2017 Annual Report Highlights

Trustpower

51% Infratil ownership

Trustpower has demerged its wind operations to Tilt Renewables which is now an entirely separate company.

While the separation was largely driven by a desire to create a standalone wind generator and developer, Trustpower will benefit from its narrowed focus on hydro generation and utilities retailing.

The defining characteristic of the New Zealand electricity market for the last decade is excess capacity. Prior to about 2006 demand grew steadily, and then it stopped growing. However, building power stations is a slow methodical process and additional capacity continued to be commissioned. Since 2006 1,620 MW of capacity, an increase of about 17%, has been added, which has been only partially offset by the retirement of about 1,220 MW of mainly gas and coal fired generation which had become uneconomic.

The excess capacity has been a boon to consumers as wholesale prices have averaged about 6.5 cents/kwh over the decade, roughly 2 cents/kwh below the prices forecast for that period. Not only has this been a constraint on generation earnings, low wholesale electricity prices and a lack of price volatility has lead to an intensely competitive retail market. This includes competition from new energy retailers who have entered the market.

Trustpower’s response has been to develop its multi-utility offering: electricity, gas, telephone and internet. This benefits provider and consumer alike as it reduces administrative hassle and cost. A recent Commerce Commission review of an application for a merger in the media sector saw evidence showing how UK households with bundled services were more satisfied and less likely to switch provider. 

UK HOUSEHOLDS: ANNUAL PROPENSITY TO CHANGE PROVIDER (measured by the number of services taken) 

Business Trustpower 1 v1.3

Over 90,000 customers now take more than one utility from Trustpower and surveys indicate that they are increasingly positive about the experience. 

The goals for Trustpower now are to continue to grow its utility business and to do so cost efficiently largely by increasing the use of technology.

A challenge with owning very long life assets which are anchored to the ground comes from changes to markets or regulation. In the run-up to the last General Election the electricity industry became a political football when one of the contesting parties threatened an entirely unjustified industry restructure.

While that proposal vanished, an unrelated initiative by the industry regulator to change transmission pricing could adversely impact Trustpower by $10-20 million a year. It is widely regarded as failing the test of good regulation; transparency, justification, proportionality, predictability; and is now under review following the intervention of a new Minister of Energy.

Year Ended 31 March

2017

2016

2015

NZ retail electricity sales

1,895 GWh

1,820 GWh

1,659 GWh

NZ generation

2,017 GWh

1,588 GWh

1,566 GWh

Australian generation

359 GWh

254 GWh

278 GWh

Electricity accounts

276,000

277,000

242,000

Gas accounts

33,000

31,000

24,000

Telecommunication accounts

76,000

62,000

38,000

Av. NZ market spot price¹

5.2c/kwh

6.4c/kwh

7.7c/kwh

EBITDAF³

$234.5m

$208.0m

$203.9m

Investment spend

$26.7m

$115.0m

$109.5m

Infratil's holding value²

$734.8m

   
1. 5.2c/kwh is the same as $52,000/GWh (ie. 1GWh = 1,000,000kwh)
2. NZX market value at period end
3. Excludes $16.7 million of demerger costs
Trustpower's Generation Now Comprises:
  • 21 hydro power schemes spread across New Zealand, generating 1,670 GWh in a year of average hydrology.

  • 65% shareholding in King Country Energy which owns 3 schemes (187GWh average output).

  • 3 schemes in NSW with 244 GWh of average output.

  • Consents that allow the development of additional capacity in NZ, when demand and electricity prices warrant the investment.

  • Trustpower also owns irrigation operations in Canterbury.

    This is a portfolio of geographically diverse, mainly smaller scale hydro power stations. They have very long operational lives (the oldest pre-date WW1) and provide energy storage. In due course New Zealand will require further generation as thermal and wind plant is retired. Trustpower is well placed for this. 

EBITDAF & Generation

Year ended 31 March

Over the last ten years Trustpower’s hydro generation has risen via acquisition of existing plant and small scale development projects. With fluctuations come from rainfall changing from one year to the next.

EBITDAF has shown some volatility reflecting hydrology conditions, but the trend has been flat. Increased generation has been offset by lower wholesale prices and increasing retail market competition.

EBITDAF p31 1 v1.4
EBITDAF Per Unit Of Generation And The Average Market Price Of Electricity

Year ended 31 March

Trustpower’s success as a utilities retailer, and with its irrigation activities, have ensured that earnings per unit of generation have remained comfortably above the wholesale market value of the generation. But this hasn’t offset the effect of NZ’s surplus generation capacity and the dampening effect on wholesale electricity prices. 

EBITDAF p31 2 v1.4
Customers And Retail Electricity Sales

Year ended 31 March

The success of Trustpower’s utility retailing offer is apparent from the graph.

However, electricity sales per customer have fallen by about a quarter over the period, while costs per customer have been reasonably stable. 

EBITDAF p31 3 v1.4

Tilt Renewables

51% Infratil ownership

Following its demerger from Trustpower, Tilt Renewables has begun life as a standalone generator with a focus on building new wind and solar capacity in Australia.

Tilt Renewables' first period of independent operation coincided with good wind conditions in both New Zealand and Australia. As all New Zealand and 96% of Australian output is sold on long term contracts there is a fairly predictable relationship between generation volume and revenue.

For Tilt Renewables, what matters most is the development of new power generation capacity. As the table illustrates, Tilt Renewables' Australian development projects where construction could commence over the next two years include more than twice as much capacity as Tilt  Renewables currently owns.

Over the next year it will become apparent which of these projects progress, how they are structured and financed, and how wholesale market prices for renewable generation hold up.

Tilt Renewables management have indicated that a start on the Salt Creek project is imminent, but as Salt Creek is of a scale which is manageable by Tilt Renewables with its existing capital resources, it will be the project which follows that will be of greater interest. 

 Existing Generation   

Tararua I

Manawatu

245 GWh


All output is sold to Trustpower at a price fixed for five years. The price then rises with the CPI or market electricity prices.

Tararua II

Manawatu

318 GWh

Mahinerangi

Otago

101 GWh

Snowtown I

SA

357 GWh

89% of output sold to Origin until 2018

Swowtown II

SA

875 GWh

All output sold to Origin to 2030
Output sold to Origin until 2019/20

Blayney/Crookwell

NSW

26 GWh

   

1,922 GWh

 

 

Generation Projects

Salt Creek

Vic

170 GWh

Consented.
Ready to go

Waddi Wind

WA

300 GWh

Consented.
Potential start
later in 2017

Waddi Solar

WA

40 GWh

Almost consented

Palmer

SA

1,150 GWh

Consented.
Potential start 2018

Dundonnell

Vic

1,000 GWh

Almost consented.
Potential start 2017

NSW Project

NSW

1,700 GWh

Consent application underway

Rye Park

NSW

1,000 GWh

Consent application underway

   

5,360 GWh

 

Year Ended 31 March

2017

2016

2015

Australian generation

1,305 GWh

1,201 GWh

1,187 GWh

NZ generation

744 GWh

724 GWh

650 GWh

Av. Australian market spot price¹ (A$)

9.7c/kwh

9.4c/kwh

-

Australian revenue

A$127.7m

A$114.3m

A$110.9m

Australian contracted sales

96%

95%

95%

Av. New Zealand market spot price (A$)

4.9c/kwh

5.3c/kwh

-

New Zealand revenue

A$46.8m

A$48.0m

A$37.3m

New Zealand contracted sales

100%

-

-

EBITDAF

A$124.4m

A$124.7m

A$103.6m

Investment spend

A$6.0m

A$4.0m

A$44.4m

Net Debt

A$544m

-

-

Infratil's holding value²

$341.8m

 

 

1. 9.7c/kwh is the same as A$97,000/GWh (ie. 1GWh = 1,000,000kwh). All prices are in A$
2. NZX market value at period end 

EBITDAF & Generation

Year ended 31 March

The graph shows the trajectory of the generation and earnings of the assets that now make up Tilt Renewables.

It has been some years since Tilt Renewables' New Zealand generation capacity rose. Australian generation has risen via the development of new wind farms, augmented by a couple of small recent acquisitions. 

EBITDAF p35 4 v1.4
EBITDAF Per Unit Of Generation

Year ended 31 March

The stability of Tilt Renewables’ earnings per unit of generation reflect that most of Tilt Renwables' output is sold on fixed price variable quantity contracts. Last year less than 5% of Tilt Renewables generation was sold on the uncontracted market. 

 

EBITDAF p35 5 v1.3

Wellington Airport

66% Infratil ownership

Wellington Airport had a year of achievements and milestones, but also a few frustrations.

One highlight was the advent of a wide-bodied jet service by Singapore Airlines linking Wellington with Canberra and Singapore. This required commitment from Wellington and Canberra airports, Wellington City Council and the ACT State government, and of course the Airline. It is a substantial investment for all parties and its initial success is gratifying. While many from central New Zealand have already enjoyed the high-quality convenient service, for the region its importance comes from its impact on inbound visitor numbers. Government figures showing what tourists spend in New Zealand indicate that most visitors stay relatively close to their ports of entry, which means that spending in central New Zealand is constrained because most tourists arrive in New Zealand via Auckland. This situation has been exacerbated by recent growth in tourism coming largely from long-haul origins.

Another highlight of the year was then Prime Minister John Key unveiling the $65 million first stage of the domestic terminal upgrade. The project includes a new regional Koru lounge for Air New Zealand which the airline’s passengers clearly enjoy. It also includes New Zealand’s first airport drive-in car valet; a traveller can now drive right into the terminal on their way to the plane and collect their car in the same spot when they return. 

For the first time, annual domestic passenger numbers exceeded 5 million following a 177,000 increase in the number of travellers, well above the last decade’s 66,000 average rate of annual increase.

 

The extra growth reflected the expansion of regional services provided by Sounds Air, the advent of Jetstar into the regional market, and increases in Air New Zealand’s capacity on some routes.

Regrettably it didn’t include an increased flow-on from international as those passengers declined from last year. In part this was consolidation after last year’s increase which was the equivalent of four year’s normal growth. But there have been some changes to the airline market which appear to mean that traffic growth is focussed on long haul services, which (at least for now) excludes Wellington. 

Wellington Airport’s partnership project with Wellington City Council to lengthen its runway to facilitate long-haul air services was expected to receive consents later in 2017, but has been put on hold while uncertainties with the Civil Aviation Authority’s regulations are resolved. CAA follows global best practice in its assessment of the safety features of New Zealand airports and when the uncertainty is resolved the application for consent to extend the runway will resume.

In November 2016 central New Zealand experienced the 7.8 Kaikoura Earthquake. It coincided with two aircraft having recently landed at Wellington Airport with two more international services approaching. Within 25 minutes the Airport had undertaken a full inspection of critical facilities and assessment of the risk a Tsunami and had reopened. The event was well handled, vindicating the Airport’s preparations (including its construction standards). The Airport has insurance of $550 million to cover material damages and business interruption, but this was not required on this occasion. 

Year Ended 31 March

2017

2016

Passengers Domestic

5,076,479

4,899,326

Passengers International

888,427

897,316

Aeronautical income

$70.3m

$67.6m

Passenger services income

$37.0m

$35.7m

Property/other

$12.2m

$9.8m

Operating costs

($29.0m)

($27.0m)

EBITDAF

$90.5m

$86.1m

Investment spending

$79.3m

$56.7m

Infratil cash income

$38.9m

$39.5m

Infratil's holding value¹

$414.5m

$408.9m

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

EBITDAF & Passengers

Year ended 31 March

Over the ten year period EBITDAF rose from $60 million to $91 million. 

Passenger numbers lifted by 945,000. On average an additional 66,000 domestic passengers each year (+1.6%pa), and an additional 28,500 international travellers (+4.4%pa.).

EBITDAF p39 6 v1.3
Aeronautical & Services Income

Year ended 31 March

Wellington Airport’s 27% increase in EBITDAF/Passenger over the period (to $15.17) reflects better passenger services, an increase in property income, and good cost control.

Wellington has the lowest passenger costs and aeronautical charges of New Zealand’s international airports.

Aeronautical

Rev/PAX

Cost/PAX

Auckland

$16.83

$5.68

Wellington

$12.07

$3.03

Christchurch

$14.51

$6.28

Queenstown

$12.45

$4.73

From Airport Disclosures.

EBITDAF p39 7 v1.3
The Cost Of Travel

Year ended 31 March

Over the ten years, consumer prices have risen 21% as has the cost of domestic NZ air travel. 

Remarkably the cost of international air travel for New Zealanders has actually fallen 17% over that period.

This means that since 2007 the cost of international air travel has fallen 45% relative to the cost of domestic air travel.

The relatively faster growth of international travel isn’t a surprise.

EBITDAF p39 8 v1.3

NZ Bus

100% Infratil ownership

NZ Bus completed a strong financial year reflecting operating cost efficiencies, stable passenger numbers and some services moving to the gross revenue model.

Results were particularly good given the ceasing of NZ Bus operations in South Auckland following the loss of contracts from October 2016. With the loss of these services it was very pleasing that NZ Bus was able to place a large portion of the displaced staff into other operations in Auckland, mainly on consistent terms and conditions.

Tenders processes have been completed for all NZ Bus services which are subject to tender. Results have been announced for South, West, and Central Auckland and the Wellington region, with only tender results for North Auckland outstanding. NZ Bus tendered for routes where it was well placed with its depot locations and where it could best deploy existing fleet and minimise technology and asset stranding risks.

NZ Bus’ tendered prices reflected the real cost of operations, market labour rates, fleet capital expenditure requirements, and the associated cost of capital. Unfortunately NZ Bus was only successful with one Central Auckland unit tender which means that there will be downsizing of the company’s operation and disruption for many loyal and long-term staff.

NZ Bus will work actively with its people, new operators and the regional authorities to ensure as smooth a transition as possible.

The final stage of the implementation of the new public transport operating model (PTOM) requires negotiation of prices of NZ Bus direct appointed units (DAU), which comprise around 500 vehicles in Auckland and 150 vehicles in Wellington. If NZ Bus and the relevant regional authority are unable to agree price, they will be set by either arbitration (to fix the price) or mediation (if mediation fails the unit can be retendered).

The future earnings of NZ Bus are at risk as they depend on the final prices determined for the DAU contracts.

NZ Bus has long recognised that PTOM procurement process and rules were designed to increase contestability for services, reduce the strength of incumbency positions, and lower cost. All of which appears to have been achieved. The process also results in higher risks of stranded assets as technology improvements result in changes to future bus motive-power, either during or on maturity of the new contracts. 

It also locks operators into old technology for the term of the contract; an unfortunate by-product of prioritising short term cost reduction over long term quality benefits. 

NZ Bus operating statistics show that it is a high-quality operator in its markets, which appears to have been given less emphasis in tender assessments of new entrants untested in metro areas. The employment terms and conditions of incumbent operator’s people are also at risk of being diluted by new entrants.

Over recent years the dedicated and capable team of people at NZ Bus have delivered a wide range of improvements to meet the daily public transport needs of thousands of New Zealanders and international visitors. Better rides for passengers as measured by Telematics monitoring of drivers, a 14% reduction in lost time injuries over the last year, tertiary accreditation by ACC, and gold accreditation was recently achieved for environmental performance, along with the smooth rescheduling of services in Auckland to align timetables to road conditions.

A recent article in a newsletter by someone who immigrated to New Zealand two years ago said a lot “I would not have guessed that the bus ride home would be such a highlight of my day. For those unaccustomed to Wellington buses, this is what happens: Each time someone alights, they break the otherwise contemplative commuter silence and yell “Thanks driver!” all the way up to the front. I had previously understood that the gentle Tui provides New Zealand with its sweetest song. That may be so in the animal kingdom. But the way that actual Kiwis thank their bus drivers is music to my ears.”

NZ Bus is continuing the development of its electric bus fleet in partnership with WrightSpeed, a New Zealander led technology innovator based in San Francisco. While the conversion project is running behind the original targets, the benefits of success are substantial in terms of enduring environmental outcomes and warrant some patience. The first intended beneficiary is expected to be Wellington City with the replacement of trolley buses, although unfortunately GWRC’s choice of diesel buses for other tenders means this technology (if successful) will have less deployment across the rest of the region. 

Year Ended 31 March

2017

2016

Patronage north

37,330,208

39,165,255

Patronage south

20,911,727

20,743,515

Bus distance (million kilometres)

43.9

46.5

Bus numbers

1,072

1,071

Passengers income

$130.6m

$133.9m

Contract income

$91.8m

$91.5m

EBITDAF

$43.7m

$42.0m

Capital spending

$16.2m

$11.2m

Infratil's holding value¹

$191.2m

$201.5m

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

 

EBITDAF & Passengers ($m)

Year ended 31 March

Over the decade passenger trips in Wellington/Hutt rose 0.7%p.a. and in Auckland 0.2%p.a. 

EBITDAF per passenger trip was $0.70/pax in 2008 and $0.75/pax in 2017. 

EBITDAF p43 9 v1.3
Revenue & Costs ($m)

Year ended 31 March

Since 2008 total fare income has risen 1.1%p.a. and contract income 1.9%p.a.

Costs have risen 1.8%p.a.

Per passenger, NZ Bus’s contract income has risen from $1.37/pax to $1.58/pax. (+1.6%p.a.)

EBITDAF p43 11 v1.3
Revenue & Operating Costs Per Passenger

Year ended 31 March

Passenger income has increased from $2.12/pax to $2.24/pax (+0.6%p.a.) 

Operating costs per passenger have risen from $2.79/pax to $3.16/pax (+1.4%p.a.)

Over the period the CPI rose 2.0%p.a.

EBITDAF p43 10 v1.3

RetireAustralia

50% Infratil ownership

RetireAustralia delivered a solid result and saw good demand for its village accommodation.

As illustrated in the following graphs, the value of RetireAustralia’s existing facilities has increased markedly over the period since Infratil’s acquisition. 

Net tangible assets

Retire Australia 1 v1.3

 

Deferred fees and value increases

Retire Australia 3 v1.3

 

Embedded value per unit

Retire Australia 2 v1.3

Most of RetireAustralia’s tangible assets are its villages (most of the remainder is property held for future development). The value of retirement village accommodation has two components. Part is the “Deferred Fee”; the gap between what residents paid to occupy their units and apartments and what RetireAustralia is obliged to pay back when they leave. The other part of the value is the gain which RetireAustralia anticipates it will receive when it again sells occupancy rights to the unit which reflects increases in what people have shown they are willing to pay.

On a per unit/apartment basis, when Infratil acquired its shareholding the Deferred Fee averaged A$75,000, it is now A$94,550. The average capital gain value has risen from A$24,000 to A$39,300. 

The value per unit increased significantly during the year due to price rises across the portfolio averaging 12% and changes to the terms of resident contracts. Resale gains are driven by sales prices and how a resident’s exit value is set.

While the value uplift of the existing assets is a good outcome, management’s focus is on delivering two initiatives to provide future value; one involves enhancing the benefits from being a resident in a RetireAustralia village and by increasing  the amount of accommodation provided. The two initiatives are entwined as improved care facilities and services requires the construction of tailored accommodation.

Because the initiatives to improve care services and facilities has required redesigning and reconsenting some of the  accommodation which RetireAustralia was about to build, this has meant deferring some construction. Last year, when RetireAustralia sold 102 new units, it forecast that the rate of construction would rise to 300 units by 2020. The target is now expected to take about a year longer to achieve.

However, progress has by no means stopped. The construction of additional accommodation is underway at four existing Central Coast villages. Four new sites have been contracted in Queensland, with the first sales of accommodation in these new villages expected from 2020.

 

 

Year Ended 31 March

2017

2016

2015

Residents

5,267

5,245

4,964

Serviced apartments

486

484

484

Independent Living Units

3,442

3,334

3,296

Unit resales

319

376

353

Resale cash gains per unit

A$113,000

A$106,000

A$96,000

New unit sales

105

102

45

New unit average price

A$571,500

A$535,300

A$575,700

Occupancy receivable/unit¹

A$94,500

A$79,600

A$75,250

Embedded resale gain/unit¹

A$39,300

A$28,300

A$23,250

Underlying profit

A$59.1m

A$38.8m

A$4.9m

Infratil's holding value

NZ$278.2m

NZ$252.9m

NZ$208.6m

1. The values are estimates of point in time value. What RetireAustralia would receive in cash for deferred occupancy fees and capital gains if all residents left and the occupancy rights were resold on that particular date. The resale values were estimated by independent valuers based on market and actual transactions. 

ANU - Student Accommodation

50% Infratil ownership

On 4 August 2016 Infratil completed the acquisition for A$80.4 million (NZ$84.8 million) of a 50% shareholding in a student accommodation concession granted by the Canberra based Australian National University. The other 50% was acquired by Infratil’s partner the Commonwealth Superannuation Corporation.

The concession is for 30 years and provides the partners with the net rental revenue from nine existing on-campus purpose built student residences comprising 3,760 beds and a new 500 bed residence completed for the commencement of the 2017 academic year. All residences are full, with waiting lists. 

While this is a good standalone investment, it is hoped to position Infratil for further opportunities. “Purpose-built student accommodation” (PBSA) is a major investment sector in the USA, but still in its fledgling stages in Australia and New Zealand. Universities have recognised they have a role providing suitable accommodation as more students come from out of town and family decisions about a university often depend on the availability and quality of accommodation.

ANU’s residences provide convenient, good value, safe accommodation. 

The University is also committed to pastoral care. It pays to have a resident on every floor of each facility contact each new student and help them participate in social activities. It is also supportive of student initiatives which among other things have included vegetable gardens. As anyone who has visited Canberra will know, it has an excellent growing climate, so long as watering is kept up.

For Infratil the ANU investment provides a reliable cash yield with low vacancy risk. The rents have historically been set below market rates and are indexed giving an inflation protected return. 

ANU has also provided Infratil with rights with respect to future developments and it is expected that this will lead to investment into additional accommodation and the social and cultural amenities required by students. Existing unmet demand and projected enrolment growth indicate that a 20% increase in accommodation will be required by 2021. 

For the eight month holding period, Infratil’s income from this investment amounted to NZ$7.0 million. 

Canberra Data Centres

48% Infratil ownership

Following the receipt of regulatory approval, Infratil completed its acquisition of 48% of Canberra Data Centres on 14 September 2016 for A$385.7 million (NZ$411.5 million).

48% was also acquired by Infratil’s partner, the Commonwealth Superannuation Corporation, with the remaining 4% rolled over by existing CDC management shareholders. Taking into account its net debt, CDC’s enterprise value at the time of purchase was A$1,075 million.

From acquisition through to 31 March 2017 CDC delivered EBITDAF of A$25.6 million (100% share). Although earnings over the last year were affected by the Federal Election, the medium term expectation is for strong growth.

CDC operates four data centres across two campuses (Hume 1, 2, 3 and Fyshwick 1) with total capacity of 39 MW. CDC’s approach is modular. It can commission new centres as demand warrants with the two most recent additions being Fyshwick 1 which was commissioned in 2015 and Hume 3 in 2016. Development work is well progressed on Fyshwick 2 which is likely to be available in 2019.

 

While CDC has 43 federal government departments and agencies as customers, including nine of the ten largest, more demand is expected from outside of the government sector as companies that provide services to government agencies seek to co-locate their services. 

Co-location provides advantages, in particular from faster communication and reduced communication costs (because the use of commercial communications networks is minimised). 

For the period from acquisition to 31 March 2017, CDC’s net surplus resulted in Infratil reporting net income of NZ$10.6 million. 

As at 31 March 2017 CDC’s net debt was A$290.4 million. 

Longroad Energy

45% Infratil ownership

During the year Infratil participated in the establishment of Longroad Energy. The other establishment partners are the New Zealand Superannuation Fund (45%) and the Longroad management team (10%).

Longroad is based in Boston Massachusetts and San Francisco California and has projects to develop utility scale renewable electricity generation underway in several US states.

Infratil’s decision to participate in the establishment of Longroad was based on the attractive investment opportunities available in the US and the quality of the management team.

The 23 people who are the core of Longroad’s management formed a similar venture in 2002 which in 2014 was sold for over US$2 billion. During those 12 years they developed 38 utility scale projects amounting to approximately 4,000 MW of capacity.

The US market is attractive for investors because of its scale and because in many states it operates as a market should; efficiently, transparently and with good risk management products and liquidity.

The three partners in the new venture have indicated support for an initial commitment of US$100 million (Infratil’s share is NZ$65 million); it is hoped this will only be stage one. 

The first transactions undertaken by Longroad; for which Infratil provided capital of NZ$33 million as at 31 March 2017, involved:

• The purchase of wind turbines in anticipation of their being deployed as developments become available. The purchase was undertaken because of the exceptional value then available.

• The purchase of a portfolio of early stage solar generation projects in over a dozen US states.

As explained in the Infratil May 2017 Update newsletter, the goal with Longroad is to develop a portfolio of cost-efficient generation projects with electricity price risk mitigated by long term sales contracts. There are a set of key variables which are expected to underpin returns; the availability of long term electricity sales contracts, the falling cost of renewable generation, state renewable energy targets, tax incentives, and the retirement of end-of-life thermal plant.

It expected that Longroad will provide a constant stream of announcements as its development projects progress, recognising that it will take time before the creation of value is externally visible. 

Other Investments

Infratil Infrastructure Property

(100% Infratil)

The New Lynn development undertaken with Auckland Council (IIP 58%) has arrived at its final phase with the retail properties almost fully leased.

The joint-venture partners' effective cost was $1.5 million and they have a $8.5 million valuation. On the back of this success, the partners are progressing the development of two further Council owned sites in New Lynn with the objective of building about 200 homes.

These projects are helping IIP position for opportunities which are expected to arise following the commissioning of the Auckland Rail Loop. Better transport accessibility will change the optimal land use in large areas of Auckland.

Over the year IIP also successfully concluded the acquisition-development-sale of a new depot for NZ Bus on Wellington’s Hutt Road. This provided NZ Bus with access to a well-placed depot at a good rent by avoiding external developers, and resulted in a small gain when the depot was on-sold by IIP.

The largest single development IIP is working on at present is its 1.8 hectare Wynyard Quarter leasehold site which is mainly now utilised by NZ Bus as a central Auckland depot. Stage One is to include a hotel, carpark and tourism venture and construction is expected to start shortly. Additional areas of the site are being actively marketed for future development. 

 

Perth Energy

(80% Infratil)

Perth Energy owns a fast-starting dual fuel 120MW power station at Kwinana and a retail business with approximately 10% of the Western Australia commercial and industrial electricity market. 

Over recent years Kwinana has operated profitably, but the retailing business has struggled, resulting in a significant loss for the 2017 financial year.

The poor performance of the retailing business is due to the slowdown of the Western Australia economy and the structure of the energy market which is materially different to that in the eastern Australian states. 

The Western Australian electricity market is physically separate from the other states and is dominated by the State Government owned gentailer, Synergy which has a regulated monopoly to supply small and medium users of energy and owns or controls approximately 77% of the state’s controllable generating capacity. 

With residential monopolised by Synergy, the contestable electricity market is limited to large commercial and industrial users, but with wholesale prices also influenced by Synergy.

This situation is facing reform, to allow residential market contestability and improvements to the wholesale and generation market. The objectives of the reform are lower cost electricity, lower Government exposure to energy market risks, and greater private investment into the Western Australian energy sector. 

While the objectives are sound, there are implementation uncertainties. An illustration is the planned restructure of the state’s generation capacity market. Unlike other Australian states or New Zealand, Western Austalia has a capacity market for generation which is separate to the energy market. Periodically the state energy agency sets the price for Reserve Capacity which it pays to generators for being available. For the FY2017 Capacity Year it is A$121,889/MW. The proposed reforms will simultaneously introduce an auction system to determine this price and retire old coal fired generation capacity. Using auctions may lower the Reserve Capacity price, but the retirement of plant will raise it. The consequence for Kwinana is difficult to forecast.

A new state government elected in March 2017 has announced the retirement of 436MW of thermal generation and a cap on Synergy’s new, non renewables, generation. These measures are likely to raise the market price of electricity which should benefit Kwinana, although the Reserve Capacity price is expected to fall this year before increasing the following year.

While these developments unfold, Perth Energy is undertaking operational improvements to lift financial performance for FY2018; shrinking the retail business to its profitable core, reducing earnings volatility with price hedging, and negotiating a wholesale supply arrangement with Synergy.

As a part of the restructuring of the Perth Energy Group, Infratil provided additional funding of A$22.9 million and guaranteed A$67.7 million of bank facilities which as at 31 March 2017 were drawn to A$43.6 million. 

Snapper

Since 2008, Snapper has at various times provided fare collection services to Wellington City Council for curb-side car parking, Wellington Cable Car, Wellington Regional Council’s total mobility scheme, many taxi companies, NZ Bus in Auckland and Wellington, and Ritchies buses in Whangarei.

From this experience, Snapper has developed ‘Ticketing as a Service’. By centralising the development and management of sophisticated systems Snapper can deliver a cost-effective, customized, experience for customers who only pay for what they need. It’s the same concept Xero offers to its clients. This model provides public transport authorities and operators with the flexibility they need to meet to the growing list of customer demands, while providing Snapper with economies of scale.

In Wellington, the Regional Council has contracted Snapper to provide an interim Ticketing as a Service solution across the regional bus network. This will support the Council’s broad wide ranging changes to the region’s public transport, which include routes, fares and operators.

Recent examples of Snapper’s innovations include the integration with Activata Prepay and the development of new self-service kiosks.

Outside of New Zealand, Snapper is growing by using the innovations it has developed for its home market to enhance transport ticketing systems in the Republic of Ireland, Latvia and Northern Ireland. 

Snapper’s capability is highly regarded, with Snapper regularly presenting at international conferences such as the Transport Ticketing Global Conference and Exhibition in London and the UITP bi-annual global Public Transport conference in Montréal. 

 

Envision Ventures Fund

In FY2016 Infratil entered into a commitment to provide US$25 million to a California based venture fund which specialises in investing in early stage companies that are likely to be relevant to Infratil’s core businesses and areas of focus.

As at 31 March 2017 US$5.25 million had been called from Infratil (NZ$9.7 million). Envision has now invested in companies involved in charging of electric vehicles, geo-spatial imaging and information, enterprise security, and software supporting the development of the Internet of Things (“IoT”) and decentralised energy generation.  

 

Australian Social Infrastructure Partners (ASIP)

Initially this was expected to rise to a $100 million investment in a portfolio of projects, but the partnership fund has now curtailed making investments in new projects, which meant that Infratil did not provide further capital over the year. Infratil’s investment as at 31 March 2017 was valued at $34 million ($33.6 million a year prior).

ASIP has invested in two developments; schools in Queensland which are preforming to expectations; operationally and financially, and the Royal Adelaide Hospital where construction finished in mid March 2017. A transition period is now underway as the hospital prepares for the arrival of its first patients in August. While this is one year later than expected, the project’s commercial and financial structures have mitigated the impact on future returns on capital. 

Annual Report 2017
Annual Report 2017
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