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Chairman's Address

16 Jul 2001

I will briefly review Infratil's performance in the year to 31 March 2001, developments that have occurred since then and our perspective on how the future may unfold from here.

At the conclusion of the meeting there will be a presentation on the Company's investments and prospects by Tim Brown, from Infratil's Manager, Morrison & Co Infrastructure Management.

Infratil maintained its focus on long term income growth and capital appreciation through its actively managed portfolio of utility investments. Active management encompasses buying, selling, reviewing and financing investments and working closely at an operational level with the management of our investments.

In the seven years from March 1994 to last Friday, the 13 July 2001, Infratil's net assets grew at 18.8% per annum. The gross return to shareholders over this same period has been 19.4% per annum.

Net after tax surplus for the year, including investment realisations, was $16.5million and dividends were maintained at 9.25cps. This compares with $35.4million in the previous year, which included a large gain on the sale of CentralPower shares.

While $16.5million is a satisfactory result, accounting rate of profit in any one financial period is not necessarily a good reflection of economic value creation for a company of Infratil's type. Profits reflect dividend flows, realisations and consolidations which may not reflect the shareholder value actually created or long term groundwork laid during the reporting period. The highlights of this year actually related more to establishing foundations for future profitability than delivering immediate gains.

Highlights of the year included Infratil's investment in Glasgow Prestwick International Airport, the improving performance of Wellington International Airport, despite Qantas New Zealand, and the continuing good results of Port of Tauranga. The disappointment of the year, as it was for 1999/2000, was Infratil's investment in Natural Gas Corporation, although since balance date that disappointment has been somewhat mitigated by Infratil being awarded a claim against NGC of slightly over $10million. NGC has an opportunity to appeal this until the end of September and we also expect to be paid interest and costs.

The NGC investment appeared at the time it was made to offer sound base returns with potential for added benefits as the industry consolidated. As it happened, NGC invested $830million in TransAlta. Our subsequent efforts to avoid the adverse consequences of this transaction have consumed considerable management time and energy and we are pleased to now see the job largely done. Infratil still has a small investment in NGC and we expect this to be realised as market opportunities allow. In all probability NGC will recover from its investment into TransAlta, but it is apparent that Infratil's funds can be better invested elsewhere.

During the year Infratil further implemented its investment strategy of pursuing control or significant influence over the companies where it is invested. Of Infratil's approximately $500million of investments, over 90% is in companies where Infratil has board involvement. This does not mean that Infratil controls these companies, but it gives us a level of influence and familiarity that cannot occur with strictly passive investments, such as tend to made by institutional or trust type investors, or indeed by private small shareholders. Of course influence is not by itself of merit to Infratil. The benefit arises from Infratil's management being able to make positive contributions to the operations, strategies and financial structure of the invested-in companies.

Of Infratil's core investments, Port of Tauranga continued its strategic, operational and financial out-performance. For several years analysts have been predicting that Tauranga's growth and development would falter. They continue to underestimate the opportunities and the ability of management to extend the Port's reach with such innovations as the South Auckland Metroport and now the development of a new port at Marsden Point. Since balance date, in anticipation of the arrival of the Takeovers Code on 1 July, we have reduced our investment to 19.9%. We continue to remain a 19.9% shareholder of Port of Tauranga and Lloyd Morrison remains on the Port's board.

Wellington International Airport's Earnings Before Interest Tax and Depreciation were $23.6million which, coincidentally, was 23.6% higher than the figure of a year earlier. The result would have been comfortably over $25million but for the under achievement and then failure of Qantas New Zealand. The Airport Company also incurred costs of over $700,000 in its preparation for the Commerce Commission inquiry into the pricing of New Zealand's international airports.

TrustPower has continued to present Infratil with both good and bad news. On the good news, TrustPower has emerged as the third largest electricity retailer by gaining some 70,000 new customers. This is a noteworthy achievement and has come about because TrustPower has shown itself to be very good at delivering the various simple functions we all demand of our electricity supplier. The bad news is that TrustPower's growth as a retailer left it exposed to buying electricity at prices that spiralled upwards during the winter.

In part, it must be said, that this short term pain is not entirely unrelated to the company's factionalised board. A united board would be expected to focus on operational issues and do a better job of overseeing the management of electricity price risk. To that end Infratil has been working with its partner Alliant Energy to resolve the control issue. Since 31 March 2001, we have bought further TrustPower shares to give Infratil 28.1% and together with Alliant a combined holding of 46.8%. Obviously this is not a control position, but we feel that gives Infratil and Alliant a position that is likely to see us have greater influence over TrustPower going forward. Exactly how this will come about is uncertain, as is what changes may come about at TrustPower, but I feel we can have considerably more confidence about our investment in TrustPower than has been the case over the last couple of years.

The other major development for Infratil over the year was the investment in Glasgow Prestwick International Airport. This is an important step in the evolution of Infratil. It is broadening our involvement in the airport industry and it is giving us a stake outside of New Zealand.

In looking back over the year it is appropriate that my final remarks are about Infratil's exits from both CentralPower and Powerco. Since balance date, this exit from the electricity distribution industry has been concluded and Infratil now has no investment, from having over $200million 2-3 years ago, if Infratil's share of TrustPower's distribution assets are included. While it is easy to regret being obliged to sell due to Government regulatory initiatives, I feel that we can take credit from having bought well and having helped the companies realise their potential. In a way the divestment from the lines industry has financed our investment into airports and I am comfortable with that development.

Infratil has invested in Glasgow Prestwick, divested from the electricity lines industry, made inroads in sorting out the TrustPower control stand-off and is looking for further operating and profit improvement from Port of Tauranga and Wellington Airport.

Looking forward, the Company's efforts are focussed on enhancing the operational performance of the investments. At Wellington Airport we have a Commerce Commission inquiry that has some positive messages for our operation, but also some risk if the Government looks to turn its back on the light-handed approach to regulation and to change the basis of how such businesses are valued. Coincident with this review, Wellington is also consulting with the airlines over prices from 1 July 2002 when the existing pricing terms expire. The team at Glasgow Prestwick are looking to encourage greater aeronautical use of the airport and to enhance the value of passenger and freight services. TrustPower is facing a range of operational and strategic issues to enable it to build on its considerable success in retailing and to increase the value of its hydro and wind power stations, while enhancing its risk management systems.

We are also continuing to look at new investments. The support shown by shareholders for the investment in Glasgow Prestwick has given us confidence to continue to look offshore, with a focus on the European airport sector and Australia. We are also continuing to progress investigation of the technology side of the utility industry. A year ago we were talking of an investment into UK air traffic control with Airways Corporation. This has not occurred, but we remain committed to technology, and to only making investments when we are very comfortable as to the merits of the transaction. Over Infratil's seven year life we have seen considerable evolution in the utility sector and technology is an increasing factor in that evolution. We intend to ensure that Infratil is positioned to benefit from developments from here.

A key ingredient of the development of our existing investments and the development of new opportunities is Infratil's managers, Morrison & Co. I should like to take this opportunity to congratulate them on delivering another very good year of management for the Company, with particular reference to the outcome of the dispute with NGC.

A final point on Infratil's funding and capital structure. Over the last financial year this was relatively unchanged. 3.5million shares were repurchased at a cost of $4.1million ($1.16 per share). A further $29million of Infrastructure Bonds were issued.

Looking forward, it is intended that Infratil retain its flexibility in respect of these matters and it is to this end that shareholders are notified of the share buyback facility and are being asked to support a renewal of the Infrastructure Bond issuance facility.

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