INFRATIL UPDATE

Decade Three: is now into its third Looking back over 20 years is a reminder APRIL 2014 decade. It has been successful over its first of events, social and environmental changes, ISSUE No. 39 two and while the third will present new the people who played a part, and what has challenges/opportunities, Infratil’s approach worked and not worked. is likely to be similar. A GOOD COMPANY

Over the last two decades Infratil has been a good company for its share and bond holders, bankers, customers, communities and staff. Because none of those groups has been neglected all have done well. Being a good and successful company over the next decade will not come about in the same way as happened over the last two, but many of the ingredients will be unchanged. A successful infrastructure company has to respect its communities and be respected by those communities. It must have good people and reward both them and the providers of capital. It is also necessary to have vision because there will be many changes and often the change will have profound value consequences. Infratil’s past returns reflect the approach taken to investment as well as the opportunities which arose over the period. In the future the approach will be similar, but the opportunities and challenges will be different.

• Investment has been into businesses where Infratil has expertise and there are strong, positive, sector trends; “it is easier to be a fast swimmer in a fast flowing river”.

• Investment has been made at prices which represent good value.

• Risks have been carefully managed. “Buying companies in good sectors at low prices and managing risk” is hardly a novel formula, but clearly it is not entirely easy (or everyone would do it). Some of Infratil’s best investments were into Trustpower, Port of and . What made them so successful illustrates why everyone didn’t do it. In each case the business was expected to undergo transformative change and each was hard to value at the time of purchase. Infratil’s initial investment into Trustpower in 1994 was at the start of a period of change which reshaped New Zealand’s electricity industry. In 1994 no-one could say where those changes would lead, but the imposition of commercial discipline on previously sleepy and bureaucratic electricity companies was expected to unlock value. Later it was anticipated that the end of the period of state subsidised hydro power and cheap gas, and measures to combat climate change, would favour companies that owned renewable generation. These factors were the “fast flowing river” but they were also hard to definitely value. Similar influences and uncertainties were at play around , Z Energy, Lumo and Infratil’s other investments. Not only were the initial stakes in these companies good value because of the industry uncertainties, each had substantial potential to invest in its own business. Trustpower has invested over $2 billion since Infratil became a shareholder. Infratil’s initial investment in Airport of less than $100 million has been dwarfed by the Airport’s subsequent $350 million in its own business (and it is planning to invest a further $250 million over the next five years). The next decade will provide different opportunities to the last two. The challenge will be to find growing or transforming sectors where Infratil has expertise and is not competing for opportunities with those with very deep pockets. One huge change since 1994 is the emergence of massive sovereign wealth and pension investors. Beijing Capital’s recent $950 million purchase of New Zealand’s largest solid waste business would have been inconceivable in 1994, but is the reality of today. Infratil’s unsuccessful bid to buy that business was at a price well below what Beijing was willing and able to pay. Nevertheless, there are many good investment opportunities which suit Infratil’s formula and total capital allocation in the last year is over $550 million. Investment projects underway today include wind generation in Australia, energy retailing on both sides of the Tasman, irrigation, aged care, airport and public transport facilities, and social infrastructure. Each fits the criteria outlined above and for several reasons is not of interest or available to sovereign wealth or pension funds. PUBLIC TRANSPORT

Public shows all the challenges of mixing public and private ownership and control, and sometimes the benefits. For ratepayers and taxpayers bus public transport is by far the least cost and fastest way to improve urban mobility in and Wellington. But it is in competition with private cars and state-owned trains for road space and funding.

THEN NOW

FROM COAL TO WIND POWER

When the government built the Meremere coal fired power station in the 1950s and 1960s it built all the power stations commissioned in New Zealand because private companies were not allowed to! Since 2000 15 different companies have spent about $4 billion building power stations in New Zealand. The power stations have been fuelled by wind, water, geothermal, biomass, gas and diesel. Meremere produced sufficient electricity for about 120,000 households and approximately 1,200,000 tonnes of CO2 per annum. Trustpower’s first Tararua wind generation commenced in 1999 and the wind farm now provides sufficient electricity for about 80,000 households with no CO2 emissions. THEN NOW

In the forty years from its opening in 1959 Wellington Airport made do with not paying dividends and used a converted factory as its terminal. In the subsequent 15 years it has invested over $350 million in better facilities and paid a similar amount to its shareholders. It has become the gateway to the region “from the flying plane to the foyer of Wellington” and is now supporting the project to have better connectivity with Asia through direct air services.

THEN NOW

CONNECTING COMMUNITIES

Infratil and its subsidiaries help community activities which helps Infratil and its people stay aware of developments in their own communities. This awareness is an integral part of establishing mutual respect and of providing the right services. Most of Infratil’s best investments have been in partnership with communities. Tauranga Electricity Consumers Trust, , NZ Superannuation Fund. Infratil is the preferred commercial partner for many reasons, but recognition of the values of its communities is at the core. THE WORLD THEN AND NOW Reading the newspapers of 20 years ago provides many surprises about what has and has not changed since then. Business has changed more than society, at least as measured by the who’s who of business on the one hand and what people were doing and interested in, on the other. Of the 20 largest listed companies in 1994, only four remain on the list now, and each of those four has undergone major change, three having split off large parts of their business and one having been bailed out by the Government. Over the same period New Zealand ownership of NZ listed companies has risen from under 60% to almost 70%. Appliances, wine, cars and flights on large aircraft are cheaper. Houses, fish, flights on smaller aircraft, and electricity for homes costs more (electricity for business costs about the same). The All Blacks played six games and won two in 1994. They played and won 14 last year. The average real wage and average hourly pay rate is up about 20% and the number of people working is up almost 46% (the male workforce has risen at a slightly faster rate than the female one). Exports have increased in value by 60% but have been stable at just below 25% of New Zealand’s production. Half of the product increase is from dairy and about half of the sales increase has been to China. In 1994 on average 27,731 tourists visited New Zealand each week (1,182,00 for the year), last year the weekly visitors averaged 53,096 (2,761,000 for the year). In 1994 the average spend was $1,600 per visitor (2014$) and last year it was $2,400. Almost the same number of babies were born in New Zealand in 1994 as last year (just over 58,000). Back then about 50% of mothers were in their 20s and 40% in their 30s, and that ratio was reversed last year. At a global level, while New Zealand’s population has risen by 856 people a week over the last two decades, that is dwarfed by the planet’s weekly rise of 1,520,000. The last decades have been a period of colossal expansion of consumption and consequences. Arable and crop land per human fell from 2.7 hectares to 2.1 hectares. In an average week the number of cars rose by a net 363,000 vehicles and a net 293,000,000 tonnes of CO2 was added to the atmosphere. The summer coverage of Arctic sea ice fell from 9 million square kilometres to 6 million, an average weekly decline of 2,900 square kilometres. Average temperatures increased 0.5 degrees. The number of major weather related insurance events rose from 500 in 1994 to 750 last year. NEW ZEALAND: POPULATION, WORKERS AND WAGES

In work Not in work

THEN: Population 3,630,000 NOW: Population 4,520,000 Over the 2 decades the number of people working has increased on average by 702 a week while the number of people not working has risen 154 a week.

+702Then Now Weekly change Male workers 886,000 1,300,000 +398 Female workers 696,000 1,012,000 +304 Unemployed 170,000 145,000 -24 Not in labour force 1,878,000 2,063,000 +178 NZ Population 3,630,000 4,520,000 +856

Average hourly earnings have risen from $23.50 (2014$) to $28.00 and average weekly earnings from $916 (2014$) to $1,078. NEW ZEALAND: SPORTS & CULTURE

Top TV Shows Then Top TV Shows Now Top Movies Then Top Movies Now One News at Six One News at Six Mrs Doubtfire Captain America Shortland Street Shortland Street The Good Son Noah Seinfeld The Big Bang Theory The Piano The Monuments Men Holmes 2 Broke Girls The Joy Luck Club Grand Budapest Hotel Coronation Street Master Chef Demolition Man The Great Beauty Between 1994 and now internet use has grown 23,000% but the TV programmes and movies New Zealanders like look surprisingly similar. Fans of rugby have been big winners from the switch to professionalism.

The All Blacks Played then Played now France Lost 2 Won 4 Australia Lost 1 Won 3 South Africa Won 2. Drew 1 Won 2 England Won 1 Argentina Won 2 Japan Won 1 Ireland Won 1 1994- 2014 28 March 1994 Infratil 50 million shares listed at 47c closed at 46c, 2,400 shareholders

Infratil increases its shareholding of TrustPower to 20% 2% 10% CentralPower Infratil reports net after tax profit $1.18 million 1 for 1 Southport 9% stake 66% of Wellington Airport rights issue purchased from the Crown. Wellington City Council retains Infratil buys 1% stake in Auckland its 34% Airport sold by Rodney Council

1994 1995 1996 1997 1998

Infratil’s first investment, Infratil’s Australian 10% of TrustPower sister company buys 50% of Southern Hydro. 4% Partners with Contact and Unisuper

20% CentralPower Infratil sells 4% shareholding in 5% Port of Tauranga Wairarapa Electricity Infratil partners NZ Shareholders’ Association with Waitakere, Best and Fairest Award Rodney and North Shore Institute of Finance Acquisition of Glasgow cities to develop Professionals. Best Corporate Prestwick Airport commercial Communicator aviation at Auckland’s CentralPower and Powerco Infratil buys 13% of ASX listed Whenuapai merge and Infratil sells its Energy Developments Airport shareholding Infratil partners with Orion and the to support the Venture Investment Fund

25% Port of Tauranga

1999 2000 2001 2002 2003 2004

Infratil buys 7% of NGC TrustPower sells its lines and Infratil provides the start up and 5% of buys generation and retailing. funding for Infratil Energy $70m Waipori Australia which takes two years $91m Coleridge before signing its first electricity Infrastructure & Utilities (NZ) $115m Matahina customer in 2004 Limited becomes Infratil $72m Patea $93m Cobb $49m Tararua Wind Infratil undertakes its first $37m Highbank/Montalto bond issue

Wellington Airport launches Wild at Heart and starts its love affair with LOTR Kent International Airport purchased for UK$17 million Infratil acquire 90% of Lübeck Airport, Germany for NZ$17 million Infratil purchases Stagecoach New Zealand for $252 million NZ Bus launches its community brands $48 million gain on S&P500 hedges as the GFC unfolds. Infratil is the only NZX50 company with an explicit hedge against the financial markets panic

Stagecoach becomes NZ Bus

2005 2006 2007 2008 2009

Infratil acquires Alliant Energy’s Infratil share split Fullers Ferries and bus depots stake in TrustPower to raise its sold for $63 million shareholding to 51% Lonsdale, Hunter and Angaston power stations are commissioned in South Australia Infratil launches Snapper. The and NSW smart and low cost way to pay Infratil acquires 82% of for rides on public transport Perth Energy NZ Bus gets Auckland to the Rugby World Cup

Kent and Glasgow Prestwick airports sold, each for £1 (before Assets with a book value tax, packaging and posting) of $264 million are sold for $392 million

260 petrol stations and truck stops become Z Energy

30% of Z Energy sold by public float. $398 million sale proceeds and a total gain over the half year of $418 million A$12 million investment in The Rock officially opened by Australian social infrastructure Prime Minister Rt Hon John Key (as part of a A$100 million commitment)

2010 2011 2012 2013 2014

Infratil and NZ Superannuation Bamarang NSW consented TrustPower commissions Wellington Airport launches its Fund purchase Shell’s NZ site purchased from NSW Snowtown I wind farm. Once project to extend its runway to downstream assets and 17% State Govt for $9 million Snowtown II is commissioned accommodate direct air services NZ Refining. Infratil’s investment Port Stanvac (South Australia) this will be the Infratil group’s with Asia is $212 million and Kwinana Power Stations largest investment ever commissioned Infratil’s $147 million purchase of 20% of

Infratil Energy Australia’s retail brands are combined to create LUMO Energy Total group investment spending $504 million 2014- 2024- THE WORLD’S POPULATION AND CONSUMPTION

10,000,000 people

internet users

THEN: Population 5,640,000,000 NOW: Population 7,220,000,000 1,520,000 The average weekly increase in the world’s population (That is 1,580,000,000 more people over two decades).

Then Now Weekly change Arable/crop land per person 2.7 hectares 2.1 hectares -0.5 metres2

Annual CO2 emissions 22.9 billion tonnes 34.8 billion tonnes

CO2 in atmosphere 359 parts/million 398 parts/million +293,000,000 tonnes Arctic sea ice 9 million kilometres2 6 million kilometres2 -2,900 kilometres2 Cars 651,000,000 1,029,000,000 +363,000 Fresh water use 3,000 cubic kilometres 4,000 cubic kilometres +963,000,000 litres

The last two decades have been a period of colossal expansion of consumption and some consequences. Arable and crop land per human fell from 2.7 hectares to 2.1 hectares. The number of cars rose 363,000 a week and on average a net 293,000,000 tonnes of CO2 was added to the atmosphere. The summer coverage of Arctic sea ice fell from 9 million square kilometres to 6 million and the average number of major weather related insurance events rose from 500 in 1994 to 750 last year. EXPORTS AND TOURISM INCOME (all 2014$)

China Rest of Asia Australia Rest of the world Tourism

EXPORT/TOURISM INCOME THEN EXPORT/TOURISM INCOME NOW In 1994 on average 27,731 tourists visited New Zealand each week (1,182,00 for the year), last year the weekly visitors averaged 53,096 (2,761,000 for the year). In 1994 the average spend was $1,600 per visitor (2014$) and last year it was $2,400. While exports have risen 60%, they have remained about a quarter of national production. Of the 60% increase, about half came from dairy products while about half of the increase in sales were to China. The price of milk powder rose 100% to $4,100/tonne.

All 2014$ Then Now Exports to China $657m $10,934m Exports to rest of Asia $9,524m $11,224m Exports to Australia $6,210m $9,037m Exports to rest of world $14,328m $18,205m From tourism $1,881m $6,700m $32,600m $56,100m NEW ZEALAND: CONSUMER PRICES (all 2014$ including GST)

1kg sirloin steak Average home 1 dozen oysters

THEN: $10.50 THEN: $196,000 THEN: $9.50 NOW: $30.00 NOW: $415,000 NOW: $25.00

Holden Commodore Auckland to London Bottle of sparkling wine

THEN: $65,800 THEN: $2,200 NOW: $49,000 NOW: $1,350 THEN: $15.60 NOW: $9.00 Price Then Now 1 kg apples $0.95 $3.50 1 kg imported grapes $6.30 $7.00 1 kg sirloin steak $10.50 $30.00 1 chicken $11.00 $13.00 1 kg Tarakihi $17.15 $25.00 1 doz oysters $9.50 $24.00 bottle of sparkling wine $15.60 $9.00 1 kg flour $1.25 $1.33 1 litre of milk $1.60 $2.10 1 kg sugar $1.57 $1.59 Electricity residential 16c/kwh 25c/kwh Airfare Auckland-Wellington $140 $100 Airfare Wellington-Dunedin $170 $199 Airfare Auckland-London $2,200 $1,350 Average home $196,000 $415,000 Holden Commodore $65,800 $49,000 Cell phone $1,500 $1,050 Computer per unit of processing power $1,029 $0.54 Small TV $1,400 $400 Dishwasher $2,100 $800

Flying to London or between Auckland and Wellington, appliances and cars, imported fruit, wine, chickens, flour, sugar and electricity for businesses all had stable or lower prices over the two decades. Fish, homes, better steak cuts, residential electricity and flights to regional airports now cost more. 20 LARGEST NZX COMPANIES BY CAPITALISATION

Then Capital Now Capital Telecom $9,675 $6,696 Carter Holt $5,814 Telecom $4,707 Fletcher Challenge $4,430 $4,595 Brierley $3,059 Meridian $4,191 Goodman Fielder $2,195 Ryman $4,110 Air NZ $1,802 $4,096 Lion Nathan $1,790 Contact $3,857 Fernz Corp $1,043 MRP $2,989 NZ Refining $984 TV $2,459 Fletcher Forest $943 Vector $2,429 Wilson & Horton $915 Sky City $2,305 Independent News $909 F&P Healthcare $2,260 NGC $804 Air NZ $2,267 Whitcoulls $641 Trustpower $2,012 Macraes Mining $430 Port of Tauranga $1,873 Fisher & Paykel $424 Z Energy $1,564 Sanford $405 $1,531 Port of Auckland $407 Ebos $1,380 St Lukes $403 $1,287 DB Group $372 Infratil $1,275 $37,445m* $57,883m

In 2014 dollars the 1994 market cap of the 20 largest shares listed on the New Zealand Stock Exchange was $58,700 million. i.e. adjusted for inflation the 20 largest companies today has about the same aggregate market equity value as the comparable group of 20 years ago. MARKET COMPOSITION

Telecommunication Building and wood Investment Food and beverage Transport and infrastructure Chemicals and mining Media Energy Retail and distribution Manufacturing and technology Property and elder care

THEN NOW FUTURE

Aged care, Australian wind farms and social infrastructure were not part of Infratil five years ago. By 2024 there will no doubt be further new areas, and also some disposals, but it is not obvious which areas will be “in” and which “out”. Comparing a list of the 20 largest New Zealand Stock Exchange listed companies today against the 1994 list shows how much corporate values change. The last two decades has illustrated the inconsistency of trends. In the late 1990s New Zealand electricity prices rose with the end of the era of state subsidised hydro and cheap gas. Recently prices have declined due to over investment in supply and greater energy efficiency. The price and availability of fuels, technology, market structure, demand and regulation have all influenced prices, often unpredictably and sometimes in contradiction. “Climate change” has been another unpredictable. A decade ago it seemed that societal pressure would make emitting greenhouse gases expensive and there would be a huge investment in keeping atmospheric CO2 below the 450 parts per million level regarded as dangerous. Today the social/political emphasis seems to be more on how to cope with climate change than in stopping it happen. Over the last decade the evolution of land transport in Auckland and Wellington has not unfolded as expected. On the one hand user-pays private motoring has fallen in cost, and on the other hand the vast bulk of state subsidies have gone into urban rail rather than buses. Looking forward to 2024?

• Technology. Batteries and communication will continue to fall in price and expand in capability. Electric vehicles are likely to become common. Energy retailing will change as will some aspects of generation and transmission.

• Consumption. Colossal increases in global consumption.

• Climate. 2 degrees of warming, the danger level, is forecast to be only about 20 years off and whether this galvanises investment in prevention or coping, the sums will be substantial.

• Society. An aging population, more expensive housing, cheaper cars and alcohol? While some of those trends will continue, not all will. The 19th century industrial revolution started in north-west England. The 20th century Trustpower’s generation atomic and information revolutions started in the coastal states of the USA. The 21st and irrigation facilities revolution will be where and of what? on the Rakaia River.

Whilst all reasonable care has been taken to ensure the facts stated are accurate, neither Infratil Limited, Morrison & Co Infrastructure Management Limited, nor any of their directors, officers or employees guarantee the accuracy or completeness of the information stated herein.