Envestra

1. Now that the Loan Note has been repaid, what form will future payments to shareholders be in?
2. What are the mechanisms for getting out of the operating and management agreements if APA Asset Management does not perform to acceptable standards?
3. APA Asset Management is paid performance bonuses. Does Envestra believe that these are warranted?
4. What is the “Subvention Payment” and when did it end?
5. How do interest rate increases affect your cash flows and profitability?
6. There is no indication of growth in recent years, other than organic growth in new housing. Is this correct?
7. Does Envestra have plans to grow by acquisition or by diversification to other sectors of the industry?
8. If APA Group sold their securities in Envestra, could you cancel their O&M contract?
9. Does the regulation of your tariffs mean that you are unable to do better than the tariffs allow?
10. Do you see any rationalisation in the industry? How will that affect Envestra?
11. What is Envestra’s strategy with respect to its debt portfolio?

1. Now that the Loan Note has been repaid, what form will future payments to shareholders be in?

Payments will be in the form of unfranked dividends.

Back to Top

2. What are the mechanisms for getting out of the operating and management agreements if APA Asset Management does not perform to acceptable standards?

Our experience in the past (under the arrangement with Origin Energy Asset Management - which concluded on 2 July, 2007) is that the relationship has worked very satisfactorily and we confidently expect this to occur in the future.

There are termination rights for certain significant breaches of the Agreement that allows Envestra to cancel the contract if APA does not perform, and continues to do so. More importantly, Envestra must approve the appointment of APA's General Manager, and each year, Envestra must approve APA's budget as well as its proposed operating activities and key performance indicators. This, coupled with close monitoring of performance, means that Envestra can ensure that APA performs to acceptable standards.

Back to Top

3. APA Asset Management is paid performance bonuses. Does Envestra believe that these are warranted?

APA's performance bonuses are determined under the Operating and Management Agreements and give APA strong incentives to improve annual operating cost performance and capital expenditure efficiency.

In a regulatory environment, the need to constantly reduce costs is paramount and we believe there is a commonality of interest between Envestra and APA, given the incentive bonus arrangements, to ensure this is achieved.

Back to Top

4. What is the “Subvention Payment” and when did it end?

The “Subvention Payment” reflected an Agreement put in place between Origin Energy and Envestra in 1999, at the time of the Victorian acquisition, under which Origin received the benefit of tax deductions associated with the Victorian assets in exchange for total payments to Envestra over a six year period of $92 million. The final payment was made to Envestra in 2003.

Back to Top

5. How do interest rate increases affect your cash flows and profitability?

Interest rate changes can significantly affect our cash flows and profitability. They also have an impact on regulatory outcomes if the changes occur at or around the time Regulators are re-setting the 5 year tariffs. However, we limit our exposure to these risks by either hedging or fixing a large portion of the interest rates of our debt portfolio, and co-ordinate the hedging program with the various regulatory re-set dates.

Back to Top

6. There is no indication of growth in recent years, other than organic growth in new housing. Is this correct?

A significant portion of our organic growth is focused on laying gas distribution pipes and installing associated assets for new housing developments, as well as upgrading the networks - for example to reduce gas leakage by inserting polyethylene pipes into existing steel mains. These types of capital programs increase our regulatory asset base and enhance future revenues.

Back to Top

7. Does Envestra have plans to grow by acquisition or by diversification to other sectors of the industry?

In the longer term we believe further consolidation of the industry is inevitable. We are therefore mindful of acquisition opportunities and regularly appraise possibilities. However, we will only proceed in the event we are convinced such an acquisition would be beneficial to our shareholders and therefore, can be secured at a suitable price.

In respect to diversification, we have a strategy to stay within the energy distribution and transmission sectors with their strong and reliable cash flows - this is consistent with the expectation of our investors, whether bondholders or shareholders. We are not intending to embark into the retail, trading or energy generation sectors.

Back to Top

8. If APA Group sold their securities in Envestra, could you cancel their O&M contract?

No, the nature of the Operating and Management Agreements with APA are not dependent on them maintaining their shareholding in Envestra.

Back to Top

9. Does the regulation of your tariffs mean that you are unable to do better than the tariffs allow?

Tariffs are based on demand forecasts over the 5 year period of each Access Arrangement. It is possible that revenue outcomes could exceed regulatory expectations, for example as a result of un-seasonally cold winters. However, experience over recent years is that many were warmer than the 10 year average.

This matter was raised with the relevant Regulators when the Access Arrangements for South Australia and Victoria were reset in July 2006 and July 2008 respectively. As a result, some recognition of the global warming trend was factored into the revised volume forecasts for each Access Arrangement.

Back to Top

10. Do you see any rationalisation in the industry? How will that affect Envestra?

We foresee further rationalisation occurring within the energy industry over coming years as the recent unbundling of businesses reverses with industry participants seeking synergies from different but compatible energy market activities, and as major players seek economies of scale, both in operations, and in financial markets. However, we expect re-bundling of services to occur across energy sectors, rather than the product orientated (ie electricity versus gas) integration of industry segments that occurred in the past. This type of trend is evident in the US and some parts of Europe.

Back to Top

11.What is Envestra’s strategy with respect to its debt portfolio?

Envestra’s financing strategy for many years has been to extend the duration of its debt portfolio, arrange refinancing at least six months prior to maturity, and limit annual repayments to 15% of the debt portfolio.

The Company’s exposure to interest rate risk is minimal with around 86% of floating rate debt hedged as at 30 June 2009 for the regulatory resets through to 2012. The average interest rate for the Group is expected to be about 8% in 2008-09.

Debt and equity investors can therefore be confident that the Company is not exposed to the refinancing risks associated with the current credit market volatility.

Back to Top

You will need Adobe Acrobat Reader to view these files.
The reader can be downloaded for free from Adobe.