Poles, wires, and pipes

Transcription

1 Energy Infrastructure AUSTRALIA SP AusNet SPN AU / SPN.AX Market Cap Avg Daily Turnover Free Float Target A$1.24 US$3,654m US$7.42m 49.0% Prev. Target A$ A$3,984m A$7.89m 3,368 m shares Up/Downside 6.0% Current A$1.17 SHORT TERM (3 MTH) LONG TERM RBS Morgans Analyst(s) Nathan LEAD T (61) E nathan.lead@rbsmorgans.com SPN Share price info Share price perf. (%) 1M 3M 12M Relative Absolute Major shareholders % held Singapore Power 51.0 Allan Gray 6.1 Poles, wires, and pipes The issues that have previously dampened our enthusiasm for SPN are the lack of M&A appeal (given SP s controlling stake), the tax issues, and the Victorian bushfire litigation. We think SGCC s purchase of a 19.9% stake in SPN deals with the first issue, and we believe that the second two issues will be resolved with limited valuation impact. We initiate coverage with an OUTPERFORM and a Target Price of $1.24 per share. Our target price implies a 1.22x EV/RAB and a 9.9x EV/EBITDA (FY15F basis). Hitting the high points (1) Defensive. SPN owns energy infrastructure assets with regulated, inflation-linked cashflows and a strong credit rating. This defensive quality is comforting in a market where stocks with negative earnings surprises are being punished; (2) Attractive income yield. SPN offers the second highest distribution yield (7.2%) in its sector. It also offers the only dividend with franking (33%), which on a grossed-up basis makes SPN the highest yield in its sector (8.2%); (3) Singapore Power s sell-down to SGCC. The purchase of a 19.9% stake in SPN by SGCC increases the potential for further M&A activity, as well as making management internalisation and the related cost-savings a real possibility; (4) Bushfire and tax issues look Conviction under control. We suspect the financial impact of these issues, which has weighed on the share price, is likely to be limited; and (5) Total return. Our DCF-based target price implies 6% upside. When combined with yield, this implies a 12m potential TSR of about 13%, at current share prices. What are the key issues? (1) Earnings outlook. Even though we expect rapid RAB growth, our earnings growth outlook is uninspiring due to the impact of low interest rates on regulated WACCs. The outlook is not helped by SPN s failure to recover some future costs related to the AMI roll-out; (2) Regulatory review. The AEMC rule changes being implemented by the AER seem to favour the consumer over investment, and increase regulatory risk; and (3) Corporate governance. Independence is already an issue, and SGCC s involvement may not improve the market s perception of SPN s corporate governance. Vol m Price Close Relative to S&P/ASX 200 (RHS) Aug-12 Nov-12 Feb-13 May-13 Source: Bloomberg 52-week share price range Current Target Financial Summary Mar-12A Mar-13A Mar-14F Mar-15F Mar-16F Revenue (A$m) 1,499 1,608 1,664 1,644 1,757 Operating EBITDA (A$m) , ,057 Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth (2.5%) (1.0%) 2.5% (2.9%) 10.4% FD Normalised P/E (x) DPS (A$) Dividend Yield 6.78% 6.95% 7.08% 7.30% 7.52% EV/EBITDA (x) P/FCFE (x) NA Net Gearing 154% 138% 150% 157% 162% P/BV (x) Recurring ROE 7.65% 7.92% 7.70% 7.46% 8.21% % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x) SOURCE: RBS MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS AND VOLATILITY CAN BE FOUND AT THE END OF THIS DOCUMENT. RBS MORGANS LIMITED (A.B.N ) AFSL A PARTICIPANT OF ASX GROUP

2 Figure 1: Financial summary Profit and loss ($m) Mar-12A Mar-13A Mar-14E Mar-15E Mar-16E Valuation details Revenue 1,499 1,608 1,664 1,644 1,757 12m Target Price $1.24 Opex (591) (632) (653) (668) (700) Share Price $1.17 EBITDA , ,057 Upside/(downside) 6.0% Depreciation (293) (322) (354) (378) (399) Yield 7.1% Amortisation (1) (1) (1) (1) (1) 12m potential TSR 13.2% D&A (294) (323) (355) (379) (400) Rating OUTPERFORM EBIT Net Interest Expense (336) (339) (346) (292) (311) Market RBSMe Net Finance Income Share price $1.17 $1.24 PBT Shares (million) 3,368 3,389 Tax (25) (44) (35) (35) (48) Equity value ($m) 3,940 4,204 Material items Net debt ($m) 5,151 5,639 NPAT Enterprise value ($m) 9,091 9,842 EPS (reported) (cps) Key multiples Mar-13A Mar-14E Mar-15E Mar-16E EPS (normalised) (cps) EV/EBITDA (x) P/OCF (x) Dividends Mar-12A Mar-13A Mar-14E Mar-15E Mar-16E Dividend yield 7.0% 7.1% 7.4% 7.6% Gross dividends ($m) P/E (x) Dividends (cps) Free cashflow yield -13% -6% -1% 1% DPS growth - 2.5% 2.0% 3.0% 3.0% EPS payout 105% 108% 108% 114% 107% Gearing ($m) Mar-13A Mar-14E Mar-15E Mar-16E Operating cashflow payout 48% 48% 48% 46% 45% B/S Net Debt 4,736 5,223 5,513 5,741 Adjustments Cashflow statement ($m) Mar-12A Mar-13A Mar-14E Mar-15E Mar-16E Net Debt 5,151 5,639 5,935 6,167 EBITDA , ,057 Net Debt / ND+BE (%) 60% 62% 63% 63% Adjustments (50) (22) (24) 1 (12) Net Debt / EBITDA (x) Gross operating cashflow ,046 FFO-to-net interest (x) Net interest paid (347) (344) (359) (301) (320) FFO-to-net debt (%) 11% 10% 10% 11% Tax paid (33) (41) (43) (42) (57) ND:RAB+Contracted (%) 68% 70% 70% 69% Abnormal tax paid (48) Operating cashflow Key ratios Mar-13A Mar-14E Mar-15E Mar-16E Revenue growth 7% 3% -1% 7% Capex (693) (844) (826) (673) (638) Opex growth 7% 3% 2% 5% Acquisitions/disposals 2 (234) Other Investing cash flow EBITDA growth 8% 4% -4% 5% Investing cashflow (691) (1,077) (817) (664) (629) EBITDA margin 61% 61% 59% 60% Equity issuance/(returns) EBIT 6% 0% -9% 10% Debt drawdown/(repaid) EBIT margin 20% 20% 20% 21% Dividends paid (226) (253) (279) (287) (298) Other financing cash flows - - (0) (7) (4) NPAT 9% 5% -2% 10% Financing cashflow 230 1,031 (227) 23 (37) EPS (norm) -1% 2% -3% 10% Net cashflow (31) 522 (461) (9) 3 Operating cashflow 19% 3% 8% 6% Balance sheet ($m) Mar-12A Mar-13A Mar-14E Mar-15E Mar-16E Earnings quality Mar-13A Mar-14E Mar-15E Mar-16E Cash Gross OCF vs. EBITDA 98% 98% 100% 99% Debtors Net int paid vs accrued 101% 104% 103% 103% Fixed Assets 7,847 8,398 8,897 9,215 9,476 Tax paid vs accrued 92% 122% 120% 120% Investments Intangibles Free cashflow ($m) Mar-13A Mar-14E Mar-15E Mar-16E Other After sustaining capex Total Assets 8,731 10,084 10,204 10,567 10,901 After total investing (508) (233) (31) 40 Debt 4,539 5,277 5,304 5,585 5,816 Segment EBITDA ($m) Mar-13A Mar-14E Mar-15E Mar-16E Creditors Electricity transmission Deferred tax Electricity distribution Other liabilities Gas distribution Total Liabilities 5,803 6,652 6,732 7,065 7,350 Select solutions Total EBITDA 976 1, ,057 Net Assets 2,928 3,432 3,472 3,502 3,551 RAB+Contracted ($m) Mar-13A Mar-14E Mar-15E Mar-16E Contributed equity 2,917 3,358 3,383 3,411 3,441 Electricity transmission 2,657 2,866 3,018 3,165 Retained earnings 1,186 1,224 1,239 1,240 1,260 Electricity distribution 2,691 2,897 3,164 3,411 Reserves (1,175) (1,150) (1,150) (1,150) (1,150) Electricity distribution (AMI) Minority Interests Gas distribution 1,281 1,371 1,456 1,538 Total Equity 2,928 3,432 3,472 3,502 3,551 Total RAB 6,948 7,464 7,934 8,373 Contracted (incl Vic Desal) Shares on issue (million) 2,896 3,368 3,389 3,414 3,439 RAB + Contracted Assets 7,562 8,056 8,503 8,919 SOURCE: RBS MORGANS, COMPANY REPORTS 2

3 Initiate coverage: Outperform 1. COMPANY OVERVIEW 1.1 Business summary SPN is an energy infrastructure business, with its key assets located in Victoria. Its principal activities are: Electricity transmission (43% of EBITDA) SPN is responsible for providing Victoria with a reliable supply of high voltage electricity via its transmission network. Electricity is transmitted over long distances from generators to connections with low voltage distribution networks within Victoria (including SPN s distribution network); Electricity distribution (37% of EBITDA) SPN is responsible for the safe and reliable delivery of low voltage electricity within its 80,000km 2 licence area in eastern Victoria (including Melbourne s outer eastern suburbs); Gas distribution (17% of EBITDA) SPN hauls natural gas via low pressure mains to customers within its 60,000 km 2 licence area in central and western Victoria (including some of Melbourne s western suburbs); Select Solutions (2% of EBITDA) the provision of specialist utility related metering, monitoring and asset management services to help customers manage their energy, water and environmental needs. The primary direct customer of SPN s transmission network is the Australian Energy Market Operator (AEMO), who on-charges the cost of transmission to the five Victorian electricity distribution networks (of which SPN owns one). The direct customers of SPN s distribution networks are energy retailers as well as large direct customers. Figure 2: Electricity supply chain SOURCES: AER 3

4 1.2 Regulated revenues comprise 87% of group revenues About 87% of SPN s revenues are subject to economic regulation by the Australian Energy Regulator (AER). Key elements of the regulation include: Building blocks approach. The AER determines a revenue allowance for SPN s networks which it believes will allow the networks to earn a competitive return on capital, and to recover its capital investment (depreciation), operating costs, and cost of tax; Incentive based. The regulatory regime includes incentives to encourage SPN to outperform cost and performance benchmarks; Inflation protection. SPN s regulated revenues (via CPI-X price formula) and the Regulated Asset Base (RAB) are both indexed to inflation; Pass-through provisions. The regulatory regime allows for SPN to apply for pass-through of certain costs and taxes; and Right of appeal. SPN has the right to appeal decisions made by the AER to the Australian Competition Tribunal, and it has had some success (and failures including the AMI appeal) in obtaining additional revenue by doing so. Figure 3: FY13 revenue split Other 3% Electricity transmission 35% Service 7% Customer contributions 2% Regulated 87% Electricity distribution 40% Gas distribution 13% Service revenue is the other major component of SPN s revenue, accounting for about 7% of operating revenue in FY13. This includes revenue earned from specialist utility related solutions (eg. Origin Energy s 550MW Mortlake gas peaking power station, AGL s 420MW wind farm at Tarrone), and operation and maintenance services related to the Victorian desalination plant s electricity transmission assets. 2. VALUATION 2.1 DCF-based target price of $1.24 per share We set our share price target for SPN at $1.24 per share, which is based on our DCF valuation of the company as at 31 March Our DCF is based on: Ungeared post-tax free cashflows projected to 2025; A post-tax WACC of 6.1% pa rising to 6.8% pa long-term, with the key driver being the forecast rise in SPN s cost of debt over time as a result of a rising interest rate environment in conjunction with expiry of interest rate hedges. We assume investors are targeting a long-run equity return of 9.8% pa from an investment in SPN; 4

5 A terminal value in 2025 based on an EV/RAB of 1.15x, which implies an EV/EBITDA of 8.3x. Both these multiples we believe are conservative given the historical range SPN has traded in since listing in 2006 (see below). Our target price implies an EV/EBITDA of 9.9x, an EV/RAB of 1.22x, and a yield of 6.9%, on a FY15F basis. 2.2 Highest yield in sector SPN offers the second highest distribution yield of listed energy infrastructure stocks. It also offers the only dividend with franking (33%), which on a grossed-up basis makes SPN the highest yield in the sector. Figure 4: Distribution yields of energy infrastructure companies Stock Local 3 yr Distribution (cps) Yield (%) Grossed-up yield (%) s/price CAGR Curr FY Next FY NFY+1 Curr FY Next FY NFY+1 Curr FY Next FY NFY+1 SP AusNet % APA Group % DUET Group % Envestra % Spark Infrastructure % Australia Median (exc SPN) Valuation based on historical trading multiples Between 2008 and 2012, SPN traded in an EV/EBITDA range between 7.75x and 8.5x (based on consensus estimates). The multiple has since expanded to about 9x EV/EBITDA. Applying this multiple to our FY15F EBITDA implies that in March 2014 SPN may trade at $0.99 per share (note that our FY15F EBITDA is impacted by the regulatory reset of Transmission business). Figure 5: EV/EBITDA EV / NTM EBITDA (x) SOURCES: RBS MORGANS, CAPITALIQ SPN s price-to-operating cashflow has been trending upwards since a low of almost 4x in 2010, and is currently trading on about 6.5x forecast cashflow. Applying this multiple to our FY15F operating cashflow derives a SPN valuation of $1.22 per share as at March

6 Figure 6: 8.5 Price / Operating cashflow P/OCF (x) SOURCES: RBS MORGANS, CAPITALIQ SPN s EV-to-RAB multiple bottomed in 2010 at under 1.1x, reached a peak of about 1.26x, and is currently trading at about 1.2x. Applying this multiple to our forecast of SPN s March 2014 RAB, we estimate SPN may trade at about $1.19 per share by March Figure 7: 1.5 EV/RAB 1.4 EV/RAB (x) SOURCES: RBS MORGANS, CAPITALIQ 3. SINGAPORE POWER TO SELL DOWN TO SGCC 3.1 Overview of management and shareholding structure Singapore Power currently owns 51% of SPN s shares, with the remaining 49% publicly held. Singapore Power is owned by Temasek, a Singaporean sovereign wealth fund. As well as its controlling stake in SPN, Singapore Power currently provides the services of the senior management team (including the Managing Director) to SPN subject to Management Services Agreements. We understand Singapore Power s management company dedicated to SPN involves around 85 employees (Australia-based staff not seconded from Singapore Power). The fees paid to Singapore Power under the Management Services Agreements include a management services charge (for wages and related costs), a performance fee (with the performance fee capped at 0.5% of the market capitalisation of SPN at the end of the financial year), and flame logo fee. In FY13, the total amount was about $45m. 6

7 3.2 SGCC s buy-in triggers the share price what-ifs In May 2013, Singapore Power announced a sell-down of its stakes in SPN and its unlisted Australian energy business (Jemena) to State Grid Corporation of China (SGCC). Subject to FIRB and ACCC approval, SGCC intends to buy a 19.9% stake in SPN for A$824m or $1.23 per share, along with a 60% interest in Jemena for an undisclosed amount. We expect the deal to receive government approval given the regulated nature of the assets, and SGCC s purchase of 41% of Electranet was approved in January SGCC is the world s largest utility company, with revenues of approximately US$300bn in 2012 and it ranks No.7 on the Fortune Global 500 list. Outside China, SGID has invested in Australia, Brazil, Portugal, and the Philippines. On the face of it, the price paid by SGCC for the stake in SPN implies a transaction multiple of 1.23 EV/RAB. However, we suspect this under-estimates the true valuation multiple, given the allocation of the overall purchase price between the SPN and Jemena sell-downs may have been skewed towards Jemena, being a high-cost base asset acquired by Singapore Power in a competitive process, at pre-gfc prices. SGCC s involvement adds the potential of increased corporate interest in SPN to consider. Based on recent corporate transactions involving regulated energy infrastructure, we estimate the following March 2014 valuation upsides if SGCC were to proceed with a full takeover bid: If SGCC is willing to pay 1.23x EV/RAB for SPN as it did for its initial 19.9% stake in SPN, then SPN may be worth $1.26 per share If SGCC is willing to pay 1.29x EV/RAB for SPN as it did for a 41% stake in Electranet, then SPN may be worth $1.40 per share; and If SGCC is willing to pay 1.38x EV/RAB for SPN as APA has offered for the 67% of Envestra that it does not own, then SPN may be worth $1.62 per share. 3.3 Corporate governance in focus Based on ASX guidelines, the corporate governance of SPN has a number of weaknesses. The majority of SPN s board members, the chairman of the board, and the majority of directors on both the nomination and remuneration committees are not independent. In our view, the aborted acquisition of Alinta assets in 2007 neither supports nor dispels the market s concerns around corporate governance. However, we do note that SPN has resisted any major M&A activity since the Alinta transaction. The involvement of Chinese company SGCC may not improve the market s perception of the quality of SPN s corporate governance. 3.4 Potential for internalisation of management With the arrival of SGCC as a substantial shareholder, there is the potential that the external management structure of SPN may change. This has been noted by SPN in its statements to the market. In FY13, the fees paid by SPN to Singapore Power related to external management totalled $45.4m, comprising: Management services charge: $24.9m Performance fee: $19.6m Flame logo fee: $1.0m The Management Services Agreements agreements commenced on 1 October 2005 and run for an initial 10 year period, with two further 10 year periods unless terminated by either Singapore Power or SPN. The latest this termination notice could be given before the next 10 year period is activated is October If SPN terminates, the termination fee is equal to the service charge paid by SPN to Singapore Power in FY14. 7

8 On the assumption that the management services charge is effectively a cost pass-through, we estimate termination in 2014 would generate an NPV benefit of about 5 cps, as a result of a permanent savings on performance fees and the flame logo fee. 4. OUTLOOK 4.1 Staggered timing of regulatory resets SPN has strong and predictable cashflows, unpinned by the CPI indexation of prices and the staggered timing of the regulatory resets across the three major businesses. Regulatory risk is heightened as each regulatory reset approaches. The regulatory resets set the price path that SPN can charge its customers in real terms for the length of the regulatory cycle. Nominal prices are then approved by the AER each year following the regulatory decision by applying actual CPI to the real prices. The timing of regulatory resets is as follows: Gas distribution. The reset was finalised in March 2013, and provides regulatory certainty until CY17; Electricity transmission. A reset is currently underway, applicable for the FY15-FY17 period. The AER s Draft Decision is due to be published in late-august 2013, with the Final Decision released in late-january 2014; and Electricity distribution. Regulated pricing is certain until CY15, with the next reset applicable for five years from CY We expect lower WACC allowances to impact revenues The Return on Capital element of the regulatory building block revenue (WACC x RAB) comprises close to 50% of SPN s overall regulated revenues (operating costs typically account for about 35% of the revenue allowance and return of capital about 13%). As such, it is a key driver of SPN s future revenues. The current regulatory practice is to determine the WACC allowance based on the typical WACC formulation: WACC = Debt / RAB x Cost of Debt + Equity / RAB x Cost of Equity where: Cost of Equity = Risk Free Rate + Beta x Market Risk Premium. At present, the AER determines the risk free rate and cost of debt based on market interest rates measured prior to the finalisation of the regulatory reset. The Gas Distribution business suffered a WACC allowance decline upon regulatory reset in March 2013, due to the previous reset occurring during the GFC when interest rates were high. For the same reason, our modelling has assumed that the WACC allowances for the Transmission and Electricity Distribution businesses suffer at their next resets. At subsequent resets, we expect the WACC allowances for each asset to improve, given our view that interest rates are likely to increase over the long-term from recent historic lows. Figure 8: Timing of regulatory resets and WACC allowance forecasts Timing Quarter M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D Electricity transmission Electricity distribution Gas distribution 9.76% pa 9.75% pa 9.10% pa 7.07% pa 7.32% pa 7.57% pa 7.38% pa 7.98% pa 7.60% pa 8

9 The chart below shows how the 10-year Australian Government bond rate, which is used by the AER as the proxy for the risk-free rate, has fallen over time to lows in 2012 and in recent months has started to increase. For illustrative purposes, we also show the five year interest rate swap rate, which is a key indicator of the direction of the cost of debt (discussed below). Figure 9: 10-yr Australian Government Bond rate % pa 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Figure 10: 5-yr Interest Rate Swap rate % pa 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 SOURCES: IRESS SOURCES: IRESS We discuss in the Risks section of this note that the AER is currently reviewing its methodology used in determining the overall WACC allowance. Until this review has been finalised and tested, the degree of certainty with respect to future regulated WACC outcomes has reduced. 4.3 Cost of debt should fall as swaps expire We expect SPN s effective interest rate will decline over the next four or so years, although its debt outstanding will grow. Figure 11: 8% 7% Effective interest rate and debt outstanding 8,000 7,000 Effective interest rate (% pa) 6% 5% 4% 3% 2% 1% 0% 6,000 5,000 4,000 3,000 2,000 1,000 Balance outstanding ($m) Debt balance (RHS) Half year Effective interest rate (LHS) At the start of an asset s regulatory cycle, SPN executes interest rate swaps for the length of the regulatory cycle, thereby locking in the base rate for the amount of debt hedged. This strategy is intended to remove the interest rate risk related to the regulatory decision. Using this approach, we expect SPN s effective interest rate to fall over time. This coincides with out-of-the-money interest rate swaps related to the Transmission (7% pa expiring 2014), Gas Distribution (7.4% pa reset to 3.4% pa in 2012), and Electricity Distribution (5.4% pa expiring 2015) businesses being replaced with hedges at lower swap rates. This process will continue as hedges 9

10 related to the Electricity Distribution assets expire in 2015 and are replaced with cheaper swaps. Partly offsetting the benefit from resetting the swaps will be the higher margins we expect SPN will be charged on fresh debt, given the downgrade in its credit rating from A- to BBB+ as a result of Singapore Power s sell-down of its stake in SPN. Also, we d expect higher swap rates at subsequent hedge resets given the rising interest rate environment. Both these factors are built into forecast of effective interest rates rising in A big capex budget driving RAB growth Under the regulatory regime, the Regulated Asset Base (RAB) is a key anchor of revenues and value. All capex deemed efficient and prudent by the AER is rolled into the RAB, providing SPN with surety of a return on and of the capex over the life of the asset. SPN has guided the market that it expects about $880m in capex in FY14 (similar to FY13), and about $3.4 billion across the FY13-FY16 period. Note that these amount includes customer contributions and capitalised borrowing costs, such that the underlying capital spend by SPN is less than these headline amounts. Our forecasts assume underlying capex averages about $675m pa across FY14-FY18. Figure 12: Capex 1, $m Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Financial Year Gas distribution Electricity distribution Transmission AMI The drivers of the big capex budget are: Replacement of ageing infrastructure (eg. Brunswick Terminal Station); Cost of connecting new electricity demand and supply sources (eg. AGL Energy s Macarthur wind farm, Origin Energy s Mortlake power station); Implementation of government programs (eg. Advanced Metering Infrastructure program); Compliance with new regulations (eg. Victorian Bushfires Royal Commission recommendations); and Capacity increases to meet growth in peak demand (eg. air-conditioners). As well as increasing with capex, the RAB increases over time with inflation and reduces with depreciation or capital recovery of investment. Regulatory depreciation net of RAB inflation (which is the return of capital) is recovered by SPN through the revenue allowance. 10

11 We liken the RAB to a CPI-linked bond, whereby capex is akin to a debt drawdown, depreciation is akin to a debt repayment, and the RAB is akin to the debt balance outstanding that increases with inflation. The WACC allowance is akin to the coupon on the bond. SPN has guided the market that it expects its RAB plus value of contracted assets to grow from $7.6 billion as at FYE-13 to about $9 billion as at FYE-16. We model the RAB growing to close to this target by FYE-16, and growing beyond that. Figure 13: 12,000 Regulated asset base Regulated Asset Base ($m) 10,000 8,000 6,000 4,000 6, ,213 2,481 7, ,281 2,657 8, ,371 2,866 8, ,456 3,018 8,919 9, ,538 1,613 3,165 3,263 9, ,677 3,395 2,000-2,565 3,010 3,227 3,460 3,670 3,852 4,057 Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Financial Year Electricity distribution (inc AMI) Electricity transmission Gas distribution Contracted assets Note that the sensitivity of our valuation to changes in the capex budget is immaterial. Also note that a weakness of investment in regulated assets is the long payback periods, which reduce the immediate earnings step-up from the commissioning of capital investment projects. 4.5 Non-inclusion of AMI costs SPN has failed in its appeal of the AER s decision to not allow recovery of about $88m of Advanced Metering Infrastructure (AMI) costs for the period. We understand that SPN is obligated to roll-out the AMI project, given it is government mandated. It will be difficult to alter the project scope and thus reduce capex to the level allowed by the AER. In the world of regulated infrastructure, it is almost a cardinal sin to incur expenditure without the ability to earn a return on and of the capital invested. SPN continues to explore all available means to recover the costs, whether that be through future budget applications and/or legal means. We have part-risked our forecasts by assuming the costs are incurred but are not recovered through a revenue allowance. 4.6 Strong credit rating impacted by SPN sell-down In May, S&P lowered its credit rating on SPN from A- to BBB+ (stable outlook), noting the implied loss of parent support as a result of the sell-down of Singapore Power s shareholding in SPN to State Grid Corporation of China. S&P expects modest improvement in SPN s financial profile over the short-to-medium term, but notes that the outcome of any legal action related to the Victorian bushfires is an event risk that is not factored into its rating. Moody s rates SPN A1, which is the equivalent of A- on the S&P scale. In its May 2013 report, Moody s noted SPN s improving financial profile but highlighted the uncertainty associated with the new regulatory rules. 11

12 We understand from discussions with SPN that the key criteria for maintaining its current ratings is a FFO-to-interest above 2.4x and FFO-to-debt above 10%. On our modelling, the FFO-to-debt metric comes under pressure in FY17, driven by regulatory reset of the electricity distribution business (including AMI revenues). We have not factored a capital raising into our forecasts to improve the metric, given it is three years into the future and it sits above the metric required by S&P for a BBB+ (at least 9% FFO-to-debt). Figure 14: FFO-to-interest Figure 15: FFO-to-debt % % 2.8 FFO to interest (x) FFO to debt (%) 10% 9% 8% 1.8 7% 1.6 Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 6% Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Financial Year End FFO : interest Minimum FFO:interest for BBB+ Financial Year End FFO : Debt Minimum FFO : Debt for BBB+ SPN has provided market guidance that it expects its ratio of Net Debt-t0-RAB and contracted assets to be less that 71% to FY16, compared to 68% currently. Figure 16: Net debt-to-regulated and contracted asset base Figure 17: Net debt-to-ebitda 74% 7.6 Net debt : RAB + contracted assets (%) 72% 70% 68% 66% 64% 62% Net debt : EBITDA (x) % Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Financial Year End Financial Year End 4.7 Debt refinancing risk mitigated by staggered maturities SPN has utilised a mix of bank and capital markets debt with varying maturities to reduce refinancing risk. Bank debt, which created problems for borrowers during the GFC, accounts for about 17% of SPN s drawn debt. SPN s target is to limit annual debt maturities to less than 20% of total debt, and spread maturities over at least seven years. We estimate the average term of the debt is about 4.5 years, less than its peers in the sector (eg. APA 6 years, ENV 11 years). 12

13 Figure 18: Debt maturity profile (11 July 2013) 1,200 1, $m Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 Sep-24 Sep-25 Sep-26 Sep-27 Half-year ending Comm Paper Bank (drawn) USD notes CHF MTN AUD MTN GBP MTN EUR MTN JPY MTN HKD MTN 4.8 Distributions should keep pace with inflation SPN says its distribution policy is to fund distributions out of Operating Cashflow after funding maintenance capex and part-funding growth capex. We view the distribution decision as a balancing act between growing the distribution to shareholders while generating the credit metrics required for a BBB+ credit rating. The credit rating is critical for SPN to effectively source cost competitive debt. Since cutting its distribution from cps to 8 cps in FY10, distribution growth has been miserly. In FY14, company guidance is that it will grow 2% to 8.36 cps. We have modelled distributions per share growing by 2.5% pa across FY15 to FY18. This should see credit metrics within the range required for a BBB+ credit rating. As a cross-check, it should also see the historical Operating Cashflow payout ratio continue (around 48% over the last four financial years, and we expect that relationship to continue in FY14). Figure 19: Distribution per share and payout ratio % 60% 57% Distribution (cps) % 51% 48% 45% 42% 39% 36% 33% Mar-11A Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Financial Year End DPS (LHS) OCF payout ratio (RHS) OCF payout ratio (%) SOURCES: CIMB, COMPANY REPORTS 13

14 5. RISKS 5.1 Black Saturday bushfire litigation SPN is currently subject to the Kilmore East and Murrindindi class actions related to the Black Saturday bushfires in Victoria that started on 7 February It is almost impossible to know for certain what the outcomes of these actions will be, as SPN acknowledges. However, we believe the financial risk is minimised, given: In both class actions, SPN is one of three defendants. The State of Victoria and SPN s contracted asset inspectors are also defendants. As such, the cost of a negative outcome will be shared among the defendants; In the case of the Kilmore East class action, SPN says that it has been agreed by experts on both sides of the litigation that lightning is the most likely cause of the damage to the electricity conductor, that this damage could not have been detected by SPN, and that this undermines any claims of negligence on SPN s behalf; SPN s statement that it is reasonable to consider that SPN s insurance and, if required, a claim to the regulator for pass-through of residual costs ultimately incurred in relation to these proceedings would be sufficient to cover SPN s liability, if any, associated with the February 2009 bushfires ; We note the settlement for the Beechworth bushfire class action involved the defendants collectively paying 40% of the plaintiffs assessed losses plus interest of 5% up to a cap of $32.85m. SPN s share of the settlement sum was 27% of the assessed losses, and its contribution was capped at $19.71m. This amount was paid by SPN s insurers; and We understand that SPN has the option to sue the State of Victoria for negligence with respect to the bushfires, thereby recovering some of the costs. Given the above, we have not incorporated any financial impact into our forecasts or valuation, but acknowledge this is a key event risk that investors need to consider. 5.2 Tax disputes with the ATO SPN is currently in dispute with the Australian Tax Office (ATO) on two matters: 1) $97.8m for tax deductions related to licence fees, of which SPN prepaid $30.6m in October Trial proceedings have concluded, and a Federal Court decision is due before CYE We understand there is no ongoing tax impact of a negative decision, given the dispute relates to fees only claimed in the first three years following privatisation. 2) $49.2m for tax deductions related to intellectual property, for the 2001 to 2010 income years, of which SPN has prepaid $17.1m. The matter is before the Federal Court, but no trial dates have yet been determined. If SPN loses this dispute it will be required to pay the remaining liability to the ATO. It will also lose access to the remaining unclaimed tax deductions related to the intellectual property, and as such will have an ongoing tax impact beyond 2010 tax year. We take comfort in SPN s position on these matters, given we understand from discussions with the company that: SPN has received strong independent advice from multiple sources that the deductions are properly available; KPMG has audited and signed off on SPN s statutory accounts, including SPN s accounting treatment of the pre-paid disputed tax as a receivable from the ATO on the Balance Sheet. In doing so, KPMG must have formed a view that it is probable that SPN will be successful in the disputes with the ATO and fully recover the prepaid disputed tax; and 14

15 SPN s Board of Directors signed off on the statutory accounting of the tax receivable, and feel strongly enough in SPN s position that it is willing to contest the dispute in court. Given the above, we have not reduced our target price for the potential impact of SPN losing the tax disputes. However, we estimate the valuation impact would be about 4 cps if both disputes were lost. 5.3 Risk from changes to thin capitalisation rules In its most recent Budget, the Federal Government reduced the safe harbour debt test for thin capitalisation from 75% to 60% debt-to-total assets (statutory accounts basis), from 1 July 2014 onwards. For SPN s two tax consolidated groups, the debt position includes not just their share of SPN s external borrowings but also the loans from the Finance trust (which net to zero upon consolidation in the group statutory accounts). We estimate that the Transmission tax consolidated group has gearing on this basis at about 75%, with the gearing of the Distribution group marginally higher. We estimate the interest on the Finance trust loans is currently running at about $179m pa, reducing tax payable by about $54m pa. Given the reduction in the safe harbour test, these high gearings levels put a material amount of SPN s interest deductions at risk. SPN says that the ATO currently accepts that SPN can utilise the arm's length debt test and as a result there is no impact from the reduction in the safe harbour rate. Under the arm s length test, gearing in excess of the 60% limit can be justified if an arm's length lender would lend to the company beyond this level based on cashflow certainty, etc. The Federal Government has referred the arm s length test to the Board of Taxation for review to improve its effectiveness, operation, and compliance. It is to report its recommendations to the Government by December With the upcoming Federal election, we view the risk related to the arm s length debt test as heightened. We have de-risked our valuation by about 4 cps by not including the value of the interest deductions created by the interest bearing loans between SPN s Finance trust and SPN s transmission and distribution operating entities. Upside to our valuation exists from the additional franking credits that would be created from the loss of the interest deductions related to the Finance trust loans. On the flipside, the additional tax paid as a result of loss of the interest deductions would weaken SPN s credit metrics, raising the potential for a capital raising. 5.4 Roughly half of the business subject to volume risk Both of SPN s electricity and gas distribution business (54% EBITDA) are subject to price cap regulation and therefore exposed to volume risk. Note that SPN s electricity transmission (43% EBITDA) is subject to revenue cap regulation and is therefore protected from volume risk; as such, it helps to buffer SPN from the volume fluctuations faced by its distribution businesses. Historically, price cap regulation benefitted SPN s distribution businesses as it allowed for outperformance of the regulator s volume forecast. However, SPN may under-recover its distribution regulated revenue allowances if actual volumes are less than forecast. This has been the case in recent periods, and there are factors that may see declining volumes continue (eg. penetration of photovoltaic solar systems, demand management, increasing energy prices). We assume that periods of revenue under-recovery resulting from volume under-performance are a temporary feature, given the company has a number of means to mitigate this risk. These include: Volume forecast. At the five yearly regulatory resets the AER recalibrates its five year forward volume forecasts based on actual trends, and factors this into the reset regulated pricing. In response to falling 15

16 volumes we expect the AER will approve higher tariffs, all else held constant, so as to allow SPN to recover its revenue allowance; Revenue cap. Prior to their next resets, SPN can elect for its distribution businesses to be subject to revenue cap regulation instead of price cap regulation, thereby removing volume risk. In our view, such a change would make sense, given it focuses SPN s attention on cost outperformance but removes the volume risk it cannot control; Tariff design. SPN may review the structure of fixed and variable charges, and/or time and demand-based pricing to better match network usage and network pricing; and Growing gas connections. Declines in volume per connection have been offset by growth in gas connections. This is likely to continue, given the low penetration of gas connections in SPN s licence area. Such a thematic is not underway in the electricity distribution business, given the high electricity penetration rates in the licence area. 5.5 Interest rate risk On the face of it, it is fair to assume that increases in interest rates will hurt the valuation of SPN. However, in reality the impact is not so simple. From a fundamental perspective: 1) higher interest rates may reflect higher inflation rates and higher levels of economic activity, both of which are beneficial to SPN s revenues; 2) at the time of the regulatory reset, the AER incorporates market interest rates into the regulated pricing determination, so higher interest rates result in higher revenues, all else being equal; and 3) SPN s debt is almost fully hedged, so rising interest rates will only increase debt service when existing interest rate hedges expire. As discussed, these hedges are set for the length of an asset s regulatory term. From a share price perspective: 1) rising interest rates may actually impact discretionary spend sectors of the economy harder than SPN s essential services, thereby making infrastructure an attractive relative investment proposition; and 2) simple analysis that we have conducted suggests that there has been little, if any, historical relationship between movements in SPN s share price and changes in bond rates and deposit rates. We acknowledge that this relationship may be stronger in future periods than it has been historically. Figure 20: Change in SPN share price vs. Change in 180d bank bill rate 20% 15% Figure 21: Change in SPN share price vs. Change in 10yr Commonwealth Government Bond Rate 20% 15% Monthly change in SPN share price 10% 5% 0% -2.0% -1.5% -1.0% -0.5% - 0.5% 1.0% -5% -10% -15% -20% -25% Monthly change in 180d bank bill rate SOURCES: RBS MORGANS, IRESS Monthly change in SPN share price 10% 5% 0% -1.0% -0.8% -0.6% -0.4% -0.2% - 0.2% 0.4% 0.6% 0.8% -5% -10% -15% -20% -25% Monthly change in 10yr Commonwealth Govt Bond Rate SOURCES: RBS MORGANS, IRESS 16

17 5.6 Regulatory reviews There are two key areas where the regulatory approach has been under review: SCER Limited Merits Review. The Standing Council on Energy and Resources intends to retain the Australian Competition Tribunal as the regulatory decision review body and maintain the limited nature of merits review. The merits review is now also required to result in a materially preferable outcome for the long-term interests of consumers. We understand from discussions from industry sources that asset owners view the results of the review as acceptable; AEMC rule changes. In November 2012, the Australian Energy Market Commission (AEMC) released new rules governing the economic regulation of energy infrastructure, giving increased discretion to the AER in setting regulated revenue for these assets. Briefly, the key reforms to the rules include: WACC: a consistent framework across electricity and gas distribution and transmission, evaluation of the WACC on a holistic basis rather than as an aggregation of individual components, consideration of a broader range of material, WACC guidelines updated every three years, and changes to the approach to setting the cost of debt (including reference to a hypothetical debt portfolio); Expenditure assessments. Revised framework will adopt a more holistic approach, with a stronger focus on the use of comparator or benchmark data; Incentives. A revised approach which will limit inclusion in the RAB of inefficient capex, by (i) asset owners and consumers sharing capex overspend and underspend, and (ii) the AER undertaking an ex-post review of capex if the AER capex forecast is breached; and Consumer engagement. For the first time, network businesses will be required to consult with their consumers in the development of their regulatory proposal. The AEMC rule changes apply to regulatory resets occurring from 1 July 2014, so won t directly impact SPN until mid-2015 when its Electricity Distribution network faces its next revenue reset. In our view, the regulatory reviews have increased regulatory uncertainty and tilted decision-making in favour of consumers over investment. Until such time as the changes are finalised and tested we view them as a net negative for SPN and the sector. We have risked our costs forecasts for these changes by assuming no future outperformance of regulatory cost forecasts, and therefore no future carryover benefits in future revenue resets. 17

18 6. FORECASTS 6.1 Revenue outlook affected by regulatory resets Figure 22: Revenue outlook* Financial Year end: Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Electricity distribution $m Electricity transmission $m Gas distribution $m Intersegment eliminations $m (13) (14) (15) (17) (17) (17) (18) Regulated Revenue $m 1,335 1,434 1,487 1,463 1,572 1,541 1,608 - growth % 5% 7% 4% -2% 7% -2% 4% Customer contributions $m Service $m Other $m Operating Revenue $m 1,535 1,640 1,695 1,675 1,789 1,762 1,834 - growth % 5% 7% 3% -1% 7% -2% 4% * excl. finance income and receivable amortisation related to the Victorian desal transmission line (FY14F $23m, FY18F $21m) Key points to note: Transmission. The regulatory reset applicable to the FY15-FY17 period is underway. SPN s initial proposal will see regulated revenue drop by about 8% ($44m) in FY15, before growing by about 6% pa across the FY16-FY17 period. The AER has noted that the contentious points of SPN s proposal include a significantly higher capex proposal and a step change in the opex cost allowance. We have made adjustments to SPN s proposal to account for lower capex and opex allowances, offset by a higher WACC allowance given the increase in interest rates since SPN s proposal. This results in transmission revenue falling more in FY15 than proposed by SPN, and with inflation-type revenue growth thereafter. We model revenue picking up in FY18, on the assumption that the next regulatory reset will result in (i) a higher WACC allowance given we assume interest rates will rise over time offset be a decline in the market risk premium from 6.5% pa under the current WACC guidelines to 6% pa, (ii) a dividend gamma allowance of 0.25 (as decided by the Australian Competition Tribunal) instead of 0.65 as per the current AER guidelines for electricity transmission, partly offset by (iii) no assumed efficiency benefit carryover. Note that the resets of the Transmission regulated revenue also impact the Electricity Distribution revenue, given the transmission cost is passed-through the distributors to the energy retailers; Electricity distribution. As a result of the price determination for the electricity distribution business in 2010, we factor in consistent regulated revenue growth through to FY16 (albeit impacted by the pass-through of the lower transmission charge discussed above as well as assumed ongoing under-recovery of allowed revenues through to CY15). We model regulated revenues will be negatively impacted from CY16 to CY20 by the regulatory reset due 2015, driven by a lower WACC allowance. Offsetting this impact is the close-out of the ESCV s S-factor scheme which negatively impacts the revenue allowance in the current regulatory cycle but won t be repeated in the next regulatory reset, and the assumed full recovery of allowed revenues from CY16 onwards. In addition, we note the AMI revenue allowance for the period has been back-ended. We expected a marked reduction in AMI-related revenue from 2016, due to (i) a drop in the WACC allowance, (ii) marked reduction in the opex allowance, and (iii) a smoothed revenue profile closely aligned with the revenue allowance; Gas distribution. Our forecast from now to CY17 is based on the smoothed revenue profile in the AER s Final Decision published in March This profile has regulated revenue declining in CY13 and further in 18

19 CY14, before growing from CY15. We expected a step-up in revenues from CY18, given we assume the next regulatory reset will benefit from a higher WACC allowance as a result of higher interest rates at that time compared to 2012/13; Victorian Desalination Plant. In December 2012, SPN spent $235m for the licence to operate and maintain the electricity transmission line supplying the Victorian Desalination Plant. The transaction sees SPN receiving a fixed monthly payment, escalated annually with inflation, for a 27 year period. At the end of this period, SPN is required to hand back the asset. Based on financial information disclosed in SPN s FY13 accounts, we estimate the (undisclosed) cash amount received will be about $33m in FY14, growing to $63m in the last year of the licence period. We estimate this transaction will generate extremely high returns for such a low risk asset about 13% pa IRR on an ungeared post-tax basis which is well above regulatory returns. SPN accounts for the transaction as a financial asset. From an accounting perspective, this results in the cash amount received being split between a declining return on (finance income) and amortisation of finance receivable (finance cashflow), offset by rapidly growing O&M services revenue. 6.2 An uninspiring earnings outlook We expect relatively flat EBITDA over the next four years, due to growth in operating costs as well as the revenue impacts discussed above. At the interest expense line, the benefits of reduced swap rates as existing hedges expire in the short term are offset over the medium term by increased borrowings to fund the capex budget and assumed rising interest rates. Figure 23: Earnings forecast Financial Year end: Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Electricity distribution $m Electricity transmission $m Gas distribution $m Intersegment eliminations $m (13) (14) (15) (17) (17) (17) (18) Regulated Revenue $m 1,335 1,434 1,487 1,463 1,572 1,541 1,608 Service $m Other $m Operating revenue $m 1,499 1,608 1,664 1,644 1,757 1,730 1,802 Customer contributions $m Revenue $m 1,535 1,640 1,695 1,675 1,789 1,762 1,834 - growth % 5% 7% 3% -1% 7% -2% 4% Opex $m (628) (664) (684) (700) (731) (750) (770) - growth % 4% 6% 3% 2% 5% 3% 3% EBITDA $m , ,057 1,012 1,064 - growth % 5% 8% 4% -4% 8% -4% 5% - margin % 59% 59% 60% 58% 59% 57% 58% D&A $m (294) (323) (355) (379) (400) (419) (438) EBIT $m Net borrowing costs $m (336) (339) (346) (292) (311) (309) (337) Net investment income $m Tax $m (25) (44) (35) (35) (48) (29) (30) NPAT $m growth % 1% 9% 5% -2% 10% -14% 1% EPS cps growth % -3% -5% 2% -3% 9% -14% 1% DPS $m growth % - 2.5% 2.0% 3.0% 3.0% 3.0% 3.0% 19

20 6.3 Balancing capex funding with distributions With a hefty capex budget and long investment payback periods, SPN is juggling a fine balance between funding distributions and growth capex. Figure 24: Cashflows Financial Year end: Mar-12A Mar-13A Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 EBITDA $m , ,057 1,012 1,064 Wcap & non-cash $m (50) (22) (24) 1 (12) (0) (13) Cash EBITDA $m ,046 1,011 1,050 Tax $m (81) (41) (43) (42) (57) (57) (60) Cflow for debt service $m Net borrowing costs $m (347) (344) (359) (301) (320) (316) (346) Operating cashflow $m Distribution $m (226) (253) (279) (287) (298) (309) (319) Available for growth $m Net capex $m (689) (842) (817) (664) (629) (588) (630) Acquisitions/investments $m (2) (236) Net capital investment $m (691) (1,077) (817) (664) (629) (588) (630) Residual cashflow $m (487) (761) (512) (318) (258) (259) (305) Net borrowings $m DRP proceeds $m Capital raising $m (0) Cash balance $m As at FYE-13, SPN held $541m cash and had $250m of undrawn bank debt facilities. The cash comes mostly from the $465m of new equity raised in FY14, which diluted shares on issue by about 17%. Over FY14-FY18, our modelling assumes cash and Distribution Reinvestment Plan proceeds will fund about 16% of capex. We also assume about 50% will be funded by operating cashflow net of distributions, with the remainder by borrowings. Our modelling suggest such a mix will see growing DPS while credit metrics remain around the levels required for the BBB+ credit rating. 6.4 Tax and the sourcing of franked dividends Over recent years, one-third of SPN s dividend has been fully franked. This sets SPN apart from its peers in the listed regulated energy infrastructure sector, which don t currently pay franking credits. The franked dividend component of SPN s distribution is sourced from SPN s Transmission operating subsidiary, which generates franking credits on the income tax it pays to the ATO. We expect SPN s distribution to continue to have a franked component, sourced from the Transmission business. The Distribution business is not currently a tax payer, given the large amount of tax losses ($889m FYE-13) that it can use to offset the future taxable income of Distribution tax group and large interest and depreciation tax deductions. As such, we do not expect the Distribution business to generate franking credits for many years. New equity capital raised by SPN is mostly allocated to units in the Finance trust, which the Finance trust then on-lends to the Transmission and Distribution operating subsidiaries, as required. Interest and principal payments on these loans by the operating subsidiaries are distributed via the Finance trust to SPN shareholders as the interest income and return of capital component of SPN s distribution. 20

21 Figure 25: Sourcing of distributions paid to SPN shareholders in FY13 SOURCES: SPN The Finance trust is not treated as a company for taxation purposes and is therefore not a tax payer. As well as being beneficial for SPN investors, the Finance trust structure reduces the tax burden of the operating subsidiaries as they claim tax deductions on the interest paid on the loans from the Finance trust. 6.5 Our forecasts vs. consensus The table below summarises our key forecasts against the median of CapitalIQ s consensus estimates. Our forecasts are below consensus on all items, except for the dividend which we are effectively in-line. Figure 26: RBSM forecasts vs. median consensus estimates FY13 Actual FY14 RBSMe CapitalIQ $ diff % diff FY15 RBSMe CapitalIQ $ diff % diff FY16 RBSMe CapitalIQ $ diff % diff Revenue $m 1,640 1,695 1,729 (34) -2% 1,675 1,763 (88) -5% 1,789 1,826 (37) -2% EBITDA $m 976 1,011 1,027 (16) -2% 975 1,048 (72) -7% 1,057 1,097 (40) -4% EPS (norm) cps (0.6) -7% (0.5) -6% (0.2) -2% Operating Cashflow $m (28) -5% % % Capex $m (45) -5% % (23) -4% Net Debt $m 4,736 5,223 5,271 (48) -1% 5,513 5,709 (196) -3% 5,741 5,981 (239) -4% Dividend cps % % SOURCES: RBS MORGANS, CAPITALIQ 21