Company overview - Spark Infrastructure Group is engaged in investment in regulated electricity distribution and transmission businesses in Australia. The Company operates through four segments: Victoria Power Networks, SA Power Networks, TransGrid and Other. Victoria Power Networks holds interest in two electricity distribution businesses in Victoria, which include CitiPower and Powercor. SA Power Networks is the operator of South Australia's electricity distribution network, supplying approximately 856,000 residential and commercial customers. TransGrid connects generators, distributors and end users in New South Wales (NSW). It holds interest in the electricity transmission business, which include NSW Electricity Networks Assets Holdings Trust (NSW Electricity Networks Assets) and NSW Electricity Networks Operations Holdings Trust (NSW Electricity Networks Operations). Other represents the economic interest in DUET Group. The Company also invests in regulated water and sewerage assets.

SKI Details

VPN $150 million MTN issuance and TransGrid USPP: Spark Infrastructure Group (ASX: SKI) announced that Victoria Power Networks (Finance) Pty Ltd (VPNF) as the Common Funding Vehicle for Victoria Networks (CitiPower and Powercor), in which it holds a 49% interest, has successfully placed A$150 million of Australian Medium-Term Notes, maturing in August 2027. The proceeds will be used to supplement the group’s liquidity and fund the continued asset growth of VPN’s network businesses. Further, in July 2017, NSW Electricity Networks Finance Pty Limited as the funding entity for TransGrid, in which it holds a 15.01% interest, has placed US$727 million and A$25 million of senior secured notes into the USPP market. As part of the transaction, cross currency swaps were simultaneously executed to convert the US dollars into Australian dollars. The transaction is expected to close in August 2017 with funds received in October 2017, and proceeds will be used to repay debt maturing in June 2019. Additionally, in March 2017, Victoria Power Networks (Finance) Pty Ltd (VPNF) has placed US$80 million of bonds, maturing in June 2027. The total proceeds raised equate to approximately A$106 million and applied to refinance pending debt maturities in July 2017.


Source: Company reports

SAPN syndicated bank facility: Recently, ETSA Utilities Finance Pty Limited, the funding vehicle for SA Power Networks, has executed a $250 million 4-year syndicated debt facility. This facility will be used to repay Australian Medium-Term Note (AMTN) debt maturing on 7 September 2017. The bank syndicate comprises Commonwealth Bank of Australia (also Mandated Lead Arranger and Book-runner and Agent), Canadian Imperial Bank of Commerce, National Australia Bank Limited, Bank of China Limited and Westpac Banking Corporation. ETSA Utilities Finance Pty Limited has also entered into a $300 million 6-month bridge facility pending another debt issue to replace the balance of its refinancing of the $500 million AMTN debt maturing in September and October 2017 and for general working capital purposes.

Federal Court’s decision in relation to the AER and ACT: In May 2017, Federal Court of Australia has published its decision in relation to the Australian Energy Regulator (AER) v Australian Competition Tribunal (ACT). The matter relates to certain disputed appeals between the AER and the NSW electricity distribution businesses Ausgrid, Endeavour Energy and Essential Energy. Spark Infrastructure notes that the ACT has once again extended its deadline to 21 August 2017 for the publication of its decisions in relation to appeals lodged with it by Victorian Power Networks.
 
Transgrid regulatory update: TransGrid’s regulatory proposal reflects the current state of infrastructure, the more complex operating environment and the challenges of evolving services to increase renewables in the national energy mix and adapt to technological innovation. The company Proposed a modest increase in operating expenditure to $908m ($2018), mainly driven by the need to mitigate bush-fire risk and expected changes in labour costs and growth of the network. On Capex front, total forecast capital expenditure is $1,612m ($2018), and asset replacement expenditure is increasing compared to the current period and remains the largest component of the program. Further, proposed five contingent projects include reinforcement of southern network, reinforcement of northern network; NSW/SA interconnector; support South Western NSW for renewables; and supply to Broken Hill. However, in the current regulatory period (2014/15 – 2017/18), there is a miss-match between forecast and actual inflation that is resulting in under-recovery of revenues by TransGrid estimated to be $110m in the first two years of this regulatory period.



Transgrid regulatory update; (Source: Company reports)
 
Strong cashflows from Investment portfolio:  The company’s Investment portfolio delivered growth of 47.4% in standalone operating cashflows in 2016. This includes the first full year of distributions from TransGrid and a significant step-up in distributions from Victoria Power Networks (VPN). The investment portfolio businesses – VPN, comprising the CitiPower and Powercor networks, SA Power Networks (SAPN) and TransGrid. In 2016, VPN delivered cash distributions to Spark Infrastructure of $145 million, an increase of 76% on the prior year. VPN’s management of its operating costs through its world class program has set the leading benchmark for the sector. This year it is expected to deliver $167 million of savings in operating costs relative to its 2013 baseline, when the program was initiated. Further, VPN experience demonstrates how a transformation program can increase network performance and improve safety outcomes and reliability at the same time. Moreover, SAPN is undertaking similar cost management initiatives and expect it will achieve comparable results. For example, SAPN is currently making increased use of drones for inspection of infrastructure and the use of virtual planning assessments of new projects. The smart use of technology holds the key to further reducing costs in already efficient businesses like SAPN and VPN. VPN and SAPN are ranked in the top quartile of efficiency amongst their peers by the Australian Energy Regulator (AER) and are industry leaders in terms of safety, reliability and customer service. In a similar vein, the company is working with TransGrid to move its business to the ‘efficient frontier’ of performance.



Guidance based on expected distributions from asset portfolio; (Source: Company reports)

FY16 impacted by SA Power Networks: For FY16, SKI reported a 13.1% yoy decline in revenue to $243.9 million while posting a 7.9% decline in net profit at $81.1 million, largely driven by SA Power Networks as its revenue decreased to $98.2 million coupled with 39% increase in staff costs. However, operating cash flows increased by 47.4% to $305.6 million, primarily due to increased distributions from associates. The group undertook productivity and efficiency efforts via VPN World CLASS program and realized total identified savings of $167 million per annum. The company has reaffirmed the distribution guidance of 2017 and the same is expected to be 15.25cps (approximately 5% higher than 2016). For 2018, the group forecasted 16.0cps which is a 5% higher than 2017.


Financial results summary - full year 2016; (Source: Company reports)

Stock performance: The company anticipates its SAPN and VPN to continue deliver strong performance with management of regulatory appeals. The group is focusing on growth and development of Energy Solutions business unit in VPN and other innovations and trials in SAPN.  Given the strong prospects coupled with ongoing developments at TransGrid, we give a “Buy” recommendation on this 5.9% dividend yield stock at the current market price of $2.47
 

SKI Daily Chart (Source: Thomson Reuters)
 

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