PRESENTATION BY TOM MEINERT, CHIEF OPERATING OFFICER; STEVE BANNING, MANAGING DIRECTOR OF EPIC ENERGY; AND PAUL BUTLER, MANAGING DIRECTOR OF SOUTH EAST WATER, OF HASTINGS DIVERSIFIED UTILITIES FUND (HDF)

“HDF - FY08 Full Year Results”

http://www.brr.com.au/event/49673

 

FRIDAY, AUGUST 22, 2008, 9:00 AM.

 

10        HDF     Good morning everybody and thanks for joining us. I’ll start quickly by introducing our speakers this morning. With me I’ve got Steve Banning, Managing Director of Epic Energy. I also have Paul Butler, Managing Director of South East Water and Jo Stimpson, the Finance Director of South East Water on the phone with us from the UK. So thank you Paul and Joe again

15                    for making yourselves available at a time which is pretty late on your side.  We’ll run through the format of the presentation. It’s really just to run through the slides which have the….everybody’s got with them by now and then have enough for questions after that.

 

20                    So I’ll start on Slide 5 with the key financial metrics and really just focusing on the key highlights. So you’ll see Epic Energy EBITDA is up by 2.7% so, again, a very solid result from Epic. Steve will provide a little bit more detail around the background of those numbers a little bit later on. South East Water investment income very much in line with expectations. The number is slightly

25                    less than last year, but I should point out that last year we did get some additional income from South East Water for reimbursement of acquisition costs. Consolidated normalized EBITDA is up by 10.4%.  Again, a couple of points….no, a couple of points to make there.  07 included a one-off 4 million capital derivative gain which should be excluded for comparative purposes, 

30                    and also we’ve excluded there the unrealised street valuations which we’ll cover next. So, again, a solid result from an EBITDA perspective. Profit and loss after tax was impacted by the unrealised movement on the South East Water capital value. We booked the total revaluation loss, unrealised revaluation loss of about 21.2 million and just to put that into perspective,

35                    around 29.7 million of that relates to currency movements with the Aussie dollar strengthening by over 10% against the pound over the six-month period. Again, I want to stress that that is very much an unrealised movement and obviously doesn’t affect our annual cash flows while we hold those assets. Also, just to point out that post 30 June, the Australian dollar has

40                    weakened against the pound quite significantly, As of 20th of August, we’ve actually accrued a $10.8 million gain since June.  So that does continue to provide some volatility in terms of our net profit number. However as I pointed out, that doesn’t actually affect our annual cash flows coming from the assets.

 

45                    Moving on to Slide 6, just the summary income statement, I’ll just pick up on a couple of highlights there. First of all, the South East Water investment income as I’ve mentioned are slightly lower because in 07 included some reimbursement for acquisition costs. You also see that the derivative amounts we’ve received in this half-year are substantially higher than what we received last year and that really reflects the strong cash flow hedging we have in place for distributions coming from South East Water. So we very much protected ourselves against the short-term currency movements from a distribution and cash flow perspective. Moving down, (inaudible) (00:03:39)

5                      operating expenses, significantly down from last year and that’s primarily related to the 07 year including the acquisition costs for South East Water. A couple of other points to make, on the finance costs, again, substantially lower this year than last year, really reflecting…..and that’s really reflecting the fact that we refinanced our fund level debts through the equity placement

10                    and yet…. and the SVP which we did in October last year. So it reduced our fund level debts considerably which has resulted in lower finance expenses for the year. You can see there, further down the unrealised revaluation gain and loss of 21.2 million.  Moving on to the cash flow statement, I’ll run down the items. So Epic operating cash flow up 4-1/2%, very solid result and cash

15                    flows from South East Water 16.6 million, very much in line with the expectations and the full-year guidance I’ve given in the past of around 30 million. I said, 07 include some one-off reimbursements for acquisition costs. Interest income of HDF expenses, the expenses were actually slightly up from last year, and really what that reflects is the merger cost in relation to

20                    South East Water. What actually happened there is that these merger costs were booked into the P&L in December last year, but in terms of physical cash payment, they only went in this half-year. So you’ll see in our P&L that expenses number is actually much lower than last year but in the cash flow just because of timing differences that’s flowed through this year.  Finance

25                    expenses are lower as I’ve mentioned because we refinanced the fund level debt. Other couple of points to note here is the QSN Link CAPEX. Obviously we’ve done substantial work on the construction of the QSN Link and had a significant capital expenditure in relation to that. Likewise we’ve drawn debt of about 48.6 million against that capital expenditure consistent with the 100%

30                    debt funding facility we have for that project. Essentially from a net position we had a positive net cash flow position of about 2 million for the half.

 

                        Moving on to next slide, which shows our distribution coverage. So this essentially reflects the cash flow statement on the previous slide, the only two

35                    items we’ve excluded are the QSN Link CAPEX number and also the total net financing investment cash flows, which actually are slightly more than the expenses. So even…..so taking up those two items, you can see from the graph there that our cash flow variable for distribution once again covers our distributions paid and as I’ve said in the past, that really reflects the fact that

40                    the half year was very much won when we received cash flows from our assets which are very much in line with what we were expecting. So, again, a very solid result from our assets. 

 

                        Moving on to Slide 9, shows our debt maturity profile. As I’ve said in the past,

45                    very long-term solid capital structure in place, and our current debt to enterprise value is around 66% or actually that was based on the security price of $2.5 as of 30th of June. I think we’re trading a little bit higher than that at the moment.  So that 66% is probably a little closer to our 62% or 63% at the moment.  We’ve got no new-term debt refinancing. We’ve extended our fund level debt of around 60 million to August next year. That was successfully executed last week without major problems.  The next item on the list is the TAPS hybrid reset, which is in 2010. We’ve actually got numerous options in terms of conversion or extension of that high rate

5                      available to us. Beyond then really the Epic debt matures I think in August 2011. We’ve got some water debt maturing in 2011 as well. By far, the majority of our debt matures post 2018 and really those are the water company bonds which are sort of the asset level. 

 

10                    Moving to next slide, and so hedging. Very similar slides to what we’ve shown in the past. We’ve got a strong level of interest rate hedging, our cover in place. Very long tail with the South East Water bonds being fixed, real and nominal, maturing between 2019 and 2033.  We will continue to apply a conservative interest rate hedging policy as we go forward. You’ll see when

15                    we talk about the Epic debt and the QSN Link debt that’s being drawn down for the hedging strategy in place to ensure we’re locking in our own stripes for the long term.  Likewise, on the TAPS hybrid and the fund level debt, we’ve got 100% hedge covered in place for that. 

 

20                    Moving on to Slide 11 let’s talk a little bit around the Epic hedging. As I’ve mentioned, we’ve currently got very strong level of distribution hedging in place. We’ve got around 78% of our expected distribution from the water company’s hedged till 2010. We’ve put that hedging in place at acquisition and that’s why you see in the cash flow statements that we continue to

25                    receive the Aussie dollar expected amounts for our….historically and also for the near term. We’ve also recently taken advantage of lower forward rates to bring our hedging beyond 2010 up to 45%. So we’ve got 45% between 2010 -……during 2010 and during 2011 and 13% thereafter to June 2013, so we’ll continue to implement a rolling hedging strategy as we move forward so that

30                    we at all times know what our cash flows are going to be in Aussie dollar terms for the short to medium term. As I’ve mentioned previously, currency movements on the underlying capital value do not affect the cash flows while we’re holding that asset. We don’t actually hedge the capital value as that could require potentially to…. or it could require very large cash settlement

35                    either to HDF or actually from HDF and also given our strategies to hold the asset for the long term we’re going to put that in place.

 

                        In terms of our growth on the next slide, Slide 12, I think we’ve demonstrated over the….since inception that HDF has a very solid growth profile. We’ve

40                    certainly demonstrated historic growth in distributions and you will hear from Steve Banning and also from Paul and Jo about the growth prospects that we have in our existing assets.  So with that I’ll hand over to Steve Banning to run us through Epic Energy.

 

45        HDF     Thanks, Tom.  Good morning everyone. Again, just starting on Slide 14, just to touch on a couple of points on here. As people would be aware, we’re on three highly strategic assets across the country, South West Queensland Pipeline, Moomba to Adelaide Pipeline on the East Coast and the Pilbara Pipeline on the west. I believe we’re ideally placed to take advantage of the boom that we’re seeing in the (inaudible) (00:11:48) over in Eastern Queensland. From January of next year, we’ll be solving to actually bring that gap into the eastern state. 

 

5                      Moving on to Slide 15, Tom has touched on a couple of big points already, but looking at the financial result and just pick up on a couple of points here. Operating income year-on-year slightly ahead 1.4%, but within that the pipeline revenue was up by approximately 4% as expected, the…. we did see a slight reduction versus last year in terms of what we’d call our pipeline

10                    projects of third-party maintenance, just to give people a feel on those values.  In the first half of this year, we would have received around about $1 million of income associated with those projects, whereas last year that was two in the first half. For the full year in 2007, we received about 3.3 million. So we’d expect that to pick up in the second part, a number of projects underway that

15                    we’ll be receiving income from. The expenses, as you can see there, reduction expenses at the first half this year versus last year, under control despite, I guess, what we’ve (inaudible) the tight market conditions particularly on the labour side. Overall we’re seeing EBITDA are up 2.7% and operating profit before tax up 8% to the corresponding period. 

20

                        Moving on to Slide 16, what we’ve summarized there is that Epic’s current debt facilities, the amount available and the amount drawn, I guess, the points I’d make on this slide would be that, you know, the book equity value as of the 30th of June, we were geared at just under 43%. On completion of

25                    Stage 1 of the QSN expansion, that will take us to 51% to book equity value.  Once we go to Stage 2, which we’re committed to do, we run those numbers that will take us approximately 55%. So, again, some fairly conservative gear in there.

 

30                    Okay, just moving on Slide 17. Now people were probably seeing this chart before, but we have updated it. The contracted revenue capacity chart, that now includes a couple of extra things. It includes the Adelaide (inaudible) deal, which was announced in the market a couple of weeks ago, so that really comes into play from 2010 onwards and just reinforces our expectation,

35                    I guess, an ongoing renegotiation and renewal of existing contracts as we start to roll off. It does include some other contracts that haven’t been announced because they’re either for one year or two-year periods and weren’t deemed to be material at that point. So there are….as people see a pretty healthy position for us to be in and this is contracted take or pay

40                    revenues that we’re looking at here. We would anticipate that as a (inaudible) (00:14:54) as other contracts start to roll off in 2011 and 2012, they will be renewed for longer periods of time going forward. The one thing the chart doesn’t include at this moment in time is the deal that we announced with the (inaudible) (00:15:09) pipeline. That is still conditional and we’re working

45                    through to conditions precedent on that contract and hope to have those finalized by the end of the year, but we’ll keep the market updated as to where we stand on that.

 

                        Moving forward to Slide 18, just wanted to provide an update as to where we are in the Stage 1 and 2 expansions of the South West Queensland pipeline and the QSN Link. The project is on time and on budget for completion mid-January 2009. To give you some facts as to where that project is actually up

5                      to. In terms of the pipeline, which is the one that we’re constructing between Valero and Moomba, we’ve…..that’s 180-yard kilometres of pipe. We’ve cleared and graded the whole route. We’ve welded 145 kilometres of pipe, so.  We’ve completed 100 kilometres of lowering that pipeline back into the ground and backfilling behind it and 50 kilometres of reinstatement at the

10                    actual source. So it was well on schedule to be completed in the time frame that we are looking to (inaudible) (00:16:20). In terms of compressor facilities, we’ve completely….we’re putting in compression mid-line on the South West Queensland so people would be aware. The actual compressor units were delivered to site this week, and all other major equipment has already been

15                    stored on that facility. Our anticipation that it….that commissioning of those compressors will commence in early November and they’re on schedule to be ready for start-up come early January. 

 

                        On Slide 19, what we’ve looked to capture there is some… is the Stage 3

20                    expansion that we recently announced the market that we were undertaking a front-end engineering design study on. That, in effect there, are four pieces of work ongoing at this moment in time. There we are carrying out two-seat studies, one of which looks at fully compressing the pipeline; the second looks at fully looping the pipeline. The second piece of work that’s ongoing is

25                    the approval works that’s looking at native title and environmental approvals all need to be completed.  The third piece of work is the negotiations with potential shippers to lock in gas transportation agreements, and the fourth piece of work which we’re working pretty closely with HDF on is the capital solution. What we’ve announced here follows significant number of request

30                    from various shippers and producers in the marketplace looking to move gas into this space. So we’ll work through that.  Our anticipation is that that should come to ahead probably by the end of this year, early January is that the timetable.  On the right-hand side of that Slide 19, what we tried to capture there is how the market actually looks.  So on the right-hand side of that slide,

35                    you’re seeing Epic 1 Delta Hub . Now coming into that, currently today you have high-pressure gas pipelines from Fairview and from Spring Valley to Coal Steam Methane Field. By early next year,  you’ll have the one from (inaudible) South coming in. So we received gas at Wollumboola.  We can move it across to Blair (inaudible) (00:18:30) to Moomba for the delivery into

40                    the southern state.  We can also redirect that gas to Gladstone and also back towards the Brisbane market.  The numbers that we’d put on there just highlight a couple of things, where it’s got number 1 that is the Stage 1 expansion. So there’s compression going in the Wollumboola, there is compression going in midline on the South West Queensland and also with

45                    constructing the pipeline. Stage 2 is putting two (inaudible) (00:`18:54) compressor stations on that (inaudible) (00:18:54) that has to be online no later than 2013.  Stage 3 would either be full compression as you can see there from the number of three (inaudible) (00:19:06) across that route.  Four, (inaudible) (00:19:07) which is the green dotted line coming across together with the installation of one compressor station at or around Valero. So exciting project for us and we’re pushing ahead with that. 

 

                        Moving on to Slide 20, the other growth opportunities we’re looking at around

5                      the country.  There’s a lot of focus on the Pilbara region at the moment.  What we see over there is the increased (inaudible) (00:19:32) requirement.  That (inaudible) (00:19:34) with various new mining projects existing (inaudible) (00:19:37) operations all driven really by the high cost of liquid fuel but that’s currently over there. So, hopefully, we can progress on the opportunities

10                    there.  On the east coast, you know, there’s a possibility that you may not be aware of,  BHP expanding the Olympic Dam facility. If we look at our assets, we would like to think we’ve got an opportunity for enhanced utilisation or expansion of those assets to participate in that project to really go ahead. We're also looking at potential gas storage opportunities on the Moomba to

15                    Adelaide pipeline and that’s really driven by what we see as customer demand related maybe to the peaking sources that people are looking for, for the gas fired power station. Probably a fourth area we’re focusing on the (inaudible) (20:24) in Queensland and what can we do around Wollumboola.  Can we help facilitate additional cost to Coal Steam Methane to come into the

20                    Wollumboola hub through additional compression that might go in there or new pipelines to come in to that place? I guess, linked to that, if you have a question to these out there, is what can we do associated with the potential LNG and what is going on because clearly, those pipelines made putting in, we'd certainly be interested and talk to the various parties about that. To that

25                    point, I’ll finish talking about Epic and just hand it over to Paul Butler to talk about South East Water objectives.

 

            HDF     Good morning, everyone. It’s Jo Stimpson, actually.

 

30                    If you turn to Slide 22, I think it’s just quite a useful background slide. Some of you would have seen the map before, which showed the water only companies and the water and sewerage companies in England and Wales in the UK. You can see the former southeastern Mid Kent mount and that represents the merged company now. You can also see some sort of key

35                    aspects of the regulatory regime in terms of…… in that it is a very established regime. The water and….well, the water companies have 25 year rolling licenses. There are some fluctuations in the (inaudible) (21:45), they’re really at the margins. HDF actually controls 50% on South East Water. As you can see there, the  economic interest is a little under that and control is shared

40                    where you can see Trust of Australia, which is another fund that is managed Hastings Funds Management.

 

                        If we turn to Slide 23, which show our some recently released financial results. These are for the complete year through March 2008. They’re in

45                    Sterling. This represents a full-year of the merged company with other companies, the former Mid Kent operations in South East Water work merged into December 2007. We were able to give a merger accounting so that we could produce meaningful account showing the year of each of the component companies that’s very useful. The overall results were at a profit level pretty close to what we budgeted, very close to what we budgeted. So I think we’re reasonably pleased with them. You can see some increase in revenue. We haven’t had full recovery on water revenues from the downturn we saw in and after the drought, but we saw some recovery last year and

5                      cost control, which is sufficient to show that EBITDA has moved forward quite nicely. At the PBT level, there were some non-cash items moving in interests both largely around the RPI linked loans and bonds we have, which include not just RPI, but also we have book and fair value assumptions, a fair value movement on the UK gap. So that’s what hit there. In terms of how the

10                    business is placed at the moment, most resources are well placed. We are not envisaging any restrictions at the moment or they’re fairly average winds so which makes it range a reasonable amount. I’ll have to say it’s been up until August that (inaudible) (23:41) up and down, some are not particularly hot and August has been very wet. So we haven’t been straining on

15                    resources just at the moment. We’re trying to spend all our allocated capital spend for return regulatory period which ends in March 2010, and that is on track. We had quite a large year spend last year. This year, also we’re talking about 80 million of capital spend. As Paul will come onto later on, clearly another focus in the company at the moment in making the merger perceived

20                    as an operation, we’re (inaudible) (24:15) having got the corporate and financing and legal aspects of the merger after the way at the end of last year.

 

                        We turn to Slide 24, this really provides further details on the South East side

25                    of things to one of the earlier slides that Tom showed really looking at the financing we have in place. We have financing that is governed by sweeter covenants both at the senior level and also at the complete group level. One of the key covenants there is linking the amount of debt we have to our regulatory capital value. We, as the senior level, that limited to 85% on

30                    regulatory asset value, and at the HoldCo level, limiting it to 95%. Again, at those covenants, we were at 81.8% and 91.1% at the end of March. I think we can also say that, again as Tom pointed out earlier, we’ve got some very long maturities in there and it’s our plan generally that as we raise money we actually get diversity of maturities in there so that we won't expose particularly

35                    at all on any refinancing rate. I think I’ll hand it back to Tom at this point to pick up the next couple of slides.

 

            HDF     Yes.  Thanks, Jo. So we wanted to provide a little bit more details around our investment structure into the South East Water assets.

40

                        On Slide 25, we’ve shown there what the structure looks like. Essentially, when we acquired South East Water, our aim was to ensure that we could deliver a stable accretive yield to HDF shareholders for the current reset period. We need obviously from our due diligence that there was a large  

45                    capital program left for this regulatory period and neither the South East Water under the old ownership was behind in their spend. So we looked to implement a structure which allowed us to fund the growth Capex from a number of different cash flow sources. For the first sources, which I outlined there,  is debt so we can draw debt up to 85% of the regulatory capital value at the ringfence level and up to 95% at the HoldCo level. So obviously as the rate grows, that allowed us to draw down more debt to fund that. Those numbers obviously look very high, but that needs to be put in a context of ….that this is due….regulated capital values as opposed to enterprise value

5                      based on the sort of estimated enterprise value. The 91% is more like 71% to enterprise value. Growth is also funded in a small proportion by equity from other shareholder. Essentially, what we wanted to do there is when we made the acquisition, we only wanted to tap the market once from an HDF perspective, so we, I guess, are putting all the equity required from HDF to

10                    fund the growth Capex upfront, whereas UTA is contributing their equity in pre-agreed amounts to 2010 over time. The remaining growth to Capex is essentially funded from operating cash flow.

 

                        So if we move to Slide 26, we actually wanted to illustrate how that looked for

15                    the financial year 08. And so you can see, the water company EBITDA up just 100 million, and really the Capex that you can see there is a fairly substantial amount and that’s essentially funded by some debt draw downs, small equity injection from UTA, which again I’ve said is a pre-agreed amount. By far, I guess the majority of the Capex is really funded from operating cash flow

20                    coming out of the asset. So you can see there how we’ve arrived at cash available for distribution, and the distribution is paid to both shareholders. As pointed out there, it’s cash flow covered. So I’ll hand it over to Paul just to give an update on the merger prices. Obviously, you’ll be aware that the regulatory reset work has commenced, and Paul will run through with our

25                    process in that.

 

            HDF     Thanks, Tom. Good morning, everybody. I think the key headline on the update of that merger, so far, is it’s on plan and it’s going very well. As Jo mentioned, the corporate activity was completed back in December very

30                    successfully. A revised license was introduced and the financing was reset very successfully. That goes into place to be able to get on with the merger on the ground. Immediately a new management has been….have been selected from the three companies and were then able to introduce plans that are being worked up in the prior months. Each of that is the operations, the

35                    front-end of the business, and that was merged immediately. Quite a lot of work to get systems aligned and give all teams across the whole new company access to data. Initial work was done to achieve that. There is much more to do going forward, but it’s enabled those things to work together and move the business forward. We moved Mid Kent Waters approach to

40                    distribution work over to the South East Water model, and that required us to cheaply transfer out some stock to contractors, and in effect, extend the South East Water maintenance model across the whole area and that’s going very well. The last point there under operations is at the point of merger, we had two laboratories, a very sophisticated laboratory at Frimley with the South

45                    East Water model laboratory, with an amount of a third party activity as well and much more than the laboratory at Mid Kent Water. We closed the Snodland laboratory, the Mid Kent Water laboratory and transferred the activity across Frimley. I have to say that that transfer was very important. It’s very important to ensure that the testings are done properly as transfer was done very, very well. It was a good success. The other big piece of work that we got with regarding the merger is customer services. Mid Kent Water, as always, had an in-house call centre. South East Water, much bigger call centre but outsourced. We took the opportunity to the contracting staff, which

5                      also is coming to an end, and we looked at decision that we wanted to bring the call centre in-house (inaudible) (31:42)  merge the call centres in due course. We felt that that would offer a much better service to the customer a, in fact, enabled us in due course, they have much better control over our cost as well. A big piece of work. We have to upgrade the (inaudible) (32:01) of

10                    the sewerage teams which is going well, and we have to recruit 80 staff which we’ve done, taking them through a training program, and we are transitioning work across from the external provider, and that will be completed actually by the end of September and the call centre at Snodland will be fully operational. Back in December, part of the merging, immediate merging was the

15                    (inaudible) (32:33) transfer, the transfer of all Mid Kent Water staff across the South East Water following due compensation, and that went very well. We anticipate that once the merger is complete, there will be 93 reduction in head count of 93 of which approximately 61 is redundancy. Most of those redundancies are completed. There is still a program as we transition over

20                    the coming months to complete that activity. The new company is being headquartered at Snodland, which was the headquarters of Mid Kent Water, and we converted the Haywards Heath, which was the head office of South East Water (inaudible) (33:21) satellite. Actually, there are three offices there. We’ve closed one and centralized some activity there. Jo has really

25                    mentioned the issues around water resources and where we are. I won't say any more about that. I’ll just talk about synergies. We’ve committed as part of the Competition Commission outcome to achieve the 3.1 million savings, and we are well on target to achieve that. That was required over the 7, 8, 9 period. Of course, the majority of those savings are coming from the merging

30                    of the Head Office and Support functions. So, I guess, in conclusion on track and the mergers going very, very well.

 

                        A big thing that faces us at the moment if I move on to Slide 28, is the regulatory reset. Many of you will be familiar with the fact that it’s a five-year

35                    reset, so we’re looking at prices per water both the 2010 and 2015 period. All companies are reset at the same time, so we’re all going through the same process. The first big part, a public part of that process, is that all companies who have submitted draft business plans on the 11th of August, we await feedback from what to regulator in October 2008. On the back of that

40                    feedback, we will all have to have the issue of final business plans in April 2009, and that will lead to price determinations in November 2009. Our proposed price increase is an average of 4.7% per annum over the five years reel. Interestingly, if anyone wants to follow this, I do suggest that you need to keep an eye on the (inaudible) (35:18) website where actually you can see

45                    the summaries of the business plans of all the companies in the sector. It’s 4.7% average, a Year 1 increase and is in line with most companies as well. Quite a significant increase of 13.6% for us and it’s similar to most of the companies. That’s due to a re-pricing of our revenues catch up for the short fall in the latter part of this period which has to do with the lower average water usage we’re experiencing and also significant increase in power cost in that first year. The cost to capital…always an important part for the price determination. Ofwat's approach for this, this time around, was to signal very strongly to the companies of the sector. Their anticipation was the….. across

5                      the capital would be next than last time. I think it’s fair to say that most common (inaudible) (36:28) that supported that year, but everybody then might be ….. on Ofwater then concerned about saying that once they’ve given that initial signal, they’re nowhere near making a final decision and (inaudible) (36:45) issue to draft determination in the summer of 2009. The

10                    industry itself commissioned a piece of work on cost of capital and gave…. it gave a headline range of 4.4$ to 4.9% real post tax, and that compares to a 5.1% industry cost of capital the last time around. In our business plan, we commissioned an update from that industry report, which concluded on 4.9% plus a 0.25% Small Company premiums specific to South East Water. So that

15                    gives us 5.15, which is the signal to the -- putting our business around. Another important feature of our plan is capital expenditure. We put a planning with a significant program, 600 million. Example on the previous periods of…which was 350, a very large increase in most daily to capital, but significantly in terms of supply demand. This is driven off of our water

20                    resource plan that we produced for the next 25 years which includes a 20% increase in population in the area that we serve and the need for appropriate investments going forward. As I mentioned earlier, operating costs include increases in power cost that we’re suffering at the moment and other operating cost increases including pension contributions and some new

25                    legislation that’s come out in terms of traffic management and permit costs where we’re charged for access through the highways in the coming years. Some of you may have read that there is out there a review of competition. There’s a government review going on at the moment led by Professor (inaudible) (38:53). There is, at the moment and has been for the last ten

30                    years, limited competition. There’s an amount of what we call in-site appointment and access but it is very, very limited. Ofwat with their duty to promote competition are pushing on this very strongly. Once the government review….once the review (inaudible) (39:19), it’s not clear whether this government has actually got the exercise for any introduction of the

35                    competition yet. We are a long way off (inaudible) (39:28) what the outcome might be and what the government might and might not be willing to take forward and with that, I’ll hand it over to Tom.

 

            HDF     Thanks, Paul. Just going through the last slide then, I guess, there are really

40                    just three main points that I wanted to make. The first one is that the results once again show that we’ve got a very solid business. The cash flows you see from Epic and South East Water are very much in line with expectations, which really demonstrates the stability and the stability of the assets and also this fund. We’re in very good shape from a capital perspective, and again, we

45                    haven’t had to respond or do any…have any short-term reactions to what's currently going on in the debt markets, which is obviously a correct position to be in. Lastly, we’ve got some very attractive growth opportunities in which Steve pointed out, just talked to, which we will continue to pursue, so there are some exciting work ahead of us and hat’s really it. So at this point, I'd like to open it up for questions.

 

      Operator    We will now begin the question and answer session. If you wish to ask a

5                      question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press  the pound or hush key. Once again, if you would like to ask a question, please press star 1 at this time.

 

10                    Our first question comes from Nathan Lee [ph]. Please go ahead.

 

            Q         Good day, guys, Nathan here. Just a quick one. Steve, your guidance for FY 09, you put there FY '08, but nothing for FY '09. Are you going to be putting anything up?

15

            HDF     Yeah, thanks. Yeah. One comment on that will be that, I guess we typically determine if you’re going at the end of the year based on the cash flows that we expect from the next year and that’s sort of how we started in the past, and we probably look to do the same again. I guess, my point here would be

20                    that there are sort of three items we look at. Obviously, we’re currently constructing the QSN line which is expected to come online in January. Obviously, everything is on time and on track but, I guess, we’ll wait to get some more certainly on that before we look at the cash flows coming from that. The second thing is likewise, on the draft business plan, which Paul

25                    talked about, we should have some fairly information on that by the end of the year. Then obviously, thirdly, the Stage 3 growth opportunity, which we’re looking at, we will want to have a firmer view on our capital solutions before we give distribution guidance for the next year.

 

30        Q         But it’s likely to be at least at the account level, the FY '08 level?

 

            HDF     That’s certainly….at this point in time, there’s nothing to suggest to us that that’s not right, yeah.

 

35        Q         Okay, great. A second question was to just in terms of the debt facilities that you’ve got in place in the South East Water, do you have enough in place that are funding your Capex program going forward or are you going to need more capital going to the business from an equity point of view?

 

40        HDF     We’re certainly fine for the next….toward the end of this period.  But for the capital program that we’ve currently submitted across the business plan, we will intend to raise more finance. Specifically, what we’ve done in the past is we’ve drawn on our floating rate facility which is what we’re doing at the moment and then to refinance that with a bond or other long-term

45                    instruments. We are currently talking to the market to see if it’s worth us raising from finance really ahead of meeting it. Despite the markets being some more interesting, there are some opportunities that particularly with what the market looks like, but we have no immediate need at the moment. But certainly for the next regulation period, it’s likely that we will raise some sort of arrangement.

 

            Q         That’s right.

5

            HDF     I mean in Europe at the moment, the really….the only business we’re raising money in terms of bond market, at the moment, are utilities. As I said, there has been actually a number of water companies raising money in all of the utilities and there’s no immediate need.

10

            Q         Okay, great. Just one follow question. On the HoldCo deal, obviously, we haven’t seen much about that before. Can you just sort of walk me through the hedging program you’ve got with that and also, what sort of rates you got on that too?

15

            HDF     Yeah. That was put into place in December.

 

            QL       Yeah.

 

20        HDF     The loans are closing right loans procured with groups of banks, external banks and external finance providers and the HoldCo facility, we actually have no obligation under the finance and documents to hedge at least 75% of that within a couple of months thus completing the facility. That was hedged for its entire term as a liable rate of just around 5% and certainly up until now,

25                    that’s been quite the contribution to it. The junior facility, again, which is with our portfolio finance providers, there was an obligation under the docs to hedge that. But even with again the hedging market world, we actually hedged 100% of that up until the end of the current regulation period. We did that in April and got a very similar rate actually.

30

            Q         So the senior piece has been hedged at 75% out of 5% drop rate?

 

            HDF     No, the senior….. although the obligation is the 75%, we actually hedged 100% of it in the end.

35

            Q         Okay, great.

 

            HDF     So it was a minimum of 75% (inaudible) (45:34) that we …that given the rate we’re looking is really quite attractive compared to liable.  We actually went

40                    100%.

 

            Q         Yeah, great. Okay. Well, that’s the end of the my questions at the moment.

 

      Operator    Thank you. We’ll now take our next question from Andrew Wollie [ph]. Please

45                    go ahead.

 

            Q         Hi, guys. I just got on the conference call a bit late, so apologies if you’ve already covered up on this. My first question is just on Epic. Just with regards to the chart there you’ve got with spare capacity, I’m just wondering if you’re able to give us some broad split of where that spare capacity is.

 

            HDF     Yeah. Thanks, Andrew. In effect, this is the chart on Page 17. So we’re

5                      looking at the black line. Basically, we are sold out on the Southwest Queensland pipeline until mid-2014 (inaudible) (46:21) beyond this chart. We are also in effect sold out on the Pilbara pipeline until probably 2/3 of (inaudible) (46:30). So basically, the pickup you see in 2011 is on that, so those are contracts that will be coming off of the (inaudible) (46:38). They will

10                    be renewed. And then a little bit of the capacity step up in 2012 is from the Pilbara pipeline.

 

            Q         And in the spare capacity, with compression or without compression?

 

15        HDF     Sorry. This is capacity that’s coming back onto the market. It’s currently being used by shippers. So we wouldn’t have to make any kind of investment to actually sell that capacity back to others.

 

            HDF     Okay. And also, I’m just looking at….on the same chart, the uncontracted

20                    revenue there. It looks like it’s a bit less than the previous. I know it’s only a half-year, but is there an….can you provide a little bit more colour on that?

 

            HDF     There’s a couple of things that are going on there. Where we tend to make our, in effect, our uncontracted revenue is, you know,  if we have the extreme

25                    heat, extreme cold for the (inaudible) (47:29) spiking, that’s obviously all dependent on gas availability so there has been a couple of constraints there this year. Also, I think, you both have seen promising geographic coming online and starting to be stable.  So supplying to Adelaide isn't fluctuating to same extent as it had in previous years. But in looking ahead, we’re going

30                    through the winter period at the moment. We would anticipate revenue from that non-firm, uncontracted level coming in June, the second part of the year whether it’s the same as last year. I’m not sure at this point. We’ll just have to wait and see.

 

35        Q         Thanks. And my second question is probably for Paul. Just on the Ofwat and WACC, I’m just wondering when are we going to hear some more information from Ofwat on that. I know we’re heading into the regulatory process now. Is it going to be in July of next year when they publish the final business plan or perhaps before that?

40

            HDF     Yeah. You won't hear any before that. In fact, definitely Ofwat will say absolutely nothing now, and we won't be until they publish a draft determination, which is July next year. As part of that, they'll obviously say what the headline (inaudible) (48:53).

45

            Q         And in your discussions with them so far, would you say it become more positive or negative on your outlook for what the WACC may become?

 

            HDF     I mean, they did make quite this role. They took quite this role start upfront. and I’ve been deliberately…. to push everybody's expectation down and they got quite a kickback from the sector, from some analysts. Whilst I wouldn’t say they moved away from that point, they did this knowledge to me to see

5                      data going forward. Then on publishing it came out that once you do believe it’s lower, we’ve got to be (inaudible) (49:43). We don’t have to make our preliminary decision until July next year, and our final decisions until November. I think that the sectors have a view that it was a little better than the initial comment that was made.

10

            Q         Right. That’s all for me. Thanks so much.

 

      Operator    Thank you. [Operator's Instructions] We’ll now take our next question from Sam Teracas [ph]. Please go ahead.

15

            Q         Sorry. The question was asked already. So thanks for that.

 

            HDF     Thank you. We’ll move to a question from Ben Brownett [ph]. Please go ahead.

20

            Q         Hi, guys. I just missed the numbers that you were saying when you were talking about South East Water, the maximum that it did to us every way you’re actually set on those …the holding company and the ringfence.

 

25        HDF     So, at the senior level where the covenant is 85%, we received that 81.8 at March '08. We sort of kind of worked to around by 83% typically and at the group level, at the HoldCo level, again, it’s a 95% covenant. Between the senior term…in the junior term facility that we got a step better, (that’s giving a covenant to each one but at the top level, we’re at 91.1. That is the

30                    covenant of 95.

 

            Q         Okay, thank you. And then on QSN, I was just wondering if….you said Epic geared at 42.9 book equity value, can you tell us what the covenant there is? And when you say there’s headroom exist to a fund further growth Capex, are

35                    you referring to the fact that you’ve got headroom and you did covenants so that you’ve got undrawn facilities?

 

            HDF     Yeah. Looking at…. in terms of our covenants there, it’s 65%. So we’re well under that under our existing banking arrangements. I guess what I’m looking

40                    at for Stage 2 expansion is our ability to draw on the revolver that we have and to put that in place. Even when we fully utilized that, that will take us to approximately 55%. So the problem with Stage 3 is that we will need another solution and I alluded to that in my earlier comments.

 

45        HDF     So I guess the Stage 1 and 2 expansions, which we’ve committed to, we essentially got other …..we got a facility in place to fund Stage 1, and then we put room under our covenants to fund Stage 2. As Steve mentioned for Stage 3, we’re currently just starting to look at the capital solutions.

 

            Q         So does that mean, you have to then raise equity or refinance the whole package and have a new debt covenant for Stage 3?

 

            HDF     Well, not necessarily.  I guess that’s a sort of process we’re going through at

5                      the moment. At this point in time, we’ve really try to just work out what all of the options are and then work out which solution….it’s really provide the best value for our shareholders. So at this point in time, I can't really say because at this point, we just don’t know yet what that solution will entail. Also, it depends, I guess, on whether we do compression on looping because the

10                    capital requirements are very different between the two solutions.

 

            Q         And at current share price levels, would raising equity be too expensive?

 

            HDF     Yeah. We'd obviously, we…no, the share process is obviously pretty low, so I

15                    would say that, at the moment, it’s at the current levels. It’s not a rather particularly attractive solution.

 

            Q         Only because that’s sort of…. definitely a problem amongst the 60% companies, that fact, and I’m sort of wondering what you think about that and

20                    what steps you can do to ….I mean, improve that to a large degree.

 

            HDF     Yeah, I mean…well, I guess one of the things we’ve tried to do here, and I guess, there’s a couple of issues. One, of the companies that are trading really go down and have got, you know, obviously issues which they need to

25                    solve, short-term issues which, you know, we’ve tried to demonstrate here that we don’t have. We’ve also really tried to be very transparent about everything in this fund, in this presentation.  So what we’ve really tried to do is make sure people understand exactly how the structure looks, how our debt positions look, and really to give people comfort that, you know, there’s

30                    nothing in there which deserves just a blanket discount for unknown.  So, you know, we will continue to go ahead and deliver, you know, the opportunities which we think we have, and I guess in the medium to long term we hope that our share price will reflect that, but I think at the moment, you know, given what’s going on with some of the other players, you know, I think it’s pretty

35                    hard to not be affected by that, just by virtue of sentiment.

 

            Q         Yeah, sure.  Thanks guys.

 

            HDF     Thanks.

40

      Operator    We’ll now move to our next question, from Paul Johnston. Please go ahead.

 

            HDF     Thanks. Just a couple of questions, first on Epic, (inaudible) (00:55:22) I just keep talking about this Hunter pipeline and building power stations at New

45                    Castle as part of this feed study of South West Queensland…like are they part of those discussions or just…it seems to me that that seems like a logical answer. I don’t know why they keep banging on about this when you guys have got the capacity to expand quite easily. Could you sort of hint of…like how they’ve been involved in those discussions and, you know, is that part of what you’re thinking?

 

            HDF     Okay, thanks, Paul. Obviously, we’re not going to disclose who exactly we’re

5                      talking to. I guess the points we’d make on that though are, you know, there is some real demand for new source of gas to enter into the South Eastern market, that’s to replace existing latents that are running down. So we’re not looking at any development to this moment in time, which will include New field… Greenfield development. I think, you spun on in terms of our ability to

10                    expand that pipeline. It would appear to be the way to go. Reason for that is it gives people the opportunity to go to a number of market, not just one. So, you know, you can bring your gas across (inaudible) (00:56:39), you can bring it to Moomba, you can go into Nappa, Australia, Olympic Dam developed, you’ve got the opportunity to go there. You’ve got the opportunity

15                    to go into Sydney.  So for any of the shipment is their ability to mitigate risk in terms of the market they’re targeting is very high and, you know, this is -- would be built in existing easement, the starting of the construction site which is relatively low risk. But, you know, at the end of the day, we’ll sit down with the various shipments and we’ll try to reach an agreement and we’d love any

20                    party that’s now there looking to move gas that come and talk to us if we’re not already talking to.

 

            Q         Okay.  The second question is on the Pilbara system, that contract with BHP, I know -- I think from memory it expires 2013 (inaudible) (00:57:29) you bid

25                    out on the timing but can you sort of update -- I know it’s a long way out, but it seems pretty important for that Pilbara network as to where that goes. Any sort of updates on that or is it just way too far out?

 

            HDF     Now, look, we’re working at that pretty hard. I mean, the current contract

30                    expires at about August 2013, but what you’ve got to look there, although the (HBI) plant is no longer present, there are still five small generating -- power generation stations up there.  It’s also the Telfa mine, which takes gas along the Pilbara pipeline, there’s (inaudible) (00:58:09) its development associated with people, you know, (inaudible) (00:58:13) that’s made them public which

35                    is in my mind and also (inaudible) (00:58:17). So - and then you’ve got all the expansion that’s going around in the (inaudible) (00:58:21) area around putting in new ports or expanding loading facilities. So I guess, our view is that the generation requirements up there will increase significantly. So although we may not get to the position that we currently have, which is at

40                    least (inaudible) (00:58:39) that pipeline, we do see some help (inaudible) (00:58:42) going on in that pipeline longer term.

 

            Q         Okay. And when could we expect to hear some developments on that?  Like is that sort of new turn type announcements or are they a while away?

45

            HDF     Look, I guess, all that Epic can do is work with these guys and put solutions in place, which is what we are doing at this moment in time. Now for some of the new developments, timing will be driven by both parties rather than that.  We’ll just facilitate whatever they need to have happened.  But I guess, your -- an answer to that one is really, you know, what your view of the market would be in terms of when some of those projects might occur or might be announced.

 

5          Q         Okay.  Thanks. They’re very helpful.

 

            HDF     All right.

 

      Operator    As a reminder, if you do wish to ask a question, please press star-1. And we’ll

10                    now take a question from Jenny Cosgrow.  Please go ahead.

 

            Q         Tom, I just wanted to push a little further perhaps on a previous line of questioning, the capital solutions of Stage 3 on Epic. Two questions, what sort of time frame do you think a decision needs to be made on that? And

15                    second, would you be prepared to sell South East Water to fund that Epic expansion?

 

            HDF     Yes, thanks, Jenny. I guess, (inaudible) (01:00:02) from our perspective, we…. I mean, we don’t really need the capital, I would say, in the next 12

20                    months or so, 12 to 18 months, but we certainly need to -- in terms of physically having the capital, but we need to know what the solution is probably end of the year, or end of this year, early next year and have a pretty good level of certainty behind it because we’d look to sign the shipper contracts, obviously, on the basis that we can raise funding for it. So we do

25                    need to essentially know what we’re going to do by the end of the year. So that’s a sort of time frame we are currently working to. And in terms of the Water …I guess, the issue with selling Water, you know, I mean, the benefit the Water company brings is really twofold, one is obviously diversity of revenue streams. But also we do believe that there is really strong long-term

30                    growth in the asset. So, you know, it’s not, you know, it’s not, I think, something which…selling the Water is not something that I think is a particularly attractive solution, but then, you know, we do need to find a solution and we’ll look at all of the options.

 

35        Q         Thanks.

 

      Operator    Thank you.  We now have a question from Sam Periaca. Please go ahead.

 

            Q         Yes, hello. Yes. You mentioned earlier about your share prices being traded

40                    at a discount due to the sector and the current market. Do you ,,…are you guys doing anything to demonstrate to the market or brokers that you are not in the same boat as the rest of the guys?

 

            HDF     Well I guess, we’re trying to. You know, we’ve sort of tried to be extremely

45                    transparent about what our debt decisions are and what our structure looks like really because I think, you know, we feel pretty confident that we’ve got a very solid capital structure in place. So, I guess, you know, we do -- we are trying to demonstrate to the market that we don’t have the same issues that some of the other funds have in an attempt to, you know, to resolve that. But I think at the moment, the whole sector is being hit pretty hard because of, you know, what’s happening with a couple of other funds we have, have some serious problems.

 

5          Q         You said a couple of funds are actually your problem, is that within the same sector, utility sector or…?

 

            HDF     Well, I guess, yeah, I mean, I think probably, yeah, it’s obviously pretty public, what’s happening over the recent days.  So, you know, I think -- and generally

10                    I think that’s our comment for the last six months, the whole utilities infrastructure sector has been hit pretty hard.

 

            Q         And how long do you think that will last in term of an impact to HDF?

 

15        HDF     I have no idea. I mean, I just don’t know. It’s a pretty hard question to answer.  I mean it’s, you know, we’ll just have to see how the sector recovers.

 

            Q         Okay, thank you.

 

20  Operator    Thank you.  We’ll now take a question from (William Oloff).  Please go ahead.

 

            HDF     Will?

 

            Q         Sorry, guys. Just a quick one, obviously, with a few investments coming out,

25                    can you just remind us what exactly your investment criteria is?

 

            HDF     Yeah. Well, it’s an interesting one on the… I guess, you know, we’ve -- our investment criteria generally state that we’re looking for to build a diversified portfolio of assets that provides stable, gets balanced and stable yield and

30                    long-term growth.  We’re also looking in to hold our assets for the long term, and obviously we’re utility sector focused. With that said at the moment, we’re really focusing on organic growth, A, because we’ve got some actually fantastic opportunities in that area, and two, you know, we’re just not, I guess, really in a position to look at other acquisitions at the moment.  So I guess for

35                    us that part of the equation is pretty simple and we’re in a good position because we’ve got such organic ….such great …organic opportunities.  So that’s what we’re focused.

 

            Q         Right. So if there’s something like with Stage 3 expansion, would that need to

40                    be yield accretive immediately or I mean, what’s the outlook for you to increase in there?

 

            HDF     Yeah. I mean, you know, I think we’re obviously very focused on making it yield accretive. In fact, currently, we …you know, the economics are looking

45                    pretty attractive. Obviously there’s a two-year construction period which we need to go through, so we need to work through how we deal with that. But, yeah, I mean that’s the - I guess, the beauty of good organic growth is you get much more value for every dollar you spend.

 

            Q         Yeah.  Thanks a lot.

 

            HDF     And also, sorry, I’m just conscious of time.  So if we can maybe perhaps take the last question at this point. Thanks.

5

      Operator    Our last question, comes from Ben Brennett), please go ahead.

 

            Q         Sorry to hop on the same line of questioning, but you know, we saw MAp during the week announced an asset sell down on the buyback and I guess

10                    that was really showing the market where they thought the security portion  should be in relation to being the net asset (inaudible) (01:05:34) would you consider selling down, you know, South East Water and buying back your own security if you really triple this and what it’s worth?

 

15        HDF     Yeah. I don’t think, you know, necessarily the focus should always just be on South East Water. I mean, I guess, I mean, yeah, the first thing I would say is we’ve got two assets, right? So…and, you know, MAp obviously has the benefit of having a lot of assets and they can really, you know, sell down some to raise money. We don’t really have that. So, you know, we’re pretty

20                    limited in terms of what we can do. But that said, you know, we could…we will look at all of those options to try and deliver the growth.

 

            Q         I mean, I would have thought if it is trading at a significant discount, the IRR doing a buyback would have to be greater than the CAPEX IRR on the Stage

25                    3 expansion. Anyway or if you look to, you know, potentially sell that business perhaps something, I don’t know. Essentially a lot of options out there that’s… that no one is really taking across the sector except we saw MAp this week was kind of the first sort of stepping in the right direction, I guess.

 

30        HDF     Yeah, yeah. You know, I agree with that. And, you know, I think, yeah, we’ll be considering that along with, I guess, everybody else.  So, yeah.

 

            HDF     Ben, just - I mean, just to finish off, there are obviously a number of options that we need to consider and I think that what Tom is really saying is that all

35                    of them would be evaluated in the next three or four months now. Perhaps we can leave it there and just to say thank you everyone for joining us. If you do have any calls, we will be…all of us available on air, so give us a call on the mobile. I know you’ve all got the numbers. And other than that, we’ll just say thanks to Paul and Jo and thanks to Tom and Steve.

40

            HDF     Yeah. Thanks everyone for listening in.

 

PRESENTATION CONCLUDED

 

 

 

 

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