18 Nov 2007
Infratil’s earnings for the six months to 30 September 2007, before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments ("EBITDAF"), were $165.0 million, from $69.0 million in the previous year. The operating surplus was $82.2 million (2006 - $29.3 million) and the net surplus attributable to Infratil shareholders was $12.5 million (2006 $24.6 million).
Depreciation and amortisation was $35.9 million, up from $19.8 million. Net interest costs were $68.9 million, up from $31.0 million ($20.0 million of the increase reflecting consolidation of TrustPower). Impairment write-downs were $7.1 million against a profit of $0.5 million last year. This included $1.5 million mark to market impairment associated with implementing investment market hedges.
There were notable positive developments during the period:
Capturing a great deal of media attention over the period and subsequently, Infratil has taken a shareholding in Auckland International Airport, in conjunction with its co-investor the New Zealand Superannuation Fund. This is a long-term investment in New Zealand’s premier commercial transport infrastructure asset.
Infratil undertook its first equity raising in over a decade with a pro-rata issue of partly-paid shares to existing shareholders. Share and warrant holders were also issued with a further share warrant and Infratil’s shares were split.
A fully imputed interim dividend of 2.5 cents per share (1.25 cents per partly-paid share) will be paid on 17 December 2007 to shareholders on the register on 7 December 2007. This is an effective increased payout for shareholders who took up their partly-paid share entitlements.
Developments over the half-year illustrated the disparate nature of Infratil’s businesses and the relative complexity in measuring their performance. In all cases three factors need to be assessed to gauge progress:
It is ultimately these factors which translate into increased asset values and hence returns to shareholders. On that criteria it was a satisfactory half year with a gain of 15.5% after tax to shareholders.
LIABILITIES & RISK MANAGEMENT
As at 30 September 2007 debt comprised 42% of Infratil’s capitalisation. This reduces to 39% if the proceeds of the October issue of partly paid shares is included.
The issue of new shares was undertaken to ensure Infratil is well placed to be able to take advantage of opportunities should current financial market volatility result in further deterioration. With this possibility in mind, Infratil has also begun to purchase hedges against equity market risk. Over the half year $1.5 million of these hedges were expensed.
BOARD & MANAGEMENT
Two directors resigned during the period: John Peterson, following Alliant Energy’s sale of its interest in TrustPower and Infratil; and, David Caygill after his appointment by the Government as the Electricity Commissioner. Both directors made a valuable contribution to Infratil. In November, Mark Tume was appointed as a director. He is experienced in finance and funds management
and is a director of the New Zealand Refining Company, Transpower and Ngai Tahu Holdings and is a member of the Board of the Guardians of The New Zealand Superannuation Fund.
Since 2004 Infratil has reported its results on a quarterly basis. Recently this frequency of reporting has attracted some negative feedback from share analysts and institutional investors.
From Infratil’s perspective, such releases are only worthwhile if they help keep investors better informed. To assess the costs and benefits of continuing to report quarterly a number of investors and financial analysts were interviewed. Their feedback was that the two quarterly reports were not of particular benefit, given the ongoing information Infratil provides about its operations. As a result, Infratil intends to stop issuing quarterly reports from 30 June 2008, and will work to upgrade the quality and materiality of its monthly reports.
Earnings (EBITDAF) were $116.2 million (2006 $114.2 million) and net profit $63.1 million (2006 $58.9 million). These were good results in the context of low hydro generation and low wholesale electricity prices.
The New Zealand Government announced its Carbon Emission Trading scheme and a target of having 90% of the country’s electricity come from renewable sources by 2025. The market based model favoured by the Government and its relative clarity will ensure that generators focus on investing in wind, hydro and geothermal plant. It is a good model for New Zealand, incentivises generators in the right way and will result in the electricity sector lowering its emissions at relatively low cost to consumers.
During the period the Tararua Stage III windfarm (93 MW) was commissioned at a cost of $174 million (budget $180 million) and construction is progressing satisfactorily at the A$200 million South Australian windfarm (88MW) and on the Waipori hydro enhancement (5MW). Provisional consents were also received for the 200MW Lake Mahinerangi wind and 72MW Wairau hydro schemes and consenting progressed for the 46 MW Arnold hydro and 240 MW Kaiwera Downs wind projects.
TrustPower’s Waipori hydro scheme near Dunedin marked 100 years of generation.
Infratil Energy Australia Group (IEA)
The Infratil Energy Australia group comprises retailing and generation activities in Victoria, South Australia, West Australia and Queensland. Earnings (EBITDAF) of A$4.6 million were approximately the same as the prior year, although this year’s result was reduced by A$0.8 million with the consolidation of Perth Energy (which expensed A$0.5 million on generation development).
This was a satisfactory result in the context of tumultuous market conditions caused by the drought tripling electricity prices and a coincident, but unrelated, restructure of the Victorian gas market which also resulted in very high prices for that fuel. The EBITDAF result also reflects the costs of growing the retail business by almost 50,000 customers and IEA’s costs associated with development of further new generation.
The unprecedented increase in energy costs were a test of the risk management systems and expertise retailers had established under more comfortable market conditions. Infratil not only delivered a profit but grew its customer base.
A number of new retailers did not survive, indicating the severity of the market conditions. This will make the entry of further new energy retailers unlikely. There will continue to be vigorous competition, but it is likely to be less speculative, with a more appropriate cost of capital. EnergyOne’s withdrawal from the market resulted in Infratil writing down its investment, taking an impairment loss of $5.6 million.
IEA’s customers increased 26% to 235,441. Construction of the new Hunter generation station (30MW) progressed on budget and is expected to be commissioned in early 2008 at a cost of approximately A$20 million.
Earnings (EBITDAF) were $27.7 million (2006 $24.1 million). Passenger numbers were only 1.7% over the level achieved for the same period in 2006, but a 16% increase in per-passenger services income (to $4.59 per passenger), a 20% increase in property income and a 6% lift in per-passenger aeronautical income contributed to the 15% increase in earnings.
Aeronautical charges were reset for five years from 1 July (being the first reset since 2002) with average charges up 2.5%per annum. Unfortunately a cordial and constructive pricing consultation with the main airline users of the Airport (AirNZ, Qantas, and Pacific Blue) was still followed by AirNZ initiating litigation. In prior consultations over aeronautical charges in 1997 and 2002, Wellington Airport reached agreement with its main customer, but seemingly legal proceedings are regarded as a necessary part of the process.
Wellington Airport progressed its enhancement of aeronautical and passenger facilities and the off-airport retail centre. Since Infratil acquired control of the Airport in 1998 $191 million has been invested in facilities and current projects will take this amount to well over $250 million by 2009.
The arrival of Pacific Blue into the domestic market, and a vigorous competitive response from AirNZ and Qantas, means that the investment programme is under review. Unless facilities are further developed they will become congested and will discourage airline growth, negatively impacting on travellers and regional development.
Infratil Airports Europe (IAE)
Earnings (EBITDAF) were £0.3 million from £0.8 million a year earlier.
The aviation market in Europe, especially the UK, was relatively flat over the period. While IAE gained a number of new services it also lost passengers as Ryanair cut services between Stansted and Glasgow Prestwick and also withdrew some services from Lübeck.
Lübeck had a weak half in terms of passenger numbers but continues to progress consents for development of its airfield, which, once achieved, is expected to be a catalyst for attracting airlines.
Freight increased slightly over the prior year due to the seasonal loss of some produce traffic at Kent, but the trends at both Glasgow Prestwick and Kent were encouraging.
IAE continues to have credible growth programmes for its airports, the necessary financial backing and very good, experienced, people to grow the business. Substantial work is progressing on developing new freight and passenger airline opportunities at all three airports.
NZ Bus provided a net earnings contribution to Infratil of $7.9 million from $10.1 million last year. This current period result is almost the same as the prior period after deducting the benefit received last year from NZ Bus’s transfer of its stake in Mana Coach. Infratil has now owned NZ Bus for almost two years and over that period comprehensive changes have been made:
A stand-out feature of public transport is that delivering successful change takes enormous commitment and time. During the period NZ Bus re-launched its central Auckland Link service. This entailed acquiring 20 new low-emission buses, designing their fit-out and services, selecting and training drivers and keeping everyone with an interest in the service informed. It took over a year and cost approximately $8 million. Initial feedback from staff and customers is that they are pleased with the new service. If users respond positively to better services it will encourage further enhancements of this service and elsewhere.
A key goal of NZ Bus is to be able to take examples of successful improvement and use them to encourage and justify support from its partners, the Wellington and Auckland Regional Councils, Auckland Regional Transport Authority, Auckland and Wellington City Councils and Land Transport New Zealand.
In the short term progress with such consensus building is uneven. There are excellent signs in the key area of bus-priorities however there is little apparent progress in encouraging Government to reform its funding provision which continues to favour roads and other modes of transport. Most disconcerting of all, Government has tabled a bill to reform aspects of how Regional Councils control bus public transport, which (in its current form) would allow the Auckland Regional Transport Authority to transfer NZ Bus’s Link Service to another operator and to ban NZ Bus’s buses from Auckland’s roads. While this is an unlikely development, it is a significant diversion of resources for operators who would prefer to focus on improving services.
As a long-term investor Infratil considers that each of its core investment sectors will deliver attractive returns. The global trend to renewable energy and public transport is only starting, air travel is increasingly within reach of the world’s growing middle classes, and the restructuring of the Australian energy sector continues.
Infratil’s businesses are continuing to build long term value through efficient operations and providing excellent services in a manner which ensures widespread community support.
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