consumed, but the previous Australian Prime Minister’s antagonism towards greenhouse gas reduction measures meant that renewable generation construction slowed even as demand for RECs was rising, hence their higher prices. Illustrating this, the wholesale market electricity price in Australia is now about A$40,000/GWh and the REC price is about A$75,000/GWh.

It seems that the Australian electorate wants policies that lower emissions and the “20% by 2020” renewable generation target is now supported by both government and opposition parties. To meet the target Australia will have to add 15,000 MW of additional capacity over the next five years. Trustpower now has 385MW of Australian generation and will be seeking to at least double that over the next three to four years. This will require a lot of capital; Trustpower invested $819 million building and buying the existing 385 MW.

Trustpower’s New Zealand generation was close to average levels and while wholesale prices were low this was a net benefit as Trustpower sells more electricity than it generates. The lower cost of electricity purchased was a small windfall in the context of the costs Trustpower is incurring by expanding its utility retailing operations; electricity accounts increased 14%, gas accounts 29% and telecom accounts 63%. 77,000 customers now take more than one utility.

This growth is expensive and it takes at least a year for a new customer to start contributing net income and a couple of years for upfront costs to be recouped. It is however apparent that many people prefer to buy their electricity, gas, phone and internet through one provider, especially when that provider has Trustpower’s high service standards.

In addition to these internal growth initiatives, Trustpower acquired 65% of King Country Energy for $78.1 million. King Country’s hydro generation and retailing operations fit well alongside Trustpower’s as does the relationship with the King Country Electric Power Trust which has retained its 19.5% shareholding.

A cloud on Trustpower’s horizon exists in the form of the Electricity Authority’s potential revision to grid charges. This could become a material distraction next year if the Authority attempts a dramatic reallocation of costs.

Each side of the Tasman has a distinct operating environment which requires a distinct business model. Australia offers strong demand for renewable generation and the risk/opportunity of selling electricity and RECs into the wholesale market. New Zealand is unlikely to need additional generation capacity for some years and energy is sold to retail customers who are increasingly interested in a more sophisticated package of services.

These differences raised questions as to whether the value of Trustpower underestimated the value of its two parts. This is driving the preparation of a proposal to separate Trustpower into two parts which will be presented to shareholders later in the year. Whatever comes of that process, it is apparent that Trustpower has real growth options on both sides of the Tasman, through building more renewable generation in Australia and increasing the scale and services of its retailing in New Zealand. 

Year Ended 31 March

2016

2015

 NZ output sold

 4,032GWh

3,934GWh 

 NZ generation

 2,312GWh

2,216GWh 

 Australian generation

 1,451GWh

1,465GWh 

 Electricity accounts

 277,000

242,000 

 Gas accounts

 31,000

24,000 

 Telecommunication accounts

 62,000

38,000 

 Av. NZ market spot price 1

 6.4c/kwh

7.7c/kwh 

 EBITDAF 

 $329.4m

$330.7m 

 Investment spend 

 $119.3m

$157.4m 

 Infratil cash income 

 $67.1m

$63.9m 

 Infratil’s holding value 2

 $1,223.6m

$1,270.0m 

1. 6.4c/kwh is the same as $64,000/GWh (ie. 1GWh = 1,000,000kwh).
2. NZX market value at period end. 

Financial Trends

EBITDAF & Generation

Year ended 31 March 

Over the decade Trustpower’s EBITDAF has risen from $196 million to $329 million (+68%) and its generation output from 1,950 GWh to 3,763 GWh (+93%). 

New Zealand EBITDAF and generation has risen $27 million and 371 GWh respectively. For Australia the figures are $105 million and 1,451 GWh. 

Infratil  EBITDAF & Generation
EBITDAF per unit of Generation and the Average Market Price of Electricity

Year ended 31 March 

New Zealand derived EBITDAF per unit of generation was about the same in FY2016 as a decade earlier ($97,000 per GWh from $101,000). The volatility of wholesale electricity prices has been smoothed out by Trustpower’s retailing operations. 

Australian EBITDAF per GWh was $72,500 last year from $67,500 five years ago, reflecting the terms of the energy sales contracts. 

Infratil  EBITDAF & Generation copy
Investments and Generation GWh

Year ended 31 March 

Over the period generation has risen from 1,941 GWh to 3,763 GWh, reflecting $819 million of capital spending in Australia and $665 million in New Zealand. 

Graphs 32 Investments and Generation GWh

Wellington Airport

Smaller long-haul aircraft such as the B787 and A350 are reshaping route economics. Whereas previously smaller regional jets fed into hubs with much larger aircraft flying between the hubs, now B787 or A350 can economically carry 200 people point to point, such as between Wellington and Shanghai. Direct service by modern fuel efficient aircraft will make travel better for those already travelling and make a lot more people willing and able to travel.

 

Wellington Airport is experiencing an exciting and exacting period as many years of work bore fruit in the form of a large increase in international airline capacity. The resulting passenger growth is a prize, but comes at a cost.

Wellington prides itself on being the most efficient international airport in Australasia (on the basis of cost per passenger), but this means having only limited spare capacity to accommodate increasing throughput. Last year 339,000 more passengers used the Airport than the prior year; about three times the usual annual growth rate. This is requiring an investment of over $200 million to expand the domestic and international terminals and to provide ancillary facilities such as a land-transport hub. Until this is completed there will be inconvenience for users.

The Jetstar, Fiji Airways, Qantas, and (soon) Singapore Airlines new services have arisen because of the Airport’s commitment to route development. Airlines rarely just pop up and new services represent many years of meetings and proposals. Airlines add services via their own complex processes and of course when prospective demand and available aircraft coincide.

Wellington is also benefiting from domestic developments. Air New Zealand has up-scaled its fleet, Jetstar has added jet services to Dunedin and prop services to Nelson, and Sounds Air has expanded to fill the gaps resulting from Air New Zealand reducing services on a number of thin routes.

Wellington, Christchurch and Auckland Airports have now been subject to information disclosure by the Commerce Commission for five years, and this is providing some fascinating data about the airports’ relative efficiency, charges and returns. Wellington is more efficient than the other airports by some margin and has the lowest average per passenger charges.

The Airport’s performance should however be measured against benchmarks beyond just efficiency and charges. Does it facilitate the low cost and efficient operation of its airlines? 

Is it attracting and growing air services that meet the needs of a full range of potential travellers? Is it convenient for travellers and do they find it comfortable? And through all of the above, is it generating a satisfactory return on its shareholders’ capital.

During the last year it is fair to feel genuinely good about these criteria although, as noted, congestion and construction have reduced users’ comfort and convenience. Crucially for its region, a lot more people are coming to and flying from Wellington.

Alongside what was already an active year for the Airport has been its venture with the City to facilitate direct northern hemisphere services by extending the runway. This was a “nose to the grindstone” period leading up to the lodgement of resource consents. 27 pieces of research were undertaken as a part of the application and were made public to provide information and to encourage feedback. This took longer than originally expected as it is much better to listen carefully to suggestions and criticism now and to lodge applications which reflect the feedback. 

Year Ended 31 March

2016

2015

 Passengers Domestic 

 4,899,326

 4,682,086

 Passengers International 

 897,316

775,193 

 Aeronautical income 

 $67.6m

$64.5m 

 Passenger services income 

 $35.7m

$34.1m 

 Property/other income 

 $9.8m

$9.7m 

 Operating costs 

 ($27.0m)

($26.2m) 

 EBITDAF 

 $86.1m

$82.1m 

 Investment spending 

 $56.7m

$21.9m 

 Infratil cash income 

 $39.5m

$35.3m 

 Infratil’s holding value1 

 $408.9m

$351.5m 

1. Infratil’s share of net assets excluding deferred tax at period end. 

Financial Trends

EBITDAF & Passengers

Year ended 31 March 

Over the decade EBITDAF rose from $47 million to $86 million. 

Passenger numbers lifted by 1,165,000 comprising 21% more domestic and 56% more international. 

Infratil  EBITDAF & Passengers 25
Aeronautical & Services Income

Year ended 31 March 

Wellington Airport’s 38% increase in EBITDAF/Passenger over the period (to $14.85) reflects better passenger services, a doubling of property income, and good cost control. Wellington is New Zealand’s lowest cost/charges international airport. 

Infratil  Aeronautical & Services Income
The Cost of Travel

Year ended 31 March 

Over the decade domestic New Zealand air travel has become relatively more expensive than international New Zealand air travel by 25% (Statistics NZ). In real terms the cost of international air travel has fallen by a quarter, hence its faster growth rate is no surprise. 

Infratil  Aeronautical & Services Income1

NZ Bus

We now have the technology tools to hugely improve New Zealand’s urban transport. Smart ticketing, electric buses, mobile information and better understanding of where people are travelling to and from. Many long held beliefs are being challenged. But we have to recognise that private vehicles are also getting better and cheaper.

NZ Bus continues to deliver better and more efficient services. A shift to preventative maintenance is paying off with improved reliability. Telematics monitoring of vehicle speed is resulting in a smoother ride for passengers and lower fuel and tyre costs.

Health and safety initiatives are building momentum and more attention is going into monitoring incidents with other road users to identify ways to reduce their occurrence. NZ Bus continues to achieve ACC tertiary accreditation, an Operator Rating of either 4 or 5 stars across the business, and earned Enviromark Silver accreditation across all depots.

There was patronage growth in the Wellington region but a slight decline in Auckland due to service and route changes. Reliability and punctuality measures have improved across NZ Bus’s services due to improved maintenance, training, and the resetting of timetables and driver schedules. These improvements have contributed to reduced passenger complaints. 

NZ Bus research into how its buses should be powered has led to a major commitment to electric and away from diesel. Each form of power has its own issues. New diesel engines are producing fewer particulates and noxious emissions, but in so doing they use more fuel. Trials and studies of diesel-hybrid buses indicate much higher vehicle acquisition and maintenance costs and only modest fuel savings, even in cities with flat topography. Trolley buses have no emissions but are expensive because of the electricity and substation network requirements. NZ Bus’s assessment is that there are as yet no viable pure-battery buses for efficient and reliable use on its routes, but as Tesla Motors and other car manufactures are showing, the technology is developing rapidly. 

Coincidentally one of the three individuals who founded Tesla, Kiwi Ian Wright, has shifted his focus from cars to larger vehicles. Rather than producing a car Wrightspeed produces “power trains”, in effect the motors, for trucks and buses. They use electric engines, batteries and a small turbine to generate electricity should the batteries go flat.

When battery technology improves or other ways are found to recharge them, then the turbine would get almost no use. In the meantime, Wrightspeed powered buses will produce none of a diesel’s noxious emissions. 

They are expected to use up to 80% less fuel than a hybrid bus and the fuel can be any of LPG, bio-fuel, petrol or diesel. They are also expected to be lighter than a conventional engine and far lighter than a hybrid, and very quiet. They are expected to cost less than a hybrid and although more than a diesel bus they will deliver environmental benefits to the communities that are prepared to adopt the technology.

NZ Bus failed to win any units in the recent tender of South Auckland services so that, after nearly 50 years of operations from Wiri for the customers of South Auckland, the operation will cease from November 2016. NZ Bus is grateful for the contribution its South Auckland staff have made to the business and customers over this time and it is working to mitigate the impacts of the closure by redeploying staff elsewhere in its operations. A provision of $4.2 million has been made for lease liabilities in respect to the Wiri depot.

Infratil has reviewed its carrying value of the NZ Bus assets in light of recent contracting changes, the closure of the South Auckland business and technology developments and determined to write-off all goodwill in the financial statements relating to NZ Bus, which amounted to $55 million. 

 Year Ended 31 March

 2016

2015 

Patronage north

 39,165,255

39,888,455 

Patronage south

 20,743,515

20,536,828 

 Bus distance (million kilometres) 

 46.5

47.8 

 Bus numbers

 1,071

1,075 

 Passenger income

 $133.9m

$131.8m 

Contract income 

 $91.5m

$91.8m 

EBITDAF 

 $42.0m

$34.2m 

Capital spending 

 $11.2m

$15.3m 

Infratil's holding value1

 $201.5m

 $285.8m

1. Infratil’s share of net assets excluding cash and deferred tax at period end. Goodwill was reduced by $55 million as explained above. 

Financial Trends

EBITDAF & Passengers

Year ended 31 March 

Over the decade passenger trips in Wellington/Hutt rose 2% and in Auckland 20%.

EBITDAF per passenger trip was $0.68/ pax in 2007 and $0.70/pax in 2016. 

Infratil  EBITDAF & Passengers 22
Revenue & Costs

Year ended 31 March 

Since 2007 total fare income has risen 17% and contract income 22%.

Costs have risen 30%. 

Infratil  Revenue & Costs
Income & Costs per Passenger

Year ended 31 March 

Per passenger, NZ Bus’s contract income has risen from $1.30/pax to $1.53/pax. (+13%). 

Passenger income has increased from $1.98/pax to $2.24/pax. (+13%).

Operating costs per passenger have risen from $2.57/pax to $3.22/pax (+25%).

Over the period the CPI has risen 19%.

Infratil  Income & Costs per Passenger

RetireAustralia

Implementing plans to provide its residents with more of what they want and need.

RetireAustralia appointed a new chief executive, Alison Quinn, and formulated a vision for the company based on two simple objectives. To identify and provide the services and facilities that meet resident needs at a satisfactory cost. And to satisfy increasing demand by building more accommodation.

RetireAustralia undertook extensive research of its residents and found that they were very satisfied with their homes and community facilities, and that they wish to stay in their homes as long as possible. This latter point has great relevance for the wellbeing of elderly people, for what makes a village attractive, and for the economics of aged care. Very old people who lack mobility and need care would still prefer to be in their own homes. Historically the model in Australia offers funding only for care in specialist institutions or in people’s homes.

Coincidental to RetireAustralia developing the objective of providing more care choices, the Australian government is changing the funding model. They are shifting control of the relevant subsidies to the individual, who will then be able to choose to either relocate to a care institution or to pay for care to be brought to their home. And “home” may be either their house or a unit/apartment in a retirement village. It is this latter point which is the key policy change affecting RetireAustralia.

The potential scale of impact is illustrated by the numbers in the table above. 

 

The changes make it possible for RetireAustralia to offer care to residents on a level playing field with specialist institutions or in-home providers. Feedback from RetireAustralia’s residents is not surprisingly positive as it will extend their ability to stay in their village homes.

Over time it is likely to result in a slight shift towards RetireAustralia’s residents being older, both on average and when they initially become residents.

RetireAustralia is also working to improve and standardise the contract terms offered to residents. This will be following in the footsteps of what happens in New Zealand and reflects that residents want a fixed charge while they are resident and a defined certain exit value when they leave a village.

Over the year RetireAustralia sold 478 units, including 102 new ones. It is on target to increase its rate of construction from the current level of about 100 units a year to 300 units a year by 2020.

Excluding unrealised fair value movements on investment properties, RetireAustralia delivered an underlying profit of A$38.8 million, which provided a contribution to Infratil’s underlying EBITDAF of NZ$21.1 million.

 

Australia wide

Retirement Villages

Home Care

Institutional Care

Residents

180,000

860,000 

230,000

Govt Subsidy 2014

0

A$3.8  billion

A$9.8  billion

Govt Subsidy 2022

          A$7.3 billion

A$12.7 billion

 

Year Ended 31 March

2016

2015

 Residents 

5,245 

 4,964

 Serviced apartments 

 484

484 

 Independent Living Units 

 3,334

3,296 

 Unit resales 

 376

353 

 Resale cash gains per unit 

A$106,000 

A$96,000 

 New unit sales 

 102

45 

 New unit average price 

A$535,300 

A$575,700 

 Occupancy receivable/unit1

 A$79,600

A$75,250 

 Embedded resale gain/unit1 

 A$28,300

A$23,250 

 Underlying profit 

 A$38.8m

A$4.9m 

 Infratil’s holding value 

 NZ$252.9m

NZ$208.6m 

1. The values are point in time estimates of what RetireAustralia would receive in cash for deferred occupancy fees and capital gains if all residents left on that particular date. 

Infratil only owned RetireAustralia for three months in FY2015. 

Other Investments

Metlifecare

(20% Infratil ownership)

Metlifecare is making good progress on its expansion plans and over the six months to 31 December 2015 it completed the construction of 41 units and 36 care beds and sold 103 new units and beds with an average development margin of 12%. A further 307 units were under construction. Sufficient land is owned to allow the construction of over 2,000 units and care beds in due course.

Metlifecare’s half year performance to 31 December 2015 showed a 29% increase in underlying profit to $33.5 million, including realised resale gains and development margins of $28.6 million up from $17.5 million for the same period the previous year.

The average gain between the payment to outgoing and incoming residents rose to $175,000 and the Embedded Value of occupied units rose to $180,000.

Metlifecare made a $12.4 million underlying EBITDAF contribution to Infratil over the year.

Infratil acknowledges the excellent contribution over the last seven years of Alan Edwards, Metlifecare’s CEO who recently retired. Metlifecare has grown substantially under Alan’s leadership with its market capitalisation increasing fivefold to $1 billion. Glen Sowry is the new CEO. 

 

Six months ended

31 December 2015

Year ended

    30 June 2015

 Units/apartments

 4,074

4,033 

 Care beds

 395

359 

 Unit resales

 200

403 

 Resale cash gains per unit 

 $175,000

$142,000 

 New unit sales 

 103

87 

 New unit average price 

 $585,000

$561,000 

 Occupancy receivable/unit 

 $76,000

$74,000 

 Embedded resale gain/unit 

 $104,000

$101,000 

 Underlying profit 

 $33.5m

$52.4m 

 Infratil’s holding value 1

 $222.7m

$199.6m 

1. The NZX value of Infratil’s holding as at 31 March 2016 and 2015

Infratil Infrastructure Property

(100% Infratil ownership)

IIP was established to provide specialist focus to the ownership of land utilised by Infratil subsidiaries, which to date mainly comprises NZ Bus depots.

Over the year IIP acquired a new site in north Wellington which was refurbished and leased to NZ Bus as a depot. IIP is also working with NZ Bus to redevelop its Kilbirnie and Auckland City Wynyard depots.

In both cities, the availability of large flat sites is constrained and optimal land use and value are changing making it a challenge to minimise the cost of bus depots, on the one hand, while maximising the value of the land on the other hand.

The development of Wynyard is especially interesting as IIP is seeking to maintain NZ Bus’s facilities while adding car parking, a hotel and a tourism venue to the site. 

Snapper Sevices

(100% Infratil ownership)

In New Zealand Snapper is participating with the joint venture between the mobile network operators and Paymark so its mobile applications are available to their customers. Snapper is the only local provider that offers transport ticketing that allows transport agencies to outsource this service and the associated cost, risk and complexity. This is a fast developing space as evidenced by the banks’ roll out of pay-wave. The goal is simplification and less cash and that means convergence of credit/debit/bank/stored- value/phones payment tools.

In the global market, Snapper is building a reputation as a provider of innovative solutions that extend ticketing systems by adding mobile, retail and online features. This capability has come from Snapper’s experience in NZ and its collaboration with Vix Technology in the Republic of Ireland. In Ireland Snapper/Vix now have over 50,000 users of their funds transfer system.

Snapper is anticipating a number of additional international contracts over the next year.

Australian Social Infrastructure Partners Fund (ASIP)

Australian state and federal government commitment to use Public-Private Partnership funding for schools, hospitals, roads and so on is providing investment opportunities that Infratil has chosen to access through ASIP.

Over the year Infratil slightly increased its investment through ASIP to A$28.7 million and received dividends of A$0.9 million.

The two projects in which Infratil holds an interest are the Queensland Aspire Schools and the Royal Adelaide Hospital.

It had been hoped that additional projects would have occurred in FY2016, but this was not to be.

A number of initiatives are being progressed which are expected to create investment opportunities in FY2017. 

Perth Energy

(80% Infratil Owned)

Perth Energy is an energy retailer and generator based in Western Australia. In FY2016 earnings and value were negatively impacted by a lower price for its generation capacity and difficult retail market conditions.

The State Government agency which sets capacity prices responded to weak demand by reducing capacity payments, which both reduced Perth Energy’s income and resulted in a reduction in the value of its Kwinana generation facility. The State Government is undertaking a review of the Western Australian electricity market which is expected to deliver plant closure that will remove excess capacity from 2018.

Perth Energy’s retail business experienced tight margins as low wholesale electricity prices increased competition for customers. Perth Energy unfortunately has wholesale supply agreements with fixed prices set at higher rates. 

2016 Annual Report
2016 Annual Report
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