2017 Annual Report Highlights

Report of the Chairman & the Chief Executive

Reporting on Infratil’s last 12 months and prospects as at 31 March 2017 has two distinct aspects. One relates to the performance and circumstances of our operating businesses, the other to our capital allocation decisions.

Report of the Chairman & the Chief Executive

On both fronts Infratil had a positive year and is well placed to provide good returns going forward.

We are mindful that shareholders may question this given the performance of Infratil's share price over the year. The reality of investments such as Canberra Data Centres and Longroad Energy is that they will take time to prove their worth to the market and the horizons of some shareholders may be shorter. We are confident that patience will pay off. 


Operations

Our goal with Infratil’s operating businesses is to provide good facilities at fair cost and create investment opportunities that will grow shareholder value over time. Each of our operating businesses faced challenges over the year, yet we can report outcomes across the portfolio that were within our range of expectations and this reflects well on the calibre of our managers and their teams.

At Trustpower and Tilt Renewables, being distracted could have been excused given the task of demerging, and both companies faced difficult regulatory and market situations. Yet in aggregate they lifted EBITDAF 11% per annum on the prior year and their contribution to Infratil’s net income increased by over 20%, excluding demerger costs.

Wellington Airport resembles a building site and the frustratingly slow progress getting consents to extend the runway isn’t made easier by witnessing the explosive traffic growth at NZ airports that accept long-haul air services. Nevertheless, the Airport has unveiled a well-received expansion to its domestic terminal, has added a popular Singapore Airways link with Canberra and Singapore, and lifted EBITDAF 5% per annum.

NZ Bus faces the dual challenge of the implementation of a new regulatory regime and significant changes to vehicle technology. Management’s focus throughout has been on efficiency which saw improved earnings despite the loss of service contracts. Regrettably the loss of contracts means NZ Bus will reduce its size and in future its contribution will be lower.

RetireAustralia is enhancing the care and facilities it provides its residents to better meet their needs. A part of this involves rethinking the form and function of accommodation to be built, at both existing villages and greenfield projects. In the short term this means commissioning fewer units and apartments as redesign works its way through the planning process. Underlying earnings rose because of demand to live in RetireAustralia's villages and the strength of the residential property market, particularly in NSW.

Perth Energy experienced a series of market difficulties which resulted in a significant loss. However, the team at Perth Energy have been exceptional in addressing the issues; and the business is responding well. As part of this restructuring Infratil provided additional financial support.


Investment Activities

Last year Infratil invested $728.2 million; $168.1 million was internal capital spending and $560.1 million was spent acquiring new investments. This was the most active year for acquisitions in Infratil’s 23 year history.

We have not purchased interests in Canberra Data Centres, Longroad Energy and ANU Student Accommodation or established Tilt Renewables with the aim of sitting back and collecting dividends. We see these four businesses as platforms for future growth, just as we also see Trustpower, Wellington Airport and RetireAustralia continuing to deploy growth capital to expand their operations.

Investment Spending

Infratil’s Recipe For Long-Run Compound Returns

Year Ended 31 March 

($Millions)  

2017 

2016

2015 

2014 

2013 

5 years 

Trustpower

$26.7

$119.3

$157.4

$349.7

$214.1

$867.2

Tilt Renewables

$6.3

-

-

-

-

$6.3

Perth Energy

$24.8

$0.6

$0.1

$0.1

$0.7

$26.3

Longroad Energy

$33.2

-

-

-

-

$33.2

Lumo

-

-

$16.2

$22.0

$27.0

$65.2

Z Energy

-

-

-

-

$70.7

$70.7

Wellington Airport

$79.3

$56.7

$21.9

$20.3

$12.0

$190.2

NZ Bus

$16.2

$11.2

$15.3

$68.1

$56.7

$167.5

RetireAustralia*

$37.8

$27.8

$219.1

-

-

$284.7

Metlifecare

-

$0.6

$1.6

$147.9

-

$150.1

ANU Student Accommodation

$84.8

-

-

-

-

$84.8

Canberra Data Centres

$411.5

-

-

-

-

$411.5

ASIP

$0.7

$0.8

$32.0

-

-

$33.5

Envision

$6.0

$3.6

-

-

-

$9.6

Other

$0.9

$0.2

$1.7

$8.0

$29.8

$40.6

Total

$728.2

$220.8

$465.3

$616.1

$411.0

$2,441.4

 
*Subsequent to acquiring 50% of RetireAustralia for $219.1 million in FY2015, the figures show 50% of RetireAustralia’s capital spending. 

Financial

Infratil’s consolidated underlying EBITDAF¹ from continuing operations was $519.5 million up from $462.1 million last year. Free cash flows from operations amounted to $245.0 million (previously $250.5 million).

Net parent surplus was $66.1 million (the $438.3 million posted last year benefited from a $436.3 million contribution from gains on the sale of Z Energy and iSite).

Excluding asset sales gains, earnings and net surplus improved relative to last year, but were still impacted by Infratil’s investment activities and conservative approach to funding. Investing and financial conservatism impose costs in the short-term, which we believe will pay off over the long-term.

The investments noted above resulted in the net debt of the wholly-owned group rising $617.4 million to $913.3 million as at 31 March 2017, although on 11th April 2017 this was reduced by $237.9 million with receipt of the Metlifecare sales proceeds.

Although Infratil does not have a credit rating, we seek to maintain credit metrics consistent with BBB (investment grade) comparators, with an overarching objective of maximising flexibility and minimising pressure from debt servicing obligations.

Given that one of Infratil’s objectives is putting more capital to work through the businesses in which it has holdings, additional investing and borrowing can be anticipated as opportunities arise.

The desirability of maintaining investment headroom is behind Infratil’s ongoing issuance of Infrastructure Bonds, even when that has meant occasionally placing funds on deposit. Infratil’s bond activities are covered on page 25 of this Report. This factor was also behind the decision (after balance date) to sell Infratil’s holding in Metlifecare realising net proceeds of $237.9 million (acquired in November 2013 for $147.9 million). 

1. Underlying EBITDAF is a non-GAAP measure of financial performance, presented to show management’s view of the underlying business performance. Underlying EBITDAF represents consolidated net earnings before interest, tax, depreciation, amortisation, financial derivative movements, revaluations, gains or losses on the sales of investments, and includes Infratil’s share of its Metlifecare and RetireAustralia underlying profits. Underlying profit for Metlifecare and RetireAustralia removes the impact of unrealised fair value movements on investment properties, impairment of property, plant and equipment and excludes one-off gains and deferred taxation, and includes resale gains and realised development margins.

 

Markets. Regulation. Change.

The last year has continued to see predictions confounded. Perhaps best illustrated by the UK’s Brexit decision and the election of the U.S. President. These outcomes weren’t expected and have been subject to continual reinterpretation ever since.

While forecasters continue to be off the mark, change is clearly underway and many forecast errors can be explained by the contradictory forces driving those changes. 

Infratil's response has been to focus on what it does best; seek sectors with robust growth, with investment opportunities that fit Infratil's capability and risk appetite, and where there is a good prospect of a healthy return on capital invested.

Increasing numbers of elderly people seeking a high quality of life. Reduced carbon emissions. Increasing air travel. Increasing electronic data storage, processing and communication. These are not transitory and they will outlast the next several U.S. Presidents.

When there is considerable uncertainty about the path or the future, it justifies caution; maintaining and developing options and financial capability and strength. Over the last few years we have proactively issued bonds to fund possible capital outlays and we have sold investments before new investments were fully committed. We anticipate continuing this approach.

Last year Infratil became a member of the New Zealand Initiative, an organisation which undertakes research and attempts to educate policy makers about ways to lift the wellbeing of New Zealanders. On both fronts, they can legitimately point to success and it is apparent that their research informs the policies of several parties contesting this year’s General Election. Infratil has a track record of participation in debates about societal change. We hold to the view that our businesses and our shareholders can only succeed when our communities prosper. We also know that changes in social attitude can be powerful drivers of value so it is good to be at the coalface where ideas are debated and policies formulated.

 

Our people

Almost 5,000 people work for Infratil’s operational businesses and 70 for Infratil’s management. The results which have been achieved for shareholders, customers and communities of those businesses warrant a note of thanks to those people. We know that the changes and challenges described in this Report have involved a lot of hard work and dedication. It is appreciated.

 

Shareholders

For Financial Year 2017, Infratil paid 5.75 cents per share interim dividend in December 2016 and will pay 10.0 cents per share final dividend on 15 June 2017 (5.25 and 9.0 cps respectively last year). The 11% increase is consistent with Infratil’s objective of providing a reliable and increasing dividend.

Because of Infratil’s capital position, the dividend reinvestment plan continues to be on hold.

 

Financial year 2018

Guidance for underlying EBITDAF is between $460 million and $500 million.

This reflects the sale of Metlifecare with no allowance made for reinvestment of the proceeds. The contribution from NZ Bus will be reduced as the company is impacted by the new contracting regime. RetireAustralia’s contribution is also expected to be lower as the company reconfigures its development program and defers some investment into FY2019.

For Tilt Renewables and Trustpower, earnings forecasts reflect long run average wind and rain conditions.

Infratil’s goal is to deliver good risk-adjusted returns for its shareholders over the long term. Last year we allocated a lot of capital to advance that goal. It has positioned Infratil to be able to undertake further investment in renewable generation, aged care and accommodation, student accommodation, data and communication services, and airport facilities. While we are confident that each of these sectors warrants investment, our future decisions will benefit from having discretion over timing and amounts. As always, we are mindful that our capital is owned by our shareholders.  

executives signatures

Annual Report 2017
Annual Report 2017
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