Title: Open Briefing. Australian Pipeline Trust. Acquiring CMS Assets

Record of interview:
corporatefile.com.au
The Australian Pipeline Trust (APA) recently announced that it had signed an
agreement to purchase CMS Energy Corporation’s interest in the Parmelia assets
and Goldfields Gas Transmission pipeline (GGT) in Western Australia for $206
million (including all transaction costs). What impact will this transaction have on
APA’s earnings and cash flow per unit, earnings, revenue and EBITDA?

MD Jim McDonald
The acquisition is expected to be earnings and cash flow per unit accretive from
year one. The consensus earnings estimates for APA for FY04 are in the range of
$41 million to $43 million net profit after tax and pro forma, the acquisition would
have added around $8 million to that number.
Before the acquisition we accounted for Southern Cross Pipelines (SCP) on an
equity accounted basis because we previously owned 45% of SCP No1 Pty Ltd,
which owns 88.2% of the GGT. However, we will now consolidate it and revenue
will increase substantially by some 25%. For the year ended 30 June 2004, the
revenue generated from the assets acquired was $103.1 million and EBITDA was
$72.2 million.

corporatefile.com.au
Will distribution levels be affected?

MD Jim McDonald
We expect the current level of distribution of 21.5 cents per unit to be at least
maintained.

corporatefile.com.au
To what extent will this acquisition offset the expected decline in earnings from
your Moomba to Sydney Pipeline system (MSP)? What further opportunities are
there for APA to participate in the rationalisation of the gas transmission industry?

MD Jim McDonald
This acquisition more than replaces the future losses in earnings from the MSP
when revenue from the Gas Transportation Deed reduces. However, we’re also
beginning to see a couple of positive influences on revenue for the MSP with the
opening up of the Sydney market through full retail contestability.
The Dampier to Bunbury Natural Gas Pipeline (DBNGP) is the one remaining gas
transmission pipeline up for sale and we’re bidding for that in conjunction with
our Canadian partner Enbridge. We anticipate final bids to be lodged by 27
August 2004 and that should be the end of gas transmission pipeline sales for some
time.

corporatefile.com.au
How does the acquisition compare with recent sector transactions on the basis of
EV/EBITDA multiples and with APA’s historic EBITDA multiple?

MD Jim McDonald
We paid an EBITDA multiple of around 8.3 times for the assets acquired. That is
better than APA’s own trading multiples of 9.9 times, is better than other
comparable asset sales and compares very favourably with the trading multiples of
other utility stocks.

corporatefile.com.au
Did APA assume any debt associated with the pipelines? Allowing for debt, what
is the total cost of the transaction?

MD Jim McDonald
We paid $206 million in cash and we assumed 45% of the $250 million in debt
held in SCP No1 Pty Ltd. So the total purchase price, or enterprise value acquired,
was $318.5 million. Offsetting the price, there was $37.4 million of free cash in
the business, so on consolidation the EV is arguably $279.3 million.

corporatefile.com.au
Can you summarise the rationale and benefits of the transaction?

MD Jim McDonald
This acquisition fits very well with our growth strategy. It provides us with a more
diverse asset base and it allows us to acquire another minority stake which is
consistent with our strategy. We will also increase the utilisation of the GGT,
where additional compression is already planned, and there are opportunities to
improve the earnings from the Parmelia gas business which is presently underutilised.
Parmelia transports gas to Perth Basin and competes for gas supply to Perth with
the DBNGP. It’s therefore an important strategic pipeline particularly with the
lack of recent investment in the DBNGP. Should we be successful in acquiring
the DBNGP, then the Parmelia pipeline and the storage facilities may be better
placed as part of the DBNGP system and not as a stand alone pipeline.
The transaction will have an immediate positive financial impact on APA and it
provides further diversification to our asset portfolio and a larger presence in
Western Australia.

corporatefile.com.au
APA raised $61.7 million through an institutional placement of 24.5 million new
ordinary units at an issue price of $2.52 per unit. How successful was the
placement? How many new institutions participated?

MD Jim McDonald
The placement was over-subscribed and new institutions came onto our register.
The placement was made at $2.52, a discount of only around 3% to our share price
at the time it was put into trading halt. When trading recommenced, the units
traded as high as $2.75 and only a small number of trades went through for the
day. So it was a very successful placement. It’s clear that the market has
supported the acquisition, and around 30 new institutions have come onto our
register. It will improve over liquidity, and APA’s market capitalisation is now
over $700 million, firmly back in the ASX top 200.

corporatefile.com.au
APA is funding the acquisition from cash, existing debt facilities and equity by
way of a bookbuild placement of $61.7 million. What will APA’s gearing (debt to
debt plus book equity) be post acquisition and how quickly will you bring gearing
back to your long run target of 65%?

MD Jim McDonald
Pro forma gearing (debt to debt plus book equity) after the acquisition, capital
raising and the impact of tax consolidation, is expected to be 65% and in line with
our long run target.
APA received a one-off income tax benefit of $92.9 million profit after tax
following a decision to enter tax consolidation effective 1 July 2003. The impact
of that is we’ll wind up with a gearing level which is practically spot-on our long
run target of 65% after the acquisition.

corporatefile.com.au
You’ve said previously that a step change in APA’s businesses was needed to
match your company’s historic growth rates. Has that put you under pressure to
purchase assets such as these?

MD Jim McDonald
I wouldn’t call it pressure. Buying or building pipelines to improve this business
is what we do.

corporatefile.com.au
Some media and broker analysts have disagreed with recent prices paid for gas
transmission pipelines. Can you comment on the level of competing bids for the
assets you’ve acquired? Was it an advantage being an existing owner of a share in
the GGT?

MD Jim McDonald
I don’t think I should comment on the level of competing bids, although I can say
that we have a reputation for not paying too much for assets and this acquisition is
consistent with that. I don’t believe we’ve been criticised by any analyst or media
commentator for the price we paid.
Although we didn’t have pre-emptive rights on a sale, it was an advantage being
an existing owner of the GGT. Once CMS decided to sell the assets in one line,
they indicated they needed certainty and speed of completion. We were able to
offer both because of our knowledge of the GGT pipeline. That helped persuade
CMS that we were the logical buyer. It also helped that our bid was free of
conditions.

corporatefile.com.au
To what extent will the CMS assets diversify your revenue base?

MD Jim McDonald
In order to answer this clearly, we need to talk about numbers on a pro-forma basis
because, as I mentioned earlier, we previously equity accounted for GGT. Prior to
the acquisition, our share of the GGT would have contributed around 22% of
APA’s total revenues for FY04 on a pro forma basis, and this would have been
32% post acquisition. Similarly, the contribution to revenue from our largest
asset, the MSP, falls from 41% pre-acquisition to 32% post acquisition. The
Parmelia assets would have contributed around 7% to FY04 revenues post
acquisition.

corporatefile.com.au
APA will acquire 100% of the Parmelia business including the 416km Parmelia
pipeline carrying gas from the Perth Basin, associated gas processing and storage
infrastructure and a small gas retail business and 45% of SCP. APA already owns
55% of SCP. How do the pipelines acquired compare with your existing pipeline
assets in terms of capacity and length?

MD Jim McDonald
The GGT has a capacity of 105 TJ/d ranking it third amongst APA’s gas pipelines
and the Parmelia pipeline has a capacity of 70 TJ/d, ranking it fifth. Our largest
pipeline is the MSP which has a capacity of 440 TJ/d and a length of 2,026km.
The GGT is 1,380km long, ranking it third and Parmelia is 416km long, ranking it
sixth. The GGT is expandable to 164 TJ/d under full compression and the
Parmelia pipeline is expandable but not anticipated.

corporatefile.com.au
How much of the existing capacity for each pipeline is contracted and what scope
is there to expand volumes?

MD Jim McDonald
The current capacity of the GGT is fully contracted and the pipeline is expandable
to 164 TJ/d under full compression. WMC, Newmont and Alinta are the major
customers and there are numerous third party shippers including Minara
Resources, OMG Cawse, Agincourt, AGL and Barrick.
We believe the potential to increase contracted volumes is very high for the GGT
because of the current buoyant conditions in the minerals industry. We have
several projects under discussion including in iron ore and nickel.
The current capacity of the Parmelia pipeline is 70 TJ/d and it is around 50%
contracted. It is expandable but it’s not anticipated that we’ll do that in the
foreseeable future. We do intend to make use of the storage facility at Mondarra
in the near future.

corporatefile.com.au
How old is each pipeline and what are the ongoing capital maintenance
requirements?

MD Jim McDonald
The GGT was built in 1996, so it’s a new generation pipeline and is in excellent
condition. We expect ongoing capital expenditure requirements to be around $1.8
million p.a., while the Parmelia pipeline was built in 1971 and is expected to
require around $0.4 million p.a. in ongoing capital expenditure. Although
Parmelia is an older pipeline it’s in good condition apart from its compressors.
However, we don’t expect we’ll need those compressor stations.

corporatefile.com.au
The acquisition of the Parmelia assets will allow you to move into gas storage and
processing businesses as you intended. How broad are the opportunities to acquire
additional businesses of this sort? How far will APA diversify along the gas chain
which extends from exploration through to gas retailing?

MD Jim McDonald
A small gas retailing business was included with the Parmelia assets but we’ll
probably dispose of that.
A feasibility study will commence as soon as possible to scope de-bottlenecking of
the storage facility.
This is our first investment in gas storage and processing. However, coal bed
methane production in Queensland has advanced to a stage where it’s pretty much
contractible and we’re actually in active discussion with coal bed methane
producers to establish a central gas processing, drying and compression facility.
That will be connected to our pipelines by new pipelines. This is another area
which we believe provides us with good opportunities to expand and diversify our
revenue base.

corporatefile.com.au
Can you explain the historical regulatory environment and the regulatory regime
that will apply in the future to these pipelines? What is the likely impact on
revenues for the GGT if the draft regulatory decision becomes final?

MD Jim McDonald
The draft regulatory decision was released pretty well the same day we bought the
CMS share in the GGT. Although it was in line with our expectations of where
the regulator would be at this point in the process, it is at the lower end of the
range of reasonable outcomes.
The draft is currently under internal review. I think it’s safe to say that no draft
regulatory decision has ever survived discussion or appeal and we expect that this
decision will improve in our favour.
The Parmelia pipeline is not regulated.

corporatefile.com.au
APA has previously lodged a bid for the DBNGP. What is the process before the
sale is finalised? How many bidders remain in the race and will a successful bid
stretch APA’s funding capabilities?

MD Jim McDonald
We believe there are two other bidders and possibility a third. Final bids are due
on 27 August 2004 and the receiver recently told us that they expect an early
completion, so maybe by the end of September or October.
It’s a fairly big investment but I don’t believe it’s going to stretch our funding
capabilities if we’re the successful bidder. We anticipate that we’ll have to raise
additional equity to fund our share of the purchase price. However, we don’t
expect that to be an issue: we are well pleased with the support the market gave us
with the CMS acquisition. We are being careful to bid for the pipeline at the right
price.

corporatefile.com.au
Thank you Jim.