1 envestra limited ian little chief financial officer july 2002 new zealand investor presentations
TRANSCRIPT
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Envestra Limited
Ian LittleChief Financial Officer
July 2002
New Zealand Investor Presentations
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Australia’s largest natural gas distributor
currently offers
a 10% yield
60% income tax free
“I would expect now to see long-term stock market returnsin the neighbourhood of 7%”
Warren Buffett – July 2001
Envestra
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1. Who is Envestra?
2. What are stapled securities and what are the benefits?
3. Why Envestra will suit NZ Investors?
Envestra
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Our business Transport of gas Deliver gas on behalf of retailers
Own two types of pipelines Distribution - 17,600 km; retail consumers Transmission - 1,100 km; from fields to cities
Consumers 900,000 retail consumers Supply 30% of Australian domestic market
Our focus Infrastructure sector Energy only Distribution and transmission assets –
consistent with low risk investor base
Envestra Limited
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Our strengthsinclude:
Natural business monopoly Government regulations established
Geographically and operationally diverse Vic, SA (Head Office), Qld, NSW, NT
Strong cashflows – reliable revenues
Strong financial position Medium and long term financing Active in capital markets
Diversified investor base 18,000 plus investors
Strong Management & Board
Competitive Advantages
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The advantagesinclude
Predictable revenues 90% domestic Not reliant on large volume consumers
Negligible asset stranding risk No duplication of pipelines
Guaranteed organic growth 2020 – natural gas to be 24% market share
Capex Discretionary and spread evenly
Low pressure networks – low risk
Alternative sources of supply
Our Focus - The Distribution Sector
“Stable” distribution sector delivers consistent results
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23% increase in the past 4 years Distributions reliably forecast –
short/medium term No decrease anticipated
High yield: 10+% return No capital gains tax for NZ
investors
Envestra’s Distributions
0
50
100
150
'98 '99 '00 '01
$M Cents
Operating profit before financing and income tax
Distributions
37.9
137.3
7.75
9.50
7
8
9
10
'98 '99 '00 '01 '02
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Energy Industry Structure
Generation(production)
Distribution
Gas
NSW Vic SA Qld WA NT
Retailing
Electricity
Envestra’s operations
Transmission
50+ Entities
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Consolidation Will occur Envestra - well placed to participate
Merger & Acquisition opportunities Vertical & cross industry integration
Exit of US entities Continues to encourage lower RAB/ prices
Government sales In short-term limited opportunities
Industry Commentary
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What are stapledsecurities …
A share with an attached loan note Commonly used in Australia for infrastructure
financing i.e. United Energy, MacquarieInfrastructure
Allows early return of cash to shareholders beforeprofits are generated
Tax efficient for issuers and shareholders - 60%income tax free
How does itwork?
Payments called Distributions as payment comes fromcashflows
Distribution has two parts Loan note interest Loan note repayment
Loan note is progressively reduced
When loan repaid, payments become dividends 2009
Loan notes have qualities of ‘Equity’ – reported as ‘Debt’
Stapled Securities
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Make-up of EnvestraStapled securities
1997 IPO A$1.00 issue price made-up of: 30¢ share 70¢ loan note
2002 90¢ (NZ$1.08) security made-up of:Loan note
Balance June 2002: 43¢/ security = NZ52¢Share
Value: 47¢/ security = NZ56¢
Distributions make-up 2001/ 02 Loan note interest 3.5¢ NZ4.2¢ Loan note Repayment 6.0¢ NZ7.2¢
9.5¢ NZ11.4¢
Since 1997Repayments of loan note: 27¢ = NZ32.4¢Distributions paid 43.65¢ = NZ53.28¢
Envestra Limited
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$M NZ$M
EBIT + 4% 88 106
Revenue + 4% 152 182
Profit before Tax and Loan NoteInterest + 20% 23 28
PAT v 3.9 loss 6.1 7.3
Gas delivered + 8%(19% over 1999)
Summary of First Half Performance
*Envestra’s stapled securities pay interest to shareholders which is included ‘above the PAT line’
Six months ended 31 December 2001
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Investing in Envestra
Why Envestra willsuit NZ Investors …
Reliable high yield distributions Proven track record – tax effective for
NZ investors
Industry structure & position Prospects for change
Portfolio & sector diversification Comparative yield
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Australian gas utility sector larger, gas usage more widespread,many gas fields
Sector provides greater growth opportunities
Comparison to New Zealand Utilities
Metric
UnitedNetworks
2002EPowerco2002A
ContactEnergy2002E
NGC2002E Average
EnvestraLimited2002E,
90¢PE 8.4 13.0 21.2 8.1 12.7Gearing 55.3% 50.1% 27.7% 55.0% 47.0% 74%Yield 4.7% 6.8% 4.6% 4.4% 5.1% 10.6%EV/ EBITDA 7.9 9.5 9.9 5.7 8.3 13Interest cover 2.2 2.1 3.9 2.3 2.6 1.4RAB 1.82 1.77 n/a n/a 1.80 1.35
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Why invest in Envestra?
If as an investoryou want …
Attractive cash yield – 10% plus A tax efficient investment Capital gains tax advantage Favourable exchange risk
Envestradelivers ….
Predictability of revenue Monopoly positions 90% from domestic and small I&C market Regulatory and operational diversity
Successful growth over past four years 120% increase in revenue
Demand for natural gas Growth 2-3% p.a.
Long life assets Pipeline lifespan - 100 years
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AppendicesWhere We Operate
Our Shareholders
Value of Consumers
Gas Industry
Energy Distribution & Transmission Companies
Envestra Gearing
Regulatory Environment
Victorian Regulatory Re-set
Financial Summary
Yield Comparison
Comparative Financials
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Where we operate
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Share RegisterStructure …
18,700 shareholders 8,500 IPO shareholders still hold stock Top 20 shareholders hold 55% of stock
Major shareholders Origin Energy (19%) Cheung Kong Infrastructure Holdings
(Hong Kong) 19% - aka CKI Lowy Family (4%)
Security Purchase Plan (SPP) Similar to DRP – $3,000 limit 2002 SPP take-up 50%
Our Shareholders
Support from two major energy companies
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Consumers(900,000)
Gas delivered(108 PJ)
Revenue($270
million)
Value of domestic and small I&C consumers
99.99%
41 PJ67 PJ
90% 10%
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Gas Industry
Full contestablity to be introduced
Regulated monopolies ENVESTRA
Competitive
May be regulated; may competeDistributors
Transmission
Retailers
Consumers
Producers &Generators
ElectricityGas
Competitive
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Energy Distribution and Transmission Companies
Distribution TransmissionState/TerritoryGas Electricity Gas Electricity
South Australia Envestra ETSA Utilities (CKI) Epic EnergyEnvestra
ElectraNet (3)
Victoria EnvestraMultinet (1)TXU
AGL (Solaris)CitipowerPowercor (CKI)TXUUnited Energy
GasNet PowerNet
New South Wales AGLEnvestra (Albury)Integral EnergyGreat Southern Energy
Energy AustraliaIntegral EnergyCountry EnergyAustralian Inland Energy
Australian Pipeline TrustDuke EnergyGasNet
Transgrid
Queensland Allgas (Energex)Envestra
EnergexErgon Energy
Allgas (Energex)EnvestraDuke EnergyEpic EnergyAustralian Pipeline Trust
Powerlink
Western Australia AlintaGas (2) Western Power Epic EnergyOrigin EnergyAustralian Pipeline TrustCMS Gas
Western Power
Northern Territory Envestra Power and Water Authority EnvestraSantosNT Gas (AGL)
Power andWater Authority
(1) Utilicorp (51%)/AMP (49%) – managed by United Energy(2) WA Gas Holdings (45%), (22.5% United Energy/22.5% Utilicorp), public (55%)(3) Harold Street Holdings – Powerlink (Qld) (40%), YTL Power Investments (33%), ABB Net SA (20%), Others (17%)
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Envestra Gearing
Envestra’s gearing is appropriate for a regulated gas distributor
Gearing Loan Notes not included in gearing as repaymentsrequire ‘available cash’ (earnings)
Gearing currently 75%
Gearing for comparable utilities APT: 55% but Transmission Sector GasNet: 69%
Recent Ernst & Young independent valuation Potential increment: $203-292m
93¢ - $1.05/ security Gearing: 65%
Interest rate changes have minimal impact Currently 100% hedged, aligned to regulatory regimes
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Regulatory Environment
Envestra’s position Regulatory environment under NationalAccess Code
Queensland to December 2006 South Australia to June 2007 Victoria to December 2002
Tariffs based on ‘Cost of Service’ Operating Costs Depreciation on regulated assets ROI
Revenue set for 5 years
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Weighted AverageCost of Capital
Submitted Real Post Tax 7.9% Multinet (United) & TXU 7-7.8%
Based on:Risk Free Rate 6.1%Equity Beta 1.16Market Risk Premium 7.3%Debt Margin 1.65%RAB 1/ 1/ 03 $683mRevenue $131m p.a.
Envestra/Other Distributors
Opex Similar
Capex Lower $174m vs $270m (5 yrs)
Victorian Regulatory Re-set
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Financial Summary
*Envestra’s stapled securities pay interest to shareholders which is included ‘above the PAT line’
A$M NZ$M(1.2:1)
Annual Revenue 268 322
Profit before Tax and Loan Note Interest* 15 18
PAT excluding Loan Note Interest small profit small profit
Total Assets 2,400 2,880
Market Capitalisation - 705m securities 620 744
S&P Credit Rating: Investment grade BBB
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Yield Comparison
Company PriceJune 02
$
Distribution(cps)LY
Yield%LY
Envestra 0.85 9.5 11.1
Australian Gas Light 9.74 52.0 5.3Australian InfrastructureFund
1.40 5.5 3.9
Alinta Gas 4.16 16.5 4.0
Australian Pipeline Trust 2.42 13.5 5.6
United Energy 2.15 17.25 8.0
Source: AFR
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Comparative Financials - Listed Pipeline Companies
Stock ENV GASNET APAS&P/ ASX200Property Index
Year FYO1(A) FYO2(F) CY01(F) CY02(F) FY01(A) FY02(F) FY01(A) FY02(F)
Share Price 0.88 0.88 2.00 2.00 2.47 2.47Market Cap 536 620 260 260 603 603Net Debt 1,761 1,734 566 566 723 723EV 2,297 2,354 826 826 1,326 1,326DPS 9.25 9.50 22.00 22.0 21.00 21.00EBITDA 173 183 72 76 128 127EBIT 137 143 58 61 104 103Net Interest* 133 129 38 37 50 50
EV/ EBITDA 13.3 13 11.5 10.9 10.4 10.5EV/ EBIT 16.8 16.4 14.1 13.5 12.7 12.9Int Cover(EBITDA) 1.3 1.4 1.9 2.1 2.6 2.5Gearing 77% 74% 69% 69% 55% 55%
Gross Yield 11% 11% 11% 11% 9% 9% 7% 7%
*excludes Loan Note interest as ‘Distributions to Shareholders’exclusive of revaluation = 10% effect