31 Oct 2000
For the six months to 30 September 2000 the consolidated unaudited net profit after tax, including investment realisation gains and after deducting minority interests, was $10.12 million compared to $25.74 million for the same period in 1999. The 1999 period was notable for the realisation of a $22.17 million gain from the sale of most of Infratil's investment in CentralPower. In the latest six months $8.73 million of realisation gains were recorded as Infratil reduced its investment in CentralPower, Powerco and NGC. Net tax paid profit, before realisations, was $1.39 million compared to $4.37.million in 1999.
Earnings for the period, before interest and tax (EBIT) and investment realisation gains and after deducting minority interests, increased 25.7% from $9.80 million to $12.32 million. Infratil's operating revenue from other than Wellington International Airport ("WIAL") was $8.26 million ($8.74 million in 1999). WIAL's net earnings before interest were $8.49 million compared to $5.72 million in 1999.
While Infratil's EBIT increased 25.7%, higher interest costs and a lower level of realisation gains reduced profit attributable to shareholders. Although the results are in line with the state of New Zealand's economy over the period, the robustness of Infratil's operating revenue illustrates the defensive nature of the utility sector and the balance achieved by Infratil's investment portfolio.
A fully imputed interim dividend of 2.75 cents per share and a special fully imputed dividend of 1.25 cents per share will be paid on 24 November 2000 to all shareholders on the register as at 5.00 PM, 17 November2000. The dividend per share is the same as last year.
The gross level of the dividend reflects the policy of passing through imputation credits to shareholders where possible, the financial results for the period, and Infratil's sound financial position.
DEBT FUNDING & INTEREST COST
In August 2000 Infratil achieved its funding targets and closed the Infrastructure Bond Programme. While shareholders have given approval for Infratil to issue further Infrastructure Bonds, there are no immediate plans to do so. A total of $150.6 million of Infrastructure Bonds are on issue.
As I noted in my address to the 7 August 2000 AGM: "Shareholders need to be mindful that the 9%pa interest cost of the bonds 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. The trade-off is between long term investment appreciation and 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." This effect is apparent in the results achieved over the six months covered by this report.
BALANCE SHEET AND INVESTMENTS
Infratil's Statement of Financial Position at 30 September 2000 shows Net Tangible Assets of $202.18 million and Total Assets of $494.64 million. This reflects consolidation of WIAL and the Infrastructure Bonds. Valuing WIAL at cost and other investments at current market prices, Net Tangible Assets, excluding minorities, exceed $300 million.
WELLINGTON INTERNATIONAL AIRPORT LIMITED (WIAL)
For the 6 months to 30 September 2000 WIAL delivered a 30% increase in earnings before interest and taxes relative to the same period in 1999. This result reflects the full period contribution from the terminal facilities that commenced operation in June 1999. Although satisfactory, the result was below budget due to slow traffic growth caused by the subdued domestic economy and the effect of the Ansett New Zealand strike and change of ownership. Specific factors contributing to the result and WIAL's prospects included:
• Concession income was up 27% reflecting WIAL's management of tenants to ensure a steady upgrade of services. In particular the opening of the airside duty free store contributed to a 10% increase in passenger spend rates. A number of further enhancements are in progress and both the quality and profitability of the Airport's retail precinct will continue to develop.
• Property income for the year is on line to achieve budget, which is for an increase of over 50% from last year.
• Carparking income was up 28%. WIAL is considering expanding services in this area and in particular, increasing the premium covered area that is very popular. Long term covered parking is also proving to be sought after.
• Aeronautical income (landing and airfield fees, international departure fees, check-in counter usage charges, etc) was up almost 8% on 1999, although 4% below budget. Low domestic and international traffic growth resulted from the slow domestic economy, reduced flying by Ansett New Zealand and constrained transtasman capacity.
• Operating costs for the period were 12% below the same period last year and 5% below budget. Labour and administrative costs were down 17% and 13% respectively. Maintenance and repair costs increased 29% due to the greater complexity and larger area of the new terminal facility.
• During the 6-month period domestic passenger numbers were almost unchanged at 1.60 million while international passengers increased 1.2% to 220,603 (following the 20% increase achieved over the previous 2 years). The airlines increased available domestic seats by only 0.5%, while available international seats actually declined by 0.9%. The lack of supply is difficult to explain given the high loadings on international flights in and out of Wellington. Both the domestic and international markets suffer from a lack of vigorous competition on the routes served.
This is a contrast to what is happening in Australia where competitive pressure has created a surge of capacity, fare discounting and air travel. We expect that WIAL will benefit once the Australian scene settles down and attention focuses on the lucrative transtasman market.
• Qantas has increased its transtasman services to WIAL by 6 flights a week from October; comprising three additional Brisbane services, two with Melbourne and one with Sydney. Partially offsetting the extra frequency will be the substitution of Boeing 737 aircraft for Boeing 767s on the Sydney route. The net effect is a 14% increase in available seats.
• Qantas New Zealand is also showing signs of rejuvenating the domestic market.
• WIAL is actively promoting opportunities for expanded international air services to and from Wellington. Market research recently conducted by WIAL established that of 100 CEOs from the region's largest private and public sector organisations, over 50% believe the lack of frequent and direct transtasman services is an inhibiting factor for growth and development of their businesses.
The underlying business is performing soundly and WIAL is well placed to produce significantly enhanced returns as volume grows.
TrustPower has been a standout performer in the domestic electricity market. Retailing has achieved solid growth due to efficient operation and competitive pricing. Its well spread portfolio of hydro and wind powered power stations are performing well and a number of development opportunities are being progressed.
A modest refurbishment of the Coleridge power station significantly increased output. Many of TrustPower's stations offer enhancement options that may be developed in future. New Zealand's wholesale energy prices are well below likely long run levels and price rises would provide TrustPower with a double benefit from its existing plant and from increasing capacity. The Ministerial review of the industry, and the likely regulatory developments that are to follow, will benefit consumers and competitive efficient retailers such as TrustPower.
PORT OF TAURANGA
Port of Tauranga ("POT") is benefiting from increasing exports and its initiatives to capture a greater share of key cargoes by focusing on customer needs, port efficiency and by delivering land transport solutions.
In the year to 30 June 2000, total income was up 32% and operating profits after tax rose 27%. This still represents only a modest 9.5%pa. pre-tax return on capital and a 7.6%pa. after tax return on equity. Profitability will follow growth as the region's trade continues to expand and the South Auckland Metroport and, in due course, the new port at Marsden Point allow POT to build on its already strong position as New Zealand's leading export port.
NATURAL GAS CORPORATION (NGC)
Infratil's divestment from NGC has progressed. From a peak of over $70 million Infratil has now reduced its investment to less than half of this level. Part of the residual investment relates to the outcome of the arbitration that is to occur in December to set a value for the 26.5 million shares that NGC repurchased from Infratil in June.
CentralPower and Powerco merged effective 1 September 2000 to form a new company also called Powerco. Infratil had worked over several years to support this merger, but cannot now remain a significant shareholder due to the Electricity Industry Reform Act.
During the six-month period Infratil divested part of its interest giving rise to a realisation gain of $9.5 million. Infratil retains approximately 5% of Powerco with a market value of approximately $15 million and a book value of $5.8 million. A sales process in underway in respect of this holding.
Powerco looks set for a strong future and is an excellent example of the ability of private and public shareholders to work together to achieve an outcome that works for both shareholders and consumers.
During the period Infratil increased its investment in Tranz Rail and now has a 7.2% interest. In the past, Tranz Rail management appears to have found it difficult to extract consistent profitability from a company with so many disparate parts. The corporate plan that Tranz Rail is now unveiling indicates an intention to increase shareholder value by simplifying the business and improving service levels.
In addition to undertaking a major restructure, Tranz Rail is also confronting a wide range of operational issues resulting from economic developments over which it has little influence. However, if exports grow, energy prices moderate, and inflation remains quiescent Tranz Rail will be facing a more positive environment as it emerges from its own restructure exercise.
STOCK EXCHANGE LISTING
Infratil has been listed on the New Zealand Stock Exchange since its inception in 1994, and its market capitalisation places it at number 37 on the NZSE40 index. There is a current debate about a potential takeover of the New Zealand Stock Exchange by the Australian Stock Exchange. Infratil believes there are disadvantages for its shareholders in such proposals.
While Infratil is comfortable with the performance of its major investments and is managing its positions in NGC, Powerco and Tranz Rail, it is also developing a number of new initiatives.
These developments, although having their genesis in Infratil's core areas, cover a wide spectrum of utility services and functions:
• Airways Corporation's bid for the UK air traffic control operation continues and Infratil's consortium will soon know if it has been short-listed.
• Australian ventures that are compatible with Infratil's domestic portfolio will continue to be considered.
• Infratil is also considering other international utility investment opportunities.
• Infratil's management is in discussions with parties about utility service providers that take advantage of new technologies to deliver services. One difficulty with such investments is the speed with which both the environment and the technology are developing. There is also the key factor of making sure that such investments deliver on Infratil's investment vision.
Despite considerable time and effort being undertaken by Infratil's managers over the period, at the time of writing no new investments had been made in the areas noted above. However, your directors expect that the work being undertaken will ultimately broaden Infratil's scope of opportunity and return.
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