INFRATIL LIMITED. — Management Reports 2011

May 1, 2011

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Infratil Monthly Operational Report

2 May 2011

Introduction

Infratil's financial year closed on 31 March. The Annual Result will be released at 10am Tuesday 17 May and will be webcast.

Infratil's $50 million general offer of June 2017 8.5% per annum bonds closed fully subscribed. The offer to exchange Infratil bonds maturing May 2011 for the June 2017 maturity remains open. Once this is closed on 15 May, it is expected that Infratil will have issued about $60 million of the June 2017 bonds, in addition to the $100 million of June 2016 bonds which closed earlier in the year.

INFINZ (Institute of Finance Professionals New Zealand) nominated Infratil as a finalist for its annual Treasury and Communications awards. Infratil is a past winner of these accolades.

TrustPower

The acquisition by Genesis Energy of the two Tekapo power stations from Meridian for $821 million (the stations produce about 1,000 GWh of electricity a year, about 2% of national consumption) and the associated issue of a NZX listed bond appears to be the final detail of Government's restructuring of its electricity companies, pending the results of this year's General Election which may lead to the sale of some Crown shares in the energy SOEs.

An interesting item in the Genesis bond documentation was the explanation of what may happen to New Zealand's largest power station at Huntly. This station represents about 10% of total national generation capacity and is the only major power station in New Zealand which still uses coal, although its units can also burn gas (in 2010 coal-fired generation made up about 4.5% of the national total).

In the bond investment statement it is noted that "Whilst Genesis Energy currently plans on taking the first Huntly unit out of service in 2012 and the second unit in 2015, it is considering both short and long-term storage options for these units. Such storage options may reduce costs but still allow Genesis Energy to capture revenue by returning stored units to the market, if commercial market opportunities are available".

The change in the status of 500 MW of this plant (the rest of the 1,000 MW of old plant is likely to be retired in due course) will have important consequences for the wholesale electricity market. On the one hand it will require replacement generation capacity, on the other if the plant is kept in "storage" (as opposed to dismantled) Genesis will presumably want to pass on the associated cost for maintaining "dry year" back-up.

The bonds are the first to be listed on the NZX by Genesis which has previously, as with Mighty River Power, only issued unlisted securities. Meridian has issued both listed and unlisted bonds. Listing means the issuer is obliged to be more forthcoming with information and it improves secondary market liquidity.

Genesis and the Huntly power station was also involved with a "head scratching" event over the month when on 26 March maintenance of the transmission grid south of Huntly reduced sources of electricity available for Auckland. At one point this resulted in Genesis setting the price of electricity coming from its Huntly power station about 250 times higher than usual. At that price a normal household would pay $3,000 a week for electricity. One other SOE (Mighty River) in its application to the Electricity Authority to have the prices retrospectively lowered noted that the price spike may have cost it $25 million.

Twenty nine complaints were received by the Electricity Authority about the price spike. TrustPower closely manages its exposure to volatile electricity prices and has not lodged a complaint.

Encouragingly for both the electricity sector and the economy as a whole, provisional data indicates that NZ electricity generation, a useful proxy for economic activity, was up in 2010 after 4 years of almost flat load.

Greenstone Energy

A year on from its acquisition from Shell, Greenstone has opened its third new service station. The Waiuku station in Franklin District cost $3 million and reflects the shift to providing quality food and beverage as opposed to convenience retail. The new station also reflects Greenstone's plan to expand its retail network and market share.

At Waiuku Greenstone is trialling a number of food, beverage and service products. Sales and customer feedback are being carefully analysed so that continuous improvement occurs as further stations are built or refurbished. Initial sales of fuel (approaching an annual rate of 10 million litres or twice the national average), car wash and food and beverage have exceeded expectations.

Across its network Greenstone is observing that higher fuel prices are restraining demand and seem to have resulted in a shift away from more expensive premium petrol in favour of regular and diesel. Relative to March last year, Greenstone's premium fuel volumes were slightly down while regular petrol and diesel sales were up. Overall Greenstone's share of the total market was up approximately 4%.

Over the year to the end of March 2011, the NZ$ price of crude oil rose 30%, the average retail pump price of petrol increased 22% while the price of diesel increased 46%. Government levies on petrol rose 18% and on diesel 90%.

Infratil Energy Australia/Lumo

The gradual shift to fair market pricing for retail electricity took another step in NSW. Lumo has established a small presence in this market and intends a major entry when pricing conditions allow. The most recent development was the announcement of draft retail electricity tariffs by the state's Independent Pricing and Regulatory Tribunal (IPART, which also sets gas and water charges and fares for public transport and taxis). Because it is not an incumbent retailer Lumo will not be obliged to set its tariffs at the IPART levels, but it will be competing with companies which do, hence their importance.

IPART's draft decision gives estimated price increases of 16% for EnergyAustralia (now TRUenergy), 15% for Integral and 18% for Country Energy (both now Origin). The increases reflect each retailer's unique costs of supplying electricity to small retail customers on regulated contracts, with differences mainly being due to different network costs. The increases are consistent with expectations and further increases are expected in future. While the draft tariffs are encouraging they are only in draft and Lumo's commitment to the market will be set after the final determination.

When the state recently sold its three energy retailers to Origin and TRU the acquisition prices represented a $1,000 - $1,300 per-customer value. If the IPART draft tariffs are fixed it will be both a step towards vindicating these customer values and incentivising new entrant retailers such as Lumo.

In the meantime the key Lumo focus is improving the retention of existing customers so they become less inclined to switch to the competition. This initiative is showing positive results after a period in the second half of 2010 when customer service slipped and Lumo's customer churn suffered. Improvements can be small factors such as making sure that all customers who indicate an intention to switch are contacted, which can be surprisingly effective in having people reverse their original decision.

The Victorian retail energy market's extreme churn makes growth and profitability challenging and until the market settles the objectives at Lumo will be to deliver satisfactory financial results and reasonable customer stability. In due course it is anticipated that it will be possible to sustain both growth and reasonable profitability.

Lumo Customer Accounts	Victoria Gas	Victoria Electricity	NSW	Queensland	South Australia	Total
31 March 09	123,129	179,269	-	53,733	30,389	385,520
30 Sept 09	136,689	200,507	-	37,483	29,140	403,819
31 March 10	138,886	205,911	173	38,434	28,076	411,480
30 Sept 10	137,976	204,369	1,743	48,901	31,472	424,461
31 March 11	127,804	192,198	1,977	50,408	36,447	408,834
1 year	-8%	-7%	+1,042	+31%	+30%	-1%
2 years	+4%	+7%	-	-6%	+20%	+6%

This table shows only the Lumo customers, Perth Energy also has 896 commercial/industrial customers, up from 491 as at 31 March 2010.

Electricity prices in the wholesale market have recently risen slightly, while gas prices are quite a bit higher than at the same time last year. Higher wholesale gas prices are positive for IEA which at present is "long gas" and is selling this excess in the wholesale market. This imbalance ceases to be a problem after winter 2011 when IEA's full range of "flex" arrangements come into effect.

In March IEA commissioned the A$55 million, 65 MW, Pt Stanvac power station in South Australia, which brings generation capacity in the National Electricity Market to 165 MW and total capacity in Australia to 285 MW.

NZ Bus

Improvements to Auckland's public transport network, service and facilities, together with $2.20/litre petrol, is resulting in demand outstripping capacity on some peak-time, key corridor, services. Over the region there were approximately 250,000 additional bus boardings in March relative to the same month in 2010. Approximately 170,000 of the additional passenger trips were provided by NZ Bus services.

In response to this demand, NZ Bus is working with Auckland Transport to immediately lift capacity through the acquisition of additional larger buses. While it is better to have too much than too little demand, it can result in slower services and passenger discomfort. In 2006 a surge in petrol prices resulted in record boardings on Wellington buses, complaints about the resulting drop in service quality and a sharp fall in public transport usage when petrol prices later fell. Auckland Transport and NZ Bus are aware that increased capacity is an urgent need if a similar series of events is to be avoided this time.

NZ Bus management are also working with Auckland Transport on longer-term improvements so that by the time the Rugby World Cup opens Aucklanders will be experiencing significantly better services on at least the central area bus network.

In the year to 31 March 2011 Auckland's total public transport use rose 8% to 64.5 million boardings while NZ Bus's patronage in the region was up 6%.

Patronage in the Wellington region continues to show only modest growth, but the overall results hide a perplexing mixture of results on individual services. The outcome has not reflected capacity which was increased in both Wellington and the Hutt Valley.

Northern passenger trips	March	12 months to 31 March
2010	3,660,566	34,462,204
2011	3,830,938	36,475,026
Change	4.7%	5.8%
Southern passenger trips	March	12 months to 31 March
2010	1,980,765	20,090,368
2011	2,007,017	20,359,263
Change	1.3%	1.3%

Snapper

Snapper's provision of its ticketing technology to Auckland's public transport users is the immediate priority. This involves installing Snapper's ticketing equipment on the NZ Bus fleet, linking this equipment with the back office "clearing house" and ensuring that the system can cope with all the various fare products. It also involves Snapper making its smartcard technology available to Auckland Transport for inclusion in its HOP Card and managing customers' swap of their redundant GoRider cards for the new HOP card.

Wellington Airport

In 2010 Wellington Airport became the first in New Zealand offering internet booking of its car parks and the popularity of this service was demonstrated in March when the entire $195,400 proceeds of net-booked car parking was donated to the Red Cross Christchurch Earthquake appeal.

"On behalf of New Zealand Red Cross, I'd like to take this opportunity to thank the generous individuals, groups and companies, like Wellington Airport, that have gone to these extraordinary lengths to support the people and communities affected by the Christchurch earthquake. I'd also like to personally thank Wellington Airport on behalf of my team, and the other Red Cross teams who were at the Airport, for their amazing support and assistance over this difficult time." Hayley Presling Red Cross Team Leader.

Wellington Airport recently opened its five-yearly price consultations with its major airline customers. The process involves the parties consulting over all the factors which go into determining aeronautical charges as well as the structure of those charges. The components (or building blocks) of the prices which are to be set for the five years from 1 April 2012 comprise:

� The aeronautical assets on which the Airport will seek to achieve a fair return: That is the assets the airlines need to use at the Airport (the airfield, parts of the terminals, hangers, etc) and their value. Adding some complexity, the assets will be forecast to change over the five years for which prices will be fixed; for instance if the runway or a terminal is to be expanded; and these changes will have to be incorporated into the Airport's aeronautical asset base.

� The fair return on the aeronautical assets is determined by independent experts, with reference to the Airport's actual cost of borrowing.

� Operating costs will be forecast for the full five year pricing period. As will passenger numbers and aircraft movements. Revaluations to the aeronautical assets will also be forecast and any expected gains in value treated as part of the Airport's aeronautical income.

The result will be a per passenger or per aircraft charge that will (if the numbers of passengers and aircraft have been correctly forecast) cover the Airport's operating cost and deliver a fair return on assets over the period 1 April 2012 to 1 April 2017. This is the fourth time Wellington Airport has undertaken price consultation with its airline customers.

As noted in the Airport's 2030 plan, by 2017 about 1 million more passengers will be using Wellington Airport than used it last year and accommodating this growth will require investment in facilities. On an average day now, Wellington hosts about 19,000 visitors, by 2017 perhaps 22,00023,000 people will be moving through the Airport on an average day. Wellington Airport has invested over $250 million in its facilities since Infratil became the majority shareholder.

In addition to working on its own development plans, the Airport is also supporting private and public initiatives to enhance the transport links with the city and region. While Wellington has New

Zealand's best airport-city public transport service (privately provided), this will not be enough to avoid major congestion if the road network (publically provided) is not upgraded over the relatively short term.

The road between Wellington Airport and the City is the most congested in New Zealand outside of those in Auckland which are now being upgraded at the cost of several billion dollars. While the timing of the improvement to Wellington's roads is as yet unclear, an important political milestone occurred recently when Mayor Celia Wade-Brown led Wellington City Council to support the road upgrade, recognising that better roads benefit users of both public and private transport, motorised and self propelled.

31 March 2011 closed a year of weak aviation growth at Wellington Airport with total passenger numbers only slightly higher than the prior year, well below the long term trend of 3% per annum. However, while this was disappointing, it reflected a year with significant disruptions; Pacific Blue withdrew from domestic services, the economy did not grow and Christchurch experienced two major natural disasters. Perhaps surprisingly in the context, the year also had a number of positives; 8% passenger growth was recorded on regional services and on the Melbourne route while traffic with Sydney rose 7%.

The good Tasman growth reflected Air New Zealand's enhanced offer, the introduction of Qantas' new 737-800 aircraft, and Pacific Blue's schedule improvements.

March	Domestic Passengers	International Passengers	Total Passengers 12 months to 31 March
2010	406,722	56,463	5,117,906
2011	400,745	56,961	5,134,227
Change	1.5%	+1%	0%

Operational figures

After several years of delay, Boeing has now started training ANA pilots in anticipation of that airline taking delivery of the first Boeing 787 which are to be delivered by September. The Boeing 787 continues to be of great interest to Wellington as its lightweight construction means it can use the relatively short Wellington Airport runway and still fly direct to Asia (existing long haul aircraft can take off from Wellington, but payload restrictions limit services to closer destinations such as the east coast of Australia). Also, the B787 is relatively small for long haul making it ideal for the size of the Wellington market.

Glasgow Prestwick Airport

March	Passengers	Freight Tonnes	Total Passengers 12 months to 31 March	Total Freight Tonnes 12 months to 31 March
2010	122,345	927	1,710,993	12,498
2011	79,533	1,223	1,524,196	13,077
Change	-35%	32%	-11%	5%

For the year ended 31 March 2011 passenger figures was down 11% as a result of Ryanair's capacity reductions on UK domestic and Irish routes.

Freight volumes continue to perform strongly with March being the seventh consecutive month of year on year growth. Freight tonnage was up 32% for the month and 5% for the 12 months ended 31 March 2011.

Operational Figures

Manston Airport

March	Freight	Tonnes	Passengers	Total Freight 12 months to 31 March	Total Passengers 12 months to 31 March
2010	2,576		0	32,443	4,185
2011	1,868		2,067	23,218	30,315
Change	-45%		-	-30%	676%

Freight tonnages continue to be impacted from a lack of aircraft capacity serving the African

market. For March tonnage was down 45% compared to March 2010 with the annual total down 30%.

Over 2,000 passengers used the scheduled services to Manchester and Edinburgh during the month. In May the Manchester service is to be replaced with one to Belfast.

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