Interim Financial Report 30 June 2006 Spark Infrastructure Holdings No. 1 Limited ABN 14 116 940 786 Spark Infrastructure Holdings No. 2 Limited ABN 16 116 940 795 Spark Infrastructure Holdings International Limited ARBN 117 034 492 Spark Infrastructure Trust ASRN 116 870 725
Results for Announcement to the Market Financial Period to 30 June 2006 Income and Profit Summary 1 118,709 Income from Investments in Associates (Refer Note below) Underlying income from Investments in Associates Profit before income tax and Loan Notes interest 103,090 97,119 Net Profit attributable to the Stapled Security Holders (Refer Note below) 19,678 Underlying net profit attributable to the Stapled Security Holders Earnings per Stapled Security before Loan Notes interest Earnings per Stapled Security 6,745 9.63 1.95 Note on Net Profit for the Period In accordance with accounting standards, the impact of movements in fair value of financial instruments that do not qualify for hedge accounting is taken into current period profits. As a consequence, in the accounts of the Asset Companies, CHEDHA and ETSA, a benefit of $31.9 million (Spark s share: $15.6 million) was included in the income statement, with resulting impact on Spark Infrastructure s result. This is a non-cash and non-operating item and therefore should be excluded when calculating the underlying results of Spark Infrastructure. The impact of these items on income from investments in Associates and Net Profit attributable to the Stapled Security Holders is as follows: Financial Period to 30 June 2006 Impact on Income from Associates Income from Investments in Associates (as reported) Impact of movement in value of financial instruments on equity profit Underlying Income from Investments in Associates 118,709 (15,619) 103,090 Impact on Net Profit Attributable to the Stapled Security Holders Net Profit attributable to the Stapled Security Holders (as reported) 19,678 Impact of movements in value of financial instruments on equity profit (15,619) Tax impact of the above 2,686 (12,933) Underlying net profit after tax attributable to the Stapled Security Holders 6,745 1 in respect of the financial period from 1 November 2005 to 30 June 2006 as detailed in note 1(k). Page 1
Results for Announcement to the Market Distributions Amount Per Stapled Security Paid: Distribution in respect of financial period ended 31 December 2005 (paid on 15 March 2006): 2 - Interest on Loan Notes 0.38 - Capital distribution 0.01 0.39 Payable: Interim distribution in respect of year ending 31 December 2006 (payable on 15 September 2006): 3 - Interest on Loan Notes 6.77 - Capital distribution 0.34 Distribution payable 7.11 Franked Amount Per Stapled Security Nil The Record date for determining entitlements to the distribution payable is 6 September 2006. 2 in respect of the period from 1 November 2005 to 31 December 2005 3 in respect of the period from 1 January 2006 to 30 June 2006 Page 2
Consolidated Income Statement Note Consolidated Financial Period to 30 June 2006 Income from Associates: - interest 50,960 - share of net profits of Associates accounted for using the equity method 2 67,749 118,709 Other income - interest 676 119,385 Management fee (5,725) Finance costs - Senior Debt (14,630) General and administrative expenses (1,911) Profit before income tax and Loan Notes interest 97,119 Interest expense - Loan Notes (paid/payable to Stapled Security Holders) (72,073) Profit before income tax attributable to Stapled Security Holders 25,046 Income tax expense (5,368) Net profit for the period attributable to Stapled Security Holders 19,678 Earnings per Security Weighted average number of Stapled Securities 1,008,651,308 Profit before income tax and Loan Notes interest () 97,119 Basic Earnings per security before income tax and Loan Notes interest 9.63 Earnings used to calculate earnings per security () 19,678 Basic earnings per Security based on net profit attributable to Stapled Security Holders. 1.95 (Diluted earnings per Security is the same as basic earnings per Security) Notes to the financial statements are included on pages 7-18 Page 3
Current Assets Spark Infrastructure Consolidated Balance Sheet as at 30 June 2006 Note Consolidated As at 30 June 2006 Cash and cash equivalents 46,566 Receivables from Associates 16,702 Other Receivables 131 Total Current Assets 63,399 Non-Current Assets Investments in Associates: - investments accounted for using the equity method 3 1,294,268 - loans to Associates 4 887,636 2,181,904 Loans - other 46,551 Other financial assets 3,709 Total Non-Current Assets 2,232,164 Total Assets 2,295,563 Current Liabilities Loan Notes interest payable to Stapled Security Holders 68,240 Payables 4,755 Total Current Liabilities 72,995 Non-Current Liabilities Loan notes attributable to Stapled Security Holders 1,231,515 Other interest bearing liabilities 423,323 Deferred tax liabilities 6,485 Total Non-Current Liabilities 1,661,323 Total Liabilities 1,734,318 Net Assets 561,245 Equity Equity attributable to Stapled Security Holders - Issued capital of the parent entity 181,598 - Minority interest issued capital of other entities in the stapled group 357,374 Equity attributable to the Stapled Security Holders 538,972 Reserves 2,595 Retained earnings 19,678 Total Equity 561,245 Notes to the financial statements are included on pages 7-18 Page 4
Consolidated Statement of Changes in Equity For the Financial Period ended 30 June 2006 Ordinary Shares Parent Entity Ordinary Shares/ Units Minority Interest Consolidated Hedge Revaluation Reserve Retained Earnings Total Equity Opening balance - - - - - Equity contributed by Stapled Security Holders 186,212 366,556 - - 552,768 Share/unit issue costs (4,614) (9,081) - - (13,695) Net profit for the period - - - 19,678 19,678 Capital distributions - (101) - - (101) Changes in fair value of cash flow hedges - - 3,708-3,708 Income tax effect directly transferred to equity - - (1,113) - (1,113) Balance at 30 June 2006 181,598 357,374 2,595 19,678 561,245 Notes to the financial statements are included on pages 7-18 Page 5
Consolidated Statement of Cash Flows Consolidated Financial Period to 30 June 2006 Cash Flows Related to Operating Activities Partnership income received Preferred Partnership Capital 24,420 Interest received - Associates 34,258 Interest received - other 474 Interest paid - other (13,230) Management fees (3,137) Other Net cash inflow from operating activities (1,121) 41,664 Cash Flows Related to Investing Activities Amounts advanced - Associates (892,824) Amounts advanced Others, net of repayments (46,550) Repayment of borrowings - Associates 5,187 Payments for investments in Associates Net cash outflow related to investing activities (1,250,695) (2,184,882) Cash Flows Related to Financing Activities Proceeds from issue of shares and units 552,768 Payments for share and unit issue costs (13,695) Proceeds from issue of Loan Notes 1,262,803 Payment of Loan Notes issue costs (31,288) Proceeds from external borrowings 425,000 Payment for external borrowing costs (1,870) Distributions to Stapled Security Holders: - Loan Notes interest (3,833) - Capital return Net cash inflow related to financing activities (101) 2,189,784 Net increase in cash for the period 46,566 Cash and cash equivalents at beginning of period - Cash and cash equivalents at end of period 46,566 Notes to the financial statements are included on pages 7-18 Page 6
Notes to the Financial Statements Note Contents 1. Summary of Accounting Policies 2. Share of Equity Accounted Profits 3. Investments Accounted for using the Equity Method 4. Loans to Associates 5. Finance Facilities 6. Details Relating to Distributions 7. Contingent Liabilities and Contingent Assets 8. Segment Information 9. Subsequent Events 10. Consolidated Income and Cash Flow Statements for the Six Months to 30 June 2006 11. Directors Details Page 7
Notes to the Financial Statements 1. Summary of Accounting Policies Basis of preparation This financial report is a general purpose financial report prepared in accordance with the Corporations Act 2001 and AASB 134 Interim Financial Reporting. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. This financial report does not include all the notes of the type normally included in an annual report. The report has been based on historical cost method. This report is for the period from incorporation of each Stapled Entity and registration of the Spark Trust Scheme to 30 June 2006, as set out in Note 1(k). Significant accounting policies The following significant accounting policies have been adopted in the preparation and presentation of the half-year financial report: (a) Principles of consolidation Spark Infrastructure is a stapled structure comprising the ordinary shares in Spark Infrastructure Holdings No 1 Limited, Spark Infrastructure Holdings No 2 Limited and Spark Infrastructure Holdings International Limited, the ordinary units in the Spark Infrastructure Trust and the Loan Notes issued by Spark Infrastructure Trust, which have been stapled pursuant to a Stapling Agreement. The Stapled Securities are listed and traded on the Australian Stock Exchange, as if they were a single security. Spark Infrastructure is a business combination by contract alone and thus is, prima facie, not a business combination for the purposes of the application of Australian Accounting Standard AASB 3 Business Combinations ( AASB 3 ). AASB interpretation 1002 Post-date of Transition Stapling Arrangements issued in December 2005 effectively scopes business combinations by contract alone back into AASB 3 by requiring application of the general principles outlined in AASB 3. In preparing the consolidated financial statements, Spark Infrastructure Holdings No 1 Limited has been identified as the parent entity of the Spark Infrastructure on the basis that it has issued the largest amount of ordinary equity. As Spark Infrastructure Holdings No 1 Limited does not own any shares in Spark Infrastructure Holdings No 2 Limited or Spark Infrastructure Holdings International Limited or any of the units in the Spark Infrastructure Trust, the entire amount of the issued equity and units of those entities has been reflected as a minority interest in the consolidated balance sheet of the Spark Infrastructure. (b) (c) (d) Acquisition of assets The purchase method of accounting is used for all acquisitions of assets. Cost is determined as the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition. Borrowings Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments. Page 8
Notes to the Financial Statements 1. Summary of Accounting Policies (continued) Significant accounting policies (continued) (e) Creditors and accruals Trade creditors and accruals are recognised when there is an obligation to make future payments resulting from the purchase of goods and services. (f) Derivative financial instruments The consolidated entity enters into a variety of derivative financial instruments to manage its exposure to interest rate risk, including interest rate swaps. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The consolidated entity designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), hedges of highly probable forecast transactions (cash flow hedges), or hedges of net investments in foreign operations. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss deferred in equity remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit and loss immediately, together with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit and loss from that date. Derivatives that do not qualify for hedge accounting Changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised immediately in profit or loss. (g) Financial instruments Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. Page 9
Notes to the Financial Statements 1. Summary of Accounting Policies (continued) Significant accounting policies (continued) (g) Financial instruments (continued) Interest, dividends and distributions Interest, dividends and distributions are classified as expenses, distributions of profit or a return of capital consistent with the balance sheet classification of the related debt or equity instruments or component parts of compound instruments. (h) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax ( GST ), except: i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised exclusive of GST. The net amount of GST recoverable from, or payable to the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (i) Impairment of assets At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset or cashgenerating unit is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. Page 10
Notes to the Financial Statements 1. Summary of Accounting Policies (continued) Significant accounting policies (continued) (j) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. Deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in associates except where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess. Page 11
Notes to the Financial Statements 1. Summary of Accounting Policies (continued) Significant accounting policies (continued) (j) Income tax (continued) Tax consolidation legislation Tax consolidation groups have been formed within Spark Infrastructure, whereby whollyowned Australian resident entities have combined together to form a tax consolidated group that will be taxed under Australian taxation law as if it was a single entity. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of members of a tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group using the separate taxpayer within group approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the head entity in the relevant tax consolidated group. (k) Incorporation The date of Incorporation or registration of each Stapled Entity is as follows: Stapled Entity Date of incorporation/ registration Spark Infrastructure Holdings No. 1 Limited 1 November 2005 Spark Infrastructure Holdings No. 2 Limited 1 November 2005 Spark Infrastructure Holdings International Limited 8 November 2005 Spark Infrastructure Trust 8 November 2005 The Stapled Entities have been granted relief by the Australian Securities and Investments Commission ( ASIC ) from subsection 323D(5) of the Corporations Act 2001, which requires that the half-year of a company, registered scheme or a disclosing entity be for the first six months of a financial year. The relief allows the Stapled Entities to prepare its first half-year report from the date of incorporation or registration to 30 June 2006. Accordingly, the attached financial statements have been prepared from the date of incorporation or registration of each Stapled Entity to 30 June 2006. (l) Investments in associates Investments in associates are accounted for initially at cost and adjusted thereafter for the post-acquisition changes in Spark Infrastructure s share of the net assets of the associates. Spark Infrastructure s income statement includes its share of the profit or loss after tax of the associates. (m) Loans and receivables Loans to associates and other receivables are recorded at amortised cost less any impairment. (n) (o) Revenue recognition Dividend and interest revenue Dividend revenue is recognised on a receivable basis. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial asset. Rounding of amounts As Spark Infrastructure is an entity of the kind referred to in ASIC Class Order 98/0100, relevant amounts in the financial report and Directors Report have been rounded to the nearest hundred thousand dollars, unless otherwise indicated. Page 12
Notes to the Financial Statements Financial Period to 30 June 2006 2. Share of Equity Accounted Profits CHEDHA Holdings Ltd (CHEDHA) 17,742 ETSA Utilities Partnership a (EUP) 50,007 a Includes Preferred Partnership Capital distribution 3. Investments Accounted for using the Equity Method (a) Amount of Investment in Associates: 67,749 As at 30 June 2006 - Investment in CHEDHA 201,931 - Investment in EUP Ordinary Capital 457,827 - Investment in EUP Partnership s Preferred Partnership Capital 634,510 (b) Particulars of Investment in Associates 1,294,268 Name of entity Principal activity Ownership interest % CHEDHA Ownership of electricity distribution business 49 EUP Ownership of electricity distribution business 49 (c) Share of Associates Profit and Loss: Financial Period to 30 June 2006 Revenue 429,472 Expenses 384,117 Profit before income tax 45,355 Income tax benefit 6,594 Net Profit for the period 51,949 Additional share of profit from Preferred Partnership Capital 18,664 Additional depreciation/amortisation charge a (2,864) Share of net profits from Associates 67,749 a Relates to depreciation/amortisation of fair value on uplift of assets on acquisition. Page 13
Notes to the Financial Statements 3. Investments Accounted for using the Equity Method (continued) (d) Share of assets and liabilities of Associates Assets As at 30 June 2006 Current Assets 217,958 Non-Current Assets 4,360,341 Total Assets 4,578,299 Liabilities Current Liabilities 246,093 Non-Current Liabilities 3,513,964 Total Liabilities 3,760,057 Net Assets 818,242 Net assets before EUP Preferred Partnership Capital 818,242 EUP Preferred Partnership Capital 622,300 Net assets attributable to Spark Infrastructure 1,440,542 4. Loans to Associates Loans to associates As at 30 June 2006 - interest bearing a 887,636 a 100 year loan to CHEDHA at fixed interest rate of 10.85% per annum. 887,636 Page 14
Notes to the Financial Statements As at 30 June 2006 5. Finance Facilities Unsecured syndicated bank borrowings - Amount used 425,000 - Amount unused - 425,000 Unsecured working capital facility - Amount used - - Amount unused 50,000 50,000 Cents per Security Total Payment Date 2006 6. Details Relating to Distributions Recognised Amounts (Distribution Paid): Distribution in respect of the period ending 31 December 2005: Interest on Loan Notes 0.38 3,833 Capital Distribution 0.01 101 0.39 3,934 15 March Unrecognised Amounts (Distribution Payable): Interim distribution in respect of year ending 31 December 2006: Interest on Loan Notes 6.77 68,240 Capital Distribution 0.34 3,475 7.11 71,715 15 September All distributions are unfranked. There was no franking account balance as at 30 June 2006. 7. Contingent Liabilities and Contingent Assets There were no material Contingent Liabilities or Contingent Assets as at 30 June 2006 which have not already been disclosed in this report. Page 15
Notes to the Financial Statements 8. Segment Information The consolidated entity operates in one business segment, being ownership of utility distribution businesses, and one geographical area, being Australia. 9. Subsequent Events There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial period, that has significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial periods. 10. Consolidated Income and Cash Flow Statements for the Six Months to 30 June 2006 As this financial report is for the period from 1 November 2005 to 30 June 2006, Spark Infrastructure has provided income and cash flow statements for the six months period to 30 June 2006 in order to enable comparisons in future reporting periods. (a) Consolidated Income Statement for the six months to 30 June 2006 1 January 2006 to 30 June 2006 Income from Associates: - interest 48,041 - share of net profits of Associates accounted for using the equity method 63,310 111,351 Other income - interest 676 112,027 Management fees (5,401) Finance costs - Senior Debt (13,802) General and administrative expenses (1,611) Profit before income tax and Loan Notes interest 91,213 Interest expense - Loan Notes (distribution paid/payable to Security Holders) (67,944) Profit before income tax attributable to Stapled Security Holders 23,269 Income tax expense (4,729) Net profit for the period attributable to Stapled Security Holders 18,540 Page 16
Notes to the Financial Statements 10. Consolidated Income and Cash Flow Statements for the Six Months to 30 June 2006 (continued) (b) Consolidated Cash Flow Statement for the six months to 30 June 2006 1 January 2006 to 30 June 2006 Cash Flows Related to Operating Activities Partnership income received Preferred Partnership Capital 24,420 Interest received - Associates 34,258 Interest received - other 474 Interest paid - other (13,230) Management fees (3,137) Other (1,121) Net cash inflow from operating activities 41,664 Cash Flows Related to Investing Activities Repayment of borrowings - Associates 5,187 Repayment of borrowings - other 4,085 Net cash inflow related to investing activities 9,272 Cash Flows Related to Financing Activities Payments for share and unit issue costs (5,559) Distributions to Stapled Security Holders: - Loan Notes interest (3,833) - Capital return (101) Net cash outflow related to financing activities (9,493) Net increase in cash for the period 41,443 Opening Cash 5,123 Cash and cash equivalents at end of period 46,566 Page 17
Notes to the Financial Statements 11 Directors Details (a) The following persons were directors of the Stapled Entities during the period and up to the date of this report: Spark Infrastructure RE Limited Spark Infrastructure Holdings No. 1 Limited Spark Infrastructure Holdings No. 2 Limited Spark Infrastructure Holdings International Limited Director Date Appointed Date Appointed Date Appointed Date Appointed S Johns 8 November 2005 8 November 2005 8 November 2005 8 November 2005 H L Kam 8 November 2005 1 November 2005 1 November 2005 8 November 2005 E Kwan 8 November 2005 1 November 2005 1 November 2005 8 November 2005 S Mays 8 November 2005 1 November 2005 1 November 2005 - B Scullin 8 November 2005 1 November 2005 1 November 2005 - D M Morley 8 November 2005 8 November 2005 8 November 2005 - C Bart 8 November 2005 8 November 2005 8 November 2005 - P St George 8 November 2005 8 November 2005 8 November 2005 - (b) To facilitate the registration and incorporation of the Stapled Entities prior to Spark Infrastructure s Initial Public Offering the following persons were directors during the period: Spark Infrastructure RE Limited A J Fay, J D Dorrian and D V Latham - appointed 24 June 2005, resigned 8 November 2005 Spark Infrastructure Holdings No. 1 Limited Spark Infrastructure Holdings No. 2 Limited D V Latham - appointed 1 November 2005, resigned 8 November 2005 Spark Infrastructure Holdings International Limited I E Collie - appointed 28 October 2005, resigned 8 November 2005 Page 18
Directors Report For the Financial Period ended 30 June 2006 The Directors of Spark Infrastructure are pleased to provide this first interim financial report for the period to 30 June 2006. This report covers the activities of the following entities from the date of their incorporation or registration, as set out in Note 1(k), to 30 June 2006: Spark Infrastructure Holdings No. 1 Limited Spark Infrastructure Holdings No. 2 Limited Spark Infrastructure Holdings International Limited Spark Infrastructure Trust Directors The following persons were directors of Spark Infrastructure during the Period and up to the date of this report. Spark Infrastructure Holdings No. 1 Limited; Spark Infrastructure Holdings No. 2 Limited; and Spark Infrastructure RE Limited (as Responsible Entity of the Spark Infrastructure Trust) Mr Stephen Johns Mr Hing Lam Kam Mr Eric Kwan Mr Shaun Mays Mr Brian Scullin Mr Don Morley Ms Cheryl Bart Mr Peter St George Spark Infrastructure Holdings International Limited Mr Stephen Johns Mr Hing Lam Kam Mr Eric Kwan Details of dates of appointment of the above directors and other persons who were directors of Spark Infrastructure during the period are set out in Note 11. Principal activity The principal activity of Spark Infrastructure during the period was investing in electricity distribution businesses in Victoria and South Australia. There has been no significant change in the activities of Spark Infrastructure during the period. Page 20
Directors Report Stapled securities Spark Infrastructure is a stapled structure comprising: one share in Spark Infrastructure Holdings No 1 Limited; one share in Spark Infrastructure Holdings No 2 Limited; one Chess Depositary Interest representing one share in Spark Infrastructure Holdings International Limited; one unit in Spark Infrastructure Trust; and one Loan Note issued by the Responsible Entity as trustee of Spark Infrastructure Trust. The Stapled Securities are listed and traded on the Australian Stock Exchange as if they were was a single security. Relief from certain provisions of the Corporations Act 2001 The Stapled Entities have been granted relief by the Australian Securities and Investments Commission ( ASIC ) from subsection 323D(5) of the Corporations Act 2001, which requires that the half-year of a company, registered scheme or a disclosing entity be for the first six months of a financial year. The relief allows the Stapled Entities to prepare its first half-year report from the date of incorporation or registration to 30 June 2006. Accordingly, the attached financial statements have been prepared from the date of incorporation or registration of each Stapled Entity to 30 June 2006. Review of performance Spark Infrastructure listed on the Australian Stock Exchange on 16 December 2005 following its successful initial public offering ( IPO ), which raised $1,815.6 million. This amount included $1,262.8 million in Loan Notes, which form part of the stapled securities. Those funds, together with $425.0 million in syndicated bank borrowings, were used to acquire a 49% interest in each of three electricity distribution companies ( Asset Companies ), CitiPower and Powercor in Victoria and ETSA Utilities ( ETSA ) in South Australia, and for fund raising costs of $46.9 million. CitiPower owns and operates the electricity distribution network in Melbourne s central business district, while Powercor is the largest electricity distribution network in Victoria, covering some 65% of the state. ETSA Utilities is South Australia s only significant electricity distribution business. The results of Spark Infrastructure for the period exceeded expectations. This was a direct result of better than expected performance of the Asset Companies which achieved higher electricity distribution revenue, as a result of both favourable weather factors and increases in new connections, continued growth in unregulated activities and operational efficiencies. In addition Spark Infrastructure s costs were lower than forecast. The financial results of Spark Infrastructure include its 49% equity share of the results of CHEDHA Holding Limited ( CHEDHA ), the holding company for the Powercor and CitiPower group, and the ETSA Utilities Partnership ( EUP ), interest and preferred partnership capital distributions on loans to and investments in those businesses, as well as the corporate activities of Spark Infrastructure. The total income of Spark Infrastructure for the period was $119.4 million with the net profit after tax attributable to the Stapled Security Holders being $19.7 million. These figures include certain non-cash, nonoperating items which are detailed later in this report. Spark Infrastructure s underlying equity share of net profits of CHEDHA and EUP, which excludes noncash, non-operating items in the Asset Companies, together with interest and preferred partnership capital distributions was $103.1 million. This was higher than anticipated at the time of the IPO. Spark Infrastructure's underlying net profit was $6.7 million. Page 21
Directors Report Electricity distribution revenues for CHEDHA and EUP are dependent on the volume of electricity delivered to customers and this is impacted by weather factors. During the period both Victoria and South Australia experienced a hotter than average summer and a colder than average winter causing domestic consumption to be higher than expected levels. The domestic consumption in Powercor and ETSA were 9.6% and 12.6% respectively higher than expected. CitiPower, which has a smaller domestic segment, was 7.6% higher. Cash operating expenses were lower in CitiPower and Powercor principally due to lower number of employees compared to their business plans. The corporate expenses of Spark Infrastructure include management fees, interest on senior debt and other general expenses. The corporate expenses were lower than anticipated in each of the three categories. Non-Cash Non-Operating Items In accordance with accounting standards, the impact of movements in fair value of financial instruments that do not qualify for hedge accounting is taken into current period profits. These are non-cash, nonoperating items and therefore excluded when calculating the underlying results of Spark Infrastructure. The accounts of the Asset Companies included an amount of $15.6 million (Spark s share) in favourable movement in the values of such financial instruments. Including this benefit and the tax impact thereof, the net profit for the period was $19.7 million. A summary of performance of Spark Infrastructure is provided below: Actual Financial Period to 30 June 2006 Underlying Basis of PDS Forecast Income from Associates - Interest 50,960 50,960 51,086 - Equity accounted profits 67,749 52,130 37,303 Total Income from Associates 118,709 103,090 88,389 Total Income 119,385 103,766 88,389 Management Fees 5,725 5,725 6,041 Net Profit before Loan Notes Interest 97,119 81,500 64,801 Net Profit after tax attributable to Stapled Security Holders 19,678 6,745 (8,124) Page 22
Directors Report The figures described above as the basis of the Prospectus/PDS Forecast are derived from the business plans of CHEDHA and EUP on which the Prospectus/PDS Forecasts for the financial year ending 31 December 2006 were based. Those business plans take into account seasonality in operations of the Asset Companies businesses Cash Flow An amount of $2,194.2 million was raised, net of costs, from the initial public offer and in senior debt. Of this amount $1,250.7 million was utilised to acquire a 49% interest in each of CHEDHA and EUP. Further amounts of $943.5 million were advanced, principally to the CHEDHA in interest bearing loans. Gearing and Hedging Spark Infrastructure s gearing, including our proportionate share of debt of CHEDHA and EUP, as at 30 June 2006 was 59.6%. The entire debt of Spark Infrastructure has been hedged to maturity. Distribution Volume During the half year, the distribution volumes of CitiPower, Powercor and ETSA were higher than in the PDS assumptions. CitiPower s volume was 2,978 GWh, 5.3% higher, Powercor s volume was 5,025 GWh, 2.7% higher, and ETSA s volume was 5,554 GWh, 5.5% higher than the Prospectus/PDS assumptions. Capital Expenditure CHEDHA and EUP continue to invest in the expansion of their networks, improving asset performance and reliability and replacement of assets. During the first half of 2006, $204.7 million was invested in capital expenditure which was in line with the business. plans of the asset companies. This will result in increased revenue in future periods. Acquisition and Growth Strategy Spark Infrastructure s mandate extends to acquisition of assets in the utilities infrastructure sector in OECD countries. The utilities infrastructure sector includes assets or entities in the transmission and distribution of electricity and gas, and regulated water and sewer sectors. During the period, Spark Infrastructure considered a number of investment opportunities and considered the prices being paid for some infrastructure assets did not provide value to shareholders. Spark Infrastructure adopts a disciplined approach and will only invest in opportunities that are value accretive to the security holders. Distributions The directors have declared an interim distribution in respect of the year ending 31 December 2006 of 7.11 cents per security ( cps ), to be paid on 15 September 2006 comprising 6.77 cents of interest on Loan Notes and 0.34 cents of return of capital on the units of Spark Infrastructure Trust. Outlook The directors are confident, subject to the assumptions outlined in the Prospectus/PDS, that Spark Infrastructure will achieve its forecast outcomes for the second half of 2006. In view of the improved performance during the period to 30 June 2006, the directors have increased the distribution guidance in respect of the final distribution for the financial year ending 31 December 2006, which is payable on 15 March 2007, to 8.11 cps bringing the total forecast distribution for the year ending 31 December 2006 to 15.22 cps. In the absence of unforseen circumstances the forecast distribution in respect of financial year ending 31 December 2007 remains unchanged at 17.06 cps, as indicated in the Prospectus/PDS. Page 23