Envestra

It is pleasing to report in a year of significant economic turbulence that the Company recorded a profit before tax of $52.4 million, an increase of $32.9 million over the previous 12 months.

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Profit after tax declined by $123.3 million as 2007-08 was impacted by a significant one-off tax benefit
of $153.2 million.

On an underlying basis, the profit after tax for 2008-09 was up $24.3 million to a record $35.6 million,compared with an underlying profit after tax of $11.3 million in 2007-08.

The Company performed very well against most of its operational measures, and a return to normal weather assisted revenues and our bottom-line result.

During the year the Board undertook a number of capital market initiatives to better enable it to ride out the substantial uncertainties in capital markets. These included debt consolidation, conducting a Rights Issue and reducing distributions to shareholders in the face of Standard & Poor’s downgrading the Company’s credit outlook (subsequently retracted after the completion of the Rights Issue in February 2009).

In February 2009, we completed a $111 million Rights Issue, which was underwritten by our largest shareholder, Australian Pipeline Limited (APA). The offer received strong support with more than 5,300, or 28%, of shareholders participating, and around 371 million new securities being issued. APA’s holding in Envestra is now 30.4% and our second largest shareholder, Cheung Kong Infrastructure Holdings (Malaysian) Limited, holds 18.4%.

In May 2009, the loan note component of our stapled security was redeemed when the final amount of principal was repaid to shareholders. This greatly simplified the equity structure of the Company. Following this payment, equity is in the form of ordinary shares. It is anticipated that unfranked dividends will be paid on these shares for the foreseeable future.

SHARE MARKET PERFORMANCE

It is extremely disappointing that shareholder returns were flat for the year and negative for those who did not participate in the Rights Issue.

This was a consequence of the material, ongoing decline in the prices of listed infrastructure securities generally, which occurred in conjunction with the turmoil in world financial markets, the substantial escalation in the cost of debt and general investor concerns regarding the ongoing availability of capital to support corporate refinancing requirements.

The Board deemed it prudent to reduce annual distributions from 9.5 cents to 5.5 cents to conserve capital in response to the global financial crisis and in recognition of the fact that the number of securities on issue increased by over 40% during the year as a result of the Rights Issue. Distributions for 2008-09 totalled 7.25 cents (4.5 cents in November and 2.75 cents in May), and are expected to be 5.5 cents in 2009-10, payable in equal half-yearly instalments.

FINANCIAL STRATEGY

Envestra’s financing strategy for many years has been to extend the duration of its debt portfolio, aim to have refinancing in place at least six months prior to maturity, and set a limit of 15% of the debt portfolio to mature in any one year. At 30 June 2009, the average loan maturity for the Envestra group was just over nine years.

During the year the Company refinanced $255 million of debt. However, the margins were substantially above those that applied to the maturing facilities, and the new loan periods were shorter than those which were
available in the past. These terms are symptomatic of the current global financial crisis. These additional costs are potentially recoverable via future regulatory resets, and in part, under our current access arrangements.

There are no further significant debt refinancing requirements until May 2011, other than a $100 million facility due in July 2010 which was undrawn at 30 June 2009.

The Company’s exposure to interest rate risk is minimal as over 95% of floating rate debt is hedged in line with the regulatory reset periods through to 2011 for South Australia and Queensland, and 2012 for Victoria.

At 30 June 2009 the Company had undrawn bank facilities amounting to $236 million with terms extending from 2009 to 2012. These credit facilities, in conjunction with the cash being generated by the business, are more than sufficient to support our capital expenditure program and fund operating costs over the next several years.

During the year, $250.9 million of debt was repaid whilst $180.7 million of new debt was drawn down. Our capital expenditure program was largely financed by internal cash generation and equity raisings.

More than 80% of the credit-wrapped Capital Indexed Bonds issued by the Envestra Group are guaranteed by the monoline insurer, FSA, which has maintained its AAA credit rating during these difficult financial times.

DEBT CONSOLIDATION

During the year we sought approval from our financiers to consolidate the debt packages of Envestra Limited and Envestra Victoria Pty Ltd, and to have covenants under the financing arrangements measured on a consolidated basis in the future. A pre-condition of the consolidation was the raising of $100 million in equity, which was achieved via the Rights Issue. The consolidation enabled the Group to access the relatively stronger financial metrics of the Parent Company and avoid the tight interest coverage covenants in Envestra Victoria which could have restricted capital expenditure in that State in the future. The consolidation also assisted in having the “Outlook Negative” classification on the Group’s investment grade rating being removed by Standard & Poor’s.