Utilities
Sustainability underestimated
Given ongoing difficult credit markets and last year's harsh AER decision, we
have undertaken a thorough analysis of the regulated utilities. In our view, the
banks are still going to be comfortable lending to the sector and this means that
current distribution levels are largely sustainable. Overweight stance maintained.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
Upside/
downside
Normalised
yield FY09F
SP AusNet SPN.AX Mar-09 Buy $0.99 $1.25 26% 12.00%
Spark Infra SKI.AX Dec-08 Buy $1.22 $1.80 48% 15.60%
DUET DUE.AX Jun-09 Buy $2.26 $2.45 8% 12.50%
Envestra ENV.AX Jun-09 Hold $0.32 $0.30 -3% 17.50%
APA Group APA.AX Jun-09 Buy $2.95 $3.50 19% 10.50%
HDF HDF.AX Dec-08 Buy $1.68 $3.00 79% 17.00%
Priced at close of business 17 February 2009.
Source: Company data, ABN AMRO forecasts
Debt will remain a key focus for investors again in 2009…
We believe investors will continue to have concerns about those stocks with high gearing
levels and/or low coverage ratios and companies with refinancings in FY09/10 are likely to be
subject to extra scrutiny by the equity market. However, Table 3 highlights that the funding
taps are still open and money is flowing into the regulated space.
… with regulatory concerns adding further uncertainty in the near term
The regulated utility space was dealt a severe blow late in CY08 when the Australian Energy
Regulator (AER) released a tougher-than-expected draft WACC review, causing a ~10%
decline in stock prices in the subsequent days. While investors will remain nervous until the
regulatory uncertainty is cleared up (final due by 31 March), we are cautiously optimistic that
the AER will ultimately soften its approach on both equity betas and credit ratings because
there is just too much necessary capex spend at risk if it doesn’t. However, if the draft were
to stand, our FCF forecasts would be trimmed by 5-10% pa (Table 12).
We believe sector capital structures are adequate and distribution levels sustainable
Focusing on key debt metrics and funding requirements, we estimate each stock will be able
to meet its growth capex profiles with the aid of modest capital raisings (eg, DRP/SPP). We
also believe current distribution levels can be sustained, although we now factor in flat
profiles, given capital needs. More conservative management teams may trim payouts by 10-
20%, but we would argue the revised distributions would still be extremely attractive vs the
shrinking RBA cash rate (currently 3.5%, but another 100bp of cuts priced in by the market).
Regulated utilities remain a safe bet, in our view – top picks SPN and SKI
In our view, availability of credit is key to a recovery of equity markets, but signs are not yet
pointing to an imminent rebound. Coupled with a bearish economic outlook, we are expecting
the regulated utilities to outperform again in 2009. We maintain our Buy call on both SPN and
SKI, upgrade DUE to Buy (from Hold) and stick with a Hold on ENV. We continue to rate
both APA and HDF as Buy, but see them as having different drivers to the ‘pure-play’ stocks.

Contents
Capital structures should be able to weather the storm 3
Many investors remain nervous about high gearing in this poor debt market
environment, although most regulated utilities performed well in 2008. Are existing
capital structures too aggressive for the new world of debt and equity? Are current
distributions sustainable?
3
Debt markets largely closed, but not for the regulated guys 4
Debt and equity markets inextricably linked 7
We believe there needs to be some sign of the debt market stabilising for a
meaningful equity market rally. The longer a recovery takes, and the deeper the
RBA cuts the cash rate in the meantime, the better the environment for the
regulated utility sector to outperform.
7
Debt shouldn’t be a four letter word for the reg cos 7
Equity market recovery still a long way off, Buy reg plays 8
Impact of the AER draft WACC review 12
On 11 December, the regulated utility space was dealt a blow by the AER’s draft
WACC review, which led to a 10% decline in stock prices. It seemed too aggressive
given the state of debt and equity markets and the sheer size of the proposed
capital commitments.
12
AER draft was a bolt from the blue, but final should ease up 12
Company analysis 14
SPN – Still our pick of the regulated utilities 14
SKI – Conservative ratios should pay off in the long run 18
DUET – Capital structure should survive the storm 22
ENV – Debt metrics still appear too tight 27
Utility sector metrics 31
Maintenance capex definition 32