Snowtown wind project sale likely to fund more Australian projects for Trustpower

Tuesday 19th May 2015

Infratil expects its 68 percent owned utility Trustpower to sell down its stake in the now completed Snowtown wind power project in South Australia to fund other emerging renewable energy opportunities in Australia, said Infratil chief executive Marko Bogoievski.

At a briefing after the release of Infratil's annual earnings for the year ended March 31, Bogoievski described the sale of Snowtown as "Plan A" for pursuing other Australian renewables projects, which are expected to start emerging as the Australian federal government finalises new parameters for its Renewable Energy Targets scheme.

The scheme has been in limbo since the Abbott government decided to reduce the target from 41,000 Gigawatt hours of installed renewable generation to 33,000GWh, with the new target yet to be legislated.

Even at that level, Australia would still be 17,000GWh short of the new target, which was "more than enough for Trustpower to get a couple of projects away," said Bogoievski. Trustpower, the Tauranga based provider of electricity, gas and communications services in New Zealand has some 475 Megawatts of installed renewable generation capacity in Australia, 1,280MW of projects in the consenting phase, and another 750MW of identified development sites.

Answering questions from an investment analyst on the funding of future Australian renewables projects, Bogoievski said: "Trustpower has funded existing developments on balance sheet. I would expect more of the same.

"At a minimum you would expect Snowtown to be available for sale to fund the next development."

Built in two stages and with installed generation of 270MW, Snowtown was "a very valuable asset", with long term cashflow ensured under a power purchase agreement with Origin Energy. The latest earnings result includes a revaluation of the Snowtown asset to A$730 million, compared with its A$430 million construction cost.

"Right now, Plan A is sale of assets in Australia. A lot of the development margin is earned already," he said.

"The only thing that that forces on the (Infratil) group is a sequential view about developing our pipeline," said Bogoievski, referring to the range of other investment opportunities the infrastructure portfolio owner owns across energy, transport, retirement and commercial property assets in both New Zealand and Australia. "If we decide we want to go faster than that or develop some things in parallel, then we can look at alternatives."

Elsewhere in its portfolio, Infratil indicated its public transport business, NZ Bus, was unlikely to see improvements it had been hoping would emerge from new contracts with local authorities under the newly created Public Transport Operating Model.

Draft contracts currently being scrutinised by the New Zealand Transport Agency appear to have changed little since last year, when NZ Bus produced analysis by investment bankers Cameron Partners suggesting the proposals would lock public transport operators into a highly regulated model, which they claimed would discourage bus operators from innovating or growing patronage.

The company sought to portray that positively in its statement today, saying the draft contracts "offer bus companies medium term certainty (six to 12 years) and seem likely to transfer most patronage and fare risk to the transport agencies.

"Today, if someone doesn't catch the bus, it's the operators who are at risk. Under the new contracts, it will be the council's problem."

The exact content of the finalised contracts is expected in coming weeks, with tenders and reissuing to existing operators to follow, starting in Auckland.

One of the "key value drivers" for the current financial year would be to "assess future long term returns available from New Zealand public transport with the PTOM."

NZ Bus reported a 14 percent decline in earnings before interest, tax, depreciation, amortisation and movements in the value of financial instruments for the year to March 31 of $34.2 million, largely reflecting depreciation costs.

Infratil management also confirmed Wellington International Airport is in line for $100 million or so of new capital expenditure in the next year on terminal and carpark expansion, and construction of a hotel connecting the domestic and international terminals. The company is waiting on a response from Environment Minister Nick Smith on an application to have a resource consent for an extended runway at Wellington heard under a fast track process as a "project of national significance."

At this stage, the runway extension does not appear in Infratil's published capex projections, although the airport is the lion's share of the known capex for 2015/16 of between $160 million and $190 million, in a year that Bogoievski said marked a "pause" in Infratil's usual annual capex, which has typically been closer to $500 million.

Today's profit result included announcement of a second special dividend payment to shareholders for the financial year just ended and signalled a more cautious approach to new opportunities as low interest rates drive up the value of capital assets offering better returns.

For the year to March 31, Infratil showed a net parent surplus of $384 million for the year, compared with $199 million the previous year, largely reflecting the combined impacts of divestments, mainly Australian energy assets, totalling a net $345 million and strong earnings from Trustpower, which began booking returns from Snowtown. The wind project is expected to add A$12 million to Trustpower's ebitdaf in the current financial year. Ebitdaf was up 4 percent to $437 million. The company revised its ebitdaf forecast for the current financial year to the lower end of the range offered at an investor in day in March, with earnings in a range of $520 million to $550 million now expected.

"Infrastructure and capital markets are currently positive, although we remain cautious given current pricing and the potential for significant volatility as developed markets face the end of QE (quantitative easing by the US Federal Reserve)," the company said in presentation notes with today's result.

"Normally Infratil relies on debt to provide approximately 50 percent of its capital. With debt now providing closer to 30 percent of funding, there is substantial capacity for further capital management or new investments."

While the company believed shareholders would rather the company deployed its capital, "we are conscious that if new investments are not executed in a reasonable time frame then some capital should be returned."

The comments coincide with a year in which much lower levels of capital expenditure are anticipated, with a forecast of between $160 million to $190 million of known capital commitments in 2016, compared with total capex last year of $507.6 million, $219.2 million of which was the joint venture investment in RetireAustralia with the New Zealand Superannuation Fund. The largest capex commitment for the year ahead is for upgrades of the Wellington airport terminal.

BusinessDesk.co.nz

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