a tale of two new ipo's.

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    Sparks in tale of two energy floats
    By Stephen Bartholomeusz
    October 29, 2005

    BY A NECESSARY coincidence, two very similar, and quite large, floats are now running in parallel and appear destined to reach the finishing post of an Australian Stock Exchange listing within days of each other. The floats, of Singapore Power's SP Ausnet and Cheung Kong Infrastructure of Hong Kong's Spark Infrastructure, will result in more than $3 billion being raised through the listing of mostly Victorian energy assets.

    SP Ausnet and Spark own Victorian electricity distribution businesses and the floats were delayed as promoters waited for the Essential Services Commission's final decision about the regulatory settings for the next five-year period. As it happened, the price cuts unveiled earlier this month for the five distribution companies (two of which, Citipower and Powercor, are owned by Spark) were less punitive than the ESC had originally flagged.

    With the ESC review out of the way and certainty about regulatory revenue, the two floats are racing each other towards their pre-Christmas deadline. The market will probably be able to compare and contrast both offerings at roughly the same time.

    Unusually, given that they are similar sets of assets, with similar structures, looking for similar amounts of money from similar investors, the floats aren't actually competing, because they need the other to do well if they are to succeed.

    While there are similarities, they aren't the same. Both offer an exposure to mainly Victorian regulated asset bases, and high-quality, stable and defensive cash flow in a market where the recent volatility and a wall of cash on the sidelines makes such assets attractive.

    There are differences. In the Spark float, CKI will keep a direct interest in about half the underlying electricity distribution businesses, including ETSA Utilities. CKI will also hold about 10 per cent of the listed entity and jointly own the listed investment management vehicle with Deutsche Bank's DB Rreef global infrastructure asset management.

    SP Ausnet's electricity and gas distribution businesses, which used to be the TXU utilities in Victoria, and its electricity transmission business, will be sold into the new vehicle. Singapore Power, however, will hold 51 per cent of the vehicle and own the investment manager.

    Spark will be listed on the ASX. SP Ausnet will list in Australia and Singapore, where investors used to sub-3 per cent yields are expected to be attracted to the higher-yielding infrastructure assets.

    Spark is purely, at this stage, an electricity distribution business, although it will look for acquisitions in energy generally and in water. With two jurisdictions, it has two regulators to diversify regulatory risk and stagger its regulatory "resets." SP Ausnet's more diversified base means that it has two regulators but three resets.

    While electricity traditionally has offered more growth, and Spark's greater focus on electricity could be seen as a positive, SP Ausnet's gas assets are in high-growth areas and provide greater diversification.

    About 92 per cent of SP Ausnet's revenues are regulated, providing security; but that may limit upside. About 80 per cent of Spark's revenues are regulated.

    Both vehicles will use stapled structures to enable tax-deferred distributions and both will have low debt and pristine credit ratings.

    Spark will have a global investment mandate, SP Ausnet a purely Australasian focus. The global nature of the mandate probably explains why CKI has chosen to team with Deutsche Bank to manage the vehicle — both are global investors in infrastructure and co-investors in some projects. The partnership provides flexibility for co-investment if they want to pursue acquisitions that are too big for the new listed vehicle, while CKI's direct ownership of about half Spark's underlying assets also enables Spark to pursue opportunities that CKI might not be interested in.

    The SP Ausnet structure is simpler and more conventional and aligns Singapore Power's interests with other investors — its majority ownership means that its primary interest will be in SP Ausnet's value. Its management fee will be capped at 0.75 per cent, whereas the CKI/DB Rreefs partnership will charge Spark a fee of 1 per cent of the entity's market value and 20 per cent of any outperformance — the norm for infrastructure managers.

    SP Ausnet is looking to raise $1.3-$1.5 billion through its listing, while Spark is seeking $1.6-$1.7 billion. The demand on the market is large, but there is a strong appetite for high-quality infrastructure investments now that the listed property trust sector has lost some of its sizzle.

    The growth option — there is continuing consolidation occurring within the sector and at least the stirrings of potential privatisation of energy in Queensland and NSW — and the parentage of the two vehicles adds some sizzle to what already appear quite substantial new listings.

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