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Investor Interview: Infratil boss Lloyd Morrison

Jenny Ruth

Saturday 12th July 2003

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Jenny Ruth
Infratil is a specialist investor in infrastructure and owns 67% of Glasgow Prestwick International Airport, 66% of Wellington International Airport, 35.2% of TrustPower, 10% of Port of Tauranga and other investments.

SC: Was your investment in Australia-based Energy Development a mistake?
Infratil managing director Lloyd Morrison: No, not yet. Thereís no doubt that itís been a disappointment that we paid too much to enter the business, but thatís looking backwards. At this point, we only own 12.7%. itís clearly a question of where we go from here, whether we buy more or buy into other similar companies. I donít feel at all uncomfortable about our exposure. I do feel disappointed that we didnít purchase more favourably.

SC: Why havenít you written down your investment in Energy Development to market value (Infratil paid nearly $56 million for a 12.9% stake in Energy Development a year ago, an average price of A$3.17 a share. They are currently trading at A$1.66)?

LM: We obviously believe the underlying value is still there. Plus we have an objective of moving forward. Itís also fair to say that a lot of the investments weíve made havenít performed early on. If everything was hunky dory there would be a lot of other competing interests to get involved and the valuation would be different.

SC: How much influence does Infratil have over Energy Development?

LM: Weíre very happy with our board representation with Bruce Harker. Itís given us a much greater appreciation of the waste part of the energy sector and of the waste sector. It ties in very well with a green, environmental-type focus. Weíve spent a lot of time thinking about issues such as methane emissions and Kyoto.

There have been changes in management. Weíre only a minority player in those changes. We only have the influence of good ideas and common sense and credibility. We canít demand change or force change. All we can do is contribute.

SC: Has your "good ideas and common sense and credibility" been appreciated by Energy Development?

LM: I would say thereís a growing appreciation. Frustratingly, it hasnít been appreciated to the degree it perhaps could be.

SC: Infratil seems prepared to spend a lot of time on investigating things which may not pay off?

LM: Weíre prepared to spend quite a lot of time finding opportunities. When we get it right, we regret not having more of the business. When we get it wrong Ė with Tranz Rail, it would be a lot worse if we had 20%. (Infratil owns 7% of Tranz Rail and wrote the stakeís value down by 5 million in the year ended March).

If you had asked me 15 months ago what position we would be in at the end of March 2003, I would have said I would be disappointed if we didnít own one or two more airports in Europe. Weíve missed opportunities for a range of different reasons. Itís part of the frustration of trying to get yourself well-positioned.

SC: Is the lesson of Infratilís experience in investing in Tranz Rail and Energy Development that owning such small stakes in companies isnít a good idea?

LM: Our preferred position is to be influential. We like to get into businesses where we can add value, but thereís no cookie cutter for any deal. In many instances, you need to ease your way into the investment. The people involved in the investment donít know us and are cautious about our involvement. And in many instances we donít know enough about the investment either.

SC: Is the idea of turning Whenuapai into a commercial airport a dud? (Infratil has formed a partnership with the Waitakere City Council aimed at developing the current airforce base into an airport.)

LM: Itís understandable people think that because itís been politicised. There are entrenched interests that donít want it to go ahead. Look at it purely from the point of view of a disinterested outsider and ask, does it make sense. Local authorities will need economic growth, Waitakere and the North Shore. For people who live in the area it makes enormous sense, itís a no brainer.

From an Infratil shareholderís point of view, itís not clear whether it makes sense yet. The question I have is whether we will actually get customers there who are willing to pay the price that the development would cost.

The scepticism is rightly there. There seems to be a lot of people unwilling for it to happen. At the moment there are over 20,000 take-offs and landings with very noisy aircraft. If they donít go ahead with it, there will never be another airport in Auckland.

SC: Youíve been selling down your stake in Port of Tauranga. Does that mean itís a mature investment to which Infratil can add little further value to?

LM: Itís not mature in the sense that the business itself has good growth prospects, but I donít think we see ourselves as being able to add material value to it. Weíre reluctant gradual sellers. We donít have unlimited resources and weíve had to review our holding at various stages. Does it seem inevitable that we would sell out of it? I would say it does, but they keep delivering the goods.

SC: Infratil and partner Alliant now control TrustPower. How much further value can be added there?

LM: We feel we can contribute very well. The companyís in a very good growth phase at the moment. Itís very well placed for an increasing focus in renewable energy.

SC: Will that include more wind power stations (in May, TrustPower announced a $60 million expansion to its Tararua windfarm)?

LM: The countries that are building a lot of wind (stations) have a more proactive approach to it than New Zealand. The economics of the Tararua stage two, with the support of carbon credits, is marginal and wouldnít have gone ahead if it wasnít part of a policy to grow in that area and if it wasnít a comparatively low cost add-on to an existing facility. I donít think the two wind power stations that have been announced recently are the thin edge of the wedge, but we think itís in the countryís interests to get them built.

SC: Infratilís head office is in Wellington which has seen an exodus of businesses moving their head offices out. Whatís your view of the Wellington commercial property market?

LM: Personally, I think itís bottomed. There arenít many big corporates to go now. But government is playing a big part in business life now. That means not only is there employment growth, but anybody not based here will have to spend a lot of time flying down here. There are also some very strong growth sectors in Wellington such as the cultural sector, particularly film.

But the real issues that drive growth and passenger numbers are the price of air travel and competition. Weíre seeing a bit of a foolís paradise with Air New Zealand at the moment. If that merger (with Qantas) goes ahead, I think it will have negative consequences for Wellington.

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