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Infratil Monthly Operational Report

24 September 2009

 

Introduction

Infratil's principal businesses continue to perform well in the face of difficult economic conditions and ongoing regulatory challenges.

Work is on time and budget at the group's two largest new investments, the Kwinana power station and Wellington's new international departure terminal.

Over the year to date Infratil has delivered a 21% after tax gain to shareholders, consistent with the New Zealand sharemarket as a whole.

The attenuated process around Energy Developments continues with a second prospective bidder undertaking due diligence.

An extensive interview with Infratil CEO Marko Bogoievski was carried in the Independent and a report on Infratil's head of property Peter Coman featured in The New Zealand Herald.

The United North Piha Lifeguard Service was supreme winner at the 2009 Infratil-Waitakere City Council Community Awards.

Infratil's Update for September will be available on the website from 25 September 2009. This edition looks at factors behind investment in new generation facilities and airport capacity. It also covers the need for Infratil's businesses to set high standards and deliver against the expectation of customers in the context of ever-ready regulators. The Update also reviews the Tasman air passenger market since 2000.

 

TrustPower

Government announced an outline of the intended changes to the Emissions Trading Scheme which is currently slated for introduction 1 January 2010. For TrustPower the salient details are that from 1 July 2010 to 1 January 2013 electricity generators that emit CO2 will be required to have emission rights for 50% of their output at a fixed cost of $25/tonne. Thereafter full emission rights will be required and their price will be determined by the market. Over the interim period it is estimated that this will add about 1 cent/kWh to average electricity prices, or perhaps $2 per week for an average household.

TrustPower's generation is entirely renewable so the company incurs no emission related costs.

The Genesis Energy announcement that the Huntly thermal station (about 5% of New Zealand's capacity) is to be changed from base-load generation to system back-up is no doubt a reflection of the impact of the increased cost of coal or gas fired generation.

The net cost to New Zealand of being a member of the Kyoto Accord over the 2008-2012 period remains problematic. The most recent forecasts of the Ministry of the Environment indicate that the country may squeak in under its cap, but the sector impacts are confusing. Some sectors (agriculture) are being excluded initially, some are being included on the basis of needing to cover 50% of their emissions at a fixed price of $25/tonne, while others (forestry) can presumably sell 100% of
their emission-reduction credits at the international rate.

The following table shows the Ministry of the Environment's most recent forecast of million tonnes of CO2 equivalent emissions for the 2008-2012 period against the 1990 benchmarks.

Million Tonnes of CO2 Equivalent 1990 2008-2012 Av Change
Agriculture 31.8 36.8 +16%
Waste 2.4 1.8 -25%
Transport 8.8 14.4 +64%
Industrial 3.4 4.1 +21%
Electricity generation 3.5 6.6 89%
Other 12.0 11.9 0%
Total 61.9 75.6 +22%
Forestry - (17)  
Net 61.9 58.6 -5%


In South Australia, the State Government denied TrustPower a planning permit change for the proposed Myponga wind farm. The request would have allowed a smaller number of slightly taller turbines to improve efficiency and financial viability. Rather than undertake the entire planning process again, TrustPower has withdrawn from the project to concentrate on other opportunities and the expansion of its existing wind farm at Snowtown.

In New Zealand, agreement was reached with the Department of Conservation which will result in DOC supporting TrustPower's Wairau hydro project in the Environment Court. The agreement involves the development of a comprehensive management plans so the hydro power station's operation does not adversely affect the habitat of the black fronted tern. TrustPower has consents for two South Island wind farms and is in the final consenting stages for the Wairau and Arnold hydro schemes.

 

Infratil Energy Australia (IEA)

Customer numbers reached 401,000 at end August, up from 387,000 in March.

Recent low electricity prices has meant that marketing to residential users has recommenced in Queensland and IEA is also expanding sales to commercial and industrial energy consumers, which currently form only a small part of its business.

The weak economic environment, and Australia's robust consumer protection regulation is resulting in record numbers of households defaulting on credit obligations. The onus is on retailers to closely manage late payments to avoid developing significant exposure to bad debt. IEA has been improving its systems to avoid taking on customers with a higher likelihood of default while also diligently pursuing customers with overdue accounts.

Preparations are being made to enter the NSW market, but there is still doubt about its sustainable profitability because of its regulatory and ownership regime. The NSW State Government has announced a privatisation process entailing:

  • Sale of each of the three government owned retailers;
  • Sale of rights to trade in the despatch of government owned generators (“gentrader” rights) in five lots;
  • Maintenance of retail price caps until at least 2013;
  • An aim to have a new player enter the NSW market;
  • The possibility of an IPO of one of the retailers and the gentrader rights.
However, there is no certainty that the sale will proceed. NSW electricity privatisation schemes have stalled before and there is doubt about the viability of the gentrader model. To add to those problems, the NSW Government has very low public confidence, rumours of a leadership challenge and a series of controversies surrounding individual ministers. The latest diversion is a slowly emerging media story of links between State politicians and property developers, one of whom was recently assassinated. These problems reduces the likelihood of good decision making on a controversial issue.

For IEA, entrance to the NSW energy market will be dictated by whether retail prices are allowed some flexibility under regulatory caps and whether the market structure will support a liquid and competitive wholesale market. At present the State Government proposals would not prevent the privatisation resulting in a vertically integrated oligopoly, which would not foster new entrant competition.

In Victoria the wholesale spot gas price remains very low (generally below $2/gigajoule) which has resulted in IEA incurring a cost due to its risk averse hedge position. IEA contracts to buy slightly more gas than it retails to provide cover on days when there are field outages and spot prices rocket. The low market spot prices are a result of several retailers having excess gas courtesy of take or pay contracts with the mild winter and spring resulting in less consumer demand for heating. These costs are a normal part of prudent risk management in what is a physical and illiquid market with excessively high maximum price caps. Over time as all retailers struggle with the problem the cost will be more fully factored into the retail prices offered to consumers whose demand is seasonal, peaky and uninterruptable.

In Western Australia construction of the 120MW Kwinana dual fuel power station is on schedule and on budget.

Concrete pour at Kwinana, September 2009

 

NZ Bus

Northern Region patronage was in line with patronage in August 2008, but Southern Region patronage was 0.6% lower than the year prior.

Senior and tertiary patronage continues to increase due to changes in fare types and pricing, but this has been balanced by lower adult patronage. The recession is impacting patronage growth, which has fallen away from what was occurring earlier in the year.

Regional transport authority belt-tightening has also meant the reduction of some services. For example, Valley Flyer’s 120 route which ran from Stokes Valley to Petone has been shortened to terminate at Queensgate resulting in a 20% decline in patronage.

To help address this constraint, NZ Bus is working to develop new routes which will not require subsidies and to terminate the subsidies currently paid on some existing routes. This will mean that regional transport authorities free up funds and it suits NZ Bus’s priority of making the person catching the bus the customer, rather than a council official. In Wellington and Auckland a number of routes have recently been registered as “purely commercial”, ie not requiring tax or rate payer subsidies, and these include the Petone-Stokes Valley service.

As Valley Flyer has shown with the Airport Flyer service, a clear focus on growing a service can generate significant patronage growth and a satisfactory return on the capital employed.

Northern passenger trips August 5 months to 31 August 12 months to 31 August
2008 3,222,876 15,148,837 33,384,220
2009 3,223,075 15,201,019 35,602,221
Change 0.0% -0.3% 6.6%
Southern passenger trips August 5 months to 31 August 12 months to 31 August
2008 1,758,702 8,898,043 20,055,715
2009 1,748,682 8,565,982 19,686,663
Change -0.6% -3.7% -1.8%

Despite a wage offer of 10.4% over three years, NZ Bus is struggling to reach agreement for a new Collective Employment Agreement for its Auckland bus drivers and cleaners with the four unions representing staff. Discussions have been underway since May including mediation. NZ Bus has filed an application with the Authority for facilitation assistance.

More positively, the last of the 60 electric trolley buses was delivered and entered service in Wellington. It will be some time before the buses are fully functional as their bespoke construction means some inevitable "in service" work is required.

The arrival of this fleet is testament to a very constructive engagement by NZ Bus, Greater Wellington Regional Council, Wellington City Council and NZTA. Thanks are also due to Annette King from when she was the Minister of Transport, and to Sue Kedgley, the Wellington Green Party MP, who has been a long term supporter of electric public transport.

On the political front work is underway to review the previous government's Public Transport Management Act which allowed regional transport authorities to ban commercial (ie unsubsidised) services. Minister Steven Joyce has indicated a preference for a public transport model which encourages the commercial provision of bus services.

 

Snapper

The Snapper system now processes more than 1.3 million transactions per month with extremely high accuracy and reliability levels. By way of comparison, Wellington region public transport boardings amount to about 3 million per month while in Seoul, Korea Smart Card processes 26 million transactions per day.

87,000 cards are now on issue (Wellington and Hutt population is 330,000) and from August they could be used on Runcimans' 120 routes in addition to all the GO Wellington and Valley Flyer services.

Also from August, Snapper cards were enabled to carry passes. This means that someone can pay a fixed sum and have the pass they have purchased electronically loaded on their Snapper card. In addition to providing all the benefits of a cardboard pass, a registered Snapper card which is lost can be cancelled with any value and loaded passes transferred to a new card.

G.H. Park the new CEO of KSCC, Snapper's Korean technology partner, visited Snapper in August and noted the analogies between the transport and ticketing requirements of the 2002 Football World Cup in Korea and the 2011 Rugby World Cup in New Zealand. This was endorsed by Mayor David Ogden of Hutt City who visited KSCC when he was recently in Seoul.

Snapper is also working with its local partners to develop services especially for large sporting and cultural events. During the weekend of Wellington's Bledisloe Cup game Snapper, GO Wellington and Valley Flyer trialled a promotion "use Snapper and travel at 50% off the cash fare" which was both a success at attracting patronage and very useful as a learning experience. Snapper use in Wellington was up 22% on what would be normal, indicating a high degree of awareness.

While the initiative has not attracted much media comment, it represents a fundamental change in how operators and regional transport agencies can approach public transport pricing. Until this weekend, over the last 10 years Wellington's bus fares have only changed twice. Now Snapper has given operators and agencies the ability to be totally flexible in their thinking.

At the World Junior Diving Championships which are being hosted in Wellington in December it is hoped that a further trial will enable Snapper holders to use their cards to gain entry to the Aquatic Centre and officials and competitors will have special ID Snappers which grant them free public transport for the duration of the competition. By the time of the Rugby World Cup in 2011, a wide range of initiatives will have been trialled and perfected.

Snapper's popularity with users was shown by a recent survey where 85% of customers said they would recommend Snapper to friends and family.

 

Wellington Airport

In August 415,031 passengers used Wellington Airport, a decline of 3.2% compared to August 2008. International passengers were up 1.5% while domestic numbers were down 3.7% which is a marked improvement to recent trends, with the year to date being down 6.6%. For August, airline capacity (measured by seat numbers) was down 8.6% on a year prior.

  August Domestic August International Total Passengers
5 months to 31 August
2007 346,538 46,636 1,934,274
2008 488,279 46,641 2,222,234
2009 367,669 47,362 2,093,861

Operational figures

The Melbourne and Brisbane routes experienced an increase in passengers of 8.4% and 7.8% respectively relative to August 2008 while Sydney was down 1.9% on a 5% drop in seat capacity. Pacific Blue commenced a three times a week service with Sydney in September which will add competition and generate passenger growth on this route.

Consequent on the process initiated by the Labour Government's passage of the Commerce Amendment Act, Wellington Airport, along with Christchurch and Auckland, participated in the Commerce Commission's one day conference on the airports' information disclosures. The submissions of interested parties and transcripts of the discussions from the conference are available on the Commission's website. The Commission's summary of this regulatory initiative is:

"The new framework focuses on information disclosure… The Commission is currently working on a determination which will set out what information the airports will need to disclose as part of the new regime. The Commission's determination may require the airports to disclose certain specified information relevant to their performance (such as financial statements, prices and quality performance measures), including forward looking information (such as forecasts and asset management plans). The purpose of the regulation is to ensure that sufficient information is readily available to be able to assess whether the purpose of Part 4 of the Commerce Act is being met. Part 4 focuses on ensuring that the long-term benefit of consumers in markets where little or no competition is maintained by promoting outcomes that are consistent with outcomes produced in competitive markets. Under the amendment the Commission must make its determination about how the information disclosure regulation will apply to each airport company no later than 1 July 2010. Until the Commission makes this determination, the information disclosure requirements made under the Airport Authorities Act 1966 continue to apply. Under the new framework, the Commission is also required to report to the Ministers of Commerce and Transport on the effectiveness of the new information disclosure regime. This reporting will take place as soon as practicable after 2012."

Wellington Airport supports the purpose of the legislation, i.e. to ultimately secure "outcomes that are consistent with outcomes produced in competitive markets."

 

Glasgow Prestwick

181,873 passengers used Glasgow Prestwick Airport in August, 29% less than a year prior, a small improvement on trend. The result reflected Ryanair capacity reductions and the continuing weak European aviation market.

Advance bookings for the recently announced Ryanair "sun routes" are strong, in particular with the under 35 age group that make up 65% of passenger who use the Airport.

Freight volumes for August were up on recent months at 1,232 tonnes which is only 5% less than a year prior.

  August Freight Tonnes August Passengers Total Passengers
5 months to 31 August
Total Freight
5 months to 31 August
2007 2,488 246,279 1,139,094 13,309
2008 1,304 256,271 1,157,751 10,277
2009 1,232 181,873 860,784 5,991

Glasgow Prestwick Operational Figures

Kent International Airport

August was another strong month for Kent with 3,136 tonnes handled, up 190% on the year prior. The last five months were 82% ahead of the same period in 2008.

Kent hosted the Royal Air Force fast jet display team the 'Red Arrows' in August, providing a base for their participation in two air shows in the South East of England. The airport was also the base for the Dutch and Belgian Air Force display aircraft participating in the UK summer air shows.

Lübeck Airport

Scheduled passenger numbers at Lübeck Airport in August were 78,860, 28% ahead of 2008. The new routes of Palma, Alicante and Alghero continue to sell well and draw from all over the airport's 120 minute drive catchment.

The City of Lübeck continues to seek a new investor ahead of Infratil's option to sell its shares in the airport back to the City in late October.

 
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