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Infratil seeks cash through Z float, windfarm sell-down and bond issue

Friday 8th March 2013

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Infrastructure investor Infratil is seeking to fill its coffers for new, earlier stage investments through the part-sale of its 50 percent shareholding in Z Energy, the possible part-sale of an Australian windfarm, and the potential to issue a low-interest 10 year bond.

The strong potential for a float of between 40 percent and 60 percent of Z was announced as being in prospect by Infratil and its 50/50 joint venture partner the New Zealand Government Superannuation Fund this morning at an Infratil investors' day.

Notes for a presentation by Infratil's chief executive, Marko Bogoievski, show how the proposed Z transaction is one of several to free up capital or replace expiring funding lines.

The moves are consistent with Infratil's strategy to invest in infrastructure, but with "a divestment bias" over the longer term.

"In 2010, Z was purchased at an attractive price but with significant transition and business risks," say Bogoievski's presentation slides. "Three years on, Infratil and NZ Super now believe that the business is entering a lower risk phase that would be valued by the market through an IPO."

The national pension fund said it wanted to down-weight Z, which sits at 2.4 percent of its total portfolio of assets under management.

Z had "strong cash-flows, a good dividend outlook and embedded growth options."

Z has also announced it is proposing to invest in a $100 million demonstration plant with Norwegian paper giant Norske Skog to turn harvested forests into diesel, subject to government funding for at least half the project.

The presentation notes show Infratil has significant funding needs in the next 12 months, with some $220 million of bank funding maturing in March 2014, a peak over the next six years, and the best part of "approximately $250 million to $300 million of investment capital available under existing facilities."

That was because "any significant recycling (the term used for actions such as a Z IPO), buybacks or special distributions."

Infratil was accessing bond markets "at the lowest nominal and real costs ... since listing in 1994", and was "reviewing potential for a 10 year retail bond issue."

The presentation also identified the potential for "a large capital gain ... for successful development risk."

TrustPower's A$439 million, 270 Megawatt Snowtown 2 windfarm project in South Australia is identified as possibly being a "good example of this dynamic", and is elsewhere tagged as the potential source of a special dividend.

Infratil owns 50.7 percent of TrustPower. Meridian Energy is also currently examining whether to exit a major Australian windfarm project, where it stands to make a substantial capital gain by selling a "bond-like" forward revenue stream.

The presentation also shows an expected 9 percent annual average increase in operating earnings, expressed as earnings before interest, tax, depreciation and unrealised movements in the value of financial instruments.

Dividends per share are projected to rise from 7.25 cents in the 2011/12 financial year to 8.25 cents.

Bogoievski told investors that Infratil is currently more attracted to risk capital, but that there was also a strong market for mature infrastructure assets, which comprise around 70 percent of the company's asset portfolio.

"Premiums are being paid for low-risk core infrastructure with (and without) a running yield" and "the proportion of mature assets versus greenfield or development is under review."

Z appears to fit the Core definition, its recent internal rate of return having run at around 12 percent, and 12 percent to 15 percent is targeted as an indicative equity internal rate of return for assets in that category.

The notes also suggest Infratil is attracted to greater involvement in irrigation projects, where it is already gaining experience in Canterbury with plans to add hydro-electric generation capacity at the same time as building substantial new irrigation capacity. Substantial government capital assistance for new irrigation has recently been announced.

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