Infratil on Facebook Email not displaying correctly? View it in your browser Infratil Monthly Operational Report 1 July 2011 Introduction Infratil's 2011 Annual Report was released and is available here. The Report provides a record of Infratil's performance over the year to 31 March 2011, its financial position as at 31 March 2011, the strategic factors which are guiding management and a summary of the performance, circumstance and prospects of Infratil's businesses. After almost a quarter of the financial year the main "take out" thus far is that Infratil is tracking to budget with the pluses and minuses roughly in balance. The 4.75cps final dividend was paid in June. 25% of shareholders holding 11% of the shares took advantage of the DRP and 1.4 million shares were issued at $1.87 each. After the DRP issue, Infratil has 604.2 million shares on issue. TrustPower A wet, warm winter has depressed wholesale electricity prices and coincidentally the Electricity Authority has initiated a $10.5 million campaign to encourage consumers to check their power bills to see if they can lower their costs. The Authority reported that approximately 6% of those who checked their bills subsequently initiated a change of retailer. The Authority is funded by a levy on electricity consumption. Over the last year about 30,000 accounts have switched company each month. Over this period TrustPower's customer gains and losses have been in balance with the overall outcome being gains by Pulse, Meridian and Genesis drawn from Contact and Mighty River Power. The temperate winter may be increasing supply and reducing demand (less electricity has been consumed to date in 2011 than for the same period in 2010) resulting in low wholesale prices, but the situation may be analogous to mortgage borrowers with floating rate loans. Eventually rates will rise and today's cheapest may not be tomorrow's. The Electricity Authority's decision to cap the prices Genesis Energy was able to charge for output from the Huntly Power Station on 26 March. While price capping is naturally popular with consumers (and retailers which haven't fully hedged their cost of supply) it can have negative consequences for the viability and longer term availability of generation plant. The following graph shows CO2 emissions from NZ's thermal power stations over the last 5 years. It is apparent that the Genesis' Huntly power station (the orange coloured emissions on the graph) are both volatile and have diminished (NB. the correlation of output and generation is not perfect as different power stations use different fuels and some are more efficient than others). Over the period hydro and wind generation has risen and demand has been depressed by the weak economy. However, what will have been good for the environment will have been bad for the economics of Huntly. A large, old station which is turned on only infrequently when wind and hydro facilities are insufficient to meet demand needs to generate revenue as well as power. Whether the Authority's price-capping decision will result in Huntly being decommissioned sooner than would otherwise have been the case is not known, but what is obvious is that without Huntly, the next cold dry winter will produce an interesting supply situation and probably much higher prices. http://www.energylink.co.nz/wp-content/uploads/2011/06/mr-11-06-26-issue737.pdf Stage one of TrustPower's Mahinerangi wind farm began operation in March and was fully commissioned in April. Z Energy The trial of the new retail and corporate brand "Z Energy" commenced with an extensive advertising campaign and 10 trial sites; Greenlane, Auckland Airport, Customhouse Quay, Mana, Waiouru, Turangi, Putaruru, Takanini, Shirley and Linwood. The last two being rebuilds after Christchurch's 22 February earthquake. Each Z Energy service station features hotel-style bathrooms, barista-made coffee, award winning Hawkes Bay gourmet pies, cupcakes produced by Laurel Watson's Petal, and touch-screen information services for maps, directions, car advice and customer feedback. An illustration of the trial aspect of the initial programme is the provision of forecourt service between 10am and 5pm each day. Pre-launch customer surveys indicated that people who want help with their vehicles tend to use service stations between those hours so this is being tested along with all the more tangible changes. Over the next 6 months Z Energy will be listening to feedback and watching what works and what doesn't. Expect changes. So far the responses have been outstandingly positive, but not to every product; savoury cupcakes have not been popular, even as the chocolate, red velvet and caramello have been selling like "hot"cupcakes. In the media, the chief executive of BP in New Zealand was reported as saying "Z had "taken a risk" by electing to ditch the Shell brand as it overhauled its non-fuel retail offering." He had visited one of the new stores, and said he doubted the overhaul would be profitable. "I don't know how they're going to make much more money out of it. Certainly, my view is they've taken a lot of stock out." Time will tell. New Zealand pump petrol prices hit their highest ever level in May; $2.20/litre. Diesel peaked earlier in April at $1.70/litre. Both prices have now fallen. High prices have some impact on demand as indicated by the following graph which shows consumption and price data from the Ministry of Economic Development (www.med.govt.nz). The last significant pump price rise in 2008 had some impact, albeit more to flatten growth than to permanently lower consumption. Following the Christchurch earthquakes on the afternoon of 13 June Port Lyttelton was temporarily closed and Z Energy maintained supply to the city by trucking fuel from its terminals in Timaru and Nelson. None of its retail or commercial outlets were materially damaged. Z Energy has announced that it is planning to issue $100 million of 7.25% bonds to mature August 2018. The managers to the issue; ANZ, Westpac, Forsyth Barr and First NZ Capital are seeking pre-launch expressions of interest. The funding would be used to repay bank loans. Infratil Energy Australia/Lumo The CEO of Lumo Energy, Simon Draper, announced his retirement from the job as a precursor to a six month sabbatical. His integrity, collegial approach and acumen will be missed and his intention to spend time learning a foreign language and experiencing a very different lifestyle is envied. Fortunately he leaves a well established and experienced senior management team to cover while recruitment of his replacement occurs. Lumo achieved a small increase in customer accounts over the first two months of the financial year. The focus remains on profitable growth and the retention of good customers. A more aggressive entry to NSW is planned and is likely to lift growth later in FY12. Lumo Customer Victoria South Victoria Gas NSW Queensland Total Accounts Electricity Australia 31 March 09 123,129 179,269 - 53,733 30,389 385,520 31 March 10 138,886 205,911 173 38,434 28,076 411,480 31 March 11 127,804 192,198 1,977 50,408 36,447 408,834 30 April 11 127,088 192,546 2,095 51,100 36,800 409,629 31 May 11 126,940 192,608 2,316 52,037 37,154 411,055 1y growth -9% -7% +606% +28% +35% -1% 2y growth -1% +4% - +10% +24% +5% The electricity markets have generally been stable over the last two months. The following graph shows electricity prices in Victoria out to the end of 2013 as at 31 March 2011 and 22 June 2011 (it shows prices for each quarter and for the calendar years 2012 and 2013). As shown in the graph there were small rises in the forward prices, which may reflect ongoing uncertainty about CO2. However, even with cheap gas, new base load plant is unlikely to be economic at these price levels. The gas market is quite different to that for electricity. In particular, if a retailer wants to be certain about having gas available at a fixed (or capped) price, it has to have contracts in place to buy that gas, and to have back ups if a gas field or pipeline fails. While it isn't possible to look at public information about future gas prices, it is possible to look backwards to what average wholesale market spot prices were, which is shown in the following graph. This shows average monthly prices over the last 12 months and the prices of the 12 months previous to that. Although recent Victorian gas prices are a little higher than was the case the year prior, two reports that came out since 31 March 2011 imply that Australian gas prices may stay low for some time yet. Macquarie Securities pointed out that the cost of building facilities to convert gas to LNG for export was rising and is likely to mean that less exporting occurs (ie there will be more gas available for domestic Australian consumption). Coincidentally the London based Global Warming Policy Foundation published a report "The Shale Gas Shock" written by Dr Matt Ridley (who was interviewed on RNZ on 18 June) which presented a credible forecast of a world with abundant natural gas, and the possibility of relatively low prices in the short to medium term due to a mining boom; longer term gas prices were expected to increase to reflect extraction costs. Infratil's corporate loyalties will be stretched on Saturday when Auckland Blues take on Queensland Reds in Brisbane.