INFRATIL LIMITED. — Management Reports 2013

Jul 1, 2013

2 July 2013

Infratil Monthly Operational Report

for May 2013

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Together
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• • TrustPower
• • Infratil Energy Australia/Lumo
• • Z Energy
• • NZ Bus
• • Wellington Airport
• • Snapper

Infratil’s Annual Report is available through Infratil’s website and is also available on smartphone and tablet devices.

Infratil’s 2022 Bond issue which closed on 30 June has raised $87 million, including $62 million of over subscriptions. The issue continues Infratil’s strategy of using long term debt and favouring a highly spread out maturity profile.

TrustPower

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Following consultation with TrustPower and other industry participants, the Electricity Authority announced it was revisiting its proposed transmission pricing model. The problem with long-life assets such as the grid or power stations is that small shifts in regulation and cost allocation can have material win/lose outcomes. Economic models which show “efficiency gains” can have those gains swamped by transition costs.

TrustPower’s construction of the $550 million Snowtown II wind farm is on track and on budget. Over 70 of the 90 concrete bases for the towers have now been poured. When completed the wind farm is expected to generate 989GWh in a year of normal wind, sufficient electricity for 170,000 average homes.

Prior to the listing of MRP, the Labour Party and Green Party released electricity sector reform policies which raised investor uncertainty and reduced the listed value energy companies by 10-15% (perhaps as much as $1 billion combined value).

The Greens have indicated they favour establishing a central agency to buy all generation on long term contracts for on-sale to retailers; effectively transferring all sector risk to a government agency.

The Labour policy would combine central purchasing with paying very low prices for electricity generated by hydro power stations.

Both the central buyer and the arbitrary determination of low purchase prices for some generation are based on errors of fact and it is expected that neither initiative will be progressed as analysis makes the errors apparent.

The policies draw on support from the electorate’s quite logical bemusement about the outcome of the restructuring of New Zealand’s electricity sector. A key goal of the restructure was that consumers should face prices linked to their relevant costs and this meant that industrial and commercial customers saw prices fall while households had prices rise. 30 years ago commercial prices were approximately twice household prices as the former group of consumers heavily subsidised the latter. Following removal of the cross subsidisation household prices are about 35% higher than the prices charged to smaller industrial and commercial customers, because it costs more to provide electricity to households than it does to commercial users.

There are better ways to assuage grievance and to help people disadvantaged by the loss of subsidies than to put the industry back three decades. Government is already helping with home insulation (the current Budget has $100 million for this) and perhaps other targeted social welfare assistance is desirable?

Ironically the New Zealand electricity sector’s removal of subsidies and adjustment from gas/coal-fired to renewable generation is now in the past. All other things being equal it is likely that all consumers will have lower prices over the next several years (excluding the effect of higher transmission costs).

Infratil Energy Australia/Lumo

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Lumo has achieved approximately 10% customer growth over the year adding an average of 3,500 additional accounts per month over the period. NSW expansion continues with customer numbers there having doubled over the past 12 months.

The “Big 3” energy retailers in the National Electricity Market (NEM) have now all announced the end of door-knocking as a way to gain customers. Both Energy Australia and AGL have ceased activity and Origin Energy has signalled it will stop by the end of September. Lumo Energy has also suspended its door to door activity (“D2D”) and is increasing its focus on other channels and other ways to gain and retain customers. As previously indicated this includes taking a higher percentage of new customers from Direct Connect.

Queensland has announced the removal of residential price controls on energy from 2015, which will follow South Australia dropping controls in February 2013. This means that of all the National Electricity Market (NEM) states, only NSW will still have price

controls on residential electricity post 2015. The developments augur well for growth opportunities. At present slightly less than 30% of Lumo Energy’s accounts are outside of Victoria.

Western Australia continues to cut its own path with its much more state controlled market (e.g. only the state owned retailer Synergy is permitted to sell electricity to households). Between 2008 and 2012, retail electricity prices for households connected to the Western Power Network rose 48% excluding the cost of the carbon tax.

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|Customers|Electricity|Gas|Total|
|May 2012|317,012|136,072|453,084|
|March 2013|338,301|152,469|490,770|
|April 2013|341,581|153,778|495,359|
|March 2013|342,280|155,488|497,768|

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Z Energy

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From non-existence two years ago to the third largest number of retail transactions of any New Zealand company is a quite spectacular brand evolution for Z. Naturally it helps to have a portfolio of the well located sites for its petrol stations, but sales figures appear to indicate that the refurbishment of the stations and their services is influencing consumer choices.

Z’s challenge is to build on this brand preference by successfully evolving its non-fuel retail offering. Petrol stations have exhibited some of the highest rate of format change of any retailers over the last 20 years. From sellers of tools, parts and lubricants, to videos, groceries, food and beverage. For Z, the non-fuel gross margin now amount to about $55 million per annum. Illustrating the long term potential, coffee comprises about 10% of that sum from almost nothing a year ago.

Weekly sales of coffee at about 13,000 litres lag retail sales of fuel at 22,000,000 litres, but the former is increasing faster than the latter.

NZ Bus

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NZ Bus ratified its three Wellington region labour agreements in May. For the first time in over 20 years all 3 agreements were passed by the relevant staff at the first vote. While no doubt this reflects the fair terms agreed, it also demonstrates the positive culture and trust between management and staff.

Recent patronage results have been very volatile. April showed good growth but May was a dramatic drop off on the same month in 2012. Strangely it seems much of the cause of this has been the weather. The lovely summer encouraged walking while the very wet autumn appears to have resulted in greater use of private cars.

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Northern Month 12 months
passenger trips
April 2012 2,992,230 38,825,325
May 2012 3,872,634 39,195,044
March 2013 38,320,948
April 2013 3,143,680 38,472,398
May 2013 3,536,244 38,136,008
Southern March 12 months
passenger trips
April 2012 1,519,495 20,396,035
May 2012 2,004,869 20,491,556
March 2013 20,331,222
April 2013 1,668,070 20,479,797
May 2013 1,924,683 20,399,611
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The Land Transport Management Amendment Act 2013 was finally passed into law after a process which had effectively commenced before Infratil became the owner of NZ Bus in 2005. Along the way there have been a number of false starts and time will tell how the new Public Transport Operating Model (PTOM) works in practice. The new Act repeals the Public Transport Management Act 2008.

PTOM extends regional transport agency control of public transport, but it is intended that it also increases the incentives for the agencies and bus companies to collaborate constructively.

Historically the regulatory model entailed operators providing services which were commercial and agencies filling in the gaps to create regional networks and services to optimise urban mobility, especially around peak times. PTOM means agencies will have greater control, and responsibility, and only a small number of services (e.g. Wellington’s Airport Flyer and Auckland’s Waiheke Ferry) will not be controlled because they receive no subsidies and are deemed to be niche.

Within each regional network a service, or a small number of interconnected services, will be allocated to a unit. The units will be defined in a Regional Public Transport Plan which will have to be compliant with NZ Transport Agency procurement rules. These Plans are now being developed in Auckland and Wellington. Once they are approved the Plans will be implemented by the relevant agency entering into contracts with bus companies to provide each unit’s services. How the terms of these contracts are determined (eg. by tender, negotiation, etc.) and their terms will be important.

At present the agencies define the bus routes, timetable, fares and quality of bus. It is presumed this will not change under the PTOM contracts, but it is intended that there will be more collaboration and risk sharing between operators and agencies.

As with any plan based on collaboration, the attitude of the parties and how difficulties are addressed will determine whether it works in practice. The first examples of the new contracts may be in place by the end of 2014 and it is expected that both Auckland and Wellington will be entirely in the PTOM by March 2016.

The real challenge for all parties is to take advantage of the enormously compelling economics of bus public transport compared to any alternative. The cost difference was highlighted by the recently released Wellington Public Transport Spine study. This compared the cost of enhanced bus services, rapid transit and trams along 10 kilometres of routes linking Wellington railway station with Newtown and Kilbirnie. This found that trams would cost an additional $94 million per kilometre and add almost nothing to patronage.

Wellington Airport

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The Airport experienced a period of spectacular weather with the massive southerly storm which travelled up New Zealand in mid-June. One unexpected consequence was the rescue of an exhausted Southern Albatross which crash landed on the runway. Following its rescue by the Airport’s safety crew the albatross was sent to the Zoo for recuperation prior to re-release once the weather calmed down.

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While the existing 2 kilometre runway was a safe landing spot for a tired albatross, it has been identified that an extension to the length is likely to be required for the safe take-off of a fully laden long-haul aircraft flying directly from Wellington to Asia or North America. Long-haul aircraft use the Airport now, but a direct flight to Singapore needs about 30 tonnes of fuel, about five times as much as what is required for a flight to Sydney, and safety standards indicate that about 2,300 metres of runway is necessary to allow for the additional weight.

With the Wellington Employers’ Chamber of Commerce identifying that direct air links with Asia would provide a major economic fillip for the region, the Airport is working with Wellington City Council to initiate the planning steps required to allow the extension to occur.

The first stage is resource consents for which $2 million has been budgeted, with the cost to be met 50/50 by the Airport and the City Council. This will involve the preparation of reports on the physical requirements and cost, the impact on the economy, coastal ecology, landscape, traffic, noise, social culture and archaeology as well as the Airport’s wider physical capability. It will also involve consultation with community and other interest groups.

With construction likely to take five years, the earliest the extension could be in place is 2018.

Domestic traffic grew strongly in May reflecting increased capacity and competition on the Auckland route, although domestic load factors were generally improved. International passenger numbers were also up with growth on Melbourne and Sydney services.

Relative to the prior year April and May’s domestic trunk passer numbers were up 15% on an 11% increase in capacity, the regional market was up 1% on a 7% fall in capacity and international was up 6% on a 6% capacity increase. On the trunk Jetstar’s capacity was up 37% on the same period last year.

Regrettably Jetstar is to suspend its direct service between Wellington and Queenstown following the peak winter season. Since Jetstar entered this service passenger numbers have trebled with Air New Zealand also increasing capacity and passengers. Jetstar’s decision to withdraw illustrates an issue with the scale of the New Zealand market and Jetstar having only one, relatively large, sized aircraft (a 177 seat A320).

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Domestic Month 12 months
Passengers
April 2012 382,136 4,481,729
May 2012 366,595 4,481,684
March 2013 4,646,724
April 2013 417,472 4,675,575
May 2013 406,181 4,715,161
International Month 12 months
Passengers
April 2012 61,583 718,185
May 2012 48,979 723,456
March 2013 726,895
April 2013 63,619 729,198
May 2013 53,374 733,329
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Snapper

Wellington City Council and Snapper have launched a new way to pay for car parking which means that people can use their Snapper card or 2Degree phone to pay for the City’s roadside car parking. It is a great deal more convenient (and reliable) than using cash and cheaper than a credit card.

Wellington City Council’s strong track record of commercial partnerships is an important ingredient in the development of the Capital’s technology industries. From small services such as paying for car parks wider opportunities develop. Wellington is the only city in Australasia where a locally developed and owned payment system allows someone to catch the bus, take a taxi, park a car, access their building, and pay for a coffee.

Each transaction entails a tiny cost, but in Wellington that cost is lower than elsewhere and the people behind the product are just down the road (Willis Street in this case) as opposed to somewhere in Europe or the US.