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Chairman's Address

7 Aug 2000

Chairman's Address - Annual Meeting

I will briefly review Infratil's performance in the year to 31 March 2000 and the key issues we now face. At the conclusion of the meeting there will be a presentation on the Company's investments and prospects by Lloyd Morrison, Chairman of Morrison & Co Infrastructure Management, Infratil's Manager. 1999/2000

The year to 31 March 2000 saw a continuation of Infratil's investment strategy as now developed over six years and saw a continuation of our solid earnings performance. In the six years from March 1994 Infratil's net assets have grown 22.3%per annum. The gross return to shareholders has been 17.7%per annum.

The highlights of the year included Infratil's increased profitability and hence dividends to shareholders, the stand out results of TrustPower and Port of Tauranga, the sale from CentralPower, Infratil's increased use of debt to fund its investments, and our increased involvement with the companies in which we are invested. The disappointment of the year was Infratil's investment in Natural Gas Corporation.

Infratil had a good year for its shareholders increasing net profit after tax 29% to $34.2million while earnings before interest, tax and realisation increased 70% to $26.4million. The relatively faster growth in this latter figure is due in part to the increased use of debt and incurrence of interest costs. Later in my review I will further discuss the implications of Infratil's use of debt.

The enhanced profitability enabled Infratil to increase its dividends to 9.25cps from 8cps, albeit the Ordinary Dividends remained at 5.25cps. The "special" designation of a part of the dividend relates to the source of the relevant income, which in this case was from Infratil's sale of a shareholding in CentralPower. Infratil's other income, dividends and interest, forms the basis of our ordinary dividend and should be reasonably stable and growing from year to year.

As always our focus has been on seeking to optimise shareholder returns in terms of income and capital appreciation. Practically this means working on, and with, each of our major investments, TrustPower, WIAL and POT, so that they might provide the best available returns. It means managing investments and divestments to reap mature opportunities and establish sources for future income and capital growth. It means using debt to enable Infratil to fund itself efficiently as it progresses growth opportunities. Optimising shareholder returns is also at the forefront of our objectives with the share buyback.

The repurchase of shares is a way of enhancing returns to our shareholders, while having regard to Infratil's financial circumstances, market conditions, and alternative investments. Given these factors we endeavour to operate the buyback in a conservative manner and do not directly impact on the market price of Infratil shares.

Of Infratil's core investments, TrustPower and POT had very good years with profitability and dividends at record levels. WIAL has now finished its terminal development program and is achieving satisfactory income from its concessions and car parking, but it is expected to be some time before it achieves an adequate return on its aeronautical activities. The recently announced increased transtasman services and Ansett NZ's relaunch are good signs.

Infratil's portfolio of investments had three notable changes over the year. 16% of CentralPower was sold for a net $45.3million. A further 5% has been sold since balance date leaving a stake of less than 1%. This is almost the end of Infratil's investment in the electricity lines industry. Our remaining CentralPower and Powerco investments have a market value of about $20million. At one time Infratil had over ten times this amount invested in electricity distribution. The second development was the acquisition of a 5% interest in Tranz Rail. This marks a new investment avenue for Infratil although it has always been a target sector. Finally there has been the disappointing investment into NGC. Our immediate objective with NGC is to sell down our investment so that the capital may be released for more productive uses. Divestment is now well advanced.

One other new investment opportunity that warrants mention today is the UK air traffic control. This opportunity has been developed with Airways Corporation and is considered by your Board to be worth further investigation. Infratil has entered into no commitments and has incurred no cost. We are aware that an investment outside of New Zealand would be breaking new ground for Infratil, although off-shore investment is covered in Infratil's management agreement with Morrison & Co, provided the investment is related to a New Zealand entity, which in this instance is Airways Corporation. The investment looks, at first appraisal, to suit Infratil's goals and sector focus, it is relatively small in the context of our investment portfolio, and it is within the investment criteria determined at the time Infratil was listed six years ago. I reiterate that this opportunity is a long way from any tangible prospect and my main reason for mentioning it today is to clarify the situation for Infratil's shareholders who may have been confused by the media coverage.

While our investments are providing strong returns and are well placed for further growth, we have also been active in the management of Infratil's liabilities. In March 1999 Infratil issued Infrastructure Bonds to finance further investment into WIAL. The encouraging level of investor interest in the Bonds lead to the development of a Bond Programme to provide core funding to augment Infratil's equity funding.

This Programme has gone well and Infratil has now raised over $80million. Infratil's use of debt is carefully monitored to ensure consistency with the vision statement "to be a successful infrastructure investment company … without taking a high risk profile". The mathematics of using debt are simple. Infratil is borrowing at 9%pa. and investing to achieve a much higher rate of return. However shareholders need to be mindful that the 9%pa. is a fixed annual cost that is incurred from the first day that the Bonds are issued, while the investment return may have a longer timeframe before full benefits are derived. In essence the trade-off is long term appreciation against interest costs in the short term. It is possible that net earnings in the current year may be reduced while the corresponding expected increase in asset value may take longer to come through.

The long term nature of our investments in airports, ports and electricity generation requires us to take a long term view as to profitability. Port of Tauranga is a good example. Infratil's 24.6% interest cost a little less than $31.5million. It now returns over $10million pa gross income. But to arrive at this healthy position required us to wait for the Port's profitability to build up. Five years ago a 24.6% holding in POT would have returned a little over $1million pa.

Finally I would like to comment on the ownership of Infratil's managers, Morrison & Co. During the last few months there have been discussions between Morrison & Co and Macquarie Bank about the latter taking a shareholding in Morrison & Co. The Infratil Board has been kept informed of developments and we have made it clear that the Directors' role is to ensure that the managers perform in accordance with their agreement with Infratil.

Infratil is New Zealand's only listed utility investment company. It has established key holdings in three major infrastructure assets and has provided its shareholders with above average returns in the process. It has developed an excellent track record, a high level of internal expertise, and strong positive relationships with a number of investor partners, in particular Alliant Energy and Wellington City Council. Looking forward we are confident that Infratil has the capacity to generate the sort of returns necessary to encourage shareholder support. The short term prospects are clouded by Government policies that do not encourage private provision of infrastructure and by a weak capital market. These are almost certainly short term issues rather than a change in the fundamental trend. We remain positive.


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