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Infratil Monthly Operational Report

1 July 2011

Introduction

Infratil's 2011 Annual Report was released and is available here. The Report provides a record of Infratil's performance over the year to 31 March 2011, its financial position as at 31 March 2011, the strategic factors which are guiding management and a summary of the performance, circumstance and prospects of Infratil's businesses.

After almost a quarter of the financial year the main "take out" thus far is that Infratil is tracking to budget with the pluses and minuses roughly in balance.

The 4.25cps final dividend was paid in June. 25% of shareholders holding 11% of the shares took advantage of the DRP and 1.4 million shares were issued at $1.87 each. After the DRP issue, Infratil has 604.2 million shares on issue.

 

TrustPower

A wet, warm winter has depressed wholesale electricity prices and coincidentally the Electricity Authority has initiated a $10.5 million campaign to encourage consumers to check their power bills to see if they can lower their costs. The Authority reported that approximately 6% of those who checked their bills subsequently initiated a change of retailer. The Authority is funded by a levy on electricity consumption.

Over the last year about 30,000 accounts have switched company each month. Over this period TrustPower's customer gains and losses have been in balance with the overall outcome being gains by Pulse, Meridian and Genesis drawn from Contact and Mighty River Power.

The temperate winter may be increasing supply and reducing demand (less electricity has been consumed to date in 2011 than for the same period in 2010) resulting in low wholesale prices, but the situation may be analogous to mortgage borrowers with floating rate loans. Eventually rates will rise and today's cheapest may not be tomorrow's.

The Electricity Authority's decided to cap the prices Genesis Energy was able to charge for output from the Huntly Power Station on 26 March. While price capping is naturally popular with consumers (and retailers which haven't fully hedged their cost of supply) it can have negative consequences for the viability and longer term availability of generation plant.

The following graph shows CO2 emissions from NZ's thermal power stations over the last 5 years. It is apparent that the Genesis' Huntly power station (the orange coloured emissions on the graph) are both volatile and have diminished (NB. the correlation of output and generation is not perfect as different power stations use different fuels and some are more efficient than others). Over the period hydro and wind generation has risen and demand has been depressed by the weak economy. However, what will have been good for the environment will have been bad for the economics of Huntly. A large, old station which is turned on only infrequently when wind and hydro facilities are insufficient to meet demand needs to generate revenue as well as power.

Whether the Authority's price-capping decision will result in Huntly being decommissioned sooner than would otherwise have been the case is not known, but what is obvious is that without Huntly, the next cold dry winter will produce an interesting supply situation and probably much higher prices.

http://www.energylink.co.nz/wp-content/uploads/2011/06/mr-11-06-26-issue737.pdf

 

Z Energy

The trial of the new retail and corporate brand "Z Energy" commenced with an extensive advertising campaign and 10 trial sites; Greenlane, Auckland Airport, Customhouse Quay, Mana, Waiouru, Turangi, Putaruru, Takanini, Shirley and Linwood. The last two being rebuilds after Christchurch's 22 February earthquake.

Each Z Energy service station features hotel-style bathrooms, barista-made coffee, award winning Hawkes Bay gourmet pies, cupcakes produced by Laurel Watson's Petal, and touch-screen information services for maps, directions, car advice and customer feedback. An illustration of the trial aspect of the initial programme is the provision of forecourt service between 10am and 5pm each day. Pre-launch customer surveys indicated that people who want help with their vehicles tend to use service stations between those hours so this is being tested along with all the more tangible changes.

Over the next 6 months Z Energy will be listening to feedback and watching what works and what doesn't. Expect changes. So far the responses have been outstandingly positive, but not to every product; savoury cupcakes have not been popular, even as the chocolate, red velvet and caramello have been selling like "hot"cupcakes.

In the media, the chief executive of BP in New Zealand was reported as saying "Z had "taken a risk" by electing to drop the Shell brand as it overhauled its non-fuel retail offering." He had visited one of the new stores, and said he doubted the overhaul would be profitable. "I don't know how they're going to make much more money out of it. Certainly, my view is they've taken a lot of stock out." Time will tell.

New Zealand pump petrol prices hit their highest ever level in May; $2.20/litre. Diesel peaked earlier in April at $1.70/litre. Both prices have now fallen. High prices have some impact on demand as indicated by the following graph which shows consumption and price data from the Ministry of Economic Development (www.med.govt.nz). The last significant pump price rise in 2008 had some impact, albeit more to flatten growth than to permanently lower consumption.

Following the Christchurch earthquakes on the afternoon of 13 June Port Lyttelton was temporarily closed and Z Energy maintained supply to the city by trucking fuel from its terminals in Timaru and Nelson. None of its retail or commercial outlets were materially damaged.

Z Energy has announced that it is planning to issue $100 million of 7.25% bonds to mature August 2018, with the capacity to accept oversubscriptions of a further $50 million. The managers to the issue; ANZ, Westpac, Forsyth Barr and First NZ Capital are seeking pre-launch expressions of interest. The funding would be used to repay bank loans.

 

Infratil Energy Australia/Lumo

The CEO of Lumo Energy, Simon Draper, announced his retirement from the job as a precursor to a six month sabbatical. His integrity, collegial approach and acumen will be missed and his intention to spend time learning a foreign language and experiencing a very different lifestyle is envied. Fortunately he leaves a well established and experienced senior management team to cover while recruitment of his replacement occurs.

Lumo achieved a small increase in customer accounts over the first two months of the financial year. The focus remains on profitable growth and the retention of good customers. A more aggressive entry to NSW is planned and is likely to lift growth later in FY12.

Lumo Customer Accounts Victoria Gas Victoria Electricity NSW Queensland South
Australia
Total
31 March 09 123,129 179,269 - 53,733 30,389 385,520
31 March 10 138,886 205,911 173 38,434 28,076 411,480
31 March 11 127,804 192,198 1,977 50,408 36,447 408,834
30 April 11 127,088 192,546 2,095 51,100 36,800 409,629
31 May 11 126,940 192,608 2,316 52,037 37,154 411,055
1y growth -9% -7% +606% +28% +35% -1%
2y growth -1% +4% - +10% +24% +5%

The electricity markets have generally been stable over the last two months. The following graph shows electricity prices in Victoria out to the end of 2013 as at 31 March 2011 and 22 June 2011 (it shows prices for each quarter and for the calendar years 2012 and 2013). As shown in the graph there were small rises in the forward prices, which may reflect ongoing uncertainty about CO2. However, even with cheap gas, new base load plant is unlikely to be economic at these price levels.

The gas market is quite different to that for electricity. In particular, if a retailer wants to be certain about having gas available at a fixed (or capped) price, it has to have contracts in place to buy that gas, and to have back ups if a gas field or pipeline fails. While it isn't possible to look at public information about future gas prices, it is possible to look backwards to what average wholesale market spot prices were, which is shown in the following graph. This shows average monthly prices over the last 12 months and the prices of the 12 months previous to that.

Although recent Victorian gas prices are a little higher than was the case the year prior, two reports that came out since 31 March 2011 imply that Australian gas prices may stay low for some time yet. Macquarie Securities pointed out that the cost of building facilities to convert gas to LNG for export was rising and is likely to mean that less exporting occurs (ie there will be more gas available for domestic Australian consumption). Coincidentally the London based Global Warming Policy Foundation published a report "The Shale Gas Shock" written by Dr Matt Ridley (who was interviewed on RNZ on 18 June) which presented a credible forecast of a world with abundant natural gas, and the possibility of relatively low prices in the short to medium term due to a mining boom; longer term gas prices were expected to increase to reflect extraction costs.

Infratil's corporate loyalties will be stretched on Saturday when Auckland Blues take on Queensland Reds in Brisbane. Lumo has teamed up with The Reds and Queensland Rugby to help grow Queensland rugby with a special offer for Queensland clients.

 

NZ Bus


Auckland Transport's introduction of the Hop cards to all NZ Bus services in that region was accomplished over May and was a remarkably smooth transition for travellers and NZ Bus. The trials, and errors, of NZ Bus and Snapper in Wellington and Hutt Valley provided the experience to ensure the pitfalls were avoided in Auckland.

In June NZ Bus took delivery of the first of 158 new Enviro200 buses purchased from British bus manufacturer ADL and Tauranga based bus assembler Kiwi Bus. This bus is an ideal addition to the NZ Bus fleet. The Enviro200 is a mid sized vehicle which will complement the larger buses which have been the main acquisition of recent years. The Euro5 engine and relatively light body weight will significantly reduce fuel consumption and emissions. The bus layout and use of electronic monitoring systems will also reduce maintenance costs. For passengers the new buses will provide a comfortable ride and good visibility.

The initial allocation of these excellent buses will be to central Auckland services. Auckland Transport is working with NZ Bus to enhance these routes. Not only will travellers have new buses and better ticketing; the timetable, routes and bus stop locations are all being upgraded.

The Central Auckland bus public transport enhancements will be a clear demonstration of the benefits of the cooperative relationship between Auckland Transport and NZ Bus, and of the efficiency of Auckland Transport as the single agency with responsibility for public transport and local roads.

Patronage in the Auckland/northern region grew 3% over the first two months of the financial year relative to the same period last year. Wellington showed a slight recovery from the Regional Council's fare increases of last October and the 2 months were up 1% on last year. For the last 12 months, Auckland growth was 6% and Wellington's 1%.

Northern passenger trips April May Year End May
2010 2,864,213 3,320,739 34,570,245
2011 2,880,041 3,502,915 36,673,030
Wellington passenger trips April May Year End May
2010 1,615,217 1,823,035 20,121,435
2011 1,556,812 1,909,348 20,387,171

Greater Wellington Regional Council has initiated public consultation over its draft "Wellington Regional Public Transport Plan 2011-21" Submissions can be made over July and Council intends to release a final Plan in September.
 

Snapper

Snapper went live on all NZ Bus's Auckland fleet care of its provision of services through Auckland Transport.

With Snapper now the main way people pay for public transport in Auckland and Wellington (covering roughly 50% of all NZ public transport), the goal now is to broaden functionality with car parking, low value purchases, access and a range of other services.

 

Wellington Airport

Construction of Wellington's new hangar for mid sized jets took a step forward as Fletcher Building literally "raised the roof" in June. The entire structure was jacked up from the ground to full height in a single day. Conversely, Mainzeal's construction of the new car park deck will occur incrementally so as to minimise disruption. Both projects are on track for completion before Rugby World Cup

Ash from the Puyehue volcano in Chile has been an unexpected and significant source of disruption to NZ aviation over the last two months, but weak traffic flows with Christchurch were a more depressing influence on Wellington's total traffic. Over each of April and May approximately 10,000 fewer people travelled between Wellington and Christchurch than over the same period in 2010 before the earthquakes.

  Domestic
Passengers
International
Passengers
April 2010 385,008 52,164
April 2011 372,788 57,931
May 2010 363,611 44,023
May 2011 366,640 47,336
YE May 2010 4,491,246 621,355
YE May 2011 4,470,970 663,757

Operational figures

Over the first 2 months of the financial year, domestic trunk traffic was down 4% (because of reduced Christchurch services), regional traffic was up 4% and international was up 9%.

Sydney traffic grew 11%, Melbourne 13% and Brisbane 3%. In each market a different airline was the stand out performer, Pacific Blue to Sydney, Qantas to Melbourne and AirNZ to Brisbane.

Over the period international loads were stable at 71% while domestic loads rose 2 points to 81%.

Wellington Airport has commenced consultation with its airline customers in respect of prices from 1 April 2012. This is a highly prescribed process which has occurred on three previous occasions. In parallel the Commerce Commission is still progressing its specification of the information NZ's three largest airports must disclose. The airports' price consultations and the information disclosure requirements will come together in a review the Commission is planning to undertake later in 2012.

For this consultation Wellington Airport is publishing all consultation documents on its website: www2.wellingtonairport.co.nz/business/consultation-airport-charges

Notwithstanding everything else that was happening at and around Wellington Airport, the main source of public interest in the Airport was "Wellywood"; a sign that was to be erected to promote Wellington's links with the film industry and to spark tourism interest. Unfortunately public opinion was not in favour of this concept and the Airport has now facilitated the establishment of an independent panel to review alternatives with the intention of holding some form of public vote. Anyone with an interest in this project is invited to contact the panel.
 

Glasgow Prestwick Airport

  Passengers Freight Tonnes
April 2010 118,605 970
April 2011 131,622 1,122
May 2010 149,743 1,034
May 2011 129,606 996

Relative to the same period in 2010, freight was up 6% and passenger numbers were down 2%.

Operational Figures

Kent Manston Airport

  Freight Tonnes Passengers
April 2010 1,718 110
April 2011 1,914 2,807
May 2010 2,608 2,811
May 2011 2,425 2,807

 
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