New long-term agreements benefit shareholders

Improved revenue, reduced expenses

SPN has announced a number of new operational arrangements with the Singapore Power Group. The arrangements are expected to strengthen SPN’s operational model, enhance its focus on niche asset services and provide immediate benefits to security holders through reduced management-performance fees.

Revenue enhancements for non-regulated services. SPN will provide end-to-end network metering services, technical services and vegetation management services to electricity and gas networks owned and managed by Jemena (formerly a part of the Alinta Group and now a member of the SP Group). SPN will also deliver contestable metering services to Jemena’s existing customers. These services are expected to contribute annual revenue of A$75m-85m to SPN. To ensure continued capital investment and deliver network growth, Jemena has been appointed an SPN preferred supplier, for the delivery of A$35m-40m of annual capex to SPN, or an estimated 10% of its annual capex. Each arrangement is for an initial 5-year term and
is on arms-length terms.

Expanded scope of work for SPN. Agreement has also been reached with a whollyowned subsidiary of SPI Management Services (SPIMS), SPN’s management company, for it to be the exclusive provider of IT services to SPN and Jemena. These services include applications management, and infrastructure and service delivery, at agreed allocations of costs with no profit margin accruing to SPIMS’ subsidiary. The agreement is for an initial term of seven years. SPN will retain its core asset-owner functions of IT strategy and policy, information security and real-time systems. The shared IT services will provide SPN with best-practice IT solutions and access to a wider pool of skilled IT resources.

Reduced expenses. With an expanded scope of work and opportunity for Jemena to participate in synergies, SPIMS has agreed to reduce performance fees payable under the Management Services Agreement. The reductions, effective 1 Oct 08 and for the duration of the IT service agreement, involve the waiver of base incentive fees, being 0.1% of market capitalisation, and the reduction of the performance-fee cap from 0.75% to 0.50% of market capitalisation. The fee reductions will be an immediate benefit for SPN security holders.

Valuation and recommendation

Positive impact on forecasts. As a result of the arrangements and expense reductions, we have raised our net profit forecasts by 9-20% for FY09-11. Our revenue forecasts have also been raised by 2.7-6.0% to account for increased revenue in the non-regulated services segment. While there are reduced expenses from management-fee reductions, we expect other expenses to rise, from providing a greater scope of services to Jemena. As such, EBITDA margins are forecast to remain at 61-62% in FY09-10.

Maintain Outperform; higher target price. We continue to like SPN’s excellent earnings visibility and predictability as well as attractive yields per stapled security. With our forecast upgrade, our DCF target price (WACC 10%, terminal growth 3%) rises to A$1.44 or S$1.71, from A$1.34 or S$1.59, supported by distribution yields of over 11%.

20/20 visibility

• Regulated and safe. Based in Australia, SPN is a regulated natural monopoly which owns Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria.

• Excellent earnings visibility. SPN offers defensive qualities in the current riskaverse climate where investors are searching for revenue and earnings assurance. Following recent revenue and tariff regulatory resets in 1H08, almost 90% of its revenue has been locked in until 2011.

• No refinancing issues until Sep 2010. Despite difficult credit-market conditions, SPN successfully refinanced A$320m of debt maturing in Nov 08 through a £250m 10-year bond to raise A$535m. It has also secured a A$1.55bn bank facility in Feb 08, demonstrating its ability to access competitively priced debt. It has an A1 credit rating from Moody’s and an A- credit rating from Standard & Poor’s.

• Initiate with Outperform. We like SPN’s high earnings visibility and predictability as well as its attractive yields per stapled security. Our DCF computation (WACC 10%, terminal growth 3%) values SPN at A$1.34 or S$1.59, which offers potential upside of over 30%, supported by distribution yields of over 11%.

SP AusNet seeking loan of A$320m to refinance debts

AUSTRALIAN power firm SP AusNet said yesterday that it is looking to borrow another A$320 million (S$415 million) this year to refinance its debts, as borrowing costs rise amid a tight credit market.

The firm, which signed a A$1.55 billion loan with a syndicate of 12 banks in February, told Reuters that it will focus on organic growth, after dropping plans in December to pay parent Singapore Power A$8.3 billion for the assets of delisted Australian energy firm Alinta due to concerns over high borrowing costs.

‘We won’t be relooking at those assets as we speak. However we’ve agreed to look at ways for the two organisations to cooperate,’ Nino Ficca, managing director of dual-listed SP AusNet, said in an interview in Singapore.

Mr Ficca said he hopes to complete those discussions this year, and the two firms could collaborate in areas such as joint procurement, and by combining their backroom services. SP AusNet owns and operates power transmission networks in Victoria state.

The company’s February loan of A$1.55 billion was led by Citigroup, Commonwealth Bank of Australia, nabCapital, Royal Bank of Scotland and Westpac Banking Corp. — Reuters

Energy infrastructure with income stability

High DPU from cash flow payouts. SP AusNet (SPN) owns and operates about A$6.5bn worth of energy infrastructure (electricity and gas) in the state of Victoria, Australia. SPN is listed on both the Singapore and Australian stock exchanges. It is structured as a stapled security, allowing investors to own two or more related securities that are bound together through one vehicle. The structure allows SPN to pay distributions out of operating cash flows, which include both net profit and non-cash charges like depreciation. SPN is paying out 11.564 A$ cents for FY08 – up 2.6% YoY. SPN guidance for FY09 DPU is at about 11.85 A$ cents, implying a quality 9.3% FY09 distribution yield on today’s exchange rates.

Revenue structure key story here. SPN owns electricity transmission and distribution and gas distribution assets – which are considered regulated natural monopolies due to their strategic nature. What this means is that about 90% of SPN’s revenue is determined by regulating authorities using a methodology that considers cost of capital, inflation, demand trends, likely operating expenses and capex required to maintain the asset. The tariff structure for the distribution assets includes a demand capacitybased component as well. The long-term cash flow visibility is a key selling point for SPN as a yield story.

Where is the growth? Of course, the regulated revenue structure also limits the upside. We do see some avenues for growth – relative population growth in Victoria, government measures to expand availability of piped gas, the installation of “smart meters”, piggybacking a lucrative telco leasing business onto existing networks, and so on. Any significant impact from these avenues would likely be slow to materialize. SPN may also try and jointly work with the Alinta assets that are currently retained by Singapore Power, 51% SPN owner, after SPN’s ambitious acquisition attempt fell through last year. The Singapore Power connection between the two entities may not fly with regulators however and could limit the extent of their cooperation.

Acquisitions are a far more likely bet as a catalyst for re-rating. The infrastructure space has captured a lot of attention and infrastructure funds are hopeful that the recent market volatility may have churned up some choice distressed sales. But SPN at this point is quite significantly leveraged (76% debt-to-regulated asset base) and any sizeable acquisitions will have to await further clearing of the debt and equity markets. We do not have a rating on this stock.

SP Ausnet delivers on stable returns

SP AUSNET offers predictable and stable returns, managing director Nino Ficca said yesterday.

‘We’ve delivered what we’ve said,’ Mr Ficca said during a briefing on the FY2008 results of the 51 per cent Singapore Power unit.

He was responding to a question on the performance of the stock since it listed in December 2005 in Australia and Singapore, and which, except for a brief period last year, has languished below its IPO price.

SP Ausnet has traded at an average of $1.57, according to Bloomberg. It’s IPO price was $1.75 and A$1.38.

Senior managers of SP Ausnet, which owns and operates power transmission networks in Australia’s Victoria state, are in Singapore this week to meet investors.

Mr Ficca noted that stock markets have been volatile but ‘this is very predictable and stable … our track record speaks for itself’.

Distribution since listing, including next month’s payout of the FY2008 final dividend, will total 26 Australian cents (34 Singapore cents).

It announced a final distribution of 5.788 Australian cents, taking the full-year 2008 distribution to 11.564 Australian cents. Singapore shareholders will receive 11.264 cents less a withholding tax of 0.3 per cent, said Lucinda Kerr of SP Ausnet’s investor relations.

‘We’re not a capital growth stock. It’s more of a distribution yield stock,’ said Ms Kerr, referring to the predictability of the company’s cash flow and its regulated revenue.

For the next three years, 90 per cent of SP Ausnet’s total revenue is assured as it has locked in 100 per cent of regulated revenue.

For current FY2009, SP Ausnet has again guided for 2.5 per cent growth in dividends.

The firm has reaffirmed guidance given earlier this year and expects revenue and earnings before interest tax, depreciation and amortisation growth of about 8 per cent. Net profit after tax is expected to be in line with that previously, due to increased interest charges.

SP Ausnet posted a full-year net profit of A$157.5 million for the period ended March 31, down 11.7 per cent because of costs related to the scrapped Alinta deal from its parent Singapore Power. Earnings per share was 2.54 Australian cents.

SP Ausnet’s stock closed one cent higher at S$1.63 yesterday.