SPAusNet – Kim Eng

Maintaining distribution guidance despite shelving of cquisition

  • SP Ausnet (SPN) cancelled its first and only post-IPO acquisition of Alinta‘s assets due to the deterioration of the debt capital market in Dec 2007. SP Power (owns 51% of SPN) acquired Alinta Limited in early 2007 under a Consortium. SPN has the first right of refusal to acquire the proportionate share of Alinta’s assets. We think that it was a pity as a successful acquisition will give SPN a larger market share (regulated asset base to double) and increase FY09 distribution to 12.14 cents. Nevertheless, SPN is maintaining its distribution guidance of 11.55 Aust cents (5.776 cents paid out in 1HFY08) and 11.8 Aust cents for FY08F and FY09F respectively.

Successful refinancing debt of A$1.55bn; no major need for refinancing till 2011

  • SPN successfully refinanced its A$850m bridge facility together with A$600m of syndicated bank debt. The new A1.55bn facility comprises of 2 facilities of equal amounts which will mature in Mar 2011 and 2013 respectively. It also provides A$100m of undrawn but committed spare capacity. Some 95% of the debt is hedged (swapped floating for fixed) and hence minimize the company’s exposure to the fluctuating interest rate risk.
  • The regulator assumes the cost of debt (in the building block revenue methodology) based on BBB+ rated assets plus a credit spread, while SPN carries a “A-“ credit rating from S&P. SPN will effectively benefit from achieving a return on its regulated asset base in excess of its actual funding costs.

Favorable regulatory decisions bolster stability and quality of distributions

  • Favourable final decision at Gas Access Arrangement Review (GARR) & Transmission Regulatory Reset (TRR) secures and locks in around 90% of the revenue for gas and electricity transmission for the next 5 years till Dec 2012 and Mar 2014 respectively. Hence, in the near term, there is only the gas distribution scheduled for reset in Dec 2010. We can expect minimal surprises from now till 2010.

Not subject to the competitive retail electricity and gas market; provides stability to distributions

  • SPN operates in the regulated privatized monopoly of electricity and gas transmission and distribution sectors where its revenue is highly regulated. This eradicates any downside risks, albeit at the expense of upside surprises. For instance, listed comparable AGL, which has a retailing arm, reported outstanding year-on-year results in FY07, but it is inevitably subject to market dynamics (i.e. demand and supply).

SPN ranks fairly high amongst high-yield comparables

  • SP Ausnet is favoured for its stable and sustainable growth in distribution per stapled security due to its predictable cash flow from the regulated revenue. It’s a relatively “safe haven” stock to consider for its highly assured distribution payout. Notably, it guided for 11.55 Aust cents for FY08F and 11.8 Aust cents for FY09F. We do not foresee any likelihood of new acquisitions in the near term.

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