2018 Annual Report Highlights

Trustpower

51% Infratil ownership

Trustpower experienced a year in which a lot went right. There was some good fortune with the weather and Trustpower’s management of that opportunity, and others, was excellent.

  • Tustpower’s New Zealand generation was 319 GWh above the average of the previous five years (taking into account the purchase of King Country Energy).

  • The average New Zealand wholesale price for electricity was 1.8cents/kwh above the five year average.

Having hydro catchments which received more than their usual rainfall in a year when the systemically important South Island lakes received less is fortunate, but it reflects a feature of Trustpower that is often overlooked. Trustpower has hydro facilities in the Bay of Plenty, Taranaki, Horowhenua, Nelson, Marlborough, Canterbury, the West Coast, and Otago. No other power company has a portfolio with such diversity and hence such opportunity to take advantage of weather patterns. 

It’s also worth noting that it is necessary that Trustpower does make hay when the weather allows. The occasional good years are factored into its value. 

During the year Trustpower sold its Australian hydro generation subsidiary Green State Power for A$168 million, the equivalent of A$700,000 per GWh of average year generation. These assets were acquired by Trustpower in 2014 for A$65 million or A$270,000 per GWh . The rise in value reflects an increase in Australian electricity prices, the increasing value of back-up generation in that market, and the excellent acquisition price. 

Trustpower also concluded the acquisition of King Country Energy. The generation assets of KCE are now owned 80% Trustpower and 20% the King Country Electric Power Trust. The enterprise value of KCE was $142 million. Its generation produces 216GWh in a year of average hydrology. 

Trustpower’s utility retailing also experienced another positive year. Total customers rose in a market which is pitting larger gentailers, telcos, and start-ups in a highly competitive environment. Over the year, two thirds of the new customers Trustpower attracted took at least two utility services and now over 100,000 of Trustpower’s customers take at least two services.

Of probably greater importance than the electricity sector review is Government’s aspiration to see New Zealand’s generation produce no greenhouse gas emissions in a year of average rainfall. This will require a large investment in new hydro, wind, geothermal and possibly solar capacity. A rough estimate is that about $5 billion will have to be invested. As the time frame is two decades it’s certainly achievable, but there are plenty of lessons from Australia and the UK about how not to go about this. As experts looking at those markets agree, a high price for greenhouse gas emissions is a much cheaper and more effective policy tool than any version of direct intervention. Recent policy announcements which could curtail the availability of natural gas could have serious consequences given the role of gas power generation as the source of the electricity system’s security of supply. 

Over the next year the electricity industry is to have its third Ministerial inquiry since 2006. Both previous Labour and National Governments undertook such reviews and consequently introduced changes. The last Labour administration guaranteed the supply of gas to Genesis’s gas-fired power station in Huntly to reduce the risk of power shortages, while National made changes to the wholesale hedge and generation markets to increase competition in the South Island. It is expected that recommended changes this time are likely to focus on “equity” issues such as pricing provided to low users. 

During the year, Trustpower’s second largest shareholder, the Tauranga Energy Consumer Trust (TECT) initiated a consultation with its beneficiaries (who are Trustpower’s customers in the Tauranga and Western Bay of Plenty) over changes to its income distribution and how it hold its capital funds. The essence was that TECT would become a charitable trust quite independent of Trustpower and its local customers. 

Trustpower opposed the proposal and during consultation with beneficiaries TECT found that a majority opposed the proposal so it was withdrawn. Going forward, if TECT wishes to again review its structure it is hoped that it will work with Trustpower to provide beneficiaries with choices that reflect the underlying purpose of the Trust, which is to hold its assets for the benefit of the consumers.

Year Ended 31 March

2018

2017

2016

New Zealand retail electricity sales

1,784GWh

1,895GWh

1,820GWh

New Zealand generation

2,235GWh

2,017GWh

1,588GWh

Australian generation

284GWh

359GWh

254GWh

Electricity accounts

273,000

276,000

277,000

Gas accounts

37,000

33,000

31,000

Telecommunication accounts

87,000

76,000

62,000

Av. NZ market spot price¹

8.8c/kwh

5.2c/kwh

6.4c/kwh

NZ EBITDAF²

$243.1m

$203.0m

$195.7m

Green State EBITDAF 

$26.7m

$31.5m

$12.3m

Investment spend

$27.9m

$26.7m

$115.0

Net debt

$469.8m

$660.8m

-

Infratil's holding value³

$893.0m

$734.8m

 -

1. 8.8c/kwh is the same as $88,000/GWh (ie. 1 GWh = 1,000,000 kwh)
2. Excludes $16.7 million of demerger costs in FY2017
3. NZX market value at period end 
Infratil's investment objectives 

Over the last decade the New Zealand electricity market has experienced an excess of generation capacity/supply and correspondingly depressed electricity prices. Looking forward the supply demand balance will change as older coal/gas power stations are retired and as transport shifts from being powered by oil to using electricity. 

Trustpower has been the most dynamic of the New Zealand gentailers showing leadership in developing generation in Australia, using its hydro storage for irrigation, and through the development of multi-utility retailing. It has now demerged its windfarms into Tilt Renewables. Opportunities are expected in New Zealand as wholesale electricity prices firm and additional generation capacity is required.

EBITDAF & generation

Year ended 31 March

Over the last ten years Trustpower’s hydro generation has risen via acquisition of operating plant and small scale development projects. 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 largely offset by lower wholesale prices and increasing retail market competition.

EBITDAF & generation
NZ EBITDAF per unit of NZ generation and the average NZ 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  New Zealand’s surplus generation capacity on wholesale electricity prices. 

EBITDAF g2
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 over a quarter over the period, while costs per customer have been reasonably stable.

EBITDAF g3

Tilt Renewables

51% Infratil ownership

Operationally, Tilt Renewables experienced the downside of relying entirely on wind to power its 582MW of generation. Output was 1,796GWh down 263GWh on the prior year and the fall in revenue was reflected in EBITDAF which was $103.8 million, down from $124.0 million.

Fluctuations in generation are to be expected and illustrate an important point about the intermittency of wind generation and hence the need for electricity systems to have back-up. All markets that are quickly transitioning from thermal (ie. controllable) to renewable (often not controllable) are grappling with the cost of back up and how to provide it. 
Tilt Renewable’s primary goal is to build a large portfolio of generation under management. This entails optimising over three requirements:

  • Generation costs. In essence this means having good sites and choosing the best-fit technology. Places that are sunny and/or windy and are well placed relative to transmission networks.
  • Hedges or contracts to reduce risk from future electricity prices. Electricity prices are hard to forecast. Tilt Renewables can accept some of this risk, but has limited capability although the highly contracted nature of the portfolio allows flexibility. 
  • Fit for purpose funding. This is the flip side of a project’s exposure to electricity price fluctuations. If all the electricity price risk is transferred to a buyer of the electricity then the project’s lower risk will suit high levels of debt funding. The more that electricity price risk is retained, the more the funding needs to be equity.

Tilt Renewables is developing a huge portfolio of projects to be “shovel ready”. So that as electricity price hedges and funding are secured projects can be progressed. Each of these projects represents a major work stream and investment, but each is difficult to value until construction is actually underway. To summarise just four of the projects on the list:

Salt Creek is a 54MW wind project in south Victoria which is under construction at present and expected to generate 172GWh in an average year. The project’s cost is budgeted at A$105 million. It is connected to the grid by a 49 kilometre 66Kv transmission line. All the electricity has been sold to Meridian Energy to 2030.

Dundonnell is a 336MW wind project located near Salt Creek. It has an estimated total cost of A$600 million and could produce sufficient electricity for about 140,000 homes and, relative to coal-fired generation, reduce annual emissions by 670,000 tonnes. A part of the output has been offered into a tender being run by the State Government to buy renewable generation. A Government decision is expected by the end of September.

Storage could involve batteries or pumped hydro which would involve pumping water from one lake to another when electricity is plentiful and then using the stored energy when the system has energy shortages. One project under review could generate 300MW for four to five hours, sufficient for about 200,000 homes. The capital cost is estimated to be about A$400 million and the SA State Government has provided Tilt Renewables with a grant to partially fund the cost of assessing the merits of the energy storage projects.

Waverley is a 130MW wind project located in south Taranaki. It is fully consented and believed to be one of the lowest cost new generation projects available in New Zealand. The cost of building Tilt Renewables' entire portfolio of projects would be in excess of $3 billion. That isn’t expected at least in the short term, but there is every prospect that at least a third will be committed over the next two years. This will require Tilt Renewables to raise equity and debt, either on its balance sheet or by selling down projects. There is good investor demand to buy renewable generation which has-long term power sales agreements.

 

Year Ended 31 March

2018

2017

2016

Australian generation

1,225GWh

1,305GWh

1,201GWh

New Zealand generation

571GWh

744GWh

724GWh

Australian revenue

A$121.7m

A$127.7m

A$114.3m

Average price 

9.9c/kwh

9.8c/kwh

9.5c/hwh

Australian contracted sales

95%

96%

95%

New Zealand revenue

A$36.2m

A$46.8m

A$48.0

Average price

6.3c/kwh

6.3c/kwh

6.6/kwh

New Zealand contracted sales

100%

100%

-

EBITDAF

A$103.8m

A$124.7m

A$124.7m

Investment spend

A$83.6m

A$6.0m

A$4.3m

Net Debt

A$593m

A$544m

-

Infratil's holding value²

$285.9m

$341.8m 

 

1. 9.9c/kwh is the same as A$99,000/GWh (ie. 1GWh = 1,000,000kwh). All prices are in A$
2. NZX market value at period end. 
Infratil's investment objectives 


Australia is undergoing a rapid shift from coal-fired electricity generation to renewables. To deliver this outcome requires very substantial investment in new generation. Tilt Renewables has the intellectual and financial capital to undertake a material part of this investment. Its immediate goal is to double assets under management by 2020.

 Generation and projects

MW

 

Existing Australia

385

Two large wind farms SA. Two small ones NSW

Existing New Zealand

197

Two wind farms NI. One wind farm SI

Salt Creek

54

Under construction. All output sold to Meridian

Dundonnell VIC

336

Power purchase terms on offer to Victoria Government

Waddi WA

105

Wind

Waddi WA

40

Solar

Snowtown SA

115

Solar + 20MW of battery storage

Palmer SA

300

Wind

Vic Wind VIC

300

Wind 

Rye Park NSW

300

Wind 

NSW Wind NSW

400

Wind

QLD Wind QLD

70

Wind 

QLD Solar QLD

770

Solar 

Waverley NI

130

Wind

Mahinerangi 2 SI

160

Wind

Kaiwera Downs SI

240

Wind

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.

TR EBITDAF g1
EBITDAF per unit of generation

Year ended 31 March

Most of Tilt Renewables’ output is sold on fixed price variable quantity contracts. Last year less than 5% of Tilt Renewables’ generation was sold on the uncontracted market. Costs associated with development projects have reduced EBITDAF over the last two years.

TR g2

Longroad Energy

45% Infratil ownership

In the less than two years since being established, Longroad Energy has delivered an impressive set of milestones. Their variety illustrates the heterogenous and dynamic character of the US electricity generation market.

Owning & Managing Generation: Longroad Energy has employed a team to manage generation assets and it has purchased three going-concern vehicles which were established in the past to own and fund generation. With each there are opportunities to release capital, to enhance their value by upgrading or expanding the generation capacity, and to provide recurring income from plant management and energy sales.

  • Federal Street Solar owns 297MW of solar generation spread over more than a dozen states with all output sold on fixed price contracts.

  • Minnesota Wind owns 80MW of wind generation with all output sold on contract. Work is under way to determine whether the turbines and blades warrant renewal to increase their output.

  • Milford Wind in Utah owns 306MW of wind generation with the potential to increase output. Electricity is sold to the Southern California Public Power Authority.

Development Projects: The Longroad Energy team are working on over 6,000MW of wind and solar generation projects in over 20 states.

The three most advanced of these are coincidentally in Texas and involve 626MW of solar generation and 238MW of wind and in aggregate will cost approximately US$1,500 million if progressed to commissioning.

With these projects Longroad Energy has arranged consents and agreements for use of the land, construction, and grid connection. It has firm pricing for the generation plant and the cost of its installation, the required debt funding and tax credits, and for the sale of the output for 15-20 years. 

Whether the projects are retained (which would involve Infratil providing equity capital) or sold prior to commissioning will depend on the value placed on them by institutional investors. Longroad Energy and Infratil are reviewing the options at present.

Financial Flexibility: The three shareholders have provided an initial commitment of US$100 million. In addition there has been conditional support provided to letters of credit issued by Longroad Energy as a part of the projects that have been acquired.

Over the last year, Longroad Energy has drawn on the US$100 million commitment as the acquisitions and projects outlined above have progressed, and repaid capital as other sources of funding have become available.

As at 31 March 2018, Infratil had invested, over the two years, $66.8 million into Longroad Energy and received back distributions of $28.9 million. Because of Longroad Energy’s book losses, Infratil’s holding had a book value of $16.0 million as at 31 March 2018.

For the twelve months to 31 December 2017 (Longroad Energy’s financial year) Longroad Energy reported a net loss of $22.6 million. This included depreciation, amortisations, and interest expenses related to the generation ownership vehicles which have been acquired as well as development costs actually incurred by Longroad Energy. Non-development activities actually delivered a profit of $1.1 million.

Over time as Longroad Energy grows its portfolio of generation it will provide more recurring income and transparency. However, in the short term, for Infratil’s shareholders Longroad Energy is likely to represent an interesting, but hard to value, portfolio of activities. In recognition of this Infratil is to consider linking Longroad Energy’s delivery of cash development earnings with dividend payments to Infratil shareholders.

Long road table

Year Ended 31 March

2018

Infratil investment amount

 $66.8 million

Infratil capital received back

 $28.9 million

Infratil book value

 $16.0 million

Infratil’s share of Longroad Energy’s net income

 ($13.8 million)

EBITDAF¹

 (US$5.6 million)

Depreciation/Amortisation¹

 (US$8.4 million)

Interest¹ 

 (US$8.6 million)

Net surplus before tax¹

 (US$22.6 million)

Operating cash flow inc. development costs¹

 (US$5.3 million)

Owned generation

 684 MW

Managed generation

 1,236 MW

Employees

 74 people

1. Longroad Energy has a 31 December financial year. These figures are for the year ended 31 December 2017.

longroad investment objectives

Infratil's investment objectives

Longroad Energy was established as a development vehicle focused on building the next generation of utility-scale renewable assets in the United States. The thesis is that an experienced development team with deep operating capability and a flexible remit will create opportunities to invest in a broad array of renewable assets as the U.S. migrates away from subsidised investment in renewables. 

Longroad is expected to produce a series of development and work-out profits, as well as a core portfolio of operating assets and recurring services revenues. The investment is also expected to provide insights into the economics and trends at the cutting edge of renewable generation which will be applied across Infratil’s overall portfolio. Longroad’s immediate priority is to deliver the first set of realised development gains from the extensive pipeline of opportunities that has been established across a range of wind and solar opportunities.

Wellington Airport

66% Infratil ownership

Wellington Airport hosted 173,000 more domestic and 7,000 more international passengers than the prior year. The growth was above budget.

Fluctuations in growth annually and over longer periods reflect the dynamics of the airline market. Last year’s domestic increase was mainly due to Air New Zealand’s incremental additions of capacity and strong competition by Jetstar on Dunedin and Nelson routes. Air New Zealand’s move to larger aircraft has created opportunities on services with lower passenger demand, and in central New Zealand Sounds Air has done a good job expanding its network.

Internationally, the flat net outcome included reduced airline capacity on the Tasman balanced by growth on Fiji Airways and Singapore Airlines services. The year ahead is more positive; following the decision by Air New Zealand to cease collaborating with Virgin Australia both airlines have announced new services, and Singapore Airlines is upgrading its service by routing it via Melbourne rather than Canberra. The new route offers more convenience, more interconnection options and a quicker travel time. It is hoped that the airline’s next step will be to introduce new aircraft and to increase the service to daily, from its current four times a week.

In the domestic market, the most positive development may be Jetstar’s reintroduction of jet services with Queenstown. This is popular with locals and Queenstown is “must see” for many international visitors. In FY2019 the route will have 260,000 seats available, up 600% from the 37,000 seats of a decade ago.

In FY2019, Wellington Airport will conclude the $300 million development programme started four years ago. The final deliveries are the hotel, the domestic terminal refurbishment, the renewal of the airfield taxiway, and the multilevel car park and transport hub. Airport management are now scoping out the capital investment programme for the following five years. Initial estimates are for $250 million of capital outlays over this period.

At the end of FY2018 Infratil had owned 66% Wellington Airport for almost two decades and had overseen $570 million of development investment. The result is that Wellington is extremely efficient, it has the lowest per-passenger operating cost of any jet airport in Australasia, and is very popular with users with the second highest user rating in Australasia. Next year Wellington Airport will again consult with its major airline customers to set aeronautical charges. Indicative of the good working relationship with airlines, they have agreed to a postponement of this while Wellington clarifies its likely investment programme.

The Airport is involved with two controversial initiatives reflecting its extremely small site and its growth. Consultation is underway with the adjacent golf club to purchase land to enable the accommodation of larger and more aircraft. The Airport’s construction of the car parking building at $72,000 per park was part of its initiatives to stay within its land footprint, but vertical parking of aircraft is not possible. The other initiative is the extension of the runway 355 metres to the south. This was delayed by 18 months due to a succession of court cases which sought to clarify how the Civil Aviation Authority should interpret its regulations. The final court decision was close to an affirmation of CAA’s historic approach and the Airport has resubmitted its application to have CAA indicate what runway safety features will be required once the runway is extended. Knowing this means that the safety features can be incorporated in the construction.

The delay means that its likely to be mid 2019 before construction consents could be available and perhaps a minimum of three years after that before the first long-haul service could take advantage of a longer runway to link central New Zealand directly with Asia or North America. While progressing construction is taking longer than hoped, the merits of the initiative are unchanged. It was recently calculated that 83% of the world can reach 100 of the worlds’ top tourist locations with a single flight. A two stop itinerary is a material impediment when competing for tourists.

Year Ended 31 March

2018

2017

Passengers Domestic

5,249,358 

5,076,479

Passengers International

895,605

888,427

Aeronautical income

$76.2m 

$70.3m

Passenger services income

$40.3m

$37.0m

Property/other

 $12.2m

$12.2m

Operating costs 

($33.2m)

($29.0m)

EBITDAF

$95.4m 

$90.5m

Investment spending

$85.1m

$79.3m 

Net debt

$400.1m 

$349.6m

Infratil cash income

$37.9m

$38.9m

Infratil’s holding value¹

$471.9m

$414.5m 

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

It is now almost two decades since Infratil acquired its 66% shareholding in Wellington Airport. Over that period, annual passenger numbers have risen from 3.5 million to 6.1 million. This has required the investment of $570 million into facilities which has driven annual earnings from $15.5 million to $95.4 million.

The Airport has benefitted from people’s increasing propensity to fly and the dynamic airline market. Both factors are expected to continue and as long as the regulatory environment allows, it is anticipated that the Airport will continue to invest in its own activities and to grow its returns and value. 

Incidentally; in 1998 Wellington Airport had 127,000 aircraft movements and employed 104 people, last year that was 95,000 movements and 107 people.

EBITDAF & passengers

Year ended 31 March

Over the ten years EBITDAF rose from $65 million to $95 million. Passenger numbers lifted by 889,000. On average an additional 67,200 domestic passengers each year and an additional 32,200 international travellers.

WLG g1
Aeronautical & services income

Year ended 31 March

Wellington Airport’s 25% increase in EBITDAF/Passenger over the period (to $15.54) reflects better passenger services, an increase in property income, and good cost control. Wellington has the lowest per passenger costs and aeronautical charges of New Zealand’s international airports.

Aeronautical

REV/PAX

Cost/PAX

Auckland

$17.65

$5.79

Wellington

$12.49

$3.22

Christchurch

$14.81

$5.85

Queenstown

$13.33

$5.07

From Airport Disclosures
WLG g2
The cost of travel

Year ended 31 March

Over the ten years, consumer prices rose 19%. The cost of domestic New Zealand air travel has risen 28%. The cost of international air travel for New Zealanders has fallen 21%. It illustrates how much more competitive the international air travel market is, and helps explain why international traffic has grown faster than domestic.

WLG g3

NZ Bus

100% Infratil ownership

The year to 31 March 2018 included several important milestones for NZ Bus. Contract and pricing negotiations were concluded with Auckland Transport and Greater Wellington Regional Council. This resulted in agreement on a series of contracts for up to 12 years requiring around 650 buses.

Alongside the re-contracting of Auckland and Wellington services, NZ Bus also won a 9 year contract to become the main provider of public transport in the Western Bay of Plenty. In awarding the contract to NZ Bus, the Bay of Plenty Regional Council noted that NZ Bus presented the best combination of price and quality and that the council’s procurement team was particularly impressed by the increased driver pay that it offered. The new services start in December and will involve approximately 86 buses. 

Across the Auckland, Wellington and Western Bay of Plenty contracts NZ Bus’s fleet will comprises 740 buses operating out of 13 depots. This provides a strong industry position for NZ Bus when combined with the location of its depots, fleet profile, technology and people. The Company is well placed to grow its provision of public transport services, revenue and earnings in the future. 

NZ Bus is also working towards the transition steps required before the new services go live. Extensive consultation has been completed in Wellington and is well underway for Auckland staff on the reorganisation required to meet new service requirements. 

In some areas the changes are moderate, but for others the changes are significant. For instance in Wellington’s Hutt Valley NZ Bus will be no longer be running many services. The Company is highly appreciative of the good will and input from staff during this difficult but required period of change, and for their service over many years. NZ Bus has built a strong health and safety culture, and is widely recognised for its commitment to innovation, value creation and its proactive approach to environmental management. 

Another area of change is represented by the desire by central and local government to see widespread introduction of electric vehicles. These buses present many challenges, both operationally and commercially, and NZ Bus is trialling options and building its understanding and capability. Two electric buses have received certificates of fitness and are under-going road testing and NZ Bus hopes to be in a position to announce further details of its progress in the near future. 

Infratil is undertaking a strategic review of NZ Bus with a view to maximising value and employee and other stakeholder outcomes. It is expected that this process will be concluded within the next few months. Infratil will continue to update the market as material developments unfold.

The $33.4 million EBITDAF included $5.2 million of one-off costs associated with re-contracting and the associated changes.

Year Ended 31 March

2018

2017

Patronage north

34,248,220

37,330,208

Patronage south

20,961,696

20,911,727

Bus distance (million kilometres)

40.0 

43.9

Bus numbers

1,001

1,072

Passenger income

$109.6m

$130.6m

Contract income

$103.8m

$91.8m

EBITDAF

$33.4m

$43.7m

Capital spending

$19.1m

$16.2m

Infratil’s holding value¹

$167.1m 

$191.2m

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

Infratil acquired NZ Bus in 2005 in the expectation that increasing road congestion in Auckland and Wellington, a social desire to reduce transport emissions, and the potential for bus public transport to be rapidly and cheaply expanded all created a platform for growth.

The business also offered many areas where it could be managed more efficiently and with more focus on users.

Buses were rebranded to reflect the community they served, WakaPacific for South Auckland, Valley Flyer for the Hutt Valley, etc. The Snapper payment system was developed and installed. Anew fleet of electric trolley buses was introduced in Wellington. Depots were upgraded and staffwere provided with better facilities.

Transport authorities have now introduced a new bus contracting regime which is a game changer. It makes Councils responsible for increasing patronage, significantly de-risks operator revenue (Councils now take most patronage and fare risk) and creates an environment for councils to grow public transport. New government initiatives are also encouraging public transport growth. Accordingly, there is an excellent prospect of bus public transport growing rapidly, for exactly the reasons Infratil anticipated in 2005.

Canberra Data Centres

48% Infratil ownership

The highlight of the year for Canberra Data Centres (CDC) was signing an agreement with Microsoft Azure for the latter to use CDC's data centres as a part of its provision of cloud services in Australia. It’s easiest to understand this by looking at the historical evolution:

• Initially a company, individual or government department stored their data on their own premises in their own computer and/or storage device.

• Data owners then started to store data off-site. Often to ensure there was a second copy if the office/home computer or disk were lost.

• Increasingly the data owner sought to regularly access and change this remote data.

• Data owners began to share their data (for instance when a passport is scanned at an airport simultaneously Immigration will be asked “is this person allowed entry?” Police will be asked “any outstanding fines?” Social Welfare “any outstanding childcare obligations?’ IRD “student loans?”.

• Sharing data storage (co-location) reduces cost and makes it faster/cheaper for, say, Police to share data with Immigration and it allows consistent standards of security and access.

• Next came Microsoft Azure and the Cloud. Azure offers ways for companies to use Microsoft tools (Word, Excel, PowerPoint, Outlook, Publisher, etc.) and data storage/ processing capability.

There is now an active “data ecosystem”. A company stores data (eg. a record of its employees) and another company uses that data to create a service (eg. Payroll). Both companies can be clients of Azure.

Azure operates 140 data centres worldwide and in Canberra it has chosen to use CDC’s rather than to build its own because they are fully accredited as secure facilities and offer enduring advantages for government agencies.

A government agency which owns highly confidential social or security information/data, or which operates critical infrastructure has many challenges. Data is expanding at an immense rate. Many parties want access to the data to deliver their core services, other parties want access to the data for information purposes, and others want to provide services to the data owner. 

While unit costs are falling, the total cost is rising because of the volume increase. Security is paramount. Constant access is an imperative. Back-up is yet another must-have.

What CDC has shown with the Azure agreement is that it offers something even a US$740 billion colossus like Microsoft would struggle to replicate. And by partnering with Azure, CDC can ensure that its primary users have a full suite of data storage and management tools and access to a full range of accredited service providers. In the background other developments are also strengthening CDC's position. The Australian Government passed the Security of Critical Infrastructure Act and has imposed stringent rules to protect data sovereignty and security. Globally the data storage industry is consolidating into the “hyperscale” massive providers (in Europe a data centre with 1,000MW is under construction!) and specialist niche providers. Canberra Data Centres is firmly ensconced in the second group but via Azure is also in the former group.

CDC delivered EBITDAF of A$55.8 million for the twelve months, which included A$33.1 million for the last six months. It reported an earnings’ “run rate” as at 31 March 2018 of A$69 million and indicated that this is expected to rise to A$83 million by the end of the following year. The Run Rate measure of EBITDAF reflects the March 2018 monthly earnings adjusted for signed contracts.

At present CDC operates 39MW of capacity at its four data centres with a A$150 million addition of a further 21MW of capacity due for commissioning later this year. A further 50MW capacity increase is planned for the Hume campus.

Year Ended 31 March

2018

2017

Capacity

39MW

39MW

Utilisation

78%

58%

EBITDAF

A$55.8m

A$47.5m

Contribution to Infratil

NZ$31.6m

NZ$10.6m

Capex

A$45.8m

A$66.5m

Net external debt

A$330.5m

A$290.4m

Infratil holding value

NZ$453.2m

NZ$426.3m

Infratil's investment objectives 

The digitalisation of data has exploded and information of every imaginable type is being stored and accessed. As costs have fallen, demand has rocketed. Computers, smart phones, TVs, and an endless procession of smart equipment are both generating data and using data from external sources.

That this growth is not about to slow is illustrated by a piece of technology that is just starting to arrive; autonomous cars. Every day such a vehicle is in operation it generates and transmits 156 times as much data as was required by the Apollo 11 landing craft to get to and from the moon in 1969.

The immense increase in data that is being stored and accessed has spawned specialist storage requirements and provision. Canberra Data Centres provides Infratil with exposure to a sector growing at a phenomenal rate which must invest in capacity to meet demand.

Retire Australia

50% infratil ownership

RetireAustralia is undergoing transition from an accommodation provider to a provider of a continuum of accommodation and care so that residents who need assistance can receive it in or near their own homes.

Achieving this transition requires two obvious steps. Specialist amenities must be built, ranging from apartments for people with low mobility to hospital facilities. And alongside this, the necessary care capabilities must be developed.

Home Care: The ultimate objective is for all residents to be able to access all the care they need in their own homes, and to also have choices of other forms of accommodation if that becomes preferable. To ensure fairness and to reduce cost it is desirable that residents have access to both government and private care. The latter point is coming to prominence as the Australian Government shifts how it provides assistance to the elderly; away from “come to us” to “we will come to you”. By 31 March 2018, 30% of RetireAustralia residents (over 1,500 people) had access to care and the intention now is to extend this to all residents.

Development: The objective is to deliver 300 units a year, from an historic rate of 100. Deliveries in FY2018 and FY2019 are well down on even the historic rate as RetireAustralia stopped progress on a number of developments in favour of facilities consistent with the long-term vision. As shown in the table, after the hiatus the rate of delivery is then expected to lift markedly and to that end shareholders committed a further A$100 million of equity. The delivery pipeline is set out in the table.

YE Ended 31 March

2019

2020

2021

2022

Existing villages

11

94

34

75

New villages

-

142

156

134

Total units

11

236

190

209

 
These contracted developments are part of a total pipeline of over 1,100 units, which will underpin the plan to increase the rate of delivery to 300 units a year, which is expected to require additional equity.

One of the new developments which contributes to the expansion is at Burleigh Golf Club in Brisbane. It is believed that this model will have many applications. The Club cedes land for the village (of approximately 180 apartments) and in exchange receives funding so it can develop its course and facilities and support its ongoing services. Residents will enjoy a good location, a pleasant outlook and access to Club facilities. 

The less salubrious side of some retirement village operators received the media spotlight in June 2017. This had a chilling effect on the sector as people were reluctant to purchase accommodation in a retirement village while the sector was being demonised on TV. The worst effected operator saw unit sales fall 42%. While RetireAustralia is free of the practices criticised and was completely untouched by the media campaign, it too saw unit sales fall 9% and its vacancy rate rise from 5% to 6%.

 RetireAustralia is acutely aware of the need to provide appropriate pastoral care of its residents and to be completely open and fair in its commercial dealings. To that end, RetireAustralia has standardised its resident contracts, to ensure they are simple, transparent, have no “hidden charges”, and generally meet resident preferences for stable costs. It’s very closely modelled on the retirement village occupancy contract which is almost universal in New Zealand.

RetireAustralia also continually monitors and invests in its services and staff, both to ensure standards are maintained, and to comply with the government requirements that come with the provision of funding for in-home care.

Financially, RetireAustralia delivered an underlying profit of A$33.7 million which was down from last year’s A$59.1 million. Development margins were down A$7.4 million because of the lower number of units delivered while management costs were up A$4.4 million reflecting the work being done to boost the development pipeline and to introduce care. Revaluations were lower as the residential property market flattened out after last year’s increase.

Year Ended 31 March

2018

2017

2016

Residents

4,968

5,267

5,245

Serviced apartments

465

486

484

Independent living units

3,509

3,442

3,334

Unit resales

238

319

376

Resale cash gains per unit

A$131,513

A$113,000

A$106,000

New unit sales

51

105

102

New unit average price

A$621,588

A$571,467

A$535,300

Occupancy receivable/unit¹

A$104,306

A$94,550

A$79,600

Embedded resale gain/unit¹

A$43,112

A$39,300

A$28,300

Underlying profit

A$33.7m

A$59.1m

A$38.8m

Capex

A$66.4m

A$71.1m

A$38.1m

Net external debt

A$153.3m

A$219.8m

A$206.8m

Infratil's holding value¹

NZ$319.0m

NZ$278.2m 

NZ$252.9m

1. The values are estimates of average per unit value at that point in time. What RetireAustralia would have received 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.
Infratil's investment objectives

There are roughly 500,000 people in Australia over 85 years old. When the youngest of these individuals was 50 years old, only slightly more than 100,000 Australians was over 85.

Many elderly people seek accommodation and care to suit their reduced mobility and personal and social needs, and they have the capital to support this. However, society has also accepted a welfare obligation, especially when medical treatment or intensive care is required.

RetireAustralia was conceived, by its previous owners/managers, to provide accommodation with features which suited retired people. The objective now is to develop RetireAustralia to offer a “full continuum” of accommodation and care. So that an elderly resident knows that a full range of facilities and services will be available in their own homes for as long as they wish. For governments which both recognise an obligation to the elderly and worry about the cost, the objective is to ensure that there is as much private care and funding as possible and as much public support as is required.

For Infratil, RetireAustralia provides investment exposure to a high growth sector and a restructuring opportunity.

Australian National University Student Accommodation

50% Infratil ownership

When Infratil and the Commonwealth Superannuation Fund acquired the economic interest in the ANU Student Accommodation in August 2016 it comprised 3,250 fully occupied units (either apartments or rooms in halls of residence).

Later that year the JV received another 500 units so that 3,750 were available for students attending ANU for the 2017 academic year. They too were fully occupied in 2017 and 2018.

The University is now building a further 450 units and it is anticipated that the JV will acquire these so they can be available for the 2019 academic year. When this occurs Infratil and its partner will provide equity and further bank funding will be drawn.

These additional units are part of the Kambri Union Court development being undertaken by ANU. Once open in 2019, Kambri will be the largest and most profound change to the ANU campus since its establishment. It combines the best elements of existing campus life, adding educational, cultural, physical and social facilities for the benefit of the university community. It will certainly make it even more attractive for students to reside on campus.

Infratil’s original thesis when making this investment was that it would deliver solid inflation-protected cash earnings and provide opportunities to put additional capital to work, to reduce risk and to increase returns. This is occurring.

It is also a showcase for a university partnering with long-term capital providers. ANU has been able to free up its balance sheet and progress developments such as Kambri. Students have benefited from having both the University and the private partners working to invest in better facilities. And the JV partners have been able to manage the facilities so as to reduce risk and capture the benefits of 100% occupancy. 

For the year to 31 March 2018 Infratil received income of NZ$14.4 million (NZ$7.0 million the previous year for an 8 month holding period). The holding was revalued up to A$90.4 million from $A83.4 million. The independent valuer recognised the improved cash flows and market discount rates.

 

Infratil's investment objectives

Universities attract students on the basis of their academic faculties and their holistic impact. This can take the form of sporting or cultural activities which build bonds amongst the students, support programmes to help students transition into university life, and living conditions which build personal bonds and life skills.

The Australian National University is taking a proactive approach to make sure that its students are offered affordable, safe, and communal accommodation in halls or apartments. ANU is not alone.

However, while the University’s rationale is apparent, it requires a lot of capital. Infratil in partnership with the Commonwealth Superannuation Fund acquired an economic interest in the student accommodation owned by ANU. It is a material investment in a sector where demand and the need for capital is growing.

Other Investments

Perth Energy Holdings 
(80% Infratil)

Infratil’s Investment Objectives

Western Australia, like New Zealand, operates an electricity industry that is entirely isolated (not connected to any other market). State electricity consumption is about the same as New Zealand’s although its generation mix is very different, being approximately 58% gas and coal (34%), although renewables (solar and wind) are growing.

The state government owns much of the state’s generation, retailing and distribution and restricts competition in the household market. In 2007 when Infratil initially invested in Perth Energy it was expected 2007 there would be an opening up of the WA market and that opportunities to invest in generation and retailing following. Instead deregulation of the market has been a slow and bumpy progress. The objective now is to restore profitability and to then assess options.

After two very difficult years there are positive signs that Perth Energy is recovering with the business delivering a positive EBITDAF of A$0.5 million over the second half of FY2018.

Instrumental in this turnaround has been a restructuring of Perth Energy's wholesale supply arrangement,  a closing out of unprofitable legacy customer contracts, and a revitalised sales team focused on dual fuel (electricity and gas) sales to the small and medium enterprise market and large commercials and industrials. The business is well placed to take advantage of a likely reduction in the retail contestability threshold that will materially expand the available market.

Over the past year Perth Energy's Kwinana power station has been running regularly in response to the changing power system operating model and has made a material contribution to lowering Perth Energy's wholesale electricity costs.

As the fastest starting power plant in WA market,Kwinana also plays an important role supporting the deployment of intermittent renewables in WA. 

YE Ended 31 March

2018

2017

Generation revenue

A$29.8m

A$16.6m

Retail revenue

A$245.8m

A$319.8m

Other revenue

A$13.8m

A$7.0m

Operating costs

($A294.8m)

(A$356.7m)

EBITDAF

(A$5.3m)

(A$13.3m)

Net loss

(A$20.2m)

(A$16.3m)

Net external debt

A$25.2m

A$29.2m

Infratil’s holding value

NZ$61.7m

NZ$73.4m

 

Snapper Services
(100% Infratil)

Infratil’s Investment Objectives

Snapper was established to provide a high-tech and low-cost public transport ticketing system which could be used by NZ Bus and other public transport operators. It delivered on its establishment objectives, but struggled to gain support from NZ public transport agencies, even as it has forged a positive reputation working with public transport bodies offshore in places as diverse as Ireland and Latvia.

Snapper’s reputational highpoint for the year was being Runner Up at London’s Annual Transport Ticketing Technology Award.

Closer to home, Snapper is transitioning from serving NZ Bus to providing ticketing services for Greater Wellington Regional Council’s regional bus services. Starting in the Wairarapa, Snapper will provide GWRC with a complete ticketing system, including a concessions management system to support new tertiary fares. 

Infratil Infrastructure Property
(100% Infratil) 

Infratil’s Investment Objectives

Through its portfolio of businesses Infratil is a substantial land owner. Rather than always leaving it to such businesses to undertake their own land development, or to sell surplus land so that others can develop it, IIP was established.

IIP has access to the necessary expertise and capital to ensure that as much value as possible is created and extracted by Infratil.

IIP’s priority role has been to provide NZ Bus with fit-for-purpose depots for its buses and to develop and on-sell land released from depots.

The last year has been a period of considerable activity, in part because of NZ Bus requiring less depot space and in part as a part of a series of long-term development initiatives.

• IIP sold its residual interests in the New Lynn development that was undertaken with Auckland Council. While the sale has terminated that stage of the JV, the parties are continuing to work on a number of other potential nearby developments.

• IIP sold two properties which had previously been used as bus depots and were now no longer required for that purpose.

• The largest development IIP is engaged on involves 1.7 hectares in Auckland’s waterfront Wynyard Quarter which where the new America’s Cup village is to be built. This will be a staged development and it is hoped that the first commitments are made in FY2019.

• The other large project IIP is progressing is in Kilbirnie Wellington. This involves relocating the NZ Bus depot to modern purpose built facilities which suits the bus company’s fleet, and the development of the old depot site which is owned by IIP.

As at 31 March 2018 IIP’s book value was $33.9 million. Over the year it contributed $4.0 million to Infratil as it undertook the asset sales noted above. 


Envision Ventures Fund 

(Infratil has committed US$25M with US$9.8M now drawn)

Infratil’s Investment Objectives 
Technology changes the fortunes of businesses by reducing the cost of desirable but previously expensive services or products.

Apple’s iPhone provided ubiquitous mobile access to the net and its extraordinary level of take up resulted in widespread disruption as it fundamentally changed the way many businesses communicate and interact with customers.

Infratil is aware of potential technology changes which could impact its businesses. More electric vehicles will mean cheaper batteries, which will impact the economics of the electricity industry. Autonomous vehicles will change how people get around town and the demand for public transport and even car parks. Cheap sensors and data processing capability will change energy demand patterns.

Historically Infratil sought to engage directly with technology with toe-in-the water initiatives. But this gave more insights about how difficult it is for start-up businesses than about which technologies were about to succeed at delivering a low-cost solution to a previously expensive problem.

To improve direct awareness of technology developments in a cost and time efficient way, Infratil has committed capital to a fund managed by California based Envision Ventures.

Infratil committed US$25 million to Envision Ventures to investment in technology activities with relevance to Infratil’s businesses. So far US$9.8 million has been committed to 10 companies. Investment sectors include transportation (electric vehicle charging), security (the “internet of things (IoT)”, cyber, real time data encryption), management of devices which connect via the IoT, and satellite communication and imaging.

An example of the investments made by the Fund is ChargePoint; which provides electric vehicle charging stations. They have over 49,000 stations in North America and are seeking to expand in other hemispheres. ChargePoint has achieved this scale by being able to work with a wide range of partners. In New York and San Francisco they are working with the cities. In other locations they work with companies such as Apple and Google to provide charging stations for employee vehicles. They are also working with Uber on that company’s initiative to introduce flying electric taxis! There are a great many lessons available to Infratil from how ChargePoint has succeeded in this field.

To date the valuation of the Fund’s portfolio is also positive. While the priority is to gain insights about technology changes relevant to Infratil and its businesses, it is naturally hoped that the investment also provides a good return.

Infratil management actively engages with both Envision Ventures Fund management and people in the investee companies and Infratil’s businesses are also encouraged to develop relationships with the technology companies relevant to their own activities; both to raise awareness and to identify commercial opportunities.

Infratil Annual Report 2018
Infratil Annual Report 2018
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