1. CIAL Pricing Reset 1 December 2012

2.  Why CIAL wishes to move to a medium term pricing methodology  The key properties of the pricing model: how it works and main areas of disagreement  How to interpret the results  How CIAL uses the pricing model in making the pricing decisions  Implications for PSE3 and beyond? Overview

3. Context Integrated Terminal Project - investment of $237 million Doubling of Aeronautical Asset Base Implications for pricing Requires major price step in the short term ITP is efficient but will take time for full utilization Short-term pricing for long-term infrastructure assets is inherently inefficient New ITP Challenge is to avoid price shocks at periodic resets driven by investment cycle while recognising that future prices cannot be fixed

4.  In setting actual Prices these are capped by the levelised constant real price derived from the model  Actual pricing seeks a balance between cost recovery and responding to market conditions  CIAL is constrained by countervailing power and competitive conditons  The model is a guide to prices, but price path set through applying commercial judgement Commercial Decision Making

5. Defining the problem

6. Seek to set a long run constant real price, by:  Estimating cost of service every year  Cost of service = pre-tax return on capital, return of capital and OPEX  Calculating PV of cost of service  Draw a line through the cost of service to obtain NPV = 0 What the model does The Key item in the model is the present value of 20 years of cost

7.  Total cost of service in any one year is an approximation because we do not match timing of tax paid in particular periods  The Model calculate revenues from actual prices times forecast passenger/aircraft movements  Levelised constant real price is the ceiling for intended price levels: hence, any time the price is below that level, the under-recovery is permanent  In any one year, annual expected revenue will differ from costs How to interpret the model

8. Revenue path and under- recovery

9.  Implied tax expense is not intended to be a correct estimate of tax payable in any one year  But the only thing that matters for the constant real price level is the present value of tax allowance  We developed a “check model”  Key analytical issue: what is the discount rate to use for arriving at present value Key controversy: tax

10. Tax expense v tax payable over 20 years Nominal cost over 20 years PV of cost over 20 years Discount rate Implied effective tax rate Tax expense $2,797m$650m13.67%28.0% Tax payable $2,797m$650m12.74%23.4% No present value difference if effective tax rate is about 24%

11.  We checked our forecast revenue against various methods of calculating cost of service  CIAL forecast revenue in PSE2 is below both BARNZ and IM estimated cost of service  IRR model demonstrates that expected return reflects competitive pressures and reasonable position taken and is less than Commission IM target range level of return 5yr IRR around 7% Profitability in PSE2

12.  We intend to take a consistent approach e.g. valuation methodology  We expect actual prices to converge with long-run levelised constant prices, where future revenues will need to exceed cost in each year i.e. achieve NPV=0  However prices cannot be prejudged or fixed Obligation to consult with our customers Need to consider change in costs / future capex and updated demand volumes  Market and competitive factors will continue to exert constraint on prices set Implication for PSE3+

13. Thank you