Conservative Holding Envestra Ltd’s (ASX: ENV, OTC: EVSRF) sustainable, long-life natural gas distribution operations are the basis of secure, reliable returns to shareholders.

Envestra has consistently spent upward of AUD100 million per year and more recently around AUD200 million to extend its networks to reach to new housing developments and to upgrade older pipelines in established areas.

And for the past several years management has spent approximately AUD10 million each year on promoting natural gas, with active campaigns on television, radio and through sponsorships.

Despite recent declines in natural gas consumption in Australia, Envestra is well positioned to benefit from longer-term trends that favor cleaner-burning fuels as well as a rebound in usage as efficiency efforts are maximized.

Envestra recently fended off an attempt by fellow Conservative Holding APA Group (ASX: APA, OTC: APAJF) to acquire the 67 percent of the Envestra shares it doesn’t already own for AUD1.3 billion.

On July 16, 2013, APA offered 0.1678 of one new APA share for each Envestra share. The bid equated to AUD1.07 per share, based on APA’s closing price on July 15. The offer represented a 6.3 percent premium to the 20-day average of Envestra’s stock price leading up to July 16, lower than the average premium of 16 percent for gas distribution deals since July 2008.

The stock surged to as high as AUD1.15 on the Australian Securities Exchange (ASX) in the aftermath of APA’s approach but has since settled back to around AUD1.04. At these levels, yielding approximately 6 percent, Envestra offers a compelling long-term buying opportunity.

Envestra, which owns 14,000 miles of pipelines that supply gas to about 1.2 million customers mostly in Victoria and South Australia, like APA is one of AE’s “Eight Income Wonders from Down Under,” the group of companies that made up the Portfolio in our debut issue in September 2011.

From Sept. 26, 2011, through Dec. 13, 2013, Envestra generated a total return in US dollar terms of 76.2 percent.

Envestra reported NPAT growth during fiscal 2013 of 46 percent to AUD107.8 million.

Revenue for the period was up 8 percent to AUD507.5 million, while EBITDA grew by 8 percent to AUD360.3 million and cash flow from operations surged 36 percent to AUD233.8 million.

The company also announced that fiscal 2014 dividends would be increased to AUD0.064 per share, up 8 percent from AUD0.059 for fiscal 2013.

Management originally guided to NPAT growth of nearly 30 percent for fiscal 2014 to AUD140 million, driven by increases in regulated rates that took effect on July 1, 2013, and further anticipated reductions in finance costs.

On Dec. 12, 2013, the company boosted its NPAT guidance to AUD145 million, noting that gas volumes to residential and commercial customers were higher than expected for the first five months of the fiscal year. First-half NPAT is expected to be a company record AUD85 million, up 44 percent versus the prior corresponding period.

Envestra sees about 55 percent of annual revenue during the first half of its fiscal year due to higher volumes transported during the winter period.

Borrowing costs for the year are also forecast to be lower than previously anticipated.

Management noted that management of operating costs and a 14 percent reduction in finance costs drove profitability. Revenue growth largely reflected the annual rate adjustments approved by the Australian Energy Regulator, with volumes to residential and smaller commercial customers (from which most revenue is derived) up 2 percent.

Operating costs were up by AUD11.7 million, though AUD9.6 million of the increase was due to expenditures related to Australia’s carbon tax. These permit costs are fully recoverable through haulage tariffs.

Net finance costs were down to AUD147.9 million due mainly to lower floating interest rates on un-hedged debt and lower rates on new fixed interest rate swaps. Net debt as a percentage of market capitalization was 54 percent, down from 64 percent a year ago.

The company boosted its capital expenditure program by 23 percent in 2012-13 to AUD217.4 million, largely on network extensions and upgrades to the networks. Management expects to spend AUD270 million in fiscal 2014.

A total of 209 kilometers of mains were laid, primarily in new subdivisions, and 417 kilometers of old mains were replaced. Envestra now has almost 24,000 kilometers of gas mains and pipelines around Australia and delivers gas to almost 1.2 million consumers.

Total dividends paid in 2012-13 were AUD93.7 million. Distributable cash flow available was AUD205, leaving a payout ratio of 45.7 percent.

Envestra has shown remarkable growth over the past decade. For example, distributable cash flow in fiscal 2003 was AUD75.9 million. Customer growth has been steady, rising by approximately 30 percent from about 900,000 as of June 30, 2003, to about 1.16 million as of June 30, 2013.

Fiscal 2003 revenue was AUD277.5 million versus AUD507.5 million for fiscal 2013, while net profit after tax has surged from AUD12.7 million to AUD107.8 million.

During this time management has also strengthened the company’s balance sheet, as overall “gearing,” or gross debt as a percentage of the book value of the company’s assets, has declined from more than 85 percent to less than 65 percent. There are minimal maturities coming due over the next two calendar years.

In May 2013 Standard & Poor’s recognized Envestra’s progress, boosting the company’s credit rating to BBB with a “stable” outlook. Managing Director Ian Little noted that S&P’s move reflected the company’s “strategy of …reducing gearing and retaining funds to assist with the financing of [Envestra’s] substantial capital expenditure program.”

Envestra’s capital structure now matches the long-life nature of its assets, with management focused on a low-risk approach to the financing of these assets. The company’s debt portfolio is very long in duration, extending to over 30 years in some cases, and has considerable value simply by way of the low-cost margins associated with particular debt issues that are locked in place for many years.

Envestra devoted AUD220 million to CAPEX in fiscal 2013 and forecast spending of CAD275 million for fiscal 2014. Management expects to invest AUD1 billion over the next four years to expand and upgrade is distribution networks, continuing the effort that’s helped it grow its customer base by nearly a third over the past decade.

Envestra is heavily impacted by the regulatory arrangements governing what basically a monopoly business. Operations are overseen by the Australian Energy Regulator (AER), which approves “access arrangements” at five-year intervals that govern Envestra’s distribution activities and prices charged to customers.

During fiscal 2013 Envestra’s access arrangement for Victoria was settled with the AER for the five years through to December 2017.

Management was not fully satisfied with a number of matters concluded by the AER, most importantly the allowed return to shareholders–the AER settled on a return on equity of 8.3 percent. But overall the AER had made a reasonable decision, and Envestra elected not to appeal any of the regulator’s conclusions.

Publication of the AER’s Victoria decision in March 2013 means that regulatory access arrangements are now in place over all of Envestra’s regulated networks through at least June 2016, establishing a great deal of cash-flow certainty for the medium term.

The regulatory environment beyond 2016 is difficult to foresee given the given the wide range of reviews, rule changes, legislative changes, Productivity Commission recommendations, consumer panel initiatives and a host of other Government interventions that have been either initiated, or are currently in process, in the Australian energy space.

Envestra management is, however, particularly concerned about the so-called “better regulation” initiatives being developed by the AER that seem to point to increased involvement of bureaucrats and consumer groups in the running of the businesses and the choice of business strategies suitable for the long-term success of these enterprises.

The AER has issued two draft guidelines about the allowed weighted average cost of capital (WACC) that may apply to gas and electricity network owners. In particular, the AER is proposing to decrease betas, gammas and allowed interest rates, all of which are input factors to calculating the rate of return.

These proposals may not be part of the future regulatory structure and in any event won’t affect Envestra until the expiry of current access arrangements in 2016. But they could have a material adverse impact on future revenues.

Envestra management, along with the Australia-based Energy Networks Association, has formally registered its objection to the AER, highlighting rocedural and analytical errors and omissions currently evident in the AER’s work.

In terms of the market in which it operates, natural gas is a fuel of choice; it’s not like electricity, at least in most instances, which is an “essential” service.

The volume of gas being transported through Envestra’s expanded networks is 2 percent lower than it was in 2003. To some extent this reflects the efforts on the part of government and others to improve energy efficiency and waste consciousness on the part of consumers.

It also reflects a variety of technical improvements to gas appliances, particularly water and space heaters. And it’s a reminder of the competitive position of natural gas in the market, and the fact that alternative green energy applications, such as solar and wind, are heavily subsidized by governments at the expense of natural gas applications.

As an example, per household gas consumption in South Australia has fallen from around 23 gigajoules in 2003 to 19 gigajoules during fiscal 2013, a decline of 2 percent per annum. But this gradual decline in household usage isn’t expected to continue in the medium-term, as potential energy-saving measures have been to a large extent exhausted.

Across Australia Envestra is seeing huge growth in the natural gas market, particularly with the advent on the east coast of LNG supplies to Asian neighbors coming to fruition within the next two years.

There are legitimate concerns regarding the potentially inadequate availability of gas to supply domestic markets without considerable price increases in the coming years. But the energy market should be able to respond to this challenge and maintain the long-term reliability of supply that’s been evident in the Australian natural gas market for more than 50 years.

And this should underpin the long-term sustainability of Envestra’s natural gas distribution business.

Envestra is a buy up to USD1 on the Australian Securities Exchange (ASX) using the symbol ENV and on the US over-the-counter (OTC) market using the symbol EVSRF.

Envestra closed at AUD1.07 on the ASX and USD0.94 on the US OTC market on Dec. 13.

Envestra’s fiscal year runs from Jul. 1 to Jun. 30.

The company reports full financial and operating results twice a year; it typically posts first-half results in late February, with full fiscal year numbers out in late August.

Interim dividends are usually declared in February, along with financial and operating results for the first half of the fiscal year, with payment typically made in late April. Final dividends are usually declared in August, along with fiscal year results, with payment made in late October.

Envestra’s final dividend in respect of fiscal 2013 of AUD0.032 was declared on Aug. 22, 2013, and paid on Oct. 31, 2013, to shareholders of record as of Sept. 13. Shares traded ex-dividend on this declaration as of Sept. 9.

The most recent interim dividend of AUD0.03 per share was declared Feb. 21, 2013. It was paid April 30, 2013, to shareholders of record as of March 22. Shares traded ex-dividend on this declaration as of March 18.

Management will declare the interim dividend for fiscal 2014 on or about Feb. 20, 2014, when it reports financial and operating results for the first six months of the financial year.

Dividends paid by Envestra are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock three rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while seven rate it a “hold.” One brokerage that covers Envestra rates the stock a “sell.”

The average 12-month target price between the eight analysts that provide a figure is AUD1.14, with a high of AUD1.22 and a low of AUD1.03.  Based on a Dec. 13, 2013, closing price of AUD1.07 on the ASX, the implied one-year total return, including the present annualized dividend rate of AUD0.064  per share, is 12.5 percent.