Prospectus and product disclosure statement Spark Infrastructure Holdings No. 1 Limited (ABN 14 116 940 786) Spark Infrastructure Holdings No. 2 Limited (ABN 16 116 940 795) Spark Infrastructure Holdings International Limited (ARBN 117 034 492) Spark Infrastructure RE Limited (ACN 114 940 984) (AFSL 290436) as responsible entity of Spark Infrastructure Trust (ARSN 116 870 725) Spark Infrastructure Instalment Limited (ACN 115 680 601) The Loan Notes forming part of the Stapled Securities are unsecured notes for the purposes of section 283BH of the Corporations Act and are issued by the Responsible Entity as trustee of the Spark Infrastructure Trust. They are subordinated to all secured and unsecured creditors of the Spark Infrastructure Trust for all amounts. Joint Lead Managers and Joint Bookrunners Management Joint Venture Parties Sole Global Coordinator and Sole Financial Advisor
The Loan Notes forming part of the Stapled Securities are unsecured notes for the purposesof section 283BH of the Corporations Act and are issued by the Responsible Entity as trusteeof the Spark Infrastructure Trust. They are subordinated to all secured and unsecured creditorsof the Spark Infrastructure Trust for all amounts.
Prospectus and product disclosure statement
Joint Lead Managers and Joint BookrunnersManagement Joint Venture Parties Sole Global Coordinator and Sole Financial Advisor
SPARK INFRASTRUCTURE INSTALMENT
SPARK INFRASTRUCTURE – STAPLED ENTITIES
Spark Infrastructure RE Limited AFSL 290436Spark Infrastructure Company 1Spark Infrastructure Company 2Spark Infrastructure Company 3
Ord MinnettLevel 8255 George StreetSydney NSW 2000
Wilson HTMRiparian Plaza71 Eagle StreetBrisbane QLD 4000
Corporate DirectoryImportant informationThis replacement prospectus and newproduct disclosure statement (OfferDocument) replaces the originalprospectus and product disclosurestatement that was lodged with ASICon 9 November 2005 (OriginalDocument). This Offer Document isimportant and requires your immediateattention.This Offer Document is dated18 November 2005 and was lodged withthe Australian Securities andInvestments Commission (ASIC) on thatdate. This Offer Document has beenprepared by Spark Infrastructure RELimited (Responsible Entity) (in itscapacity as trustee of SparkInfrastructure Trust), SparkInfrastructure Holdings No 1 Limited(Spark Infrastructure Company 1),Spark Infrastructure Holdings No 2Limited (Spark Infrastructure Company2) and Spark Infrastructure HoldingsInternational Limited (SparkInfrastructure Company 3) (collectivelySpark Infrastructure and each aStapled Entity), and relates to the offerof Stapled Securities via an InstalmentReceipt mechanism (Securities). SparkInfrastructure is solely responsible forthis Offer Document. Each StapledEntity takes full responsibility for thewhole of this Offer Document otherthan the Financial Services Guidescontained in this Offer Document. ASICand Australian Stock Exchange Limited(ASX) take no responsibility for thecontents of this Offer Document. Thefact that ASX may admit SparkInfrastructure to the official list of ASXand quote Instalment Receipts andStapled Securities is not to be taken inany way as an indication of the meritsof Spark Infrastructure. No financialproducts will be issued on the basisof this Offer Document later than13 months after the date of this OfferDocument.This Offer Document contains aninvitation to apply to purchase StapledSecurities at a price of $2.00 for RetailInvestors (or such lesser amount ifadjusted in accordance with Section 3of this Offer Document) per StapledSecurity payable in two instalmentscomprising the First Instalment and theFinal Instalment plus the InstalmentInterest (Offer). Institutional Investorswill pay the price of the StapledSecurities as determined by theBookbuild. Each Stapled Securityacquired under this Offer will berepresented by an Instalment Receiptuntil payment of the Final Instalmentand Instalment Interest.The Instalment Receipts will be issuedby Spark Instalment. However ASIC hasmodified the operation of theCorporations Act so that:• for the purposes of Chapter 6D of the
Corporations Act, the persons whoare taken to offer the InstalmentReceipts insofar as they aresecurities are the Stapled Entities;and
• for the purposes of Part 7.9 of theCorporations Act, the person who istaken to issue the InstalmentReceipts insofar as they are aninterest in an interest in a managedinvestment scheme is theResponsible Entity.
The Responsible Entity is offering toarrange for the issue of InstalmentReceipts by Spark InfrastructureInstalment (Spark Instalment). Byapplying for Securities you accept theoffer by the Responsible Entity toarrange for the issue of the InstalmentReceipts which is subject to the termsof this Offer Document, including
acceptance of your Application. Theoffer by the Responsible Entity, and theissue of Instalment Receipts by SparkInstalment, are made under anagreement between Spark Instalmentand the Responsible Entity that is anintermediary authorisation for thepurposes of section 911A(2)(b) of theCorporations Act. Application will be made, within sevendays from the date of this OfferDocument, for Spark Infrastructure tobe admitted to the official list and forquotation of the Instalment Receiptsand Stapled Securities on ASX,although the Stapled Securities will notbe traded until payment of the FinalInstalment and Instalment Interest.Information is not financial adviceThe information contained in this OfferDocument is general information onlyand does not take into account theinvestment objectives, financialsituation and particular needs ofindividual Investors. You should obtainyour own independent financial advicefrom a qualified financial advisor andconsider the appropriateness of theOffer having regard to your objectives,financial situation and needs.It is important that you read the entireOffer Document before making anyinvestment in Securities. In particular, inconsidering the prospects of SparkInfrastructure, it is important that youconsider the risk factors that couldaffect the financial performance ofSpark Infrastructure and theassumptions underlying the FinancialInformation. Some of the risk factors thatshould be considered are in Section 13and the assumptions underlying theFinancial Information appear in Section11.No person is authorised to give anyinformation or to make anyrepresentation in connection with theOffer that is not disclosed in this OfferDocument. Any information orrepresentation not so contained may notbe relied upon as having beenauthorised by Spark Infrastructure,Spark Instalment, CKI, RREEFInfrastructure or the Joint LeadManagers in connection with the Offer.No guarantee of capital orinvestment returnsNone of Spark Infrastructure or any ofits controlled entities or any otherperson, guarantees the repayment ofcapital or the investment performanceof Spark Infrastructure or theSecurities. Investments in Securitiesare not deposits with or liabilities ofDeutsche Bank (subject to theInstalment Creditor’s obligation to fundSpark Infrastructure’s acquisition of a49% interest in the Asset Companies tothe extent the acquisition price exceedsthe Offer Proceeds attributable to theFirst Instalment, which will be repaidvia the Instalment PurchaseArrangements) or any other relatedparty or associate of Deutsche Bank.Deutsche Bank is not a Related BodyCorporate of Spark Infrastructure. Suchinvestments are subject to investmentrisk, including possible delays inrepayment and loss of income andcapital invested. Neither DeutscheBank nor any of its related parties orassociates gives any guarantee orassurance as to the performance of theSecurities, any particular rate of returnon the Securities or the repayment ofcapital or principal.No cooling offNo cooling-off rights apply to anapplication for Securities. This meansyou cannot withdraw your applicationonce it has been made.
Selling restrictionsThis Offer Document does notconstitute an offer or invitation in anyplace where, or to any person whom, itwould not be lawful to make such anoffer or invitation.In particular, the Securities have notbeen, and will not be, registered underthe US Securities Act of 1933, asamended (US Securities Act). SeeSection 3.14 for information regardingselling restrictions.The Securities Commission of TheBahamas is not responsible for thecontents of this Offer Document, thelatest published annual report or theaudited accounts of the AssetCompanies. Nothing in this OfferDocument constitutes a warrantyby the Securities Commission of TheBahamas as to the performance ofSpark Infrastructure and the SecuritiesCommission of The Bahamas shall notbe liable for the performance or defaultof Spark Infrastructure. Accordingly inregistering, or in respect of any filingby, Spark Infrastructure Company 3, theSecurities Commission of The Bahamasdoes not take responsibility for thefinancial soundness of SparkInfrastructure Company 3 or SparkInfrastructure or for the correctness ofany statements made or opinionexpressed in this regard.Persons, trusts and corporations whoor which have been designated as"resident for purposes of exchangecontrol" by the Central Bank of TheBahamas may not purchase or holdSecurities without the prior writtenpermission of that authority.TimingNo Securities will be issued and noApplications will be processed until the“exposure period” of seven days (or upto 14 days if ASIC so decides) afterlodgement of the Original Documentwith ASIC has expired. No offer ofSecurities is being made during theexposure period.Spark Infrastructure, in consultationwith CKI and the Joint Lead Managers,reserves the right to extend the Offer,close the Offer Period early orwithdraw the Offer, in each casewithout notice.Credit ratingA credit rating is not a recommendationto buy, sell or hold securities and maybe subject to a suspension, reductionor withdrawal at any time by anassigning rating agency and any ratingshould be evaluated independently ofany other information.Expert reportsWhile Spark Infrastructure isresponsible for this Offer Document,this Offer Document contains expertreports issued by Deloitte ToucheTohmatsu, Deloitte Corporate FinancePty Ltd, Deloitte Touche Tohmatsu Ltdand Mallesons Stephen Jaquesrespectively. Deloitte Touche Tohmatsuis responsible for its own reports(including its Financial Services Guide)subject to any disclaimer, waiver orindemnity. Deloitte Touche Tohmatsu isan independent party and isremunerated for its services asdescribed in Section 15.4. MallesonsStephen Jaques is an independentparty responsible for its own reportsubject to any disclaimer, waiver orindemnity and has been remuneratedfor its services as described in Section15.4. Details of experts’ remuneration isin Section 15.4.Industry and market dataIndustry and market data usedthroughout this Offer Document was, in
most instances, obtained from surveysand studies conducted by third partiesand industry and general publications.Spark Infrastructure has no reason todoubt that this information is reliable,however this has not been verified byany independent sources.Graphs and dataAll graphs and data presented in thisOffer Document are expressed as at30 June 2005, unless otherwise stated.Diagrams in this Offer Document areillustrative only and not drawn to scale.Definitions and abbreviationsDefined terms and abbreviations usedin this Offer Document have themeanings given in the Glossary.CurrencyAll financial amounts in this OfferDocument are expressed in Australiancurrency, unless otherwise stated.PhotographsPhotographs do not necessarily depictassets of Spark Infrastructure.Copies of the Offer DocumentPaper copies of this Offer Documentincluding the Application Form areavailable free of charge during theOffer Period by calling SparkInfrastructure Offer Information Line on1300 730 579.Electronic Offer DocumentThe Offer Document is also availableto Australian Investors on SparkInfrastructure’s website atwww.sparkinfrastructure.com. The Offerconstituted by this Offer Documentin electronic form is not available toInvestors in any other jurisdiction. Thefollowing conditions apply if the OfferDocument is accessed electronically:• you must download the Offer
Document in its entirety fromwww.sparkinfrastructure.com;
• your Application will only beconsidered where you have appliedon an Application Form thataccompanied the electronic OfferDocument. By making an application,you declare that you were givenaccess to the electronic OfferDocument together with theApplication Form;
• the offer of Securities constituted bythis Offer Document is only availableelectronically to Australian residentsaccessing and downloading orprinting the electronic version of theOffer Document in Australia; and
• you must mail or deliver yourApplication Form in the manner setout in Section 3.
The Corporations Act prohibits anyperson from passing on to any otherperson the Application Form unless it isattached to a hard copy of this OfferDocument or the complete andunaltered electronic version of thisOffer Document.Up to date informationInformation relating to the Offer maychange from time to time. Where thisinformation is of a kind that is requiredto be included in a supplementaryprospectus or product disclosurestatement, this information may beupdated and made available onSpark Infrastructure’s website(www.sparkinfrastructure.com) or byway of paper copy, free of charge, bycontacting Spark InfrastructureOffer Information Line on 1300 730 579(within Australia) or +613 9415 4286(outside Australia). Where updatedinformation about the Offer requires theissue of a supplementary prospectusor product disclosure statement inaccordance with the Corporations Act,a supplementary offer document willbe issued.
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Prospectus and product disclosure statement
Letter from the Chairman 3Offer summary 4Key information 5Investment highlights 6
one Summary of key information 14two Key questions and answers 24
three Details of the Offer 40four Australian electricity industry overview 48five Regulatory overview 56six The asset companies 62
seven Spark Infrastructure 82eight Management and governance 90nine Investment objectives 100ten Fees and expenses 104
eleven Financial information 116twelve Independent Experts’ Reports 156
thirteen Risk factors 220fourteen Material contracts 228
fifteen Additional information 280sixteen Glossary 290
Appendix: Financial Statements forthe period ending 30 June 2005– CHEDHA 302– ETSA 342Financial Services Guides
– Spark Infrastructure RE Limited 400– Australian Executor Trustee Limited 402Application forms 406Corporate directory IBC
contents1
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Spark Infrastructure hasbeen established to developa diversified portfolio ofinternational utilityinfrastructure assets.
Its investment strategy isfocused on providing anattractive yield and longterm capital growth.
It is my pleasure to invite you to become an Investor in Spark Infrastructure. This is an opportunity for you to invest in an ASXlisted vehicle of significant scale, initially comprising a diversified portfolio of high quality Australian electricity distributionassets with stable and predictable cash flows and the prospect of future growth.The Offer comprises 908.8 million Stapled Securities via an Instalment Receipt mechanism which will raise approximately$1,817 million, making it one of the largest initial public offerings in Australia in recent years. Together with CKI’s 9.9%interest based on a Final Price of $2.00, Spark Infrastructure would have a market capitalisation of$2,017 million upon payment of the Final Instalment.The price of the Stapled Securities:• for a Retail Investor, will be an initial instalment (the Retail First Instalment) of $1.40 per Stapled
Security, payable on Application and a final instalment (the Retail Final Instalment) of $0.60 perStapled Security which is payable on the Final Instalment Payment Date (expected to be 15 March2007);– if the Final Price determined under the Bookbuild is lower than $2.00, successful Retail
Investors will receive a refund of the difference between 70% of the Final Price and $1.40 andthe Final Instalment will also be reduced to 30% of the Final Price;
– if the Final Price is higher than $2.00, Retail Investors will not be required to pay the higheramount;
• for an Institutional Investor, will be determined under a Bookbuild which is expected to becompleted on 14 December 2005. The indicative price range for the Bookbuild is $1.80 to $2.00 perStapled Security although institutional investors may bid within, above or below this range. TheFinal Price determined under the Bookbuild will be payable in two instalments.
Interest is payable on the Final Instalment (Instalment Interest) on the Final Instalment Payment Date. The interest rate willbe determined on completion of the Bookbuild based on a margin of 1.5% per annum over the Market Rate on that date. As atthe date of the Original Document the interest rate would be approximately 7.39% per annum.Spark Infrastructure will be managed by a management company owned jointly by Cheung Kong Infrastructure HoldingsLimited (CKI) and RREEF Infrastructure (RREEF Infrastructure):• CKI, listed in Hong Kong and part of the Cheung Kong Group, is one of the world’s largest utility and infrastructure asset
owners with a portfolio of over $33 billion in utility and infrastructure investments;• RREEF Infrastructure is the infrastructure investment business of Deutsche Asset Management, the asset management
business of Deutsche Bank AG. Globally, Deutsche Asset Management has over $875 billion in funds under management;• CKI and RREEF Infrastructure have invested together in a number of other infrastructure projects.Spark Infrastructure will target acquisition opportunities in the utility infrastructure sector with the aim of maintaining anattractive yield, generating long term cash flows and enhancing the quality, scale and diversity of its asset portfolio.
Spark Infrastructure is expected to benefit from the considerable experience in global infrastructure investment and operationsprovided by CKI and RREEF Infrastructure who may potentially co-invest with Spark Infrastructure where suitable opportunitiesarise.The proceeds from the Offer will be used to partially fund the acquisition of a 49% interest in the following Australian electricitydistribution companies (the Asset Companies) from CKI:CitiPower – is the owner and manager of the electricity distribution network servicing approximately 286,000 customers inMelbourne’s central business district (CBD) and inner suburbs of Melbourne. The CitiPower network covers 157 squarekilometres and includes all major offices of the Government and private sector within the CBD, as well as other landmarks suchas the Melbourne Cricket Ground and Federation Square;Powercor – is the owner and manager of the largest electricity distribution network (by area) in Victoria, servicingapproximately 643,000 customers across 65% of the State; andETSA – is the owner and manager of South Australia’s only significant electricity distributor, servicing approximately768,000 customers over an area of approximately 178,200 square kilometres.The Asset Companies have recently been subject to regulatory determinations which are expected to provide a predictablerevenue stream until 30 June 2010 for ETSA and 31 December 2010 for CitiPower and Powercor.Following listing of Spark Infrastructure on ASX, the remaining 51% interest in the Asset Companies will be held by CKI and itsaffiliate, Hongkong Electric (HKE). CKI will also acquire a 9.9% interest in the Stapled Securities of Spark Infrastructure at theFinal Price.The directors forecast that Spark Infrastructure will pay a cash distribution of 0.39 cents per Stapled Security for the periodfrom the Issue Date to 31 December 2005 and 14.07 cents per Stapled Security for the 12 months ending 31 December 2006.Based on the payment of the Retail First Instalment of $1.40, this represents an attractive cash distribution yield of 10.05% forthe 12 months to 31 December 2006. The directors expect a cash distribution for the year ending 31 December 2007 of17.06 cents per Stapled Security. This represents a cash distribution yield of 8.3% per annum based on a Final Price of $2.00and assuming payment of Instalment Interest at a rate of 7.39% per annum and treating Instalment Interest as an addition tothe Final Price. See Section 1.2.2 for a discussion of distribution forecasts.I encourage you to read this Offer Document carefully, taking particular note of Section 11 dealing with financial informationand Section 13 dealing with various risk factors associated with Spark Infrastructure.I look forward to welcoming you as an Investor in Spark Infrastructure.Yours sincerely,
Offer summaryThe Offer consists of 908.8 million Stapled Securities. Each Stapled Security comprises:• one unit in Spark Infrastructure Trust;• one share in each of Spark Infrastructure Company 1 and Spark Infrastructure
Company 2;• an interest in one share in Spark Infrastructure Company 3 through a CHESS Depositary
Interest (CDI) issued over a share; and• one Loan Note issued by the Responsible Entity as trustee of Spark Infrastructure Trust. Each Stapled Security acquired will be represented by an Instalment Receipt until paymentof the Final Instalment and Instalment Interest. The units in Spark Infrastructure Trust, theshares and CDIs in the Stapled Companies and the Loan Notes are stapled together andcannot be traded independently.The Loan Notes forming part of the Stapled Securities are unsecured notes for thepurposes of section 283BH of the Corporations Act and are issued by the ResponsibleEntity as trustee of Spark Infrastructure Trust. They are subordinated to all secured andunsecured creditors of Spark Infrastructure Trust for all amounts.The Final Price is payable in two instalments. Holders will be required to pay a FirstInstalment on Application and a Final Instalment plus Instalment Interest on the FinalInstalment Payment Date (expected to be 15 March 2007 but which may be earlier incertain limited circumstances). Details of the amounts of the instalments are set out inSection 1.4.
Application will be made within seven days from the date of this Offer Document for SparkInfrastructure to be admitted to the official list of ASX and for quotation of the InstalmentReceipts and Stapled Securities on ASX. Stapled Securities will not be able to be traded onASX until after the Final Instalment Payment Date.
Key datesOffer Document date 18 November 2005Retail Offer opens 21 November 2005General Public Offer closes 5:00pm, 7 December 2005Broker Firm Offer closes 5:00pm, 12 December 2005Bookbuild 13-14 December 2005Pricing and allocation announced 15 December 2005Expected commencement of trading of Instalment Receiptson ASX on a conditional and deferred settlement basis 16 December 2005Institutional settlement 20 December 2005Allotment and expected dispatch of holding statements 21 December 2005Expected commencement of trading of Instalment Receiptson ASX on a normal settlement basis 22 December 2005Expected record date for determining Holders’ liability for Final Instalmentand Instalment Interest 1 March 2007Expected Final Instalment Payment Date 15 March 2007All references to dates are Australian dates and all references to time are Sydney, Australia time. These dates are indicative only, and Spark Infrastructure,after consultation with the Joint Lead Managers and CKI, reserves the right to vary the dates and times of the Offer (including, without limitation, theclosing date of any part of the Offer) without notifying you.
Key Offer informationRetail Application Price1,2 per Stapled Security $2.00– Retail First Instalment $1.40– Retail Final Instalment $0.60Instalment Interest2 per Stapled Security To be determined following the BookbuildTotal Stapled Securities on offer 908.8 millionTotal Stapled Securities on issue following the Offer 1,008.7 millionBookbuild Range $1.80-$2.00Market capitalisation3 $2,017.3 millionEnterprise Value4 $2,442.3 millionFor the year ending 31 December 20066
– Forecast cash distribution per Stapled Security 14.07 cents– Forecast cash distribution yield5 10.05%– EV/EBITDA3,7 9.7x– Gearing3,8 54.4%For the year ending 31 December 20079
– Expected cash distribution per Stapled Security9 17.06 cents– Expected cash distribution yield10 8.30%1 The Offer provides Investors with the ability to acquire a Stapled Security at a price payable in two instalments. The Retail First Instalment payable by
Retail Investors on Application is $1.40 per Stapled Security. If the Final Price is less than $2.00, Retail Investors will receive a refund equal to thedifference between $1.40 and 70% of the Final Price. If the Final Price is less than $2.00, the Retail Final Instalment will also be reduced to 30% of theFinal Price. If the Final Price is above $2.00, Retail Investors will pay no more than the Retail Application Price.
2 The Instalment Interest Rate will be determined following completion of the Bookbuild based on the Market Rate as at that date plus the Margin. At thedate of the Original Document the Instalment Interest Rate would be approximately 7.39% per annum. Instalment Interest is payable on the FinalInstalment Payment Date (which is expected to be 15 March 2007 but may be earlier in certain circumstances). Refer to Section 1.4.4 for more details.
3 Based on the Retail Application Price of $2.00 (after the Instalment Receipt has been fully paid) and the total Stapled Securities of 1,008.7 million onissue following the Offer.
4 Based on the Retail Application Price of $2.00, total Stapled Securities on issue following the Offer of 1,008.7 million and Senior Debt of SparkInfrastructure of $425 million.
5 Based on the Retail First Instalment of $1.40 and assuming that no Performance Fee is payable during this period and the Base Fee is calculated usinga market capitalisation based on the Retail Application Price.
6 It is not certain that this distribution or cash distribution yield will be achieved. Investors should carefully read Section 11, which relates to the financialforecasts, and Section 13, which details the risk factors.
7 The adjusted EV/EBITDA is calculated as the sum of Spark Infrastructure’s enterprise value at the Retail Application Price ($2,442.3 million) and theAsset Group’s net Senior Debt as at 30 June 2005 as defined in the Investigating Accountant’s Report ($1,980.5 million – see notes 5, 13 and 16)divided by the Asset Group’s EBITDA ($471.8 million – see Table 11.1) adjusted for estimated Base Fees ($12.5 million – see Table 11.3) and otheroperating expenses ($5.6 million – Table 11.3) payable by Spark Infrastructure in the year to 31 December 2006, i.e. ($2,442.3 million + $1,980.5 million)divided by ($471.8 million –$12.5 million – $5.6 million), which is equal to 9.7x.
8 Spark Infrastructure’s gearing is equal to its Senior Debt ($425 million) plus the Asset Group’s net Senior Debt as defined in the InvestigatingAccountant’s Report ($1,980.5 million) divided by the sum of Spark Infrastructure’s enterprise value at the Retail Application Price ($2,442.3 million)and the Asset Group’s net Senior Debt as defined in the Investigating Accountant’s Report ($1,980.5 million), = ($425 million + $1,980.5 million)/$2,442.3 million + $1,980.5 million), which is equal to 54.4%
9 Spark Infrastructure has not prepared detailed financial forecast information for the year ending 31 December 2007 and the Independent Review ofDirectors’ Financial Forecasts in Section 12.2 does not cover that period. The expected distribution for the year ending 31 December 2007 has beenprovided as a guide for Investors, primarily to illustrate the effect of the Instalment Purchase Arrangements on distributions. It is not certain that thedistributions or the cash distribution yield described in relation to the year to 31 December 2007 will be achieved. Please refer to Section 1.2.2 for moredetail.
10 Based on the Retail Application Price of $2.00 and payment of Instalment Interest at a rate of 7.39% per annum (equating to approximately 6 cents perStapled Security) as an addition to the Retail Application Price.
Two global powerhousescombine to createSpark InfrastructureTogether, CKI and RREEF Infrastructure provide global presence,extensive experience and a proven track record
CKI is the owner and manager of over $33 billion of utility andinfrastructure assets globally, and is part of the Cheung KongGroup, whose market capitalisation is $114 billion
RREEF Infrastructure is the infrastructure arm of Deutsche AssetManagement. Deutsche Asset Management has over $875 billionin funds under management globally
Attractive yieldSpark Infrastructure is forecasting a cashdistribution of 14.07 cents for the year ending31 December 2006, representing a cashdistribution yield of 10.05% per annum based onthe payment of the Retail First Instalment of $1.40
The directors expect a cash distribution of17.06 cents for the year ending 31 December2007, representing a cash distribution yield of8.3% per annum based on a Final Price of $2.00,assuming payment of Instalment Interest at arate of 7.39% per annum and treating InstalmentInterest as an addition to the Final Price. SeeSection 1.2.2 for a discussion of distributionforecasts
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High qualitynatural monopolyassetsSpark Infrastructure’s assets deliver an essential service to approximately 1.7 million customersin Victoria and South Australia
Spark Infrastructure has been established with theaim of developing a diversified portfolio of utilityinfrastructure assets. It will provide the opportunityto invest in one of the largest listed regulated utilityinfrastructure asset portfolios in Australia. The assetsof Spark Infrastructure will initially comprise a 49%interest in each of CitiPower, Powercor and ETSA.CKI and HKE, which presently own the AssetCompanies, will own the remaining 51% stake in theAsset Companies. CKI will also acquire a 9.9%interest in Stapled Securities of Spark Infrastructureat the Final Price.
Spark Infrastructure is expected to receive aninvestment grade credit rating following the IPO.
The acquisition of a 49% interest in the AssetCompanies is subject to conditions precedent. If theconditions precedent are not met the Offer will notproceed and Application Monies will be returned(without interest). If the Offer is not fully subscribed,the Offer will not proceed and Application Monieswill be refunded in full, without interest.
Spark Infrastructure intends to target electricity andgas transmission and distribution assets, regulatedwater assets and infrastructure-related assets whichprovide diversification by geography and regulatoryregime. Spark Infrastructure is focused on providingan attractive cash yield and long term capital growthto Holders.
Spark Infrastructure will comprise SparkInfrastructure Trust (a registered managedinvestment scheme in respect of which SparkInfrastructure RE Limited will act as the ResponsibleEntity), Spark Infrastructure Company 1 (which willhold a 49% interest in CitiPower and Powercorthrough CHEDHA), Spark Infrastructure Company 2(which will hold a 49% interest in ETSA), andSpark Infrastructure Company 3 (which is a companyincorporated in The Bahamas that currently does nothold any assets).
1.2 Investment highlights
1.2.1 CKI and RREEF Infrastructure – global
presence and proven track record
Spark Infrastructure will be managed by amanagement company ultimately jointly owned byCKI and RREEF Infrastructure. The Manager will haveaccess to the infrastructure expertise and investmentmanagement resources of CKI and RREEFInfrastructure.
CKI is the largest publicly listed infrastructurecompany in Hong Kong, managing over $33 billionof utility and infrastructure assets. CKI forms part ofthe Cheung Kong Group, that has a combined marketcapitalisation of $114 billion as at 1 November 2005.
RREEF Infrastructure is an experienced investmentmanager with significant asset and fundsmanagement expertise. RREEF Infrastructure is theinfrastructure investment management business of
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Figure 1.1 Spark Infrastructure – simplified corporate and ownership structure
Deutsche Asset Management, the asset management businessof Deutsche Bank AG. Deutsche Asset Management has over$875 billion in funds under management in Australia andoverseas as at 30 September 2005. RREEF Infrastructurecurrently manages ownership positions for clients in a numberof infrastructure assets including Melbourne Airport and theNorth of England gas distribution network.
1.2.2 Attractive yield
Spark Infrastructure is forecasting a cash distribution of 0.39cents per Stapled Security for the period from the Issue Date to31 December 2005.
Spark Infrastructure is forecasting a cash distribution of 14.07 centsper Stapled Security for the 12 months to 31 December 2006. Thisrepresents a cash distribution yield of 10.05% per annum based onthe payment of the Retail First Instalment of $1.40.
The directors expect a cash distribution of 17.06 cents perStapled Security for the year ending 31 December 2007.This represents a cash distribution yield of 8.3% per annumbased on a Retail Application Price of $2.00, assuming paymentof Instalment Interest at a rate of 7.39% per annum (equating to
approximately 6 cents) and treating Instalment Interest as anaddition to the Retail Application Price. For details of howInstalment Interest is calculated and how the Instalment InterestRate will be determined, refer to Section 1.4.4.
The forecast cash distribution for the 12 months to 31 December2006 is based on the Forecast Information as set out in Section 11.
The expected cash distribution for the 12 months to 31 December2007 has been provided as a guide for Investors, primarily toillustrate the effect of the Instalment Purchase Arrangements ondistribution yields. Detailed financial forecast information has notbeen presented for that year and the Independent Review ofDirectors’ Financial Forecasts in Section 12.2 does not coverthat period.
The expected cash distribution for the 12 months to31 December 2007 has been estimated by reference to acashflow model prepared by the Asset Companies and SparkInfrastructure which has been assessed for consistency with therecent regulatory determinations. The Directors have assessedthe anticipated cashflows against a number of material variablesaffecting the expected operating results and cashflows of the
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Table 1.1 Spark Infrastructure financial summary and forecast and expected distributions1
Notes:1 All financial forecasts have been prepared by Spark Infrastructure. It is not certain that the forecast information including distributions will be
achieved. Refer to Sections 11 and 13 for more information. 2 Instalment Interest is based on an assumed rate of 7.39% per annum and the expected Final Instalment Payment date of 15 March 2007. The
actual Instalment Interest Rate will be calculated as set out in Section 1.4.4. The Final Instalment Payment Date may be earlier in certain limitedcircumstances as set out in Section 13.5.
3 Tax deferred component relates to a capital return component of the distribution and is expected to be funded from cash flow distributed from theAsset Companies. Refer to the Taxation Report in Section 12 for more information.
4 Assumes that no Performance Fee is payable during this period and the Base Fee is calculated using a market capitalisation based on the RetailApplication Price.
8.30%n/an/a
Cash yield on Retail Application Price of $2.00 plusInstalment Interest of 6 cents per Stapled Security2
This assumes the Instalment Interest as an additionto the Retail Application Price
n/a10.05%n/aYield on payment of Retail First Instalment of $1.40
20.40%3.45%3.45%Average % tax deferred
3.48 cents0.49 cents0.01 cents– Tax deferred3
13.58 cents13.58 cents0.38 cents– Taxable
17.06 cents14.07 cents0.39 centsCash distributions per Stapled Security
n/a(8.9)(0.9)Net loss after tax attributable to Holders
n/a(7.9)(0.9) Net loss before tax attributable to Holders
n/a(137.0)(3.8)Interest expense – Loan Notes (distribution to Holders)
n/a129.22.9Net profit before tax and Loan Notes attributable to Holders
Asset Companies and Spark Infrastructure, includingthe ongoing working capital and capital expenditurerequirements of the Asset Companies. They have alsohad regard to the financing facilities available and likelyto be available to the Asset Companies and SparkInfrastructure. While the distribution for the 12 monthsto 31 December 2007 is inherently more difficult toassess than for the 12 months to 31 December 2006,the directors believe that the expected distribution isan appropriate guide to likely distributions for thatperiod. Refer to Section 11.5 for more informationrelating to the expected distribution for the 12 monthsto 31 December 2007.
The ability to pay future distributions will depend on arange of factors, including the results of operations ofthe Asset Companies, availability of distributable cashflow, availability of new or continued debt facilities,Spark Infrastructure’s financial position, taxationconsiderations, the ongoing capital and cashrequirements of the Asset Companies and such otherfactors that the boards of the Stapled Entities considerrelevant. It is not certain that the distributions or thecash distribution yields set out in the table ordescribed above will be achieved. Investors shouldcarefully read Section 11, which details theassumptions on which the forecasts in this OfferDocument are based and Section 13 relating to therisks associated with an investment in the Securities.
Table 1.1 summarises the forecast financialperformance of Spark Infrastructure over the ForecastPeriod, which includes the period from Issue Date to31 December 2005 and the 12 months to 31 December2006. The table also includes forecast distributions overthe Forecast Period and expected distributions for the12 months to 31 December 2007 as described above.The table should be read in conjunction with the moredetailed financial information in Section 11 and the riskfactors in Section 13.
1.2.3 Predictable and stable cash flow
The regulated nature of the revenue streams fromthe Asset Companies should mean that the cashflows from the Asset Companies provide Holderswith relatively stable and predictable distributions.
Regulated distribution network tariffs charged tousers of the electricity distribution networksrepresent the largest component of revenue for eachof the Asset Companies. For the year ended 30 June2005, approximately 78% of the Asset Companies’revenue was derived from regulated network tariffsdetermined by state based regulators.
S&P has confirmed that each of the AssetCompanies’ credit ratings of A– will be reaffirmedassuming completion of the transactions set out inthis Offer Document.
1.2.4 Long term regulatory certainty
Each of the Asset Companies has recently completeda regulatory price determination. The regulatorypricing arrangement for Powercor and CitiPower has
been determined for the period 1 January 2006 until31 December 2010 and the regulatory pricingarrangement for ETSA has been determined for theperiod 1 July 2005 until 30 June 2010. Refer toSection 5 for further information and to Section 13.2under the heading “Regulatory pricing andcompliance” relating to the risks associated with theregulatory pricing arrangements.
1.2.5 High quality assets
CitiPower, Powercor and ETSA deliver an essentialservice to approximately 1.7 million customers inSouth Australia and Victoria.
Spark Infrastructure’s portfolio will comprise a 49%interest in each of the following natural monopolyassets:• CitiPower – the electricity distributor for
Melbourne’s CBD and inner suburbs withapproximately 286,000 customers;
• Powercor – the largest electricity distributor inVictoria with approximately 643,000 customers; and
• ETSA – the only significant electricity distributor inSouth Australia, with approximately 768,000customers.
1.2.6 Growth potential
Both CKI and RREEF Infrastructure have anextensive global presence in the utility infrastructuresector with a proven track record of investment andasset management.
CKI and RREEF Infrastructure each indirectly jointlyown the Manager. It is anticipated that they willprovide access to new acquisition opportunitiesthrough their global reach and resources. CKI andRREEF Infrastructure may co-invest with SparkInfrastructure where suitable opportunities arise.See Section 9.5 for a discussion of the investmentreferral principles.
Spark Infrastructure will target acquisitionopportunities in the utility infrastructure sector thatallow it to maintain an attractive yield, generate longterm cash flows and enhance the quality, scale anddiversity of its asset portfolio.
Spark Infrastructure considers such opportunities arelikely to emerge in Australia and internationally givencurrent trends of industry consolidation, privatisationsand secondary asset sales.
Organic growth will be sought through higherelectricity distribution volumes, cost synergies andincreases in unregulated revenue.
1.2.7 Size and scale of Spark Infrastructure
Spark Infrastructure is expected to be one of thelargest utility infrastructure owners listed on ASX.
Spark Infrastructure’s size and the potential for it toco-invest with CKI and RREEF Infrastructure, willallow it to target large international acquisitionopportunities, where there is potential for moreattractive valuations relative to competitive auctionsfor smaller utility infrastructure assets.
CKI and RREEF Infrastructure have extensive managementexperience in identifying, assessing, acquiring, operating andmanaging utility infrastructure assets. In addition, CitiPower,Powercor and ETSA bring with them stable and experiencedmanagement teams, which position the Asset Companies tooptimise organic growth opportunities.
1.3 Key financial information
Table 1.2 summarises the pro forma historical and forecastfinancial performance of Spark Infrastructure’s 49% interest inthe earnings of the Asset Companies, which is referred to asthe Asset Group. The table should be read in conjunction withthe more detailed financial information in Section 11 and therisk factors in Section 13.
1.4 The Offer
1.4.1 Overview
The Offer consists of 908.8 million Stapled Securities in SparkInfrastructure initially represented by Instalment Receipts. EachStapled Security comprises:• one unit in Spark Infrastructure Trust;• one share in Spark Infrastructure Company 1;• one share in Spark Infrastructure Company 2;• one CDI representing one share in Spark Infrastructure
Company 3; and• one Loan Note issued by the Responsible Entity as trustee
of Spark Infrastructure Trust.
The Loan Notes forming part of the Stapled Securities areunsecured notes for the purposes of section 283BH of theCorporations Act and are issued by the Responsible Entity astrustee of Spark Infrastructure Trust. They are subordinated toall secured and unsecured creditors of Spark Infrastructure Trustfor all amounts.
Each of the units in Spark Infrastructure Trust, the shares in SparkInfrastructure Company 1 and Spark Infrastructure Company 2,the CDI in Spark Infrastructure Company 3 and the Loan Notesare stapled together and cannot be traded separately.
The Offer provides Investors with the ability to acquire a StapledSecurity at a price payable in two instalments. Investors will paythe First Instalment on Application and will be issued InstalmentReceipts. Holders of Instalment Receipts on the Final InstalmentRecord Date will have an obligation to pay the Final Instalment andInstalment Interest. The Instalment Receipts will remain on issueuntil the Final Instalment and Instalment Interest are paid on theFinal Instalment Payment Date which is expected to be 15 March2007 but may be earlier in certain limited circumstances. SeeSection 13.5 for further details.
Application will be made for the Instalment Receipts to bequoted on ASX and they are expected to commence trading on aconditional and deferred basis on 16 December 2005. Applicationwill be made for the Stapled Securities to also be quoted on ASXbut Stapled Securities will not be able to be traded until after theFinal Instalment Payment Date.
19Table 1.2 Financial information summary – Spark Infrastructure’s 49% interest in the Asset Companies
All financial forecasts have been prepared by Spark Infrastructure. It is not certain that the forecast information including distributions will be achieved.Refer to Sections 11 and 13 for more information.
15.8Net profit after tax attributable to SparkInfrastructure
(34.1)Preferred Capital Distributions– payable to Spark Infrastructure
Retail Investors will apply at the Retail ApplicationPrice which will be payable in two instalments asfollows:• the Retail First Instalment (being 70% of the
Retail Application Price) is payable on Application.If the Final Price determined under the Bookbuildis lower than $2.00, Retail Investors will receive arefund of the difference between 70% of theFinal Price and $1.40;
• the Retail Final Instalment (being the lower of$0.60 and 30% of the Final Price as determinedunder the Bookbuild).
In addition, Instalment Interest is payable on theFinal Instalment Payment Date.
This means that, excluding Instalment Interest, RetailInvestors will not pay more than $2.00 for a StapledSecurity under the Offer, even if InstitutionalInvestors pay a higher price following the Bookbuild.
The payments expected to be required by a RetailInvestor are set out in Table 1.3.
Table 1.3
Payment Amount Date payable
Retail First $1.401 On ApplicationInstalment
Retail Final $0.601 Final InstalmentInstalment Payment Date
Instalment To be determined Final InstalmentInterest following completion Payment Date
of the Bookbuild2
Notes:1 Based on the Retail Application Price of $2.00.2 Refer to Section 1.4.4 for details of how Instalment
Interest is calculated and how the Instalment InterestRate will be determined.
1.4.3 Institutional offer price
Institutional Investors will apply at the Final Price.The Final Price will be determined by SparkInfrastructure, CKI and the Joint Lead Managers,following completion of the Bookbuild, expected tooccur on 14 December 2005. The Final Price isexpected to be announced on 15 December 2005.
If the Final Price is within the Bookbuild Range,Institutional Investors will be required to pay onApplication an Institutional First Instalment equivalentto 70% of the lower of $2.00 and the Final Price. Ifthe Final Price is higher than $2.00, InstitutionalInvestors will also pay on Application the differencebetween $2.00 and the Final Price. An InstitutionalFinal Instalment equivalent to the lower of $0.60 perStapled Security and 30% of the Final Price will bepayable on the Final Instalment Payment Date.
1.4.4 Instalment Interest
In addition to payment of the First Instalment andthe Final Instalment, Holders also have an obligationto pay interest on the amount of the Final Instalmentover the term of the Instalment Receipt. TheInstalment Interest Rate will be determined followingcompletion of the Bookbuild based on the MarketRate on that date plus the Margin. At the date of theOriginal Document, the Instalment Interest Ratewould be 7.39% per annum which would result in anamount of approximately 6 cents per StapledSecurity becoming payable on the Final InstalmentPayment Date.
Interest will be calculated daily and compoundedquarterly but will only be payable on the FinalInstalment Payment Date.
1.5 Ownership of Stapled Securities on
completion of the Offer
CKI will subscribe for Stapled Securities at the FinalPrice and will not hold Instalment Receipts. Uponcompletion of the Offer, CKI will hold a 9.9% interestin the Stapled Securities of Spark Infrastructure.
On completion of the Offer, the Holders of Securitieswill be as summarised in Table 1.4:
Table 1.4 – Holders of Spark Infrastructure
Securities %
CKI1 99.9 million 9.9%Holders2 under the Offer 908.8 million 90.1%Total 1,008.7 million 100%
Notes:1 CKI will receive Stapled Securities. Stapled Securities will
be quoted but will not be able to be traded on ASX untilafter the Final Instalment Payment Date.
2 Holders will initially hold Instalment Receipts which willbe cancelled and replaced by Stapled Securities after theFinal Instalment Payment Date.
Please refer to Sections 3.2 and 3.3 for a descriptionof the components of the Offer and instructions onhow to apply.
The Offer proceeds, together with debt raised by SparkInfrastructure, will be used to acquire a 49% interest inCitiPower, Powercor and ETSA from CKI. CKI will acquire a 9.9%interest in the Stapled Securities of Spark Infrastructure at theFinal Price and in conjunction with HKE, will own the remaining51% interest in the Asset Companies.
At the Retail Application Price, funds raised under the Offer willbe used as described in Table 1.5:
Table 1.5 – Sources and applications of funds
Sources of funds $ million
Offer Proceeds – First Instalment1 1,272.3Assignment of Instalment debt1 545.3Senior Debt raised by Spark Infrastructure 425.0Total sources of funds 2,242.6
Application of funds $ million
Payment to CKI2 2,122.1Repayment of CitiPower Senior Debt 50.0Transaction expenses3 70.5
Total application of funds 2,242.6
Notes:1 Spark Infrastructure intends to acquire a 49% interest in the Asset
Companies utilising the funds from the First Instalment and fundsreceived from the assignment of the instalment debt to theInstalment Creditor in an amount equal to the aggregate FinalInstalment. See Section 14.5.1 for further details.
2 Exclusive of CKI’s 99.9 million Stapled Securities at the Final Priceper Stapled Security.
3 Details of transaction expenses are in Sections 10 and 14. All costs(includes GST where applicable) are estimated based oncircumstances known to Spark Infrastructure as at the date of theOriginal Document, and which may change.
The proceeds payable to CKI for the sale of the 49% interest ineach of the Asset Companies in connection with the Offer will bedetermined by the Final Price. If the Final Price is above or belowthe Retail Application Price then the proceeds to CKI will increaseor decrease to reflect this and the change in transaction costs. Theamount of CitiPower’s debt to be repaid will remain $50 million.
Details of the equity, shareholder loans and subordinated debtrelating to the Asset Companies are in Sections 7, 11 and 14.
1.7 Spark Infrastructure’s investment objectives
and strategy
Over time, Spark Infrastructure will endeavour to accumulatea portfolio of utility infrastructure assets internationally, with theobjective of diversifying the future asset portfolio by industry,region and regulatory regime.
The targeted asset classes will include:• electricity transmission and distribution assets;• gas transmission and distribution assets;• regulated water assets; and• utility infrastructure-related assets.
Spark Infrastructure intends to target investments that exhibitthe following investment criteria:• predictable and stable long term cash flows;• revenue growth potential;• transparent regulatory regime;
• relatively high barriers to entry;• availability of a significant investment;• capable operational management; and• complementary to the existing asset portfolio.
Spark Infrastructure will seek to invest in assets withinAustralia, New Zealand, OECD countries and countries whichhave comparable sovereign credit ratings or level of economicdevelopment.
Please refer to Section 9 for a more detailed description ofthe investment objectives and strategy for Spark Infrastructureand Section 8 for a description of the management ofSpark Infrastructure.
1.8 Strategic partners
1.8.1 CKI
CKI is the largest publicly listed infrastructure company in HongKong with diversified investments in energy infrastructure,transportation infrastructure, water infrastructure andinfrastructure-related businesses. It has investments in HongKong, China, Australia, UK, Canada and the Philippines.
CKI has a 50% indirect interest in both the Manager andResponsible Entity, and will assist the Manager with:• investment management expertise;• detailed analysis and due diligence of investment
opportunities; and• identification and referral of future investment opportunities
to Spark Infrastructure in accordance with the investmentreferral principles discussed in Section 9.5.
CKI will acquire a 9.9% interest in Spark Infrastructure asStapled Securities.
1.8.2 RREEF Infrastructure
RREEF Infrastructure is an experienced investment managerwith significant asset and funds management expertise. RREEFInfrastructure is the infrastructure investment businessof Deutsche Asset Management, the asset managementbusiness of Deutsche Bank AG. Deutsche Asset Managementhas over $875 billion of funds under management in Australiaand overseas.
RREEF Infrastructure has a 50% interest in the Manager andResponsible Entity, and will assist with:• investment management expertise;• detailed analysis and due diligence of investment
opportunities; and• identification and referral of future investment opportunities
to Spark Infrastructure in accordance with the investmentreferral principles discussed in Section 9.5.
1.8.3 Manager
The Manager is ultimately 50% jointly owned by CKI and RREEFInfrastructure. The Manager is responsible for providing certainmanagement services to Spark Infrastructure.
The Manager will provide its services under a ManagementAgreement entered into with Spark Infrastructure. SeeSection 7.5 for more information on the Manager andSection 14.6.1 for a summary of the Management Agreement.The term of the Management Agreement is 25 years, subjectto the termination rights described in Section 14.6.1. Inaddition, the Manager will be issued a Special Voting Share
which will entitle it to appoint up to 50% of themaximum number of directors of each of the StapledCompanies (see Sections 8.5.3 and 14.3.4).
The remuneration of the Manager will comprise aBase Fee and, potentially, a Performance Fee. TheBase Fee is calculated as a percentage per annum ofEnterprise Value, being 0.5% per annum up to$2.443 billion plus 1.0% per annum of any amountby which the Enterprise Value exceeds $2.443 billion.The Manager is also entitled to a Performance Fee ifSpark Infrastructure’s Return exceeds theperformance of the Benchmark Index. Refer toSection 10 for details of calculating the Base Fee andthe Performance Fee.
The Manager may also be reimbursed for certainexpenses incurred on behalf of Spark Infrastructureon the basis outlined in Sections 10 and 14.
1.8.4 Responsible Entity
It is a requirement of the Corporations Act fora registered managed investment scheme such asSpark Infrastructure Trust to have a ResponsibleEntity. The Responsible Entity is ultimately 50%jointly owned by CKI and RREEF Infrastructure.
The Responsible Entity will operate SparkInfrastructure Trust in accordance with SparkInfrastructure Trust Constitution and theCorporations Act. This includes holding anyinvestments of Spark Infrastructure held by SparkInfrastructure Trust on trust for Holders, ensuringcompliance with the Compliance Plan and acting inthe best interests of Holders.
The remuneration of the Responsible Entity willcomprise a quarterly fixed amount of $25,000 plusinternal costs not otherwise reimbursable. TheResponsible Entity may also be reimbursed forexpenses in relation to the proper performance of itsduties in respect of the Spark Infrastructure Trust.Further details on these fees and expenses are setout in Sections 10.3 and 14.3.2.
1.9 Distribution policy
Distributions to Holders are expected to be payablehalf yearly in March and September in respect of thepreceding six month periods ending 31 Decemberand 30 June respectively.
It is expected that the majority of distributions will bemade from interest paid on the Loan Notes whichform part of the Stapled Securities. The remainder ofany distributions will be made by way of distributionsfrom Spark Infrastructure Trust and dividends from theStapled Companies.
A summary of Spark Infrastructure’s DistributionPolicy can be found in Section 7.7.
1.10 Key investment risks
Investors should consider carefully the risksassociated with investing in Spark Infrastructure.These risks may affect the value of StapledSecurities and Instalment Receipts, the distributionswhich may be expected from Spark Infrastructure, orboth. The risks associated with investing in SparkInfrastructure are described in detail in Section 13.Key areas of risk are also summarised below.
1.10.1 Economic and financial market
environments
The Stapled Securities and the Instalment Receiptsare subject to risks which affect the economic andfinancial market environments generally, includingmovements on international and domestic stockmarkets, changes in interest rates, actual andexpected economic growth, overall economic andfinancial market conditions and Government taxation,regulation and other policy changes. Adversechanges in these factors which affect the marketgenerally may decrease the value of, or decrease theamount of expected distributions from, SparkInfrastructure. See Section 13.1 for furtherinformation.
1.10.2 Key risks specific to an investment in
Spark Infrastructure and the Asset Companies
Certain risks are specific to an investment in SparkInfrastructure and the Asset Companies. A reductionin revenue earned by the Asset Companies mayreduce their ability to pay distributions to SparkInfrastructure, and in turn limit Spark Infrastructure’sability to make distributions to Investors. Key risks tothe Asset Companies’ revenue are variations incustomer load, regulatory pricing and compliance,inflation and network disruptions. Other risks arisefrom the financing arrangements affecting SparkInfrastructure and the Asset Companies such as therisk of occurrence of a Senior Debt Lock Up and theability of Spark Infrastructure to defer interestpayments on the Loan Notes, from the taxationaffairs of the Asset Companies, from present andfuture joint venture arrangements and from thepotential for conflicts of interest under SparkInfrastructure’s management arrangements. SeeSection 13.2 for further information.
1.10.3 Operational risks applicable to the Asset
Companies
Investors are also subject to operational risksapplicable to the Asset Companies, including inparticular exposure to any unforeseen increases inoperating expenses of the Asset Companies. Otheroperational risks include the risk of unbudgetedcapital expenditure, the impact of bushfires, potentialnative title claims, industrial action, changes toenvironmental policies and controls or electricalsafety standards and the credit risks that the AssetCompanies have in respect of major customers. SeeSection 13.3 for further information.
In addition, Investors must rely on the judgment of the boardsof directors of the Stapled Entities and of the Manager. Thesuccess of Spark Infrastructure will depend in a large part onthe performance of the Manager in managing the affairs of theStapled Entities including the implementation of the investmentpolicy. See Section 13.4 for further information.
1.10.5 Risks related to the Offer, the Stapled Securities
and the Instalment Receipts
Investors should also be aware of risks related to the Offer, theStapled Securities and the Instalment Receipts. In particular,there is no guarantee that forecast distributions on theSecurities, including interest payments relating to the LoanNotes, will be achieved and future distributions may beadversely impacted by a number of factors outside of thecontrol of Investors, Spark Infrastructure or the AssetCompanies. See Section 13.5 and Question 40 in Section 2 forfurther information.
Outlined below is a summary of the Offer. For more detailed information refer to the Sections listed to the right ofthe summary.
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14.3.1• The Constituent Documents contain provisions allowing eachStapled Security to be stapled. Stapling means that acomponent of a Stapled Security must not be issued,transferred or otherwise dealt with without a correspondingand contemporaneous issue, transfer or dealing of each othercomponent of a Stapled Security. Essentially, the componentsof a Stapled Security are attached such that they are treated asone security.
• The Constituent Documents also provide that each Holderirrevocably appoints the Stapled Entities as that Holder’s:– agent and attorney to do all acts and things and execute all
documents which Spark Infrastructure considers necessary,desirable or reasonably incidental to effect a number ofstapling matters; and
– proxy to vote at any meeting in favour of any resolution toeffect a stapling matter.
• Further details on stapling and stapling matters are set out inSection 14.3.1
6. What doesStapling mean?
7.2• Spark Infrastructure Trust (ARSN 116870725) is a unit trust whichhas been registered as a managed investment scheme. TheResponsible Entity will operate Spark Infrastructure Trust.
• Spark Infrastructure Trust will act primarily as the financing vehiclewithin Spark Infrastructure.
5. What is SparkInfrastructure Trust?
7.2• Spark Infrastructure Company 1, Spark Infrastructure Company2 and Spark Infrastructure Company 3 are the StapledCompanies.
• Spark Infrastructure Company 1 will hold Spark Infrastructure’s49% interest in CHEDHA which in turn owns 100% ofCitiPower and Powercor.
• Spark Infrastructure Company 2 will hold Spark Infrastructure’s49% interest in ETSA.
• Spark Infrastructure Company 3 has been established to holdinterests in any future investments outside of Australia.
4. What are theStapled Companies?
7.2• Spark Infrastructure Company 1, Spark Infrastructure Company2, Spark Infrastructure Company 3 and Spark InfrastructureTrust are the Stapled Entities.
3. What are theStapled Entities?
7.2• Spark Infrastructure Trust (acting through the ResponsibleEntity), Spark Infrastructure Company 1, Spark InfrastructureCompany 2 and Spark Infrastructure Company 3 make upSpark Infrastructure.
• See the Corporate Directory for contact details.
2. What is SparkInfrastructure?
• Spark Infrastructure is issuing the Stapled Securities.• Spark Instalment is issuing the Instalment Receipts.• Spark Infrastructure is deemed to be “the person making the
offer” and the “issuer” of the financial products pursuant tothis Offer Document.
Key Dates and 3• The key dates appear on page 5 of this Offer Document.12. What are the keydates of the Offer?
1, 7.1 and 14• The First Instalment proceeds will be used to partially fundSpark Infrastructure’s acquisition of the 49% interest in theAsset Companies from CKI, repay existing debt of the AssetCompanies and pay transaction expenses. The remainder ofthe funds required will be received from the InstalmentCreditor in consideration for the assignment to it of the right tobe paid the Final Instalment and Instalment Interest and fromsenior debt that will be obtained by Spark Infrastructure.
• An overview of the ownership structure following the Offer isset out in Section 7.
11. How will theOffer Proceeds beused?
3• The key terms are summarised in Section 3.10. What are the keyterms of the Offer?
1.8,3, 1.8.4,10.1, 10.2, 10.3
• A Base Fee payable to the Manager, quarterly in arrears,calculated as a percentage per annum of Enterprise Value,being 0.5% per annum up to $2.443 billion and 1.0% perannum of any amount by which Enterprise Value exceeds$2.443 billion. See Section 10.3 for an explanation as to howEnterprise Value is determined.
• The Manager may also be entitled to a Performance Fee –see Section 10.3.
• The net fees and costs of the Offer (including management andselling fees, legal and accounting costs, costs of establishingSpark Infrastructure, ASIC fees and ASX fees) which arepayable out of the proceeds of the Offer, are estimated to total$70.5 million inclusive of GST (where applicable).
• The Responsible Entity will be paid a quarterly managementfee comprising a fixed amount of $25,000 plus internal costsnot otherwise reimbursed. The Responsible Entity will also bereimbursed for expenses incurred by it in relation to the properperformance of its duties in respect of the Spark InfrastructureTrust.
• Spark Infrastructure also pays fees and expenses to theSecurity Trustee and the Note Trustee and expenses of SparkInstalment.
• Spark Infrastructure also bears ongoing costs.
9. What are the feespayable by SparkInfrastructure?
1.8.3, 7.5and 8.2
• The Manager is ultimately 50% jointly owned by RREEFInfrastructure and CKI.
• The Manager is responsible for providing managementservices to Spark Infrastructure in accordance with theManagement Agreement.
8. Who is theManager?
1.8.4, 7.2 and 8.3.1
• The Responsible Entity is ultimately 50% jointly owned byRREEF Infrastructure and CKI, and is the responsible entity ofSpark Infrastructure Trust.
• The Responsible Entity is responsible for operating SparkInfrastructure Trust in accordance with the Spark InfrastructureTrust Constitution and the Corporations Act.
3.2• Each Stapled Security will be paid for in two instalments inaccordance with the Instalment Purchase Arrangements.
• The Retail First Instalment of $1.40 is payable on Applicationbut will be refunded to the extent it exceeds the FirstInstalment set by the Bookbuild. The Retail Final Instalment isthe lower of $0.60 and 30% of the Final Price set by theBookbuild.
• The Institutional First Instalment and the Institutional FinalInstalment to be paid by Institutional Investors will be set bythe Bookbuild.
• Instalment Interest will also be required to be paid.
15. How much willeach StapledSecurity cost?
7.3• Stapled Securities comprise one ordinary share in each ofSpark Infrastructure Company 1 and Spark InfrastructureCompany 2, an interest in a share in Spark InfrastructureCompany 3 (through a CDI issued over a share), a unit in SparkInfrastructure Trust and a Loan Note.
• The Loan Notes forming part of the Stapled Securities areunsecured notes for the purposes of section 283BH of theCorporations Act and are issued by the Responsible Entity astrustee of the Spark Infrastructure Trust. They are subordinatedto all secured and unsecured creditors of the SparkInfrastructure Trust for all amounts.
• The units in Spark Infrastructure Trust, the shares in SparkInfrastructure Company 1 and Spark Infrastructure Company 2,the CDI in Spark Infrastructure Company 3 and the Loan Noteare stapled together and will not be traded independently.
14. What are theStapled Securities?
7.2 and 14.16• Spark Infrastructure will acquire its 49% interest in the AssetCompanies immediately before settlement of the Offer,expected to be on 21 December 2005.
• The Offer is conditional on the shareholders of CKI approvingthe disposal of a 49% interest in the Asset Companies ascontemplated under this Offer Document. A special generalmeeting for this purpose is expected to be convened and heldprior to commencement of the Bookbuild.
• Hutchison Whampoa Limited has an approximate 84.6% interestin CKI and has confirmed that they will vote in favour of theresolution for approving the disposal at CKI’s shareholder meeting.
• The Offer is also conditional on:– receipt of advice from the Treasurer that there are no
objections to the proposed restructure and the acquisitionby Spark Infrastructure of a 49% interest in the AssetCompanies under Australia’s foreign investment policy,or expiry of the period during which the Treasurer mayobject; and
– satisfaction of the conditions precedent applicable to theSenior Debt to be raised by Spark Infrastructure.
• In addition, Spark Infrastructure in consultation with the JointLead Managers reserves the right to withdraw the Offerwithout notice.
14.5Instalment Receipt Holders’ rights are set out in the SecuritiesAdministration Deed and include the:• right to receive all distributions paid on the Stapled Securities;• ability to receive notices and attend meetings of the Stapled
Entities and exercise voting rights on resolutions put to holdersof Stapled Securities by directing the Security Trustee how tovote in respect of the Stapled Securities to which theirInstalment Receipts relate;
• right to receive annual reports and other notices directly fromthe Stapled Entities as though the Instalment Receipt Holderswere Holders of Stapled Securities;
• right to receive the benefit of certain corporate actions(including rights issues, bonus issues, entitlements offers).The benefits of such corporate actions either flow directly toInstalment Receipt holders or will be held by the SecurityTrustee on the same trust as the Stapled Securities.
In addition, Instalment Receipt holders have the ability to transferor sell the Instalment Receipts.
20. What rights doI have as anInstalment Receiptholder?
3 and 14.5• After acceptance of an Application and payment of the FirstInstalment, each Investor will be registered as the holder of anInstalment Receipt.
• The Instalment Receipts evidence the Holder’s beneficialinterest in the underlying Stapled Securities. The underlyingStapled Securities will be registered in the name of theSecurity Trustee, Australian Executor Trustees Limited untilthe Final Instalment and Instalment Interest are paid.
• On payment of the Final Instalment and Instalment Interest,the Instalment Receipts will be cancelled and the underlyingStapled Securities will be registered in the name of the Holderson the basis of one Stapled Security for each InstalmentReceipt held.
19. What are theInstalment PurchaseArrangements?
1.5 and 14.5• Stapled Securities will be purchased by Spark Instalment onbehalf of Holders under the Instalment Purchase Arrangementsand by CKI subscribing for 9.9% of the Stapled Securities.
18. Who willpurchase StapledSecurities?
14.5
8.1
• Spark Instalment is a special purpose vehicle jointly owned byCKI and RREEF Infrastructure.
• It has been established to issue the Instalment Receipts.It shares a common board of directors with the ResponsibleEntity, Spark Infrastructure Company 1 and Spark InfrastructureCompany 2.
17. Who is SparkInstalment?
14.5• Spark Instalment will issue the Instalment Receipts.16. Who is theissuer of theInstalment Receipts?
12• The trustee of a superannuation fund is prohibited bysuperannuation law from borrowing and charging the assets ofthe superannuation fund except in limited circumstances. Theyare also prohibited from holding more than 5% of the fund’sassets in “in-house assets”.
• The report in Section 12 prepared by Mallesons StephenJaques states that an investment in Stapled Securities on theterms of the Instalment Purchase Arrangements does notconstitute a borrowing for the purposes of superannuation law.The report also states that the trustee of a superannuation fundshould not create a charge over the assets of thesuperannuation fund by agreeing to the Instalment PurchaseArrangements. However, in each case, there is a risk thatAPRA or the ATO may take a different view. The report alsosays that an investment in the Instalment Receipts will not bean in-house asset of any superannuation fund if they are listedon the ASX.
• Trustees of superannuation entities should obtain their ownprofessional advice and exercise their own skill and care indetermining whether an investment in Stapled Securities onthe terms of the Instalment Purchase Arrangements isappropriate.
23. Are InstalmentReceipts suitableinvestments forsuperannuationentities?
1.4• Application will be made for the Instalment Receipts to bequoted on the ASX within seven days of the date of this OfferDocument.
• Application will also be made for the Stapled Securities tobe quoted on the ASX but Stapled Securities will not be able to betraded on the ASX until after the Final Instalment Payment Date.
22. How will mySecurities trade onthe ASX?
1, 3.9 and 14• Instalment Receipt holders’ obligations are set out in theSecurities Administration Deed and include principally theobligation to pay the Final Instalment and Instalment Intereston the Final Instalment Payment Date.
• The Final Instalment Payment Date is scheduled for 15 March2007 but may be brought forward by the Instalment Creditor ifany of the following events occur:– a change of control occurs (i.e. any person other than the
Instalment Creditor controls 20% or more of the StapledSecurities or the Instalment Receipts);
– the Security Trustee or Spark Instalment breaches a materialobligation under the Securities Administration Deed;
– quotation of the Instalment Receipts (or the StapledSecurities) on the ASX ceases; or
– certain documents which establish the Instalment Receiptstructure are void, illegal or unenforceable.
If this happens, in addition to the Final Instalment and InstalmentInterest, Holders of Instalment Receipts will be required to payany costs incurred by the Instalment Creditor as a consequence ofthe acceleration of the Final Instalment Payment Date includingbreak costs in respect of the fixed rate funding of the FinalInstalment. The break costs payable are unlikely to be materialand are not quantifiable in advance.
21. What obligationsdo I have as anInstalment Receiptholder?
14.3.7• The term of the Loan Notes is 100 years after the date of theNote Trust Deed, unless ended earlier in certain circumstances.On expiry of the term, the Loan Notes will be redeemed by theResponsible Entity, and the then outstanding principal amountwill be repaid, together with accrued and unpaid interest.
• The Responsible Entity can also redeem the Loan Notes earlyin certain circumstances, including:– on a reset date (see above) by prior notice to Holders; – if certain tax or regulatory events occur as specified in the
Note Trust Deed; or– if the Noteholder holds less than a minimum holding or
holds a small holding of Loan Notes.• The Responsible Entity has the right to repay in part some of
the principal amount of all (but not some) of the Loan Notes. • Upon redemption of the Loan Notes in full, the Holders are
entitled to be repaid the then face value of the Loan Notes plusany outstanding interest, except if the Loan Notes have beenredeemed as a result of a tax or regulatory event as specifiedin the Note Trust Deed. In those circumstances, theResponsible Entity may apply the face value of the Loan Notespayable at that time as consideration for the issue of a NewAttached Security to the Noteholders.
27. When will I berepaid the principalof my Loan Notes?
14.3.7• The terms of the Loan Notes are set out in the Note TrustDeed, and are summarised in section 14.3.7.
• The Responsible Entity may reset certain terms of the LoanNotes from the date of any reset date as described in the NoteTrust Deed. The first reset date is 30 November 2010.
• The terms that may be reset include:– the interest rate (subject to a minimum base rate as
described in Section 14.3.7(i));– the method of calculating interest payments; – the timing of interest payment dates; and– the timing of the next reset date.
• The Responsible Entity or the Note Trustee may also incertain circumstances amend or supplement the Note TrustDeed and the terms of the Loan Notes, without the consentof Noteholders.
26. What are theLoan Note Termsand can theychange?
14.3.7• Australian Executor Trustees Limited has been appointed asNote Trustee. It acts as trustee for the benefit of Holders, andholds on trust any amounts it receives for Noteholders, and theright to enforce the Responsible Entity’s obligations in respectof the Loan Notes.
25. Who is the NoteTrustee?
14.3.7• The Note Trust Deed contains the terms of the Loan Notesissued by the Responsible Entity as the responsible entity ofSpark Infrastructure Trust, and establishes the note trust underwhich the Note Trustee is appointed. Each Holder is bound bythe Note Trust Deed.
• The forecast cash distribution for the period from Issue Date to31 December 2005 is 0.39 cents per Stapled Security.
• The forecast cash distribution for the year ending 31 December2006 is 14.07 cents per Stapled Security.
• The expected cash distribution for the year ending31 December 2007 is 17.06 cents per Stapled Security.
• The main source of Spark Infrastructure’s income, and thus themain source of funds available for distributions to Holders, isexpected to be derived from the earnings of and distributions(in the form of dividends) or payment of interest onsubordinated loans from the Asset Companies.
• It is expected that the distribution payable to Holders willlargely comprise interest income from the Loan Notes.
• Refer to Section 7 and Section 11 for more details on SparkInfrastructure’s distribution policy and the forecast assumptions.
30. What is theforecast cashdistribution?
14.3.7• The Responsible Entity may issue further Loan Notes withoutthe consent of any Noteholder or the Note Trustee. Those LoanNotes must be issued on the same terms and conditions asany outstanding Loan Notes, except that the ResponsibleEntity may elect:– that the holders of the further issue of Loan Notes are
entitled to participate fully for payment of interest in respectof the interest period in which the further Loan Notes areissued, as if the holders of the further issue of Loan Noteshad held those Loan Notes from the first day of that interestperiod; or
– for the interest period in which the further issue of LoanNotes is issued, that no interest shall be paid in respect ofthat interest period to either then existing Holders orholders of the further issue of Loan Notes, or both.
29. What happens iffurther Loan Notesare issued?
14.3.7• The forecast and expected distributions described in this OfferDocument are expected to largely comprise interest on theLoan Notes. Interest accrues daily on each Loan Note on theface value of the Loan Note, for the period from the Issue Dateto (but excluding) the first reset date (see Question 27 above),at the rate of 10.85% per annum.
• The face value is initially $1.25, and will be reduced if the LoanNotes are repaid in part in accordance with the Note TrustDeed by an amount equal to the principal repaid.
• From the first reset date, interest may be reset (seeQuestion 27 above).
• The Responsible Entity may defer interest payments, by noticeto the Note Trustee and Noteholders. All outstanding interestmust be paid on the next reset date, except to the extent thatcertain monies are owing by a Stapled Entity. Deferral ofinterest payments, and non-payment on a reset date in certainpermitted circumstances, does not constitute a default.
• Interest is generally payable semi-annually, in arrears, on15 March and 15 September or if not a Business Day thenext Business Day.
28. What interestincome will I receiveon my Loan Notes?
• CKI and RREEF have the right to appoint directors to theboards of both the Responsible Entity and the Manager.The Manager has a special voting share (the Special Voting
Share) in each of the Stapled Companies, which entitles theManager to appoint and remove one half of the maximumnumber of directors in respect of each board. These rightscease on termination of the Management Agreement, theunstapling of all of the Stapled Securities, or a resolution beingpassed to remove the Responsible Entity, subject to limitedrights to transfer them to an incoming manager.
34. What votingrights does theManager have?
14.3.2, 14.3.4 and 15.2
• Holders of Instalment Receipts can direct the Security Trusteehow to exercise the votes attaching to the Stapled Securitiesto which those Instalment Receipts relate. While theInstalment Receipts are on issue, all votes of Holders ofStapled Securities will be put to a poll.
• Each Holder of Stapled Securities can cast one vote on a showof hands and one vote for each Stapled Security held on a poll,subject to the ASX Listing Rules and the Corporations Act.
• Holders may appoint 50% of the maximum number ofdirectors on the boards of directors of the Stapled Companies.
33. What votingrights do Holdershave?
14.4• Spark Infrastructure has established a DRP which willallow Holders to reinvest their distributions into SparkInfrastructure. Holders will be notified once the boards ofdirectors of the Stapled Companies and the ResponsibleEntity deem it to be in the interest of Holders that the DRPbecome operative.
• The Financial Information assumes that the DRP is notactivated in the Forecast Period.
32. Is there adistributionreinvestment plan(DRP)?
1.9, 7.7• Distributions to Holders are expected to be payable half yearlyin arrears in March and September in respect of the precedingsix month periods ending 31 December and 30 Junerespectively.
• The first distribution following the Offer is expected to be paidon or around 15 March 2006 based on the period from IssueDate to 31 December 2005.
• The second distribution following the Offer is expected to bepaid on or around 15 September 2006 based on the six monthsto 30 June 2006.
• The third distribution following the Offer is expected to bepaid on or around 15 March 2007 based on the six monthsto 31 December 2006. This date coincides with the expectedFinal Instalment Payment Date.
12• The Taxation Report prepared by Deloitte Touche Tohmatsu Ltdin Section 12 contains a summary of Australian income taxationmatters in relation to the Offer. Holders should read theTaxation Report for information regarding how distributionsfrom Spark Infrastructure will be taxed. The taxation treatmentof an investment will differ depending on a Holder’s individualcircumstances. Potential Investors should consult theirstockbroker or other professional advisor.
38. What are thetaxation implicationsof investing inSecurities?
3.11, 14.3.5,14.3.7 and 15.8
15.10
Following Spark Infrastructure being listed on the ASX, SparkInfrastructure will provide Holders with the following information:• holding statements;• an annual report;• concise financial statements;• a half yearly update;• distribution advice statements;• an annual taxation statement; and• any other information required by the Corporations Act or the
ASX Listing Rules.The Responsible Entity will also lodge reports with ASIC and theNote Trustee in respect of the Note Trust.
37. What informationwill I be entitled toreceive as a Holder?
14• Holders may not grant security interests (such as a mortgageor charge) over Stapled Securities while the InstalmentReceipts are on issue.
• However, Holders may grant security interests over theirInstalment Receipts, but such security interests cannot extendto the underlying Stapled Securities and the Security Trusteeand the Registrar need not recognise or give effect to anysecurity interest in respect of the Instalment Receipt.
36. Can I grantsecurity interestsover my Securities?
8.5.3, 14.3.2,and 14.3.4
• The Manager holds a Special Voting Share that carries the rightto appoint and remove up to 50% of the maximum number ofdirectors on the boards of each of the Stapled Companies.These rights cease upon the occurrence of certain events,including the termination of the Management Agreement, theunstapling of all of the Stapled Securities or a resolution beingpassed by Holders to remove the Responsible Entity, subjectto limited rights to transfer them to an incoming manager.
• Subject to the rights attaching to the Special Voting Share,Holders will be able to appoint or remove directors of theStapled Companies in accordance with the constitutions of eachof the relevant Stapled Companies and the Corporations Act.
• As the Responsible Entity is ultimately 50% jointly owned byCKI and RREEF Infrastructure, the right to appoint the board ofthe Responsible Entity rests with CKI and RREEF Infrastructureand not with Holders. However, CKI and RREEF Infrastructurehave each undertaken that while they remain indirectshareholders in the Responsible Entity they will act to ensurethat the Board of the Responsible Entity is comprised of thesame persons as the board of the Stapled Companies (with theexception of Spark Infrastructure Company 3, unless theResponsible Entity determines otherwise).
13.5 and 14.5Risks of the Instalment Purchase Arrangements include:• the lack of evidence of how the price of Instalment Receipts is
likely to move following the commencement of trading or thelikely volume of trading;
• the risk that superannuation funds may be precluded fromacquiring Instalment Receipts. Section 12 contains a reportprepared by Mallesons Stephen Jaques in which MallesonsStephen Jaques concludes that superannuation entities shouldbe able to invest in the Stapled Securities through theInstalment Receipts. However there is a risk that APRA or theATO may take a different view;
• the risk that the fixed rate of Instalment Interest becomes anunattractive interest rate due to changing market rates;
• the risk that Instalment Interest may not be deductible forincome tax purposes. Section 12 contains a report preparedby Deloitte Touche Tohmatsu Ltd which concludes that theInstalment Interest should be deductible for income taxpurposes and the deduction should broadly arise as theexpense accrues. That is, Investors should be entitled todeductions for Instalment Interest related to the period forwhich the Investors own the Instalment Receipt. However,there is a risk that the ATO may take a different view;
• if a Holder does not pay the Final Instalment and InstalmentInterest when due, they will be required to pay interest onthe unpaid amount and the Stapled Securities to which thepayments relate may be sold. If the proceeds from such sale(less any interest costs, expenses of sale, duties and taxesowed) are insufficient to meet the Holder’s obligations thenthe Holder will remain liable for the outstanding balance; and
• there is a risk that the Final Instalment Payment Date will bebrought forward, requiring Holders to pay the Final Instalmentand Instalment Interest early.
40. What are thesignificant risks ininvesting in StapledSecurities by wayof the InstalmentPurchaseArrangements?
3.5• There is no cooling off period for Investors. This means thatonce you have submitted your Application Form you will not beable to withdraw your application except as permitted underthe Corporations Act. However, you will be able to offer yourInstalment Receipts for sale on the ASX once the InstalmentReceipts commence trading on the ASX.
• A holder of Stapled Securities will not have a right to withdrawfrom the Spark Infrastructure Trust or to have their unitsredeemed. Instead, the holder may sell their Stapled Securitieson the ASX.
7.5 and 14.6.1• The Manager has been appointed as the manager of each ofthe Stapled Entities. In this role the Manager will identifyinvestment opportunities and manage and realise investmentsof the kind that Spark Infrastructure proposes to make.
• The Manager will be appointed for a term of 25 years, subjectto certain limited termination events. In addition, the Managerwill be issued with a Special Voting Share, which will entitle itto appoint up to 50% of the maximum number of directors onthe boards of each of the Stapled Companies.
44. What is theManagers role?
1.2.1, 1.2.6and 1.8.2
• RREEF Infrastructure is the infrastructure investment businessof Deutsche Asset Management, the asset managementbusiness of Deutsche Bank AG. Deutsche Asset Managementhas over $875 billion in funds under management. RREEFInfrastructure is an experienced investment manager. Itmanages investments for clients in a number of infrastructureassets including Melbourne Airport and the North of Englandgas distribution network.
• RREEF Infrastructure, along with CKI, the ultimate joint ownerof Spark Instalment, the Manager and the Responsible Entityand will provide technical services to the Manager for thebenefit of Spark Infrastructure.
43. Who is RREEFInfrastructure andwhat is its ongoingrole?
1.2.1, 1.2.6and 1.8.1
• CKI is the largest publicly listed infrastructure company in HongKong based on a market capitalisation of HK$55 billion as at1 November 2005 with investments in energy infrastructure,transportation infrastructure, water infrastructure andinfrastructure related businesses.
• CKI, along with RREEF Infrastructure, is the ultimate jointowner of Spark Instalment, the Manager and the ResponsibleEntity, and will provide technical services to the Manager forthe benefit of Spark Infrastructure.
42. Who is CKI andwhat is its ongoingrole?
13 and 14.5• Distributions to Holders are not guaranteed. Factors such as anincrease in interest rates, inflation and inflationary expectations,the issue of further Stapled Securities or diminished financialresults of the Asset Companies may have an adverse impacton the financial performance of Spark Infrastructure, whichmay reduce or prevent distributions being made. The ability ofSpark Infrastructure to defer interest payments on the LoanNotes may also prevent distributions being made.
• Examples of events which could adversely affect the financialperformance of Spark Infrastructure and/or the AssetCompanies, and therefore affect distributions and/or the valueof Stapled Securities and Instalment Receipts, include theeffect of regulatory resets, increased costs in relation to theoperation of the Asset Companies, reduced revenues for theAsset Companies, the occurrence of a Senior Debt Lock Up,market and external forces, the ability of Spark Infrastructureto defer interest payments on the Loan Notes and thepotential for conflict of interest in Spark Infrastructure’smanagement arrangements.
41. What are thesignificant risks ofinvesting in theSecurities?
6.7• The remaining 51% of the Asset Companies not owned bySpark Infrastructure will be owned by CKI and HKE.
• HKE specialises in ownership and management of utilityinfrastructure assets. CKI holds an interest of approximately38.9% in HKE.
• CKI and HKE will together hold a direct stake of 51% in theAsset Companies, and an aggregate beneficial interest of55.85% (taking into account CKI’s 9.9% interest in the StapledSecurities of Spark Infrastructure).
• CKI intends to offer to purchase from HKE a portion of its 50%interest in the Asset Companies so that CKI and HKE each holdthe same effective percentage ownership in each of the AssetCompanies. The offer will be made at a price derived from theFinal Price achieved in the Bookbuild.
48. Who will ownthe other 51% of theAsset Companies?
14.6.1
14.7.2 and14.7.3
14.6.2
8.6.4 and 14.6.3
8.6.2
• The Management Agreement sets out the managementservices to be provided by the Manager to Spark Infrastructure.
• The relationship between Spark Infrastructure, CKI and HKEwith respect to their interests in the Asset Companies isgoverned by the Asset Company Agreements.
• The Technical Services Agreements with each of CKI andDAML govern the investment management services to beprovided by each of CKI and DAML to the Manager.
• The Financial Services Agreement sets out the investmentbanking services to be provided by Deutsche Bank to theStapled Entities.
• The Related Party Protocols help protect the interests ofHolders and establish a framework to manage any conflicts ofinterest that may arise in any transactions and servicearrangements between related parties.
47. What are therelevant contractsgoverning SparkInfrastructure’srelationship with theAsset Companies,CKI, HKE, DAML andDeutsche Bank?
10.1, 14.5.11,14.17 and 15.4
• Deutsche Bank has been appointed as the Global Co-ordinator,Joint Bookrunner and Joint Lead Manager to the Offer bySpark Infrastructure.
• Deutsche Bank has acted as financial advisor to CKI in relationto the sale of a 49% interest in the Asset Companies by CKI toSpark Infrastructure.
• Deutsche Bank has been appointed as Joint Lead Underwriterin relation to the Senior Debt to be provided to SparkInfrastructure in connection with the acquisition of the Assets.
• Deutsche Bank has been appointed to provide 50% of hedgingproducts provided in connection with the Senior Debt.
• Deutsche Bank also guarantees the payment of the purchaseprice by SELECT ACCESS Investments (No 1) Limited to acquirethe rights of Instalment Creditor in relation to the InstalmentPurchase Arrangements referred to in Section 14.5.
46. What isDeutsche Bank’s rolein connection withthe Offer?
8.6.4 and 14.63• Deutsche Bank operates in 74 countries with over 65,000employees, providing a wide range of wholesale investmentbanking and asset management services and advice to clients.
• Deutsche Bank will act as Spark Infrastructure’s financialadvisor to provide advisory services including in relation tocapital raisings and potential acquisitions and divestments.
45. Who is DeutscheBank and what is itsongoing role?
9.5• CKI and RREEF Infrastructure have agreed investment referralprinciples. Each intends to use best endeavours to referappropriate investment opportunities in the utilitiesinfrastructure sector in Australia and overseas to SparkInfrastructure. Such referrals must not be inconsistent with thebusiness objectives of CKI and RREEF Infrastructure and theirrelated parties or with the duties of any of those parties to theirclients or funds associated with their business. Any referralswill be in accordance with the Related Party Protocols.
• Spark Infrastructure has no direct rights under the investmentreferral principles, which has been entered into by the Manager.
52. What investmentreferral obligationsdo CKI and RREEFhave in respect toSpark Infrastructure?
9.1, 9.2 and 9.3• Yes, it is the intention of Spark Infrastructure to seek suitableinvestment opportunities to further growth, subject to meetingthe investment policy and criteria described in Section 9.
• The growth opportunities may be sought by SparkInfrastructure in its own right or on a co-investment basis withCKI and/or RREEF Infrastructure or other third parties.
• Future investment opportunities are expected to be fundedthrough potential debt and equity raisings.
• Spark Infrastructure does not take into account labourstandards or environmental, social or ethical considerations inthe selection, retention or realisation of investments.
51. Can SparkInfrastructureacquire other assetsin the future?
6.8
14.7.2
14.7.3
• Yes, a pre-emptive rights regime exists among SparkInfrastructure, CKI and HKE which provides SparkInfrastructure on the one hand and CKI/HKE on the other handwith a pre-emptive right to acquire an additional interest inCHEDHA or the Asset Companies where an interest is offeredfor sale by CKI/HKE or Spark Infrastructure.
• Spark Infrastructure’s pre-emptive rights do not apply to any saleof an interest in CHEDHA or the Asset Companies between CKIand HKE. Similarly, CKI and HKE’s pre emptive rights do notapply to a sale of CHEDHA or an interest in CHEDHA or theAsset Companies between members of Spark Infrastructure.
• Spark Infrastructure, CKI and HKE also have pre-emptive rightsin relation to new issues of interests.
• The pre-emptive rights regime and change of control provisionsare described in more detail in Section 14.
• Spark Infrastructure’s senior debt facilities impose a reviewevent if a change in control occurs.
50. Are there anypre-emptive rightsprovisions?
7.1
6.7
• The establishment of Spark Infrastructure will allow CKI toreallocate capital and to pursue new and larger acquisitions in theutility and infrastructure markets and to support further growth.
• Spark Infrastructure may co-invest with CKI where suitableopportunities arise. This may assist CKI and SparkInfrastructure to seek larger transactions that offer moreattractive valuations, on a co-investment basis.
• CKI and HKE remain involved with the CitiPower, Powercorand ETSA businesses. Representatives of CKI and HKE willcontinue on the boards of the Asset Companies aftercompletion of the Offer and CKI and HKE will together hold adirect stake of 51% of the underlying assets, and an aggregatebeneficial interest of 55.85%, with CKI holding a 9.9% interestin the Stapled Securities.
49. Why is CKIselling a portion ofits interests in theAsset Companies?
• If you require assistance or further copies of this OfferDocument, call Spark Infrastructure Offer Information Line on1300 730 579.
57. How can I obtainfurther informationon the Offer, SparkInfrastructure, SparkInstalment orthe Manager?
6.1• The Asset Companies consist of CitiPower, Powercor andETSA, which are electricity distribution businesses located inVictoria (CitiPower and Powercor) and South Australia (ETSA).
• The acquisition of a 49% interest in the Asset Companies issubject to conditions precedent.
56. What are theAsset Companies?
14• Certain material contracts are summarised in Section 14.• References to particular contracts or agreements in this Offer
Document are references to the contracts which aresummarised in Section 14.
55. What are thematerial contracts?
3.14, 14.3.1(f),14.3.1(g)
Certain selling restrictions apply in relation to the Offer as set outin Section 3.14 and it is the responsibility of any Investor toensure compliance with the laws of any country outside Australiarelevant to their application.Excluded US Persons
In addition, Securities may not be held by or for or on accountof Excluded US Persons. Where Spark Infrastructure determinesthat a person is an Excluded US Person, it may:• refuse to register a transfer of Securities to that person; and• request that person to sell their Securities within 30 Business
Days and may divest that person of their Securities if they failto sell the Securities within that period.
Designated Foreign Holders
It is possible that the issue/transfer of a New Attached Security to aForeign Member would require compliance with legal and regulatoryrequirements in the foreign jurisdiction. The Stapling Provisionsprovide that Spark Infrastructure may determine that a ForeignMember is a Designated Foreign Holder and divest that Holder oftheir Stapled Securities where Spark Infrastructure determines thatit is unreasonable to issue or transfer New Attached Securities tosuch Holders, having regard to specified criteria.Where Excluded US Persons or Designated Foreign Holders aredivested of their Securities, these Securities will be sold and theproceeds of sale (net of transaction costs including withoutlimitation any applicable brokerage, stamp duty and other taxes orcharges) will be paid to the divested Holder as soon as practicableafter the sale.
54. What are therestrictionsapplicable to foreignHolders?
15.7• All complaints should be brought to the attention of SparkInfrastructure. If Holders are dissatisfied with the response ofSpark Infrastructure, external resolution can be sought fromFinancial Industry Complaints Services, an external complaintresolution body.
53. What is thedispute resolutionprocedure to dealwith Holdercomplaints?
The Offer relates to the offer of 908.8 million StapledSecurities. Investors will pay for the StapledSecurities in two instalments.
Each Stapled Security acquired under the Offer willinitially be represented by an Instalment Receipt untilpayment of the Final Instalment and InstalmentInterest on the Final Instalment Payment Date.
By participating in the Offer, Investors will receivethe benefits of ownership of Stapled Securitiesrepresented by Instalment Receipts. AustralianExecutor Trustees Limited, in its capacity as theSecurity Trustee, will hold legal title to the StapledSecurities while the Final Instalment and InstalmentInterest remain unpaid. Upon payment of the FinalInstalment and Instalment Interest, InstalmentReceipts will be cancelled and legal title to theStapled Securities will be transferred to Holders.
The Offer has two components:• the Retail Offer consisting of:
– the General Public Offer;– the Broker Firm Offer; and
• the Institutional Offer.
3.2 Pricing
The Offer provides Investors with the ability toacquire Stapled Securities at a price payable in twoinstalments. The payment method varies betweenthe Retail Offer and the Institutional Offer.
Retail Offer priceRetail Investors will apply at the Retail ApplicationPrice which will be payable in two instalments. TheRetail First Instalment, payable on Application, is$1.40 per Stapled Security. Successful Applicants inthe Retail Offer will receive a refund on their FirstInstalment if the Final Price is less than $2.00. Therefund will be equal to the difference between $1.40and 70% of the Final Price. The Final Price will bedetermined following the Bookbuild which isexpected to be completed on 14 December 2005.
This means that Retail Investors will not pay a pricegreater than $2.00 (excluding Instalment Interest) forthe price of a Stapled Security under the Offer, evenif Institutional Investors pay a higher price followingthe Bookbuild.
The Final Instalment will be the lower of $0.60 perStapled Security and 30% of the Final Price, and ispayable on the Final Instalment Payment Date(expected to be 15 March 2007).
Institutional Offer priceInstitutional Investors will apply at the Final Price.The Final Price will be determined by SparkInfrastructure, CKI and the Joint Lead Managers,following the Bookbuild which is expected to becompleted on 14 December 2005.
If the Final Price is within the Bookbuild RangeInstitutional Investors will be required to pay onApplication an Institutional First Instalment equivalentto 70% of the lower of $2.00 per Stapled Securityand the Final Price. If the Final Price is higher than$2.00, successful Applicants in the Institutional Offerwill also pay on Application the difference between$2.00 and the Final Price. An Institutional FinalInstalment equivalent to the lower of $0.60 perStapled Security and 30% of the Final Price will bepayable on the Final Instalment Payment Date.
Instalment InterestIn addition to the First Instalment and the FinalInstalment all Holders also have an obligation topay Instalment Interest on the Final InstalmentPayment Date. See Section 1.4.4 for further details.
3.3 General Public Offer
Who may apply?Members of the general public who are residents ofAustralia may apply under the General Public Offer.
How do you apply for Securities?Investors under the General Public Offer mustcomplete and lodge the blue General PublicApplication Form accompanying this OfferDocument. The Application Form must be completedin accordance with the instructions set out on thereverse of the Application Form.
How many Securities can you apply for?An application for Securities under the General PublicOffer must be:• for a minimum of 2,000 Stapled Securities; and
then• in multiples of 100 Stapled Securities.
There is no limit on the number of Securities thatmay be applied for, however, Spark Infrastructureand the Joint Lead Managers reserve the right toreject Applications, in whole or in part, in excess of$750,000.
To whom do you make your cheque(s) payable?Each application which is submitted under theGeneral Public Offer must be accompanied by acheque or cheques for an amount equal to the RetailFirst Instalment multiplied by the number ofSecurities applied for in the application. All chequesmust be in Australian currency, drawn on anAustralian branch of an Australian bank and madepayable to “Spark Infrastructure Security Offer” andcrossed “Not Negotiable”.
How do you lodge your Application Form?If you are applying under the General Public Offer, you shouldreturn your completed Application Form and cheque(s) in thereply paid envelope provided, to the following address:
Applications under the General Public Offer must be receivedby the Registry by no later than 5:00pm Sydney time, on7 December 2005.
Submission of an application constitutes an irrevocable offer byyou to purchase Securities on the terms and conditions set outin this Offer Document, including any supplementary orreplacement Offer Document, and in the Application Form.
Broker stamping feeWhere the Application Form of a successful Applicant underthe General Public Offer bears the code of a participatingorganisation of ASX, the Joint Lead Managers will pay thatparticipating organisation a Broker Stamping Fee of an amountequal to 0.5% of the Retail First Instalment (net of any refund ifthe Final Price is less than $2.00) paid by the Applicant forSecurities under the Application, capped at a maximumstamping fee per Application (or group of applications from thesame Retail Investor) of $200. This Broker Stamping Fee willnot apply to Securities issued under the Broker Firm Offer.
Acceptance of Applications and scale back in the eventof over-subscriptionThe Joint Lead Managers, in consultation with SparkInfrastructure, have the absolute right to reject any Application,including Applications that have not been correctly completedor are accompanied by cheques that are dishonoured. Inaddition, the Joint Lead Managers, in consultation with SparkInfrastructure, may allocate to any person fewer Securitiesthan those that person applied for. Spark Infrastructure may,after consultation with the Joint Lead Managers, close theGeneral Public Offer early, or extend the General Public Offer,without notice.
If the number of Securities applied for in the Retail Offer andthe Institutional Offer is greater than the number of Securitiesavailable, scale back arrangements will apply.
Under subscriptionIf the Offer is not fully subscribed, the Offer will not proceedand Application Monies will be refunded in full, without interest.
3.4 Broker Firm Offer
The Broker Firm Offer is open to Australian resident Investorswho have received a firm allocation of Securities from a JointLead Manager or Co-Manager.
If you are applying under the Broker Firm Offer, you shouldreturn your completed Application Form directly to the relevantbroker from whom a firm allocation was received, in accordancewith the instructions provided by the broker.
Applications under the Broker Firm Offer must be received byno later than 5:00pm Sydney time, on 12 December 2005.
Submission of an application constitutes an irrevocable offer byyou to purchase Securities on the terms and conditions set outin this Offer Document, including any supplementaryor replacement offer document, and in the Application Form.
3.5 Disbursement of Application Monies
All monies received with Applications under the Retail Offer willbe held in a special purpose trust account until InstalmentReceipts are registered in the names of successful Applicantsand evidenced by the issue of Instalment Receipts. A refundwill be made in the following circumstances:• if you have applied under the General Public Offer and your
Application is not accepted, or you were allocated a lowernumber of Securities than the number you applied for, youwill receive a refund (without accrued interest, if any) of allor part of your Application Monies, as applicable;
• if you have applied under the Retail Offer, your Application isaccepted in full or in part and the Final Price is lower than$2.00, you will receive a refund (without accrued interest, ifany) equal to the difference between $1.40 and 70% of theFinal Price, multiplied by the number of Securities allocatedto you;
• if application is not made to ASX within seven days of thedate of this Offer Document for quotation of the InstalmentReceipts or Stapled Securities, you will receive a refund(without accrued interest, if any) of all of your ApplicationMonies;
• if the Instalment Receipts or Stapled Securities are notadmitted to quotation within three months of the date of thisOffer Document, all Application Monies will be refunded infull (without accrued interest, if any); and
• if the Instalment Receipts are not issued before the end ofone month starting on the day the Application Monies werereceived, you will receive a refund (without accrued interest,if any) of all of your Application Monies.
Interest (if any) earned on Application Monies will be paidto CKI.
After the Instalment Receipts are registered in the names ofsuccessful Applicants, the balance of the Application Moniesheld in the special purpose trust account will ultimately bepayable to Spark Infrastructure.
Brokerage, commission and stamp dutyNo brokerage, commission or stamp duty is payableby Investors on an acquisition of Securities underthe Offer.
Cooling-off periodInvestors should note that there is no cooling-offperiod in relation to an application for Securitiesunder this Offer Document.
3.6 Institutional Offer
The Institutional Offer is open to Australian andcertain international Institutional Investors. TheInstitutional Offer will be conducted by way of aBookbuild, under which certain Institutional Investorswill be able to bid for Securities at a price within oroutside the Bookbuild Range. Offers to AustralianInstitutional Investors under the Institutional Offerare made under this Offer Document and thoseInvestors will be required to apply for Securitiespursuant to this Offer Document. Offers toInternational Institutional Investors under theInstitutional Offer will be made under a separateInternational Offer Document.
Final PriceThe Bookbuild will be used to determine the FinalPrice, which may be set within, above or below theBookbuild Range.
Allocation policyThe allocation of Securities amongst bidders in theInstitutional Offer will be determined by SparkInfrastructure and the Joint Lead Managers. Theyhave absolute discretion regarding the basis ofallocation of Securities, and there is no assurancethat any bidder will be allocated Securities or thenumber of Securities for which it has bid.
3.7 Listing and conditional and deferred
settlement trading
It is expected that the Instalment Receipts will bequoted on ASX on or about Friday 16 December2005, initially on a conditional and deferredsettlement basis. It is expected that StapledSecurities will be quoted shortly thereafter, butStapled Securities will not be able to be traded onASX until the Final Instalment and the InstalmentInterest have been paid.
Conditional trading will continue until SparkInfrastructure has advised ASX that Allotment hasoccurred, which is expected to be on or aboutTuesday 21 December 2005. Trading will then be onan unconditional but deferred settlement basis untilSpark Infrastructure has advised ASX that initialstatements of holding have been dispatched toHolders. Normal delivery trading of InstalmentReceipts is expected to commence on or about22 December 2005.
If Allotment has not occurred within 14 days (or suchlonger period as ASX allows) after the InstalmentReceipts are first quoted on ASX, the Offer and allcontracts arising on acceptance of Applications andbids will be cancelled and of no further effect and allApplication Monies will be refunded (withoutinterest). In these circumstances, all purchases andsales made through ASX participating organisationsduring the conditional trading period will be cancelledand of no effect.
It is the responsibility of each Investor or bidder toconfirm their holding before trading in InstalmentReceipts. Investors or bidders who sell InstalmentReceipts before they receive an initial statement ofholding do so at their own risk. Spark Infrastructure,the Registry and the Joint Lead Managers disclaimall liability, whether in negligence or otherwise, topersons who sell Instalment Receipts beforereceiving their initial statement of holding, whetheron the basis of a confirmation of allocation providedby any of them or by Spark Infrastructure via theSpark Infrastructure Offer Information Line, or abroker or otherwise.
3.8 CHESS and holding statements
Spark Infrastructure will apply to participate inCHESS. In accordance with the ASX Listing Rulesand ASTC Settlement Rules, Spark Infrastructure willmaintain an electronic issuer sponsored subregisterand an electronic CHESS subregister.
New Holders will receive an initial statement ofholding that sets out the number of InstalmentReceipts they hold as a result of the number ofStapled Securities which have been allocated to themin the Offer. This statement will also provide detailsof the Holder’s HIN in the case of a holding on theCHESS subregister, or SRN in the case of a holdingon the issuer sponsored subregister. Holders will berequired to quote their HIN or SRN, as appropriate, inall dealings with a stockbroker or the Registry.
Holders will receive subsequent statements at theend of any month in which there has been a changein their holding on the Register and as otherwiserequired under the ASX Listing Rules and theCorporations Act. Additional statements may berequested at any other time, either directly throughthe Holder’s sponsoring broker, in the case of aholding on the CHESS sub-register, or through theRegistry in the case of holding on the issuersponsored sub-register. Spark Infrastructure or theRegistry may charge a fee for those additionalstatements.
Holders shown in the register on the Final Instalment RecordDate must pay the Final Instalment and Instalment Interestwhen it is due on the Final Instalment Payment Date.
The Final Instalment Record Date is expected to be 1 March2007. However, the Final Instalment Record Date may beearlier if the Final Instalment Payment Date is accelerated bythe Instalment Creditor which can only occur in the limitedcircumstances described in Section 13.5. If the Final InstalmentPayment Date is accelerated, the Final Instalment Record Datewill be the date that the Instalment Creditor gives notice of thatacceleration to Spark Instalment.
Spark Instalment will otherwise send Holders a payment noticebefore the expected Final Instalment Record Date.
When a sale or transfer of an Instalment Receipt occurs, theobligation to pay the Final Instalment and Instalment Interest istransferred from the former Holder to the new Holder.
If the Final Instalment and Instalment Interest are paid whendue, the Security Trustee will transfer the underlying StapledSecurities to the relevant Holder. Upon such transfer theInstalment Creditor’s Reserved Interest in the Stapled Securityis extinguished and the relevant Instalment Receiptis cancelled.
If a Holder does not pay the Final Instalment and InstalmentInterest on the Final Instalment Payment Date, default interestwill accrue at a rate of 2% per annum above the InstalmentInterest Rate on the unpaid amounts and the InstalmentCreditor may direct the Security Trustee to sell the StapledSecurities to which the Instalment Receipts relate and apply theproceeds of sale to pay all outstanding amounts owed by theHolder. If there is any balance from the sale, that balance willbe paid to the Holder.
If the net proceeds from the sale are insufficient to fully paythe Holder’s obligations, the Holder remains liable to pay theoutstanding amount and any associated interest and costs.The Instalment Creditor may take all necessary and appropriateaction to recover the unpaid amounts including commencinglegal proceedings against such Holder. For further details, seeSection 14.
No early prepayment of Final Instalment or InstalmentInterestIn the absence of the Final Instalment Payment Date beingaccelerated as described in Section 13.5, Holders do not haveany right or capacity to prepay the Final Instalment or theInstalment Interest prior to the Final Instalment Payment Date.
Acceleration of Final Instalment Payment DateThe Final Instalment Payment Date is scheduled for 15 March2007 but may be brought forward by the Instalment Creditor ifany of the following events occur:• a change of control occurs (i.e. any person other than the
Instalment Creditor controls 20% or more of the StapledSecurities or the Instalment Receipts);
• the Security Trustee or Spark Instalment breaches a materialobligation under the Securities Administration Deed;
• quotation of the Instalment Receipts (or the StapledSecurities) on ASX ceases; or
• certain documents which establish the Instalment Receiptstructure are void, illegal or unenforceable.
If this happens, in addition to the Final Instalment andInstalment Interest, Holders of Instalment Receipts will berequired to pay any costs incurred by the Instalment Creditor asa consequence of the acceleration of the Final InstalmentPayment Date including break costs in respect of the fixed ratefunding of the Final Instalment. The break costs payable areunlikely to be material and are not quantifiable in advance.
3.10 Offer Management Agreement
The Offer is not underwritten. The Offer is not sold, guaranteedor underwritten by Deutsche Bank or CKI. Spark Infrastructureand the Joint Lead Managers have entered into an OfferManagement Agreement in respect to the management of theOffer. Once the Final Price has been determined, the Joint LeadManagers will be obliged to provide settlement support inrespect of successful bids in the Institutional Offer and theBroker Firm Offer pursuant to the Offer ManagementAgreement. A summary of certain terms of the OfferManagement Agreement including the termination provisionsis set out in Section 14.
3.11 Rights attached to Stapled Securities
The rights attached to the ownership of the Stapled Securitiesare set out in the Co-operation Deed, the constitutions of SparkInfrastructure Trust and the Stapled Companies and the NoteTrust Deed and in certain circumstances are regulated by theCorporations Act, the ASX Listing Rules and general law.A summary of these rights is set out in Section 14.
The rights and obligations of Instalment Receipt Holders are setout in the Securities Administration Deed. A summary of theterms of the Securities Administration Deed is also set out inSection 14.
This Offer Document may be viewed online only byAustralian residents located in Australia, atwww.sparkinfrastructure.com.
Persons who receive the electronic version of theOffer Document should ensure they download andread the entire Offer Document. The Offer constitutedby the electronic version of the Offer Document isnot open to persons outside Australia, includingpersons in the United States and US Persons.See Section 3.14 for applicable selling restrictions.
Persons viewing the electronic version of the OfferDocument who wish to apply for Securities may doso under the General Public Offer, as described inSection 3.3.
A paper copy of this Offer Document will beprovided free of charge by Spark Infrastructure toany eligible person who requests a copy. Simplycontact Spark Infrastructure Offer InformationLine on 1300 730 579.
3.13 Enquiries and further information
Further information regarding the Offer can beobtained by eligible Investors by:• calling Spark Infrastructure Offer Information
Line on 1300 730 579;• visiting Spark Infrastructure website at
www.sparkinfrastructure.com; or• contacting one of the Joint Lead Managers or
Co-Managers whose details are contained in theCorporate Directory at the back of this OfferDocument.
No person is authorised to give any information ormake any representations other than those containedin this Offer Document and, if given or made, suchinformation or representations may not be reliedupon as having been authorised by SparkInfrastructure, the Joint Lead Managers or any otherperson. No liability or responsibility for any suchinformation or representation is accepted.
3.14 Selling restrictions
This Offer Document does not constitute an offeror an invitation to subscribe for or purchase Securitiesin any jurisdiction in which, or to any person towhom, it would not be lawful to make such an offeror invitation or issue this Offer Document. It is theresponsibility of any Investor to ensure compliancewith the laws of any country (outside Australia)relevant to their Application. This Offer Documentmay not be distributed in the United States or toUS Persons, or elsewhere outside Australia, unless itis attached to, or constitutes part of, the InternationalOffer Document that further describes sellingrestrictions applicable in the United States and otherjurisdictions outside Australia, and may only bedistributed to persons to whom the Offer may belawfully made in accordance with the laws of anyapplicable jurisdiction.
Each Investor to whom the Offer is made under thisOffer Document (and each person to whom theInstitutional Offer is made under this OfferDocument), will be required to represent, warrantand agree as follows (and will be taken to have doneso if it makes a bid in the Institutional Offer):• it acknowledges that the Securities have not
been, and will not be, registered under the USSecurities Act or in any other jurisdiction outsideAustralia, and that no member of SparkInfrastructure group has been, or will be,registered under the US Investment Company Actin reliance on the exemption provided bysection 3(c)(7) thereof. Accordingly, the Securitiesmay only be offered and sold (i) in the UnitedStates to QIBs who are also QPs in accordancewith Regulation D or Rule 144A under the USSecurities Act and applicable state securities lawsand section 3(c)(7) under the US InvestmentCompany Act and (ii) outside the United States topersons other than US Persons in offshoretransactions in compliance with Regulation S ofthe US Securities Act and section 3(c)(7) of theUS Investment Company Act;
• it is not in the United States or a US Person and it is notacting for the account or benefit of a US Person or any otherforeign person; and
• either: (1) it is not engaged in the business of distributingsecurities; or (2) if it is, it agrees that it will not offer or resellin the United States or to a US Person any Securities itacquires in the Offer at any time other than in transactionsthrough a United States selling agent of the Joint LeadManagers meeting the requirements of Rule 144A under theUS Securities Act and section 3(c)(7) of the US InvestmentCompany Act of 1940; provided, however, that the foregoingwill not prohibit any sale of Securities on ASX if neither theseller nor any person acting on its behalf knows, or hasreason to know, that the sale has been prearranged with,or that the purchaser is, a person in the United States ora US Person.
In addition, each Investor will be required to acknowledge thatthe Securities are not permitted to be held at any time by, or forthe account or benefit of, any US Person who is not both a QIBand a QP. Further, each Investor will be required toacknowledge that in accordance with the constitutions of eachof the Stapled Companies and Spark Infrastructure Trust, SparkInfrastructure will have the right to: (i) request any US Personwho beneficially holds Securities that is not a QIB and a QPto divest their holdings of Securities; or (ii) sell any Securitiesbeneficially held by a US Person who is not both a QIB andQP on behalf of such beneficial owner.
No action has been taken to register or qualify the Offer, in anyjurisdiction outside Australia.
In order to ensure that the foreign ownership restrictions setout in the Constituent Documents can be monitored andmaintained and that Securities are not held by or for theaccount or benefit of any US Person, who is not both a QIBand a QP, ASTC has agreed:(a) to classify the Securities as Foreign Ownership Restrictions
financial products under the ASTC Settlement Rules and toinclude the Securities in Schedule 1 of the ASTC SettlementRules; and
(b) to implement certain additional procedures as contemplatedin Guidance Note 4 of the ASTC Settlement Rules (FinancialProducts subject to Foreign Ownership restrictions) inrelation to the Securities.
3.15 Right to purchase Securities
None of Spark Infrastructure, the Joint Lead Managers or anyrelated entity expects to make a market in the Securities.However, each of the Joint Lead Managers and any relatedentity acting as an investor for its own account may take up theSecurities and in that capacity may apply for, retain, purchase orsell for its own account the Securities and any other securitiesof Spark Infrastructure or related investments, and may offeror sell such securities or other investments otherwise than inconnection with the Offer. In particular, the Joint Lead Managersor any related entity may apply for Securities under the Offer toensure that any minimum issue size for the Securities is met.Accordingly, references in this document to the Securities beingoffered or placed should be read as including any offering orplacement of securities to the Joint Lead Managers and anyrelated entity acting in such capacity. The Joint Lead Managersdo not intend to disclose the extent of any such investment ortransactions otherwise than in accordance with any legal orregulatory obligation to do so.
At the beginning of the 1990s, the Australianelectricity sector was dominated by StateGovernment owned, vertically integrated electricityauthorities. During the 1990s, a number of Statesreformed their industries by disaggregating theirvertically integrated State owned monopolies intothe functional sectors of generation, transmission,distribution and retail.
Competition has been introduced into the generationand retail sectors while the transmission anddistribution sectors, which are not conducive tocompetition, are subject to independent priceregulation. The centrepiece of the reform processwas the introduction of the National ElectricityMarket (NEM) in 1998 which introduced acompetitive wholesale spot market in the easternAustralian States. The physical structure of theNational Electricity Market appears in Figure 4.1.
In both Victoria and South Australia, the electricityindustry has been privatised. In Victoria, this occurredby sale of the businesses while in South Australia,privatisation occurred by long term leases ofelectricity assets from the Government. Theincumbent electricity businesses in the other majorStates and Territories remain Government owned.
CitiPower and Powercor are two of the fiveelectricity distributors that were originally privatisedby the Victorian Government in the mid-1990s. ETSAis the only significant electricity distributor in SouthAustralia. ETSA leased the distribution network andassociated land from the South AustralianGovernment in 2000 for a period of 200 years.
Since the original reforms, there has been a trend inthe industry towards:• regulated network businesses being separated
from the competitive retail and generation sectorssuch that many participants are either primarilymerchant or network businesses;
• vertical integration between the generation andretail sectors as a means of minimising theimpact of wholesale price volatility;
• horizontal reaggregation of businesses withinfunctional sectors as participants seek greaterscale; and
• convergence between electricity and gasmarkets.
4.2 Distributors’ role in the electricity
supply chain
The elements of the electricity supply chain fromgeneration through to delivery and sale to the enduse customer are shown in Figure 4.2.
Electricity distributors own and operate theinfrastructure which provides the physical facilitiesfor the distribution of electricity from the high voltagetransmission network to the end users of electricity.Electricity distributors charge regulated distributiontariffs to retailers who use the distribution networks.The primary activities of electricity distributors arethe operation, construction, and maintenance of theirelectricity distribution networks, consisting of lines,poles, public lighting, substations, meters, andwiring.
Figure 4.1 Physical structure of the National Electricity Market
QueenslandGeneration 9,704 MWDemand 7,912 MW
New South WalesGeneration 12,002 MWDemand 12,476 MW
The NEM is a competitive wholesale electricity spot marketwhich covers New South Wales, Victoria, Queensland, SouthAustralia and the Australian Capital Territory. These jurisdictionsall have interconnected electricity grids. Tasmania has alsorecently joined the NEM although it is not yet connected tothe mainland grid.
The key features of the NEM are:• all electricity is traded through a centralised pool;• generators offer to supply electricity at prices of their
choice and are dispatched in increasing offer price order;• the price the generators receive is the pool clearing price
for any half hour period;• wholesale purchasers (mainly retailers) buy their electricity
requirements from the pool;• retailers and generators enter into hedging contracts outside
the pool to manage price volatility risks;• an open access regime for the connection to, and use of,
electricity transmission and distribution networks; and• as natural monopolies, electricity networks are subject to
price or revenue regulation with network charges set andrecovered independently of electricity prices in thewholesale spot market.
The day to day operation of the NEM is governed by theNational Electricity Rules (NE Rules). The NE Rules regulate theoperation of the wholesale market and the operation of thenational electricity system for the purposes of safety, securityand reliability. They also contain an access regime under whichnetwork service providers allow access to their networks.
The National Electricity Market Management Company(NEMMCO) is responsible for implementing, administering andoperating the NEM in accordance with the NE Rules. NEMMCOhas dual roles of market operator and system operator.
NEMMCO’s key functions are to:• operate and administer the wholesale exchange;• promote the development, and improve the effectiveness of
the operation and administration, of the wholesale exchange;• register persons as registered participants;• exempt certain persons from being registered as registered
participants;• maintain and improve power system security; and• undertake the co-ordination of the planning of
augmentations to the national electricity system.
4.3.2 Regulation of NEM
There are two regulatory bodies that primarily oversee theNEM:• the Australian Energy Market Commission (AEMC), which is
responsible for rule making and market development; and• the Australian Energy Regulator (AER), which is responsible
for economic regulation (including regulating access totransmission networks) and market rule enforcement.
The regulatory arrangements underpinning the electricityindustry have recently undergone further reform (see Section 5)and these regulatory bodies only commenced operations on1 July 2005 with a move to national regulation expected by31 December 2006.
In addition to the requirements of the NEM, all States currentlymaintain their own licensing regimes for electricity industryparticipants. Distribution pricing and access to distributionnetworks are also primarily regulated on a State basis at thisstage. The Victorian and South Australian distribution codesprovide that distributors must comply with certain standards,including regarding the quality of supply.
Figure 4.2 Electricity supply chain
GenerationElectricity generation using
coal, gas, hydro, orwind power stations
TransmissionElectricity transportation using
high voltage and lowvoltage transmission lines
NEMMCOOperates the
wholesale market
DistributionElectricity distribution from
transmission lines to premisesof end users of electricity
The Victorian electricity industry comprises fourlevels: generation, transmission, distribution andretail.
Generation – electricity generated in Victoria ismainly sourced from the four major coal-firedgenerators located in the Latrobe Valley – Loy YangA, Loy Yang B, Yallourn and Hazelwood. Electricityis also generated from gas-fired stations and otherNEM generators that export electricity via theinterconnect from other NEM states which includeNew South Wales, South Australia, Queenslandand potentially Tasmania.
Transmission – the electricity produced by thegenerators is transmitted via high voltagetransmission lines to the distribution networks.These transmission assets are owned andmaintained by SP AusNet in accordance with itscontract with VENCorp and NEMMCO’s systemsecurity requirements. VENCorp is a statutory bodywhich has responsibility for planning and directingthe augmentation of the transmission system.
Distribution – five distributors distribute electricityat high and low voltages (240 V to 66 kV) overdistribution networks in their region. AGL Electricity,CitiPower and United Energy are the metropolitandistributors and SPI Electricity and Powercor areprimarily rural distributors. As distribution is a naturalmonopoly activity, most areas of Victoria are coveredby only one licensed distributor. However, bothCitiPower and Powercor have licences to distributein Melbourne Docklands.
Retail – three local retailers have an obligation to offerto sell electricity to customers in their local areas andcan sell electricity to customers in other areas incompetition to the local retailer. The local retailers areAGL, Origin Energy and TRUenergy. A number ofindependent retailers also sell electricity to customersin competition to the local retailer and other retailersin a competitive market arrangement. All customersin Victoria are contestable and can choose theirretailer. If there is an unplanned exit of a retailer(eg due to an insolvency), Victoria has a “retailer oflast resort” regime under which the other retailerswill step in and supply the exited retailer’s customers.
4.4.2 Victorian distribution arrangements
4.4.2.1 Use of system agreements with retailersDistributors such as CitiPower and Powercor arerequired under their licence to provide and maintainthe lines, transformers and meters that allowretailers to supply their customers with electricity.Retailers pay distributors for the use of thedistribution network at the regulated networkdistribution tariff rates under use of systemagreements, which are established between thedistributor and retailer. Retailers may then bill theircustomers for these network charges.
The charges collected under the UoS Agreement arethe distributors’ main source of revenue. Asdistributors are not responsible for collecting thesecharges from each end user customer, the defaultagreement requires that retailers must paydistributors’ network charges even if those chargesare not ultimately collected from their customers.Retailers are generally required to provide creditsupport to distributors if they do not meetcreditworthiness tests. A summary of CitiPower andPowercor’s standard form default use of systemagreement is included in Section 14.
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Figure 4.3 Victorian electricity industry structure and participants
SystemOperator
System Planning and Governance
Loy Yang A Loy Yang B Yallourn Hazelwood OtherGeneratorsGeneration
4.4.2.2 Agreements with SP AusNet and VENCorpOne of the major expenses for distributors is the charges theypay VENCorp and SP AusNet for connection to, and use of, thetransmission system in order to transfer electricity from thegenerators to the network distribution grid. These pass-throughcharges are included in the distribution charges payable byretailers and other customers to the electricity distributors.Distributors are liable to pay the transmission fees even if theyare not ultimately recovered from retailers.
4.5 South Australian electricity sector
4.5.1 South Australian industry participants
The South Australian electricity industry comprises four levels:generation, transmission, distribution and retail.
Generation – four major power stations provide electricity toSouth Australia – Torrens Island, Northern Power, Playford andPelican Point. Additional electricity is also supplied from Victoriaover the Heywood Interconnector and MurrayLinkInterconnector.
Transmission – the electricity produced by the generators istransmitted via high voltage transmission lines. Thesetransmission assets are leased by ElectraNet.
Distribution – the only significant distributor in South Australiais ETSA.
Retail – there are numerous electricity retailers that purchaseelectricity from the NEM to sell to customers with the mainretailers being AGL, Origin Energy and TRUenergy. The retailersmay sell to customers anywhere in South Australia.
South Australia also has a “retailer of last resort” regime ifthere is an unplanned exit of a retailer (e.g. due to insolvency)except that ETSA, rather than other retailers, is required tostep in and supply and bill the exited retailer’s customers.
4.5.2 South Australian distribution arrangements
ETSA’s main contractual arrangements are similar to thosedescribed for CitiPower and Powercor.
4.5.2.1 Co-ordination agreements with retailersRetailers and ETSA must enter into a co-ordination agreementon terms approved by ESCOSA. Under these agreements,retailers pay ETSA for the provision of distribution of electricityaccording to the regulated distribution tariff rates establishedby ESCOSA and related services to retailers’ customers.
As with CitiPower and Powercor, the charges received underthese agreements are ETSA’s main source of revenue and aretailer’s obligation to pay the distribution charges is notaffected by the failure of the end user customer to pay theretailer. A summary of the standard form co-ordinationagreement is included in Section 14.
4.5.2.2 Transmission connection agreement with ElectraNetETSA receives, and must pay for, transmission of electricityfrom the generators to ETSA’s distribution network under itsconnection agreement with ElectraNet. These charges areincluded in the distribution charges payable by retailers. ETSAis liable to pay the transmission fees even if they are notultimately recovered from retailers.
53
Figure 4.4 South Australian electricity industry structure and participants
SystemOperator
Torrens Island Northern Playford Pelican Point OthergeneratorsGeneration
A number of factors contribute to the changing levelsand rates of growth in demand for electricity inVictoria and South Australia. These factors rangefrom macroeconomic and regulatory drivers tomarket and technological influences. Broadlythese include:• general economic growth in industrial and
commercial sectors;• State’s population growth;• State’s growth in new housing;• growth in household disposable income;
• continued growth in the installed capacity ofairconditioners;
• general growth in electrical appliance sales; and• customer demand response to price changes.
In Victoria and South Australia, historical electricityand forecast electricity distribution volumes aresummarised in Figure 4.5.
Victoria has enjoyed stable and predictable growthin electricity sales in recent years due to steadyeconomic and population growth. Favourableeconomic conditions have driven an increase inpurchases of electricity appliances andairconditioners as well as overall electricity sales,which averaged growth of 2.2% per annum over
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30000
0
0
32500
35000
37500
40000
2002 2006 20102000 2004 2008
2002 2006 20102000 2004 2008
Source: ESC Electricity Distribution Price Review 2006-2010 Final Decision, aggregate of energy consumption forecast by distributor
Figure 4.5 Historical and forecast electricity distribution volumes (GWh)
Victoria
10000
12500
15000
17500
20000
South Australia
Source: 1999/2000 to 2002/03 – ESIPC “Sales forecasts by tariff category for South Australia’s electricity distribution network for period from 2002/03 to 2009/10” – NIEIR February 2005 “Electricity sales and customernumber forecasts for ETSA Distribution 2005/06 to 2009/10” – Forecasts in ESCOSA Final Determination, page 65
the period from 2000 to 2004. Future electricity consumption inVictoria is forecast to grow at 1.8% per annum over the periodfrom 2005 to 2010.
South Australia has enjoyed similar conditions, except for aprice-related moderation in consumption growth after asignificant retail energy price rise in 2003. In South Australia,growth in electricity sales averaged 1% per annum over theperiod from 1999/2000 to 2003/2004. Future electricity sales inSouth Australia are forecast to grow at 1.4% per annum overthe period from 2003/2004 to 2009/2010.
For individual distributors, the growth in electricity distributionvolumes depends on the location of the distributor’s coverage,customer profile and level of usage.
The underlying electricity distribution assets in whichSpark Infrastructure will have a 49% interest –CitiPower, Powercor and ETSA – provide electricitydistribution services that are subject to Federal andState based regulations.
As a result of recent reviews into the energyindustry, there have been a number of changes tothe regulatory arrangements that apply. Many ofthese changes commenced on 1 July 2005 and aredescribed below. The purpose of these reforms wasto streamline the existing regulatory arrangementsand to eliminate regulatory overlap.
5.2 New regulatory model for the National
Electricity Market
In 2003, following the independent review of theAustralian energy market for the Council of AustralianGovernments, the Ministerial Council on Energy(MCE) agreed to a package of market and regulatoryreforms, including the move away from State basedregulation of electricity to a single national regulator.
The MCE, which comprises the energy ministersfrom all jurisdictions and has responsibility of policymaking for the NEM, announced that from 1 July2005, the following new regulatory arrangementswould apply to the electricity industry:• AER – the AER is a new Federal regulatory body
with responsibility for monitoring and regulatingthe wholesale electricity market (includingenforcing the NE Rules) and economic regulationof electricity transmission networks. The ACCCpreviously had responsibility for this latterfunction;
• AEMC – the AEMC is a new body withresponsibility for NEM rule making and marketdevelopment. The National Electricity CodeAdministrator previously had these responsibilitiesbut has now been abolished; and
• ACCC – the ACCC retains responsibility forgeneral competition and anti-trust regulation,access undertakings and industry access codeapprovals under the Trade Practices Act 1974(Cth).
A memorandum of understanding will be developedbetween the AER, the AEMC and the ACCC tofacilitate the operation of the new energy governanceand institutional arrangements, with the objective ofencouraging efficient and effective co-operation andco-ordination between the three bodies.
The State based regulators are currentlyresponsible for licensing electricity industryparticipants in those states and regulating thedistribution service standards and prices.Distributors are currently regulated by ESC inVictoria and ESCOSA in South Australia.
However, it is proposed that from 1 January 2007,the AER will have responsibility for the economicregulation of electricity transmission and distributionnetworks (except in Western Australia) and retailmarkets (other than retail pricing) following thedevelopment of an agreed national framework.A discussion of the proposed regulation appearsin Section 5.7.
Figure 5.1 Proposed regulatory model for National Electricity Market
The maximum tariffs that may be charged by a distributor aredetermined periodically by the regulator, based on the principlesset out in the NE Rules and the relevant State instruments, asappropriate. Features of the economic regulatory regimerelating to the Victorian and South Australian assets arediscussed in Sections 5.5 and 5.6 respectively.
Generally, all distribution services provided by a distributor will beregulated, however, distribution services are segmented into twocategories. The first is referred to as prescribed services, whichare services that are subject to a price control mechanism. Theseprescribed services are the core services provided by thedistributor – the delivery of electricity to customers.
The second category is excluded services, which are servicesthat are generally subject to a more light-handed regulatoryapproach, such as a price monitoring regime (rather than themore stringent price control regime). These are often servicesthat are provided to a particular customer, such as aconnection service. The costs of these services are generallyrecovered from that customer and charged on a fair andreasonable basis.
Distributors are not limited to providing just distribution servicesand they can also undertake other activities that lead to nonregulated revenue; that is, revenue that is not subject toregulatory oversight through a price control or price monitoringregime.
5.4 Price determination process
Every five years, the Victorian and South Australian regulatorsestablish a new set of price controls that will apply to electricitydistribution tariffs.
For Victoria, ESC published the final price determinationin October 2005 for the period from 1 January 2006 to31 December 2010. Subject to the ESC appeal process thatCitiPower and Powercor intend to lodge, the new price controlswill take effect from 1 January 2006.
For South Australia, ESCOSA published the final pricere-determination in June 2005 for the period from 1 July 2005to 30 June 2010. These price controls were effective from1 July 2005.
The regulators are required to use a CPI-X incentive basedframework for determining the distributors’ price controls forprescribed services. It gives the distributors an opportunityto set out a plan for how they will invest in and operate theirdistribution networks and how the costs of these activitieswill be recovered through the distribution tariffs charged tocustomers using the networks.
The process for assessing the distributors’ price controlsinvolves the development of forward looking revenuebenchmarks for each distributor, based on specified servicelevels to be provided over the period.
In order to determine each distributor’s benchmark revenuerequirement, the regulators consider:• service levels (including reliability, quality and customer service);• level of demand;• return on assets;• regulatory depreciation;• capital expenditure;• operating and maintenance expenditure;• corporate taxation payments (where relevant); and• efficiency carry-over under which the business is able to
carry over efficiency gains (ie outperformance against thebenchmarks) from the previous regulatory period.
The distribution tariffs for prescribed services are set to allowthe distributor to recover the forecast revenue requirementbased on the assumed level of demand. Under the CPI-Xapproach used, the tariffs are adjusted each year by CPI lessa predetermined “X” or productivity factor. This means thatcustomers share in efficiency gains to the extent that tariffsincrease at less than inflation due to the X factor. It is possiblefor X to be negative, such that price increases increase at a rateabove CPI; which is the case for ETSA.
Refer to the Independent Regulatory Report contained inSection 12 for further information regarding the regulatoryregime in which the Asset Companies operate.
5.5 Regulation of the Victorian electricity distribution sector
5.5.1 Overview
The main legislation governing Victoria’s electricity industry isthe National Electricity (Victoria) Act 2005 (Vic), the ElectricityIndustry Act 2000 (Vic) and the Electricity Safety Act 1998 (Vic).
Each of the NEM jurisdictions has passed co-operativelegislation which gives effect to the National Electricity Law.In Victoria, this is done by the National Electricity (Victoria) Act2005 (Vic). The National Electricity Law is the uniform legislationwhich underpins the NEM and provides for the making andamendment of the NE Rules and the functions of the variousregulatory bodies and NEMMCO.
The Electricity Industry Act 2000 (Vic) and related regulationsestablish the general regulatory framework for the Victorianelectricity industry. It confers on the ESC the power to grantlicences and make codes and guidelines in relation toelectricity distribution.
CitiPower and Powercor have distribution licences grantedunder this Act which authorise them to carry out distributionactivities in Victoria. These licences have no set expiry date.While the licences may be amended, or in a limited numberof circumstances, even be revoked by the ESC, this can onlyoccur after due process has been followed in accordancewith the Act. The licences do not provide for exclusivity in theprovision of distribution services in their territories but due tothe capital investment required to develop an alternativedistribution network the risk of bypass or competition is low.
The Essential Services Commission Act 2001 (Vic)establishes the ESC as the independent economicregulator to regulate prescribed essential utilityservices supplied by the electricity, gas, water, ports,grain handling and rail freight industries in Victoria.The ESC commenced operations on 1 January 2002,subsuming the Office of the Regulator-GeneralVictoria.
One of the powers conferred on the ESC by theElectricity Industry Act 2000 (Vic) is the power toregulate electricity distribution pricing. This 2000 Act,ESC’s enacting legislation and the NE Rules providethe legal framework and objectives for making pricedeterminations. In particular, both this Act and the NERules require ESC to have regard to the VictorianTariff Order that sets out high level principles whichmust be followed by ESC. These includerequirements that ESC use price based regulationadopting a CPI-X approach rather than rate of returnregulation and to adopt a regulatory period of not lessthan five years. More information on the pricingmethodology and process is set out in theIndependent Regulatory Report contained inSection 12.
In 2000, the then Office of the Regulator-Generaldetermined the price controls that currently applyto distribution network tariffs for the 2001-2005regulatory period. These price controls are due toexpire on 31 December 2005. ESC released the FinalElectricity Distribution Price Determination2006-2010, in October 2005. This new pricereset is due to apply from 1 January 2006 to31 December 2010. A discussion of the FinalElectricity Distribution Price Determination for2006-2010 for CitiPower and Powercor appears inthe Independent Regulatory Report contained inSection 12.
5.5.3 Appeal of Final Electricity Distribution Price
Determination 2006-2010
CitiPower and Powercor intend to exercise their rightto appeal the final price determination.
CitiPower and Powercor have advised SparkInfrastructure that in their view the ESC in itsElectricity Distribution Price Review 2006-10 FinalDecision should have provided for an additionaloperating expenditure allowance for the newElectricity Safety (Electric Line Clearance)Regulations 2005.
Although the cost of compliance activities associatedwith the Electricity Safety (Electric Line Clearance)regulations have been factored into the ForecastInformation, CitiPower and Powercor expect toappeal the ESC decision as they believe thecompanies are entitled to an allowance for thesecosts from the ESC.
The appeal is also expected to include a request forcorrection of what CitiPower and Powercor believeare arithmetic errors in the ESC decision.
In accordance with the ESC appeal procedures, theappeal process is confined to specific issues raisedby an aggrieved party. The outcome of the appealprocess provides a potential revenue enhancementfor the Asset Group and therefore SparkInfrastructure over the period 2006-2010.
CitiPower and Powercor do not believe that areduction in revenue is likely to result from anyappeal process.
5.6 Regulation of South Australian electricity
distribution sector
5.6.1 Overview
The main legislation governing South Australia’selectricity industry is the National Electricity (SouthAustralia) Act 1996 (SA), the Electricity Act 1996 (SA)and the Essential Services Commission Act 2002(SA). The National Electricity (South Australia) Act1996 (SA) gives effect to the National Electricity Lawin South Australia in the same way as describedfor Victoria.
The Electricity Act 1996 (SA) and related regulationsestablish the general regulatory framework for SouthAustralia, including electrical safety and the licensingof electricity industry participants and grants powersto make codes and guidelines in relation to electricitydistribution. The Act also establishes the Office of theTechnical Regulator to ensure the safety of workers,consumers and property and compliance withlegislation and technical standards relating toelectricity.
ETSA has been granted a distribution licence underthis Act which authorises it to carry out distributionoperations in South Australia. This licence has no setexpiry date. While the licences may be amended or, ina limited number of circumstances, even suspendedor cancelled by ESCOSA, this can only occur after dueprocess has been followed in accordance with theAct. As with the Victorian licence, the distributionlicence does not provide for exclusivity in the provisionof distribution services in its territory but the risk ofbypass or competition is low.
5.6.2 ESCOSA and price determinations
ESCOSA is the independent regulator in SouthAustralia that was established under the EssentialServices Commission Act 2002 (SA) (ESCOSA Act),which came into effect on 12 September 2002.ESCOSA is the same body corporate as the formerSouth Australian Independent Industry Regulator,and is responsible for regulation of services relatingto electricity, gas, water, ports and the rail freightindustries.
One of ESCOSA’s functions under the ESCOSA Act is theregulation of distribution prices under the Electricity Act 1996(SA). These Acts, the NE Rules and the Electricity Pricing Order(EPO) provide the legal framework and objectives for makingprice determinations.
ETSA’s price controls for electricity distribution services wereestablished for the period from 11 October 1999 to 30 June2005 under the EPO issued by the then Treasurer in accordancewith the Electricity Act 1996 (SA). The terms of the EPO areconsistent with the principles and objectives of the NE Rulesand, as well as regulating charges for electricity distributionservices, it provides additional guidance to ESCOSA as to howit must regulate charges for electricity distribution services inthe future in respect of certain matters.
From 1 July 2005, the EPO no longer regulates electricitydistribution prices directly and ESCOSA was required, by boththe EPO and the NE Rules, to establish new price controls toapply for a period of five years from that date. The EPO alsorequired the ESCOSA to adopt a CPI-X approach (applied toaverage revenue per MWh) with a single X factor to apply forthe 2005-10 regulatory period. More information on the pricingmethodology and process is set out in the IndependentRegulatory Report in Section 12.
ESCOSA has released the Final Electricity Distribution PriceDetermination 2005-2010. Following an application for reviewby ETSA pursuant to the ESCOSA Act, ESCOSA has releasedthe Final Electricity Distribution (Variation) Price Determination2005-2010.
A discussion of the Final Electricity Distribution (Variation) PriceDetermination 2005-2010 for ETSA appears in the IndependentRegulatory Report contained in Section 12.
5.7 Proposed regulatory reform
5.7.1 Transitional overview
The MCE is responsible for the development of the nationalframework for the regulation of distribution and retailing of gasand electricity. It is currently undertaking a public consultationprocess in relation to the regulatory framework to give effectto these arrangements. That framework is not expected to befinalised until the end of 2005 at the earliest.
The MCE is made up of Ministers from each of the States andTerritories and a Commonwealth Minister. It is expected thatthe regime will be a co-operative scheme whereby each Stateand Territory will have its own legislation which applies auniform national regime. This is expected to require that eachof the States and Territories will have to agree to the newregulatory framework rather than having the regime imposedunder Federal legislation.
When enacting legislation is put in place, it is expected thatresponsibility for regulation of distribution networks will passfrom State based regulators to the AER. This is scheduled tooccur by 31 December 2006. As some States have recentlyraised concerns about the new arrangements, there is apossibility that the transfer of responsibility to the AER maybe delayed.
5.7.2 Preservation of price determinations made under the
existing regimes
Despite the proposed transfer of responsibility to the AER, theindications are that price determinations made by the existingjurisdictional economic regulators will continue in force untiltheir expiry in accordance with their terms.
This approach is consistent with the approach taken in previousregulatory restructurings. For example in Victoria, when theVictorian Gas Code was replaced by the National Gas Code,the price determinations made under the Victorian Codewere expressly preserved until the expiry of the first accessarrangement.
On this basis, it is expected that the new regime wouldgrandfather the existing decisions and therefore the AER wouldnot reset prices until the next scheduled review. However, asthe relevant legislation has not yet been released, there is arisk that the existing price determinations may be subjectto change.
Should there be no express provision in the legislation to allowfor the continuation of the existing price determinations, it isexpected that the AER would be unlikely to seek to resetdistribution prices until the existing determinations expire.
In the unlikely event that the relevant Governments are unableto agree on the new framework, then future pricedeterminations for the Asset Companies will presumably beundertaken by the current State based regulators using a similarapproach to the existing price determinations.
Spark Infrastructure will acquire a 49% interest inthree electricity distribution networks which togethercover over 328,000 square kilometres in Victoria andSouth Australia and serve approximately 1.7 millioncustomers. These electricity distribution networkscomprise:• CitiPower, which services Melbourne’s CBD and
inner suburbs. CitiPower is one of the largesturban electricity distribution companies in Victoriaand the most reliable distribution business inAustralia based on the System AverageInterruption Duration Index;
• Powercor, which predominantly distributeselectricity to central and western regional areas ofVictoria and the western suburbs of Melbourne.Powercor operates the largest distributionnetwork (by area) in Victoria and is the mostreliable rural distribution business in Australiabased on the System Average InterruptionDuration Index (2004). Powercor and CitiPower
are managed and owned by a common holdingcompany, CHEDHA; and
• ETSA, which is South Australia’s only significantdistributor of electricity and serves all of theState’s major population centres, including thecapital city of Adelaide.
Each of the electricity distribution assets is a naturalmonopoly located in regions that are characterisedby growing customer bases and load growth and atransparent and stable regulatory regime. The AssetCompanies have benefited from quality managementthat will continue to oversee stewardship. Thediversity of the Asset Companies reduces thedependency on economic growth and exposure tounfavourable weather conditions in any one State.S&P has confirmed that each of the AssetCompanies’ credit ratings of A– will be reaffirmedassuming completion of the transactions set out inthis Offer Document.
A summary of the Asset Companies and an outlineof key statistics are set out below in Table 6.1.
sixth
e as
set c
ompa
nies
Table 6.1 Key asset statistics
1 All RAB figures are stated in real 2004 dollar terms
$2,466.0 million as at30 June 2005
$1,626.5 million as at31 December 2005
$990.9 million as at31 December 2005
Regulatory
Asset Base1
164 minutes (Year to30 June 2005)
77.4 minutes (6 months to30 June 2005)
11.79 minutes (6 monthsto 30 June 2005)
System Average
Interruption
Duration
Index (SAIDI)
99.97%99.97%99.99%Network
availability
Average 4 year (1999-2004)historic load growth of1.4% per annum
Average 5 year (1999-2004)historic load growth of1.9% per annum
Average 5 year (1999-2004)historic load growth of2.5% per annum
Historic load
growth
Approximately 768,000Approximately 643,000Approximately 286,000Customers
394 zone/66,336distribution substations and723,000 poles46 connections totransmission networkOnly Australian distributorexclusively using steel andconcrete poles14% of wires underground
67 zone/74,973 distributionsubstations and 515,562 poles7% of wires underground
39 zone/3,148 distributionsubstations and 60,487 poles45% of wires underground
Asset
infrastructure
80,645 kilometres servicing178,200 square kilometresof South Australia
81,613 kilometres servicing150,000 square kilometresin Victoria’s regional west
CitiPower owns and operates the distribution network thatsupplies electricity to approximately 286,000 customers inMelbourne’s CBD and inner suburbs. These customers includesome of Australia’s largest companies, public transport systemsand cultural and sporting venues. The network itself had aregulated asset value of $968.4 million (31 December 2004)and consists of 4,132 kilometres of distribution line spanning157 square kilometres. Figure 6.1 depicts the CitiPowerdistribution network.
CitiPower’s management and much of its operations werealigned with Powercor after CKI and HKE acquired CitiPower in2002, having previously bought Powercor in 2000. The jointmanagement team which is contained in CHEDHA, the holdingcompany for 100% of CitiPower and Powercor, is discussed inSection 6.4.5.
6.2.1 Revenue and customer profile
Distribution revenueFor the year ended 31 December 2004, CitiPower derivedapproximately 83%1 of its revenues from regulated distributionactivities. Regulated network revenue is derived from regulatedtariffs that are charged to customers (recovered by retailers onbehalf of CitiPower) for use of the distribution and transmissionnetwork. Regulated network revenue consists of:• DUoS revenue based on fees charged to retailers for the use
of CitiPower’s distribution network, which is the net revenueto the distributor; and
• TUoS based on fees charged to retailers to cover certainfees for the use of the transmission grid. TUoS revenue isbased on payments made by CitiPower to SP AusNet andVENCorp for use of the transmission network. All TUoSrevenue collected by CitiPower is passed on to eitherSP AusNet or VENCorp in the form of TUoS charges.
ESC recently completed a price determination for the periodfrom 1 January 2006 until 31 December 2010. In its final pricedetermination, ESC reduced the overall revenue requirementsfor each of the five electricity distributors within Victoria for the2006-2010 period based upon the combination of favourablecapital market conditions, efficiencies achieved during the2001-2005 period and the expectation of growth in customernumbers and the volume of electricity to be distributed inVictoria. The price reductions for each of the Victorian electricitydistributors as determined by ESC reflect the passing throughto customers of efficiency gains and the favourable economicand operating conditions that the Victorian electricitydistributors benefited from during the 2001-2005 period. Withrespect to CitiPower, the reduced revenue requirements for the2006-2010 period as established by ESC translate into a realprice reduction of 7.7% in 2006 from the average regulatedtariff rate established by the ESC for 2005 with an annual price
Figure 6.1 CitiPower’s distribution network
Port Phillip
Yarra
Boroondara
Moreland Darebin
Melbourne
Stonnington
Glen Eira
MooneeValley
Brunswick
Thornbury
Northcote NorthBalwyn
Balwyn
Canterbury
Camberwell
Hawthorn
Kew
North Melb
Footscray
Port MelbourneAlbertPark
St KildaCaulfield
PrahranMalvern
SouthYarra
Toorak
Richmond
EastMelb
Collingwood
Fitzroy
65
Table 6.1 Key asset statistics (continued)
1 A credit rating is not a recommendation to buy, sell or hold securities and may be subject to a suspension, reduction or withdrawal at any timeby an assigning rating agency and any rating should be evaluated independently of any other information.
A–A–A–S&P corporate
credit rating1
Acquired by CKI/HEI in 2000Acquired by CKI/HKE in 2000Acquired by CKI/HKE in 2002Ownership
history
1 July 20051 January 20061 January 2006Effective date of
current price
reset
Completed Final PriceDetermination 2005-2010including Variation
reduction of 1.5% thereafter (as adjusted forincreases in CPI) through to 2010. This also includesthe impact of new metering changes for the intervalmetering roll out.
For more details concerning the ESC’s pricedetermination process and the final 2006-2010 pricedetermination for CitiPower, refer to the IndependentRegulatory Review Report in Section 12.
Aside from the level of regulated network tariffs thatCitiPower is allowed to charge customers for use ofits distribution network, the key driver of CitiPower’sdistribution revenue is load, or the volume ofelectricity carried though CitiPower’s distributionnetwork. Load is largely dependent on the numberof customers connected to the CitiPower distributionnetwork, which is dependent upon population growthand overall economic growth, and weather conditions,with the demand for electricity rising during relativelywarm summers and cold winters. See “Growth inelectricity distribution volumes” below for adescription of CitiPower’s forecast load growth.
Distribution customer profileCitiPower’s key direct customer is Origin Energy,which accounts for a significant proportion ofCitiPower’s distribution revenue. In order to reducecustomer risk, CitiPower requires that Origin Energyand other retailers maintain a minimum BBB– byS&P (or equivalent) credit rating of their seniorunsecured debt and, where required, security in theform of bank guarantees or other prudentialarrangements.
For the year ended 31 December 2004,approximately 21% of distribution volume and 26%of distribution revenues were derived fromresidential customers. Given residential customersare typically less susceptible to business cycles,distribution revenues earned from this segment arerelatively stable. The remaining distribution revenueof CitiPower is derived from a diverse range ofindustrial and commercial customers. For the yearended 31 December 2004, CitiPower’s 10 largestend users of electricity represented only 3.3% ofCitiPower’s total distribution revenues. Figure 6.2outlines CitiPower’s end user profile.
Growth in electricity distribution volumesHistorically, CitiPower’s electricity distribution volumedemand has increased at levels greater than theVictorian average. From 1999-2004, electricitydistribution volumes through CitiPower’s networkload grew at an average annual rate of 2.5%,compared with the Victorian average of 2.2%. Thisperformance was largely driven by the trend towardinner city living which increased the overall numberof customers connected to the CitiPower distributionnetwork. CitiPower’s load growth is expected tocontinue at lower levels due primarily to a surplus ofinner city housing with growth in electricitydistribution volumes (GWh) forecast by the ESC toaverage 1.3% between 2006 and 2010. Figure 6.3outlines the historic and the ESC’s forecast forCitiPower’s forecast load growth between 2000-2010.
4,000
5,000
6,000
7,000
2000
2002
2004
2006
2008
2010
Figure 6.3 CitiPower – Historical and Forecast electricity distribution volume
Source: ESC Final Electricity Distribution PriceReview 2006-10 Decision
GWh
Figure 6.2 CitiPower electricity end user profile for the year ended 31 December 2004
Non-distribution activitiesIn addition to its regulated distribution revenues, CitiPowerderives additional non-distribution and non-regulated revenuefrom other sources, including the provision of services such aspublic lighting, meter data, connection services and engineeringservices to external clients. For the year ended 31 December2004, these revenues accounted for approximately 17%1 ofCitiPower’s total revenue. These services, which are provided inconjunction with Powercor, are discussed in Section 6.4.2.
6.2.2 Network assets
CitiPower owns and operates the distribution network from thepoint of connection with the transmission network (owned bySP AusNet) down to and including the end customer meter.CitiPower’s regulated assets had a depreciated value of$968.4 million at the end of 2004 and included:• 4,132 kilometres of power lines over 157 square kilometres;• 3,148 distribution substations;• approximately 51,341 public lights; • 60,487 poles; and• land and buildings, plant and tools, easements, information
technology and office equipment, working capital and capitalworks in progress.
Age and condition of network assetsApproximately half of CitiPower’s existing asset base (byreplacement cost) was installed in the period from the late1950s to the mid-1970s.
CitiPower has in place asset management plans and operationsthat incorporate a number of factors in order to optimise thereplacement and refurbishment of its assets and ensurethat the reliability and condition of the network assets aremaintained at levels consistent with or above those requiredby the ESC.
Figure 6.4 summarises the age profile of CitiPower’s networkassets.
Network reliabilityThe CitiPower network is the most reliable electricitydistribution network in Australia. This is due, in part, tothe network being the most concentrated in Victoria at1,821 customers per square kilometre, which allows efficientuse of network crews over a small geographical area. Inaddition, the network is 45% underground and is thereforesignificantly sheltered from the weather and other factors thatmight cause disruption.
A range of measures are used by the ESC to monitor networkperformance. Key measures include SAIDI, which measures theaverage number of minutes of lost service per customer peryear and SAIFI, which measures the average number ofinterruptions per customer per year. Figure 6.5 compares theperformance of the CitiPower network with certain regulatorybenchmarks between 1994 and 2005 while Figure 6.6compares the performance of CitiPower to other Victorianelectricity distributors in 2004.
0
10
20
30
40
50
60
70
80
90
100
Figure 6.4 CitiPower distribution network pole assets age profile as at 31 December 2004
The outperformance of the CitiPower networkagainst regulatory benchmarks and other urbandistributors has been achieved while maintaining orimproving upon the levels of capital and operatingexpenditure set by ESC in determining regulatedtariffs. Although this is no guide to the future, wheresuch results can be consistently achieved throughthe use of innovative practices, increased profitabilitymay result.
Operating and capital expenditureKey drivers affecting CitiPower’s total operatingexpenditure include the provision of a safe andreliable supply of electricity, overall growth indemand from, and service to, customers,maintenance expenses and new regulatoryobligations. Key drivers affecting CitiPower’s totalcapital expenditure include asset renewal andreplacement, the connection of new end users ofelectricity, the need to augment the network tomeet demand growth, a greater focus ondelivering improved reliability and qualityof supply to customers, and new and expandedregulatory obligations. For a discussion of CitiPower’shistorical operating and capital expenditure seeSections 11.1.2 and 11.10.3.
Figure 6.6
Total SAIDI (31 December 2004) (System Average Interruption Duration Index)
Total SAIDI (minutes)
AGL
CitiPower
Powercor
SPI Electricity
United Energy
Source: ESC Electricity Distribution Business Comparative Performance Report (2004)
Total SAIFI (31 December 2004) (System Average Interruption Frequency Index)
Total SAIFI (Interruption Frequency)
0 50 100 150 200 250 300
0 1 2 3 4 5 6
AGL
CitiPower
Powercor
SPI Electricity
United Energy
ESC (including Office of Regulator General) Targets
CitiPower Actual Performance
0
20
40
60
80
100
120
140
160
180
200
220
240
260
1996
1998
2000
2002
2004
2005
1995
1994
1997
1999
2001
2003
SAIDI (minutes)
CitiPower’s network reliability and ESC targets
Total minutesoff supply
Unplanned minutes off supply
Planned minutes off supply
Unplanned interruption frequency
Unplannedinterruptionduration
Momentaryinterruptionfrequency
2004 ESC Reliability Target
minutes
2004 Actual Performance
0 10 20 30 40 50 60
Source: ESC Electricity Distribution Business Comparative Performance Report (2004)
Source: ESC Electricity Distribution Business Comparative Performance Report (2004)
The CitiPower and Powercor networks are managed by a jointmanagement team and joint workforce. The workforce isdiscussed in Section 6.4.4 and the management team isdiscussed in Section 6.4.5.
6.3 Powercor
Powercor is the largest distributor of electricity in Victoria,owning and operating a network that serves approximately643,000 customers in central and western regional Victoria andthe western suburbs of Melbourne. These customers representan estimated 27% of Victoria’s electricity end users, 24%of the State’s manufacturing sector and 65% of the State’sagricultural sector. The network itself had a regulated assetvalue of $1,592.2 million at the end of 2004 and consists of81,613 kilometres of distribution line spanning 150,000 squarekilometres. Figure 6.7 depicts the Powercor distributionnetwork.
The Powercor network is jointly managed with the CitiPowernetwork by CHEDHA. Refer to Section 6.4.3.
6.3.1 Revenue and customer profile
Distribution revenueDuring the year ended 31 December 2004, Powercor derivedapproximately 73%1 of its revenues from regulated distributionactivities. Regulated network revenue consists of:• DUoS revenue based on fees charged to retailers for the use
of Powercor’s distribution network, which is the net revenueto the distributor; and
• TUoS revenue based on fees charged to retailers to covercertain fees for the use of the transmission grid. TUoSrevenue is based on payments made by Powercor to SPAusNet and VENCorp for use of the transmission network.All TUoS revenue collected by Powercor is passed on toeither SP AusNet or VENCorp in the form of TUoS charges.
Distribution revenue is derived from regulated tariffs charged tocustomers as determined in accordance with the allowablerevenue set every five years by the ESC. (See Section 5 for adiscussion of Powercor’s regulatory regime, including the ESCand the move to a national regulator.) In the future, a nationalregulator is expected to take on this role.
The ESC recently completed a price determination for theperiod from 1 January 2006 until 31 December 2010.As described above, the ESC reduced the overall revenuerequirements for each of the five electricity distributors withinVictoria for the 2006-2010 period based upon the combinationof favourable capital market conditions, efficiencies achievedduring the 2001-2005 period and the expectation of growth incustomer numbers and the volume of electricity to bedistributed in Victoria. With respect to Powercor, the reducedrevenue requirements for the 2006-2010 period as establishedby the ESC translate into a real price reduction of 16.4% in2006 from the average regulated tariff rate established by theESC for 2005, with an annual price reduction of 1.1% perannum thereafter (as adjusted for increases in CPI) throughto 2010. This also includes the impact of the new meteringcharges for the interval metering roll out.
Aside from the level of regulated network tariffs that Powercoris allowed to charge customers for use of its distributionnetwork, the key driver of Powercor’s distribution revenue isload, or the volume of electricity carried though Powercor’sdistribution network. Load is largely dependent on the numberof customers connected to the Powercor distribution network,which is dependent upon population growth and overalleconomic growth, and weather conditions, with the demandfor electricity rising during relatively warm summers and coldwinters. See “Growth in distribution consumption” below fora description of Powercor’s forecast load growth.
Figure 6.7 Powercor’s distribution network
Mildura
Ouyen
Swan Hill
Charlton
Nhill
Horsham
Edenhope
Hamilton
Portland
Cobden
Echuca
Shepparton
Cobram
Castlemaine
KynetonArarat
Ballarat Sunshine
Werribee
Geelong
Colac
Maryborough
Melbourne
Apollo Bay
Warrnambool
Powercor Australia Powercor Locations Powercor Local Service Agents
Distribution customer profilePowercor’s key direct customer is Origin Energy,which accounts for a significant proportion ofPowercor’s distribution revenue. In order to reducecustomer risk, Powercor requires that Origin Energyand other retailers maintain a minimum BBB– byS&P (or equivalent) credit rating and, where required,security in the form of bank guarantees, or otherprudential arrangements.
For the year ended 31 December 2004,approximately 33% of distribution volume and 42%of distribution revenues were derived fromresidential customers, a typically predictable andstable customer segment. The remaining distributionrevenue of Powercor is derived from a diverse rangeof industrial and commercial customers. For the yearended 31 December 2004, Powercor’s 10 largestend users represented only 3.5% of totaldistribution revenues. Figure 6.8 outlines Powercor’send user profile:
Growth in electricity distribution volumesElectricity distribution volumes through Powercor’snetwork grew at an average annual rate of 1.9%in between 1999 and 2004. Powercor’s electricitydistribution growth was largely driven by theexpansion of new communities in Melbourne’s northand west, population growth in regional centres andthe development of agricultural and manufacturingindustries. Despite these drivers, the growth inelectricity distribution volumes has been lower thanthe State average due to relatively stronger growthexperienced by urban networks such as CitiPower.
The ESC is forecasting that Powercor’s annualaverage growth in electricity distribution volumes(GWh) over the next regulatory period will be 1.9%per annum. Figure 6.9 outlines the historic and theESC’s forecast for Powercor’s load growth between2000-2010.
Non-distribution activitiesIn addition to its regulated distribution revenues,Powercor derives additional non-distribution andnon-regulated revenue from other sources, includingthe provision of services such as public lighting,meter data, connections services and engineeringservices to external clients. For the year ended31 December 2004, these revenues accounted forapproximately 27%1 of Powercor’s total revenue.These services, which are provided in conjunctionwith CitiPower, are discussed in Section 6.4.2.
6.3.2 Network assets
Like CitiPower, Powercor owns, operates, maintainsand repairs the distribution network from the point ofconnection with the transmission network (owned bySP AusNet) down to and including the end customermeter. Powercor’s regulated assets hada depreciated value of $1,592.2 million as at31 December 2004 and included:• 81,613 kilometres of power lines over 150,000
square kilometres;• 74,973 distribution substations;• approximately 122,774 public lights;• 515,562 poles; and• land and buildings, plant and tools, easements,
IT and office equipment, working capital andcapital works in progress.
0
8,000
9,000
10,000
11,000
12,000
2002
2006
2010
2000
2004
2008
Figure 6.9 Powercor – Historical and Forecast electricity distribution volumes
GWh
Source: Electricity Distribution Price Review 2006-2010 Final Decision
Figure 6.8 Powercor electricity end user profile for the year ended 31 December 2004
Age and condition of network assetsApproximately half of Powercor’s existing asset base (byreplacement cost) was installed in the period from the late1950s to the mid-1970s.
Powercor has in place asset management plans and operationsthat incorporate a number of factors in order to optimise thereplacement and refurbishment of its assets and ensure thatthe reliability and condition of the network assets aremaintained at levels consistent or above those required bythe ESC.
Figure 6.10 summarises the age profile of Powercor’snetwork assets.
Network performance and reliabilityThe Powercor network is the most reliable rural electricitydistribution network in Australia based on SAIDI (2004).While the network spans over 150,000 square kilometres andis largely overhead, the team that operates and maintains thenetwork has consistently demonstrated an ability to meet andsurpass both regulatory benchmarks and comparableperformances by other rural electricity distribution networks.
Figure 6.11 compares the performance of the Powercornetwork with regulatory benchmarks for SAIDI between 1995and 2005 and certain other regulatory benchmarks for the yearended 31 December 2004. Refer to Figure 6.6 to compare theperformance of the Powercor network with the other Victorianelectricity distributors with respect to certain industrybenchmarks for the year ended 31 December 2004.
ESC Targets including (Office of Regulator General)
Powercor Actual Performance
130
0
150
170
190
210
230
250
270
290
310
330
350
370
390
410
1996
1998
2000
2002
2004
2005
1995
1997
1999
2001
2003
SAIDI (minutes)
Powercor’s network reliability and ESC targets
Total minutes off supply
Unplanned minutes off supply
Planned minutes off supply
Unplanned interruption frequency
Unplannedinterruptionduration
Momentaryinterruptionfrequency
2004 ESC Reliability Target
minutes
2004 Actual Performance
0 50 100 150 200 250
Figure 6.11
Powercor’s network performance and ESC targets0
10
20
30
40
50
60
70
80
90
100
Figure 6.10 Powercor distribution network poleassets age profile as at 31 December 2004
The outperformance of the Powercor networkagainst regulatory benchmarks and other ruraldistributors has been achieved while maintaining orimproving upon the levels of capital and operatingexpenditure set by the ESC in determining regulatedtariffs. Although this is no guide to the future, wheresuch results can be consistently achieved throughthe use of innovative practices, increased profitabilitymay result.
Operating and capital expenditureSimilar to CitiPower, key drivers affecting Powercor’stotal operating expenditure include the provision ofsafe and reliable supply of electricity, growth indemand and service to customers, maintenanceexpenses and new regulatory obligations. Key driversaffecting Powercor’s total capital expenditure includeasset renewal and replacement, the connection ofnew end users of electricity, the need to augmentthe network to meet demand growth, a greaterfocus on delivering improved reliability and qualityof supply to customers and new and expandedregulatory obligations. For a discussion of Powercor’shistorical operating and capital expenditure seeSections 11.1.2 and 11.10.3.
6.3.3 Workforce and management
The Powercor and CitiPower networks are managedby a joint management team and workforce. Theworkforce is discussed in Section 6.4.4 and themanagement team is discussed in Section 6.4.5.
6.4 CitiPower and Powercor operations
6.4.1 Business strategy
The joint business strategy of CitiPower andPowercor is to:• focus on the core business of electricity
distribution;• achieve profitable revenue growth in unregulated
markets leveraging core business skills andcapacities in:– IT; and– construction and maintenance services;
• achieve cross-business synergies and integrationbenefits between CitiPower and Powercor;
• refine pricing structures to encourage demand;• target network investments to consistently
outperform regulatory targets; and• continually improve business delivery systems
and processes.
6.4.2 Non-distribution business activities
CitiPower and Powercor both derive revenue fromnon-distribution sources such as public lighting,meter reading and customer connection services tothe networks. These revenue sources are referredto as excluded services. These services are notregulated by the CPI-X regime and are pre-approvedwith the ESC on a “fair and reasonable” basis.In addition, CitiPower and Powercor charge customercontributions. Customer contributions arise whencustomers contribute to the cost of constructing newdistribution assets to connect them to the network.
In addition to these revenues, CitiPower andPowercor are jointly pursuing a strategy of optimisingnon-regulated revenue by providing network-relatedservices to external clients that leverage off corenetwork activities, thereby increasing revenues andcreating economies of scale that in turn enhance thecore network activities. Engineering and informationtechnology services are also currently provided to anumber of external clients.
Non-distribution and non-regulated revenuesaccounted for approximately 17% of CitiPower’s totalrevenues and 27% of Powercor’s total revenues inthe year ended 31 December 2004 (includingtransactions between the Asset Companies).
Following the acquisition of Powercor in 2000 and CitiPower in2002 by CKI and HKE, the management of each company wasaligned to form a common management and operations group.This group employs approximately 1,500 employees and jointlymeets the corporate, customer services and IT requirements ofeach network as well as managing the separate Powercor andCitiPower network teams. It also provides relatednon-distribution services to external clients.
The integration of the Powercor and CitiPower managementhas produced and continues to produce a number of benefits,including efficiencies from combining corporate, customerservices and IT activities for each network. The integration alsomeans that the Powercor and CitiPower network teams workwith shared knowledge and expertise, assisting with developingbest of breed practices as well as common standards anddesign principles.
Further benefits have been realised through co-operation andco-ordination with ETSA management. The Victorian businessesprovide call centre and IT services to ETSA while the twogroups also further drive efficiencies through jointly procuringmaterials and services.
6.4.4 CitiPower and Powercor workforce
With the exception of certain senior management, professional,technical and support employees employed under contract, theconditions of employment for a majority of CitiPower andPowercor’s employees are governed by a series of EnterpriseBargaining Agreements. These EBAs are subject torenegotiation from time to time.
6.4.5 The management team
The CitiPower and Powercor management team has significantoperational experience in utilities infrastructure and the Victorianregulatory regime. The management structure and team whichwill remain in place post completion of the Offer are outlined inFigure 6.13 while profiles of key members of the seniormanagement team are outlined below.
Shane BrehenyChief Executive OfficerShane Breheny has over 16 years’ experience in the electricityindustry in both finance and general management roles. Duringthis time, Mr Breheny was head of Electricity Services Victoria,the Victorian Government body in charge of Victoria’s electricitynetworks prior to privatisation in 1995. In addition, Mr Brehenyis also a director of the Energy Supply Association of Australia.
Julie WilliamsChief Financial OfficerJulie Williams has over 15 years’ experience in the electricityindustry in finance, treasury and risk management roles.Ms Williams was CitiPower’s inaugural treasurer in 1994 andappointed treasurer of Powercor in 2002.
Bryan QuinnGeneral Manager – Powercor NetworkBryan Quinn has over 30 years of experience in engineeringand strategic asset management, having previously workedin senior management roles at Rio Tinto and Esso Australia.
Garry AudleyGeneral Manager – CitiPower NetworkGarry Audley has over 23 years of experience in the electricityindustry and has been instrumental in reliability andperformance initiatives that have established CitiPower asAustralia’s most reliable electricity network. Mr Audley hasbeen general manager of CitiPower’s network businesssince 1998.
Both CitiPower and Powercor maintain an insuranceand risk management program over their respectiveoperations to protect the assets and employees fromclaims made by third parties.
6.4.7 Bushfire mitigation
Both CitiPower and Powercor are required to prepareand submit for approval to Energy Safe Victoria, anannual bushfire mitigation strategic plan. The formand content of this strategic plan are determinedby the Electricity Safety (Bushfire Mitigation)Regulations 2003 and generally consist of pole andpowerline inspections, tree clearings, preventativecapital projects and contingency plans. As asubstantial portion of CitiPower’s distributionnetwork is underground and located primarily inlower vegetated areas of Melbourne’s CBD andinner-suburbs, CitiPower has had no incidence withbushfires and the overall risk of bushfires isconsidered to be lower than Powercor’s distributionnetwork which is located in primarily rural districts.
Due to its higher risk of bushfires, Powercor, hascreated a formal management structure for theimplementation and control of all bushfire mitigationactivities.
In addition to bushfire mitigation plans, each ofCitiPower, Powercor and ETSA have group basedinsurance coverage for amounts which they may beheld liable for personal injury or property damagearising from fires that are caused or arise from theirrespective distribution networks. Powercor’s currentlimit of liability for bushfire coverage is $860 million,for any one claim or series of claims arising from oneevent, while CitiPower’s limit is $330 million,reflecting the lower level of bushfire risk due to itsurban distribution network. In addition to the limitsdescribed above, the total limitation for all bushfireclaims during any one insurance period for CitiPower,Powercor and ETSA is capped at $1.72 billion.
Any damage to the poles and wires within theCitiPower and Powercor distribution networkscaused by a bushfire or other losses are self insuredby CitiPower, Powercor and ETSA.
6.4.8 Telecommunication assets
CHEDHA is currently considering the potential saleof its telecommunication business to a companyowned 50% by CKI and 50% by HKE. The business,which provides managed bandwidth services,accounts for less than 1% of CHEDHA’s totalrevenue. It is expected that should the sale occur,CHEDHA will earn revenue from the provision ofback office support and the lease of assets followingthe sale pursuant to contractual arrangements on anarm’s length basis.
Any sale undertaken is to be subject to anindependent valuation. The proceeds from any salewill be payable to the Asset Companies, in whichSpark Infrastructure will hold a 49% interest.
6.5 ETSA
ETSA operates and maintains the only significantelectricity distribution network in South Australia,supplying all of the major population centres,including the capital city, Adelaide – referto Figure 6.14. Serving approximately 768,000residential, commercial and industrial customersand with regulated assets (30 June 2005) ofapproximately $2,488 million, ETSA is the sixthlargest distributor of electricity in Australia bycustomer numbers, and the largest privately owneddistributor.
For the year ended 30 June 2005, 78% of ETSA’srevenue was derived from prescribed distributionservice charges, with an additional 11% derivedfrom excluded services (such as public lighting).The remaining 11% of ETSA’s revenue was derivedfrom non-regulated activities, including networkconstruction and maintenance and networkmanagement services.
ETSA operates its distribution network undera 200 year lease from the South AustralianGovernment, which commenced in January 2000.(See Section 14 for a summary of the ETSA networklease arrangements).
Figure 6.14 Location of ETSA’s distribution network
ETSA’s business strategy is to:• focus on the core business of electricity distribution;• achieve profitable revenue growth in unregulated lines
of business leveraging core business skills and capacitiesincluding:– construction and maintenance services; and– asset management services;
• achieve cross-company synergy and integration benefits;• achieve targets in each of five “Critical Success Factor”
areas which will lead to achievement of financial objectives.These “Critical Success Factors” consist of:– employee commitment;– productivity;– growth;– customer service; and– regulation;
• target and optimise network investments to consistentlyoutperform regulatory targets; and
• continually improve business delivery systems and processes.
6.5.2 Revenue and customer profile
Distribution revenueFor the year ended 30 June 2005, ETSA derived 78% of itstotal revenue from Prescribed Services. Approximately 99.7%of the Prescribed Services revenue is regulated networkrevenue which is derived from regulated tariffs that are chargedto customers (recovered by retailers on behalf of ETSA) for useof the distribution and transmission network. Regulatednetwork revenue consists of:• DUoS revenue based on fees charged to retailers for the use
of ETSA’s distribution network, which is the net revenue tothe distributor; and
• TUoS revenue based on fees charged to retailers to covercertain fees for the use of the transmission grid. TUoSrevenue is based on payments made by ETSA to ElectraNetSA for use of the transmission network. All TUoS revenuecollected by ETSA from retailers is passed on to ElectraNetSA in the form of TUoS charges.
The tariffs charged to customers are currently determined inaccordance with the allowable revenue set by a State basedregulator, ESCOSA, every five years. In the future, the AER isexpected to take on this role (scheduled for 31 December2006). ESCOSA recently completed a price determination,setting allowable revenues for ETSA until July 2010. Refer toSection 5 for further discussion of the regulatory regime andthe recent price determination.
ESCOSA completed a price determination in June 2005, settingthe price formulae and allowable revenues for ETSA for theperiod from 1 July 2005 through 30 June 2010. In its final pricedetermination, ESCOSA reduced the average prices for 2005/06in real terms by 4.0% compared to the average regulated tarifffor the 2004/05 period. In subsequent years to 2009/10,customer prices on average are to increase in real terms (afteradjustments for CPI) by 0.8% per annum. For more detailsconcerning the ESCOSA’s price determination process and thefinal 2005-2010 price determination for ETSA, refer to theIndependent Regulatory Review Report in Section 12.
The level of regulated network tariffs and the volume of electricity(sales) carried through ETSA’s distribution network determinesETSA’s network revenue. This revenue is only directly dependenton sales in a band of 0.5% either side of the forecast sales targetdetermined by ESCOSA. Outside of that band, the revenueimpact of sales variations is capped to 15% of the variation.These arrangements reduce the variability of distribution revenuefor both higher and lower distribution volumes.
Sales are largely dependent on the number of customersconnected to the ETSA distribution network, which isdependent upon population growth and overall economicgrowth, and weather conditions, with the demand for electricityrising during relatively warm summers and cold winters. SeeGrowth in electricity distribution volumes below for adescription of ETSA’s forecast load growth.
Distribution customer profileETSA receives revenue from electricity retailers who collectdistribution fees from customers on ETSA’s behalf. AGL collectsa significant portion of ETSA’s distribution revenue. In order toreduce customer risk, where retailers do not retain a minimumBBB credit rating, ETSA may require retailers to provide securityin the form of bank guarantees (or other alternative creditsupport as negotiated with ETSA). Additionally, where theregulator declares that a specified event has occurred, triggeringthe “retailer of last resort” regime, ETSA in its role as “retailerof last resort” must supply and bill retail customers directly.
For the year ended 31 December 2004, approximately 38% ofdistribution volume and 54% of revenues were derived fromresidential customers. As electricity consumption by residentialcustomers is less susceptible to business cycles as comparedto industrial or commercial customers, ETSA’s long term salesto the residential segment are relatively stable.
A diverse range of businesses provide the balance ofdistribution revenues. Although industrial and commercialcustomers are more susceptible to economic downturns,individual customers do not represent a large portion of ETSA’stotal distribution revenues. For the year ended 31 December2004, ETSA’s 10 largest customers (as measured by volume)represented only 3.4% of total distribution revenues.
A profile of ETSA’s customers by electricity end user billings isprovided in Figure 6.15.
Figure 6.15 ETSA electricity end user profile for the year ended 31 December 2004
Growth in electricity distribution volumes From 1999/2000 to 2003/2004, ETSA’s energy salesgrew by an average of 1.4% per annum. In the initialpart of this period residential sales had shown stronggrowth but were negatively affected later in theperiod by an increase in retail prices following the fullderegulation of South Australia’s electricity retailindustry.
For 2003/2004 to 2009/2010, it is forecast thatresidential sales growth will remain flat and thistogether with loss of some major customers (Mobiland Mitsubishi Lonsdale) has resulted in the ETSAsales growth average forecast dropping to 1.0% perannum for the period.
The State’s energy consumption growth averageprojections of 1.4% per annum for the same periodfrom 2003/2004 to 2009/2010 are higher than theETSA average growth mainly because of forecastincreased consumption at mining sites where theenergy is delivered direct by the transmissioncompany ElectraNet SA rather than by ETSA.Figure 6.16 outlines ETSA’s historical and forecastload growth between 1999/2000 and 2009/2010based on ETSA’s recent regulatoryprice determination.
Non-distribution activitiesOutside of its prescribed distribution serviceactivities, ETSA also derives income from a numberof related activities. Approximately 11% (for the yearended 30 June 2005) of ETSA’s revenue is derivedfrom excluded services activities, such as publiclighting and new and upgraded connection points.As compared to prescribed services, these excludedservices are regulated with a more light-handedapproach to price regulation and require that ETSAcharge on a fair and reasonable basis.
A further 11% of ETSA’s revenue (for the yearended 30 June 2005) is derived from providingnon-regulated services that are still closely relatedto its core capabilities.
These services include providing construction andmaintenance services for large infrastructure projectsand network management services to externalnetworks.
6.5.3 Network assets
ETSA constructs, operates and maintains thedistribution network from the point of connectionwith the transmission network (operated byElectraNet) down to and including the end customermeter. As at 30 June 2005, ETSA had a regulatedasset base of $2,488 million and included:• 80,645 circuit kilometres of power lines spreading
over 178,200 square kilometres;• 394 zone/66,336 distribution substations and
723,000 poles;• approximately 173,800 public lights; and• land and buildings, plant and tools, easements,
IT and office equipment, working capital andcapital works in progress.
ETSA is the only Australian distribution business thatexclusively uses poles made of steel and concretereferred to as Stobie poles. Stobie poles have aservice life averaging 90 years. This compares withwooden poles that have a significantly shorter thanaverage life than Stobie poles.
Figure 6.17 ETSA – regulated and unregulated revenue
2000/01
2001/02
%
Prescribed distribution services
Excluded distribution services
Other, non-regulated services and interest income
2002/03
2004/05
2003/04
0 20 40 60 80 100
8.2 5.486.4
9.9 6.184.0
8.0 7.584.5
10.9 10.878.3
9.9 7.882.3
0
9,500
10,000
10,500
11,000
11,500
12,000
Figure 6.16 ETSA – Historical and Forecast electricity distribution volumes
2003
/04
2009
/10
1999
/00
2001
/02
2005
/06
2007
/08
GWh
Source: 1999/2000 to 2002/03 – ESIPC Report14 September 2004 “Sales forecasts by tariff categoryfor South Australia’s electricity distribution network”2002/03 to 2009/10 – NIEIR February 2005 “Electricitysales and customer number forecasts for ETSADistribution”2005/06 to 2009/10 – Forecasts in ESCOSA FinalDetermination, page 65
ETSA has entered into two 200 year leases with the SouthAustralian Treasurer, acting as agent for the Distribution LessorCorporation (DLC), for the distribution network and the land onwhich it is located respectively.
If the DLC terminates either of the 200 year leases for a defaultevent by ETSA, the upfront payment and pre-payments thatETSA have made are forfeited. ETSA may, however, receivesome compensation in certain circumstances.
Default events giving the DLC the ability to terminate are:• non-payment of monies;• entering into external administration;• selling or charging ETSA interests in the lease;• a licence required to operate the distribution network being
suspended or cancelled;• there being a substantial cessation in the use of the
distribution network for its intended purpose;• failing to undertake appropriate maintenance; or• the charge securing the prepayment entered into in relation
to the leases being claimed to be unenforceable.
ETSA is provided with agreed cure periods to remedy anyconditions that may result in a default event.
If either lease is terminated, the other lease automaticallyterminates and the defaulting party under the first lease willbe considered a defaulting party under the second lease.
ETSA is entitled to own certain geographic extensions to thenetwork and new network assets exceeding a certain value.However, ETSA must transfer these interests to DLC, ifrequired, at expiry or termination of the leases. If the leasesare terminated due to ETSA’s default, ETSA will not receive anycompensation for these assets. Otherwise, ETSA may receivesome compensation.
ETSA provides an extensive indemnity to DLC and the Crownin relation to the distribution network and site.
See Section 14, for a further discussion of ETSA’s leasingarrangements with respect to the distribution network.
Age and condition of network assetsLike most Australian distributors, much of ETSA’s distributionnetwork was built in the late 1950s and 1960s and some of thenetwork is now reaching up to 50 years of age. ETSA has inplace, asset management plans and operations that incorporatea number of factors in order to optimise the replacement andrefurbishment of its assets and ensure that the reliability andcondition of the network assets are maintained at levelsconsistent with those required by ESCOSA.
Figure 6.18 summarises the age profile of ETSA’s networkpole assets:
ETSA is required by its distribution licence to prepare a safety,reliability, maintenance and technical management plan andannually review and update the plan if necessary. The Officeof the Technical Regulator conducts audits to verify complianceby ETSA with the safety and technical requirements of the plan.
0
10
20
30
40
50
60
70
80
90
100
Figure 6.18 ETSA distribution network pole assets age profile as at 31 December 2003
Network reliabilityETSA seeks to meet the network reliabilityexpectations set by the regulator. Historically, thereliability of the ETSA network has been in line withtargets set by ESCOSA.
A range of measures are used by ESCOSA tomonitor network performance. One key measureis SAIDI, which measures the average number ofminutes of lost service per customer per year.ETSA’s SAIDI performance between 2001/2002 and2004/2005 is shown in Figure 6.19. The averageSAIDI result for the state over the four year periodis 161 minutes per annum.
ETSA’s SAIDI performance for the 2004/2005 yearis shown against the ESCOSA service standards forurban, rural and remote regions is also shown inFigure 6.19.
Performance against the SAIDI standards togetherwith other standards for the number of supplyinterruptions, supply restoration and efficiency setby ESCOSA has resulted in ETSA being awarded anincentive bonus by the regulator in each of the lastfour regulatory years.
Importantly, ETSA’s network performance hasbeen achieved whilst spending in line with thecapital and operating expenditure allowance set byESCOSA for the regulatory period that concludedon 30 June 2005.
Operating and capital expenditureKey drivers affecting ETSA’s total operatingexpenditure include the provision of safe and reliablesupply of electricity, growth in demand from, andservice to, customers partially as the result of fullretail contestability, distribution network assetmaintenance, new regulatory obligations, and theprovision of services to customers in non-regulatedareas of construction and maintenance services andasset management services. Key drivers affectingETSA’s total capital expenditure include assetrenewal and replacement, the connection of newcustomers, the need to augment the network tomeet demand growth, a greater focus on deliveringimproved reliability and quality of supply tocustomers and new and expanded regulatoryobligations. For a discussion of ETSA’s historicaloperating and capital expenditure seeSections 11.1.2 and 11.10.3.
6.5.4 Workforce
ETSA currently employs approximately 1,390 fulltime employees. With the exception of certain seniormanagement employed under contract, the ETSAworkforce conditions are governed by a series ofEBAs. These EBAs are subject to renegotiation fromtime to time.
Figure 6.19 ETSA network reliability performance
Network reliability and ESCOSA standards for urban, rural and remote regions
The ETSA senior management team has significant experiencein the energy and utilities industry and has demonstratedsuccess in meeting and surpassing regulatory, operational andfinancial targets. The ETSA senior management structure isoutlined in Figure 6.20 while profiles of key members of thesenior management team are outlined below.
Lew OwensChief Executive OfficerLew Owens has over 16 years of experience in the electricity,gas and energy industries including Mobil Oil, SA Gas Company,Department of Mines and Energy and the Energy PlanningSecretariat. He was previously chairman of the ESCOSA,responsible for regulating the South Australian electricityindustry, gas industry, intra-state and Darwin railways, ports andurban water pricing, a member of the ACCC Energy Committee,South Australian Jurisdictional Regulator, South AustralianIndependent Industry Regulator, and chief executive officerof Funds South Australia and Workcover Corporation.
Mr Owens was appointed chief executive officer of ETSAin July 2005.
Robert StevensChief Financial OfficerRobert Stevens has 15 years’ experience in the electricityindustry, including senior roles in accounting, internal audit andfinancial IT systems. He is responsible for ETSA’s financialmanagement, purchasing, contracts, treasury and tax functions.He served as a member of the steering committee for theimplementation of full retail contestability systems in ETSA,a joint ETSA/Powercor project.
Richard TwiskGeneral Manager – networks and customer serviceRichard Twisk has experience in the energy, constructionand aviation industries, across areas including engineeringmanagement, asset management and strategic planning. He isresponsible for ETSA’s network asset management, networkplanning and development, network system control, technicaland operating standards and performance, customer serviceand metering asset management.
Jeff BamentGeneral Manager – construction and maintenance servicesJeff Bament has over 34 years’ experience within the SouthAustralian electrical power industry in power station operation,maintenance, construction, commissioning and design,information technology and telecommunication, transmissionnetwork management and operation and full retailcontestability. He is responsible for ETSA’s maintenance ofsupply, network construction and maintenance, customerconnection and logistics.
Dr Eric LindnerGeneral Manager – corporate affairsDr Eric Lindner has over 34 years’ experience in the electricityindustry covering planning, research, design, environmentalmanagement and a wide range of corporate functions. He isresponsible for ETSA’s risk management, insurance, internalaudit, legal services, safety, environmental management, realestate and regulatory management functions, plus acting asthe company secretary.
ETSA maintains an insurance and risk managementprogram over their respective operations to protectthe assets and employees from claims made by thirdparties.
6.5.7 Bushfire mitigation
ETSA’s electricity distribution licence requires thatETSA complies with the Electricity Act 1996 (SA)and associated regulations that contain variousobligations regarding the clearance of vegetationfrom powerlines. In addition to complying with thevegetation obligations of the Electricity Act 1996(SA), ETSA has adopted a range of bushfire riskmitigation procedures. Further, ETSA has adoptedprotection systems that operate to shut down thedistribution network and additional disconnectionpractices in the event of high or extreme riskof bushfires.
In addition to bushfire mitigation plans, ETSA is partyto the group based insurance coverage for amountswhich it may be held liable arising from fire asdescribed earlier with respect to CitiPower andPowercor. ETSA’s current limit of liability for bushfirecoverage is $860 million for any one claim or series ofclaims arising from one event. As mentioned above,in addition to this $860 million coverage limitation, thetotal limitation for all bushfire claims during any oneinsurance period for CitiPower and Powercor andETSA is capped at $1.72 billion. Any damage to thepoles and wires within the ETSA distribution networkcaused by a bushfire is not covered by this insurancepolicy. This policy only covers liabilities associatedwith damage to a third party.
6.5.8 Telecommunication assets
ETSA is currently considering the potential sale of itstelecommunications business to a company owned50% by CKI and 50% by HKE. The business, whichprovides managed bandwidth services, accounts forless than 2% of ETSA’s total revenue. It is expectedthat should the sale occur, ETSA will continue toearn revenue post the sale from the provision ofback office support and lease of assets pursuant tocontractual arrangements on an arm’s length basis.
Any sale undertaken is to be subject to anindependent valuation. The proceeds from any salewill be payable to the Asset Companies, in whichSpark Infrastructure holds a 49% interest.
6.6 Growth opportunities for the Asset
Companies
6.6.1 Growth in distribution volumes
The Asset Companies growth in distribution volumesis driven by a combination of macroeconomic andmicroeconomic factors. On a State level, thefollowing factors are attributable to the AssetCompanies’ load growth:• general economic growth in industrial and
commercial sectors;• state’s population growth;• state’s growth in new housing;• continued growth in the installed capacity
of airconditioners; and• general growth in electrical appliance sales.
Victoria and South Australia have enjoyed stable andpredictable energy consumption growth in recentyears due to stable economic and population growth.Favourable economic conditions have driven theincrease in purchases of electrical appliances andairconditioners, and the overall energy consumptiongrowth.
The Asset Companies have enjoyed stable andpredictable load growth patterns in recent years.CitiPower’s growth has been driven by a trendtowards inner city Melbourne living whilePowercor’s growth has been driven by theestablishment of new communities in Melbourne’snorth and west, population growth in regionalcentres and the development of agricultural andmanufacturing industries in its service area. ETSA’sload growth has been largely driven by energy usagein the South Australian commercial sector. The AssetCompanies stable load growth is expectedto continue and contribute to Spark Infrastructure’spotential growth. Refer to Sections 4.6, 6.2.1, 6.3.1and 6.5.2.
6.6.2 Growth in non-regulated revenue
The Asset Companies provide non-regulated servicesthat include the provision of construction andmaintenance services for large infrastructureprojects, network management services to externalnetworks and engineering services to corporateclients that leverage off the existing distributioninfrastructure.
It is the intention of the Asset Companies to growrevenue and earnings from this business segment.
CitiPower and Powercor have undertaken a major integrationof back-office activities that provide cost and knowledgesynergies. CHED Services, which is a wholly owned subsidiaryof CHEDHA, was established in 2004 to be a service provider toCitiPower and Powercor for information technology, customerservices, corporate services, company secretary and legalservices, regulation and finance. CHED Services also providescustomer service and information technology services to ETSA.
6.7 Asset Company ownership
Prior to the Offer, CKI and HKE each held a 50% interest in theAsset Companies. On completion of the Offer, CKI will hold a1% interest in the underlying assets and a 9.9% interest inSpark Infrastructure, Spark Infrastructure will own a 49%interest in the Asset Companies and HKE will maintain its 50%interest in the Asset Companies.
CKI intends to offer to purchase from HKE a portion of HKE’s50% interest in the Asset Companies with the intention thatCKI and HKE in the future each hold the same effectivepercentage ownership in the Asset Companies in economicterms. The offer will be made at a price which is derived fromthe Final Price achieved in the Bookbuild.
HKE will be unable to accept CKI’s offer without first obtainingthe approval of its shareholders.
If the offer from CKI is accepted by HKE, CKI and HKE willtogether continue to hold a direct stake of 51% of theunderlying assets, and an aggregate beneficial interest of55.85%, including CKI holding a 9.9% interest in SparkInfrastructure.
Spark Infrastructure will continue to own a 49% interest inthe Asset Companies.
The proposed change in ownership of the Asset Companiesreaffirms CKI’s and HKE’s commitment to the AssetCompanies.
Details of the corporate governance arrangements relating tothe Asset Companies, including the shareholding agreementsbetween Spark Infrastructure, CKI, HKE and the composition ofthe boards for the respective Asset Companies are detailed inSection 8.6.5.
6.8 Pre-emptive rights
The Asset Company Agreements also provide for pre-emptiverights to Spark Infrastructure, CKI and HKE. These rights requirethat before CKI/HKE on the one hand or Spark Infrastructureon the other hand can sell any of their interest in the AssetCompanies to an external party, they must first offer it for saleto the other of them. Refer to Section 14 for furtherinformation.
Pre-IPO
HKE 50%
CKI 50%
Figure 6.21: Ownership interests in the Asset Companies – Pre IPO, at IPO and (intended) Post-IPO
Stage 1 – At IPO
CKI 1%
HKE 50%
Spark Infrastructure 49%
Stage 2 – Post-IPO1
CKI 23%
HKE 28%
Spark Infrastructure 49%
Note:1. The potential beneficial ownership interests in the Asset Companies
after the IPO and assuming HKE accepts the offer for an interest in the Asset Companies described in Section 6.7. Indirect (via Spark Direct Infrastructure) Total
CKI 23.07% 4.85%1 27.93%HKE 27.93% – 27.93%Cheung Kong Group 51.00%2 4.85% 55.85%Spark Infrastructure 49.00%Total 100.00%
Notes:1. 9.9% stake in Spark Infrastructure.2. Interests in the Asset Companies held by CKI and HKE.
Spark Infrastructure has been established to acquirea 49% interest in each of CitiPower, Powercor andETSA, with the aim of developing a diversifiedportfolio of utility infrastructure assets in Australiaand international locations.
Spark Infrastructure aims to provide Investors withthe opportunity to participate in a utility infrastructurefund with an investment strategy that is focused onproviding an attractive cash yield and long termcapital growth. Spark Infrastructure has beenstructured to optimise distributions to Holders.
Spark Infrastructure intends to target electricity andgas transmission and distribution assets, regulatedwater assets and other infrastructure-related assetswith risk/return characteristics similar to those of theAsset Companies and which provide diversificationby geography and regulatory regime. SparkInfrastructure will seek to invest in OECD countries
and countries which have comparable sovereigncredit ratings or level of economic development.
Acquisition growth opportunities for SparkInfrastructure are expected to be introduced throughthe Manager, CKI and RREEF Infrastructure. SparkInfrastructure may undertake co-investmentopportunities with CKI and RREEF Infrastructurewhere suitable opportunities arise.
7.2 Spark Infrastructure investment structure
Spark Infrastructure is a stapled structure with thefollowing four entities:• Spark Infrastructure Trust, which is a registered
management investment scheme;• Spark Infrastructure Company 1;• Spark Infrastructure Company 2; and• Spark Infrastructure Company 3.
A simplified summary of the corporate andinvestment structure of Spark Infrastructure appearsin Figure 7.1:
seve
n Spar
k In
fras
truc
ture
Figure 7.1 Spark Infrastructure – simplified corporate and ownership structure
Subject to satisfaction (or waiver) of certain conditions asfurther detailed below, Spark Infrastructure Company 1 andSpark Infrastructure Company 2 will hold a 49% interest inCHEDHA and ETSA respectively. CHEDHA holds a 100%interest in CitiPower and Powercor. Spark InfrastructureCompany 2 will hold its interest in ETSA via a partnership. SparkInfrastructure Company 3 is a Bahamas incorporated companywhich is intended to hold non-Australian investments in thefuture. Spark Infrastructure Company 3 will not initially hold anyinvestments.
The conditions that will need to be satisfied (or waived) for theacquisition to proceed include:• the conditions for the asset restructure set out in
Section 14.7.1;• satisfaction of the conditions precedent applicable to the
Senior Debt, set out in Section 14.16;• receipt of advice from the Treasurer that there are no
objections under Australia’s foreign investment policy to theasset restructure, or expiry of the period during which (theproposed restructure having been notified) the Treasurermay object; and
• approval by the shareholders of CKI of the proposed disposalof its 49% interest in CHEDHA and ETSA as required by therules of the Hong Kong Stock Exchange and CKI’sgovernance requirements.
The Offer will not proceed unless these conditions are satisfiedor waived.
The Responsible Entity will act as the responsible entity ofSpark Infrastructure Trust and will provide a range of servicesto Spark Infrastructure Trust in accordance with the SparkInfrastructure Trust Constitution and the Corporations Act.Refer to Section 14 for more information. Spark InfrastructureTrust is a registered managed investment scheme and isintended to be used as a funding vehicle, lending money to theStapled Companies and/or their subsidiaries.
The Manager will manage Spark Infrastructure. Both theManager and the Responsible Entity are ultimately jointlyowned by CKI and RREEF Infrastructure.
7.3 Nature of Stapled Securities and distributions
Each Stapled Security in Spark Infrastructure comprises oneunit in Spark Infrastructure Trust, one Loan Note issued by theResponsible Entity as trustee of Spark Infrastructure Trust, anordinary share in each of Spark Infrastructure Company 1 andSpark Infrastructure Company 2 and one CDI over one share inSpark Infrastructure Company 3 which are stapled togetherand unable to be separately traded, transferred or sold. SparkInfrastructure will apply for the Stapled Securities and theInstalment Receipts to be quoted on ASX although the StapledSecurities will not be traded until after the Final InstalmentPayment Date.
Each Stapled Security issued under the Offer will berepresented by an Instalment Receipt until payment of the FinalInstalment and the Instalment Interest.
The Final Price is the total price payable for one unit in SparkInfrastructure Trust, one Loan Note, one ordinary share in SparkInfrastructure Company 1, one ordinary share in SparkInfrastructure Company 2 and one CDI over one share in SparkInfrastructure Company 3. As a result, any market price of eachStapled Security will be the combined price of each componentof the Stapled Security.
Assuming a Final Price of $2.00, the amounts paid for theStapled Securities under the Offer will be allocated as describedin Table 7.1.
Distributions paid on the Stapled Securities will be comprised ofinterest income on the Loan Notes, distributions from SparkInfrastructure Trust and dividends from the Stapled Companies.It is expected that the majority of distributions to Holders willbe made via interest paid on the Loan Notes.
The Loan Notes forming part of the Stapled Securities areunsecured notes for the purposes of section 283BH of theCorporations Act and are issued by the Responsible Entity astrustee of the Spark Infrastructure Trust. They are subordinatedto all secured and unsecured creditors of Spark InfrastructureTrust for all amounts including the Senior Debt raised by SparkInfrastructure and the Management Fees as described inSection 10.
85
Table 7.1 – Allocation of Final Price
1 Assuming a Final Price of $2.00 per Stapled Security. If the Final Price is above or below $2.00, the difference will be allocated to SparkInfrastructure Company 1 and Spark Infrastructure Company 2 in a proportion to be determined by Spark Infrastructure.
2 A nominal amount will be allocated to Spark Infrastructure Company 3.
The Loan Notes are a debt product with a 100 yearnon-amortising term which will be required to berefinanced at maturity.
Holders will receive interest on principal outstandingon the Loan Notes which is cumulative. The interestrate payable on principal outstanding on the LoanNote is:• for the period to 30 November 2010, 10.85% per
annum; and• after 30 November 2010, a market based rate
comprising the prevailing five year swap rate anda credit margin, which is reset every five yearsuntil 2105. Refer to Section 14 for moreinformation.
Interest on the Loan Notes may only be paid to theextent that Spark Infrastructure has available cash.The Responsible Entity may defer payment ofinterest on the Loan Notes at any time and in theevent that interest on the Loan Notes is deferred,the interest will accrue until such time as SparkInfrastructure is able to pay the accrued interest.
The right to enforce the obligations of theResponsible Entity under the Note Trust Deed will beheld on behalf of the Noteholders by a Note Trustee,which is responsible for administering the Loan Notesand ensuring that the terms of the Note Trust Deedare adhered to. Refer to Section 14 for a discussionof the Note Trust Deed and the Note Trustee.
7.4 Spark Infrastructure Company 3
A component of the Stapled Securities will be a CDIover a share in Spark Infrastructure Company 3.
CDIs are a type of depositary receipt which providesthe Holder with beneficial ownership of the underlyingshares. The legal title to the shares is held by theDepository Nominee.
A CDI will be issued over each share in SparkInfrastructure Company 3 as Spark InfrastructureCompany 3 is a company incorporated in The Bahamasand it is not possible for certain foreign incorporatedcompanies to have their shares traded directly on ASX.This is because they are subject to foreign laws that donot recognise CHESS as a valid mechanism fortransferring legal title to shares. CDIs have been createdto facilitate electronic trading in Australia for foreigncompanies such as Spark Infrastructure Company 3.
In the case of Stapled Securities, each CDI willrepresent a beneficial interest in one SparkInfrastructure Company 3 share and form one of thecomponents of each Stapled Security. Unlike SparkInfrastructure Company 3 shares, the CDI will beable to be transferred and settled electronically onASX along with the other securities which togethercomprise each Stapled Security.
Refer to Section 14 for a discussion of the constitutionof Spark Infrastructure Company 3, the CDIs and theDepository Nominee.
7.5 The Manager
The Manager is the manager of Spark Infrastructure.Its board of directors comprises two CKIrepresentatives and two RREEF Infrastructurerepresentatives.
The Manager will provide its management servicesto Spark Infrastructure through the ManagementAgreement. Under the Management Agreement, theManager is appointed as the exclusive manager ofeach of the Stapled Entities for a 25 year term,subject to certain termination events (which are setout in section 14.6.1). The key roles to beundertaken by the Manager include:• the submission of investment proposals relating
to acquisitions and disposals, to the boards of theStapled Entities;
• where applicable, implementation of investmentopportunities for Spark Infrastructure as approvedby the relevant boards of Spark Infrastructure;
• financial management and administration(including debt and equity funding management);
• making available appropriately qualified andexperienced individuals to perform rolesequivalent to Chief Executive Officer, ChiefFinancial Officer, Chief Investment Officer andCompany Secretary for Spark Infrastructure;
• corporate governance in relation to SparkInfrastructure’s investment in the AssetCompanies, in conjunction with the boards ofCHEDHA (which holds 100% of both CitiPowerand Powercor) and ETSA;
• ASX listing management and all relatedcompliance management; and
• investor relations,
as further detailed in the summary of theManagement Agreement in Section 14.6.1.
The Manager is obliged to make available to theStapled Entities any investment opportunity itsources which is within the investment policy ofSpark Infrastructure (see Section 9) on a first right ofrefusal basis and otherwise in accordance with theprocedures set out in the Management Agreement.Any investments must be kept under review by theManager and recommendations must be made as tohow each Stapled Entity should deal with theinvestments. Spark Infrastructure may onlychange its investment policy with the prior approvalof the Manager.
If Spark Infrastructure acquires assets as a result of aninvestment opportunity introduced by a person other than theManager, CKI or RREEF Infrastructure, then in relation to thoseassets Spark Infrastructure may, where it is a condition of theacquisition that any existing management arrangementsaffecting those assets continue, allow those arrangements tocontinue in accordance with those requirements or, at the timeof the acquisition, make alternative arrangements in relation tomanagement of those assets. Otherwise, assets so acquiredwill be managed by the Manager.
The board of each Stapled Entity has absolute discretion withrespect to all investment decisions submitted to it.
The Manager does not guarantee the performance of anyinvestment made by any of the Stapled Entities.
The Manager is required to provide quarterly reporting duringthe term of the agreement in a form agreed between theManager and each Stapled Entity. There is also provision foradditional reporting at the request of the Stapled Entities.
The Manager has entered into arrangements with each of CKIand RREEF Infrastructure to establish investment referralprinciples whereby each will from time to time refer investmentproposals within the investment policy to the Stapled Entitiessubject to the terms of the protocol. Further details about CKIand RREEF Infrastructure are provided in Section 7 and thedetails of these entities’ arrangements with Spark Infrastructureare found in Section 14. A summary of the Related PartyProtocols, which govern the conduct of related partytransactions involving CKI, RREEF Infrastructure and DeutscheBank and their affiliates, is in Section 8.6.2.
Under the Management Agreement, the Manager is to beremunerated through payment of a Base Fee by SparkInfrastructure. In certain circumstances, a Performance Feemay also be payable to the Manager. The Manager must bearall costs, charges and expenses incurred by it in providing themanagement services, including its own ordinary overheadand administrative costs including costs of staff. SparkInfrastructure will bear all expenses normally associated with alisted entity with a diverse range of investors and investments.A summary of the management fees payable is contained inSection 10.
7.6 Acquisition, funding and investment structure
The key features of the arrangements relating to acquisition,funding and flow of distributions are as follows:• at the Retail Application Price, the Offer will
raise $1,817.6 million which together with the StapledSecurities issued to CKI and the $425.0 million debt raisedby Spark Infrastructure will be used to acquire equity andrefinance shareholder loans and subordinated debt from CKIto obtain a 49% interest in the Asset Companies for a totalcash consideration of $2,122.1 million after taking intoaccount repayment of CitiPower Senior Debt of $50 millionand transaction expenses of $70.5 million (including GSTwhere applicable). Refer to Section 1.6 for further details;
• to effect the acquisition of the 49% interest in the AssetCompanies, proceeds from the issue of Stapled Securitieswill be allocated as follows (assuming that the RetailApplication Price is the Final Price):– $1,262.8 million will be allocated as Loan Notes and on
lent as debt to Spark Infrastructure Company (Victoria)Pty Limited;
– $230.0 million will be allocated to units in SparkInfrastructure Trust and on lent as debt to SparkInfrastructure Company (Victoria) Pty Limited;
– $302.6 million will be subscribed as equity to SparkInfrastructure Company 1;
– $221.9 million will be subscribed as equity to SparkInfrastructure Company 2; and
– a nominal amount will be subscribed as equity to SparkInfrastructure Company 3;
• the $425.0 million in Senior Debt raised by SparkInfrastructure (Victoria) Pty Limited will be on lent to SparkInfrastructure (SA) Pty Limited and CHEDHA.
Distributions from the Asset Companies are facilitated throughthe payment of interest on the shareholder loans andsubordinated debt, returns of capital plus dividends fromCHEDHA and partnership distributions from ETSA. Thesedistributions may be returned to Holders as interest on the LoanNotes, distributions from Spark Infrastructure Trust anddividends from the Stapled Companies. It is expected that themajority of distributions paid to Holders will be interest on theLoan Notes.
The funding arrangements to effect the acquisition andthe potential payment of distributions are illustrated inFigure 7.2.
The purpose of the structure is to facilitate distributions fromthe Asset Companies via the Stapled Entities to the Holders.Distributions to the Stapled Entities from ETSA and CHEDHAcan only be made from cash flow available to equity, whichrequires that all Senior Debt obligations payable by the AssetCompanies are satisfied first. Refer to Section 11 and Section14 for more information.
Distributions to Holders are expected to be payablehalf yearly in March and September in respect of thepreceding six month periods ending 31 Decemberand 30 June. The first distribution to Holders isexpected to be paid on or near 15 March 2006 forthe period from the Issue Date to 31 December2005. The distribution dates for the StapledSecurities and the Instalment Receipts are the same.
Distributions paid on the Stapled Securities will becomprised of interest income on the Loan Notes,distributions from Spark Infrastructure Trust, returnsof capital on units and dividends from the StapledCompanies. It is expected that the majority of thedistributions to Holders will be made via interest paidon the Loan Notes.
Unless otherwise determined by the ResponsibleEntity, the distributable income of SparkInfrastructure Trust is not less than the taxableincome of Spark Infrastructure Trust. SparkInfrastructure Trust will, unless otherwisedetermined by the Responsible Entity, distribute allof its taxable income in respect of each six monthperiod. Further details of the tax treatment ofdistributions to Holders are found in the TaxationReport in Section 12. Investors should, however,seek their own independent tax advice as to theirown position.
Forecast distributions for Spark Infrastructure arediscussed in Section 1.2.2 and Section 11.
Spark Infrastructure has established a DRP whichwill allow Holders to reinvest their distributions intoSpark Infrastructure. The DRP will not initially beoperative. Holders will be notified once the relevantboards of the Stapled Entities deem it to be in theinterest of Holders that the DRP become operative.
It is Spark Infrastructure’s intention to hedge interest rate riskin respect of any debt raised to a level which the directorsconsider prudent. In relation to Senior Debt raised by SparkInfrastructure, it is the directors’ intention to hedge 95% ofinterest rate risk over a three to five year period.
Investments by Spark Infrastructure in overseas countries mayresult in changes in the Australian dollar value of assets ascurrency exchange rates move. To partially mitigate this risk,Spark Infrastructure intends to adopt risk managementpractices and prudential frameworks that may include:• for acquisitions and divestments, hedging from around the
date of commitment to the date funds are paid or received;and
• hedging the future equity funding component for knownmaterial capital expenditure items, for terms out to 12 months.
Spark Infrastructure will consider on a case by case basis whetherit should hedge either distributions from, or translation risk on, anyoffshore asset in which Spark Infrastructure may invest.
7.9 Spark Infrastructure borrowing policy
Spark Infrastructure intends to raise $425 million in SeniorDebt which has been underwritten by Deutsche Bank andCommonwealth Bank of Australia (CBA). This Senior Debt willsupport the acquisition funding of the 49% interest in the AssetCompanies in connection with the Offer. The amount of thisdebt will be adjusted after completion of the Bookbuild inaccordance with the hedging of interest rates at that time. Theadjustment will be made such that the forecast distributions forthe year ending 31 December 2006 and the expecteddistribution for the year ending 31 December 2007 will not beany lower and the proceeds to CKI will alter if required. Inaddition, CBA has underwritten a $50 million Working CapitalFacility. A summary of the anticipated terms and conditions ofthe debt facilities based on the commitment letter obtained canbe found in Section 14.16. Senior Debt raised by SparkInfrastructure Company (Victoria) Pty Limited ranks above theLoan Notes which form part of the Stapled Securities. SparkInfrastructure is expected to receive an investment grade creditrating following the IPO. Once received, it is the intention ofSpark Infrastructure to retain an investment grade credit ratingin respect of the senior unsecured debt obligations goingforward.
Spark Infrastructure is also exposed to debt at the AssetCompany level as it is a provider of both subordinated debt andan equity investor in the Asset Companies. The Senior Debtarrangements at the Asset Company level are described inmore detail in Section 11.9.
Spark Infrastructure is expected to seek to acquire significantinvestments in electricity and gas transmission and distributionassets, regulated water assets and other infrastructure relatedassets with similar risk/return characteristics. This is expectedto involve borrowing against the assets acquired. The level ofdebt required is likely to reflect the suitability of the underlyingassets for debt financing.
Spark Infrastructure may also consider raising further debt tosupport future acquisitions subject to retaining an investmentgrade credit rating in respect of the relevant debt.
Spark Infrastructure is managed by the Manager.The Responsible Entity will operate the SparkInfrastructure Trust, a registered managed investmentscheme which is one of the Stapled Entities thatcomprise Spark Infrastructure. The Manager and theResponsible Entity are ultimately jointly 50% ownedby CKI and RREEF Infrastructure.
The Responsible Entity, the Stapled Companies,Spark Instalment and the Manager have separateboards of directors. The Responsible Entity, SparkInfrastructure Company 1, Spark InfrastructureCompany 2 and Spark Instalment share a commonboard of directors (which is comprised of two CKIrepresentatives, two RREEF Infrastructurerepresentatives and four independent directors).Stephen Johns is the Chairman and an independentdirector of each of the Responsible Entity, theStapled Companies and Spark Instalment.
Spark Infrastructure Company 3 has a different boardof directors, comprising three board members EricKwan, Hing Lam Kam and Stephen Johns. SparkInfrastructure Company 3 is a Bahamas incorporatedcompany established to hold non-Australianinvestments of Spark Infrastructure. SparkInfrastructure Company 3 does not currently hold anyinvestments.
The Manager’s board of directors comprises two CKIrepresentatives and two RREEF Infrastructurerepresentatives.
8.2 The Manager
8.2.1 Overview
An overview of the Manager appears in Section 7.5.
8.2.2 Manager – board of directors
The Manager’s board of directors (described below inFigure 8.1) comprises two representatives of CKIand two representatives of RREEF Infrastructure.The directors of the Manager are:• Hing Lam Kam;• Eric Kwan;• Danny Latham; and• Shaun Mays.
Danny LathamMApp Fin, BEcNon-executive director• Danny has been a director of RREEF Infrastructure
since 2004. He has over 11 years of experience inthe infrastructure and utilities industry covering theareas of asset acquisition, management, operationsand funds management.
• Previous to his role at RREEF Infrastructure, Dannywas a director and head of infrastructure inAsia/Pacific with AMP Henderson Global Investors,responsible for the development andimplementation of the strategy for theinfrastructure sector in the Asia/Pacific regioncovering a range of projects across energy, power,water, airports and social infrastructure sectors.
• Danny is currently a director of Northern GasNetworks Ltd in the UK, a director and executivecommittee member of the Australian Council forInfrastructure Development and a Fellow of theAustralian Institute of Company Directors. He waspreviously a director of a number of companiesincluding Australia Pacific Airports Corporation, EpicEnergy Group, United Energy Limited, PowerPartnership Pty Ltd (holding company for UnitedEnergy Ltd), Yallourn Energy Ltd, ComindicoHoldings, Energy Partnerships (holding companyfor Multinet and Ikon Energy), Pulse Energy, ArrowSystems Pty Ltd and NSW Rent Buy Pty Ltd.
For profiles of the other directors, refer toSection 8.4.
8.2.3 The Manager – senior management
The senior management of the Manager has expertknowledge and significant experience in utilitiesinfrastructure. In addition to the people outlinedbelow, employees may be seconded from RREEFInfrastructure or CKI as required. The structure of themanagement team is summarised in Figure 8.2.
Joanna Chen has been seconded from CKI and willact as the interim Chief Investment Officer until apermanent appointment is made. The Manager willuse the services of the Deutsche AssetManagement Compliance Division for complianceservices until a Legal and Compliance Manager hasbeen appointed.
Details of the other members of senior management aresummarised below.
Bob Stobbe BBus, FCPA, MAICDChief Executive Officer, Manager• Bob has over 30 years of experience in the utilities
infrastructure sector having held key senior managementpositions in the electricity, water, gas andtelecommunications sectors. He holds a Bachelor ofBusiness degree in Accounting, is a Fellow of CPA Australiaand is a member of The Australian Institute of CompanyDirectors.
• Bob has significant knowledge of the Asset Companiesas he held previous chief financial officer positions at ETSA(1996-2002), CitiPower and Powercor (2003-2004). Bob wasGeneral Manager of ETSA’s retail business immediately priorto the sale of ETSA in 2000, having established the retailoperations in three states following the commencementof the competitive retail market in Australia. He was alsoresponsible for the establishment of ETSA’stelecommunications business.
• Prior to his commencement at ETSA, Bob held numerouskey management roles in the South Australian waterindustry in the areas of financial management, internal auditand strategic planning.
• Bob was the interim head and finance director of CKI’s NorthEngland gas distribution networks (2004-2005) withknowledge of the United Kingdom utilities market.
• Bob was previously director of Northern Gas NetworksPension Scheme, Xoserve (gas market billing agent), ElectricityIndustry Superannuation Board, SA Down Syndrome SocietyBoard and Netherlands Aged Care Services Board.
John Dorrian BA, FCA, MAICDChief Financial Officer, Manager• John has over 20 years of finance and investment industry
experience. He is a Fellow of the Institute of CharteredAccountants and a member of The Australian Institute ofCompany Directors.
• John spent over 11 years with AMP Henderson GlobalInvestors. He was director and head of portfoliomanagement for the Private Capital Division and directlyresponsible for AMP Life Limited’s private capital portfolios.
• John was previously a director and head of AMP Henderson’sInfrastructure and Private Debt Group and was responsible formanagement of infrastructure, fixed income and private debtfunds. He has been involved in acquisitions of airports,electricity distribution and generation and social infrastructure.
• John is currently a director of Australian Council forInfrastructure Development Limited and the largest not forprofit, community housing organisation in New South Wales,St George Community Housing Co-operative Limited. He hasbeen a director of a number of significant companiesincluding the Sugar Australia/New Zealand Sugar CompanyLimited Group, ED & F Man Australia, Australia PacificAirports Corporation, Stanbroke Pastoral Company, UnitedEnergy, Power Partnership Pty Limited, Yallourn Energy,Pulse Energy, Multinet and Ikon Energy Partnerships Groupand Australian Mortgage Securities.
8.3 Responsible Entity
8.3.1 Overview
A responsible entity is a public company licensed to operate aregistered managed investment scheme. Under theCorporations Act, a responsible entity is required to take fullresponsibility for operating its schemes. The rights of investorscannot be fully protected unless a scheme complies with thelaw.
The responsible entity of Spark Infrastructure Trust is obliged tooperate Spark Infrastructure Trust in accordance with the SparkInfrastructure Trust Constitution and the Corporations Act. TheResponsible Entity is ultimately jointly 50% owned by CKI andRREEF Infrastructure.
The Responsible Entity is entitled under the Spark InfrastructureTrust Constitution to a quarterly management fee comprising afixed fee of $25,000 plus its internal costs not otherwisereimbursed. In addition, the Responsible Entity is entitled to bereimbursed out of the assets of Spark Infrastructure Trust for allexpenses incurred by it in relation to the proper performance ofits duties in respect of Spark Infrastructure Trust.
The Responsible Entity may also be required to pay fees to theManager out of Spark Infrastructure Trust for the managementservices provided in accordance with the ManagementAgreement (described further in Section 14). The ResponsibleEntity is jointly and severally responsible for these fees with themembers of Spark Infrastructure. The relevant fees aredescribed in more detail in Section 10.3.
8.3.2 Responsible Entity’s board of directors
CKI and RREEF Infrastructure have each undertaken that whilethey or any of their Related Bodies Corporate remain indirectshareholders in the Responsible Entity they will act to ensurethat the Responsible Entity shares a common board with theStapled Companies (except for Spark Infrastructure Company 3)and that the number of independent directors is equal to thenumber of CKI and RREEF Infrastructure representatives. SeeSections 8.5.3 and 14.3.4(b) for information about how thedirectors of the Stapled Companies are appointed.
The board of directors of the Responsible Entity is depicted inFigure 8.3:
For profiles of the directors refer to Section 8.4.
Figure 8.3 The board of directors of the Responsible Entity
The qualifications and experience of the personswho are directors of the Responsible Entity, theStapled Entities and Spark Instalment (as describedin Sections 8.1 to 8.3) are summarised below:
Stephen JohnsBEc, FCAChairman and independent directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Infrastructure Company 3Spark Instalment• Mr Johns had a long executive career with
Westfield where he held a number of positionsincluding that of finance director from 1985 to2002. He was appointed an executive director ofWestfield Holdings Limited and the Westfield Trustin 1985, and Westfield America Trust upon itslisting in 1996. He became a non executive directorof the three Westfield boards in October 2003.
• Mr Johns is currently a non-executive director ofthe Westfield Group, which resulted from themerger of the three listed entities in July 2004,and has an ongoing advisory role with respect tothe financial affairs of the Westfield Group.
• Mr Johns has been a director of BramblesIndustries Limited and Brambles Industries plcsince August 2004.ei
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Hing Lam Kam Shaun MaysStephen Johns Eric Kwan
• He is also a member of the Council of Governorsof Ascham School and a director of AschamFoundation Limited, and a director of SydneySymphony Orchestra Holdings Pty Limited. Hehas a Bachelor of Economics degree from theUniversity of Sydney and is a Fellow of TheInstitute of Chartered Accountants in Australia.
Hing Lam Kam MBA, BScNon executive directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Infrastructure Company 3Spark Instalment• Hing Lam Kam has been the group managing
director of Cheung Kong Infrastructure HoldingsLimited since its incorporation in May 1996 and
the deputy managing director of Cheung Kong(Holdings) Limited since February 1993. He hasplayed a leading role in developing the CheungKong group’s corporate and strategic direction.
• He is also the president and chief executiveofficer of CK Life Sciences Int’l., (Holdings) Inc.,and an executive director of Hutchison WhampoaLimited and Hongkong Electric Holdings Limited.In Australia, he is a director of CitiPower,Powercor Australia , ETSA, Envestra, AquaTower,Lane Cove Tunnel Holding Company and CrossCity Motorway Holdings.
Eric KwanMBA, CEng, MIEE, MIEAustNon-executive directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Infrastructure Company 3Spark Instalment• Eric Kwan has been an executive director of
Cheung Kong Infrastructure Holdings Limitedsince January 2000.
• He is currently the deputy managing director ofCKI. He joined CKI in 1996 and has been with theCheung Kong Group since February 1994.
• He has considerable experience in thedevelopment, acquisition, financing and
management of large infrastructure projects on aglobal basis.
• He has directorships for CKI’s investments in theUnited Kingdom, Australia and China, includingCitiPower, Powercor Australia, ETSA, Cross CityMotorway Holdings, Lane Cove Tunnel HoldingCompany, Cambridge Water and Northern GasNetworks Holdings in UK.
Shaun MaysBSc (Hons), MSc, MBANon-executive directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Instalment• Mr Mays is a managing director of Deutsche Bank
and the head of RREEF Infrastructure, based inNew York. Mr Mays is responsible for managing
the global RREEF Infrastructure business which is thefiduciary infrastructure investment operation withinDeutsche Asset Management.
• Prior to taking up this position, Mr Mays was chief executiveofficer of Deutsche Asset Management (Australia) Limited.Mr Mays has more than 18 years’ experience in the fundsmanagement industry in both executive management andinvestment positions in Australia and the United Kingdom.Prior to joining Deutsche Asset Management, Mr Mays wasManaging Director of Australia’s Westpac Financial Servicesgroup. Also in Australia, he was chief investment officer ofCommonwealth Financial Services after holding the positionof managing director and chief investment officer at MercuryAsset Management, where he also served on the board ofMercury Asset Management UK plc.
• He has made significant contributions to industryassociations and Federal Government advisory boardsthroughout his career, including authoring the AustralianFederal Government report “Corporate Sustainability: anInvestor Perspective (the Mays’ Report)” in 2003.
• Mr Mays is currently a director of a number of DeutscheAsset Management entities, in addition to DB RREEF Trust,one of the largest listed real estate investment trusts inAustralia.
Cheryl Bart Peter St GeorgeBrian Scullin Don Morley
• He was previously a vice chairman of the Investment andFinancial Services Association (IFSA) and remains on theirnominations committee.
• Brian is a part-time member of the Federal Government’sFinancial Reporting Council (FRC) and a Director of StateSuper Financial Services.
Don MorleyBSc, MBA, FAustIMMIndependent directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Instalment• Don Morley is the current Chairman of Alumina Ltd (since
2002) and an Independent Director of Iluka Resources Ltd(since 2002).
• He was previously a director of Finance at WMC Limitedwith over 30 years of service at the company where he wasinvolved in the development of the Mt Keith Nickeloperation, Olympic Dam and Queensland Fertilizer and theevolution of WMC’s strategic alliance with Alcoa.
Brian ScullinBEcNon-executive directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Instalment• Following a career in Government and politics in Canberra,
Brian Scullin was appointed the inaugural executive directorof the Association of Superannuation Funds of Australia(ASFA) in 1987.
• He joined Bankers Trust in Australia in 1993 and held anumber of senior positions, with responsibilities includingmarketing, technology, legal, tax and compliance, securityservices, investor services and margin lending. He wasposted to Tokyo and became the president of Japan BankersTrust in 1997. In 1999 he was appointed chief executiveofficer – Asia/Pacific for Deutsche Asset Management.
• Brian retired from full-time employment in 2002 but remainsactively involved in the Australian funds managementindustry through his role as a non executive director ofDeutsche Asset Management and associated companies.
Cheryl BartBCom, LLBIndependent directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Instalment• Cheryl Bart is a lawyer and non-executive director on the
board of ETSA since 1995.• She has significant asset level knowledge and utilities
industry experience and has been a member of various auditand legal committees for the company.
• Current directorship positions include EconomicDevelopment Board (SA), Global Properties Limited, SouthAustralian Film Corporation, Adelaide International FilmFestival, Shaw of Australia, Defence Industry AdvisoryBoard, Electro Optic Systems Holdings Limited and AlcoholEducation and Rehabilitation Foundation.
• Previous directorships include Sydney Ports Corporation,Australian Sports Foundation and Information EconomyAdvisory Board.
CA (SA), MBAIndependent directorResponsible EntitySpark Infrastructure Company 1Spark Infrastructure Company 2Spark Instalment• Peter St George has been director of First
Quantum Minerals Limited (a Canadian companylisted in Toronto and London) since 2003 and adirector of SFE Corporation Limited from 2000.He has also been Chairman of the Walter TurnbullGroup (Chartered Accountants) since 2002.
• He was CEO/Co CEO of Salomon Smith BarneyAustralia Limited from 1998 to 2001. He was CEOof NatWest Markets Australia from 1995 until itsacquisition by Salomon Smith Barney in 1998.
• Prior to that, he worked in London at senior levelsin investment banking, initially with Hill Samuel &Co Limited (to 1986) and then NatWest MarketsGroup, most recently as a member of theManagement Committee and Head of theCorporate Finance Division until relocating toAustralia in 1995.
• Peter qualified as a Chartered Accountant inSouth Africa.
8.5 Corporate governance
8.5.1 Corporate governance framework for Spark
Infrastructure
The Corporations Act, the ASX Listing Rules, theConstituent Documents, the arrangements betweenthe Manager, CKI, HKE, RREEF Infrastructure andDeutsche Bank and the general law regulate theworkings of Spark Infrastructure and the essentialpractices, responsibilities and duties of the StapledEntities and their officers.
The directors and other officers of the StapledEntities must exercise their functions diligently and inthe best interests of Holders. Spark Infrastructureand its directors and other officers manage theassets of Spark Infrastructure in accordance with theConstituent Documents and the Corporations Actand subject to the Management Agreement.
The Manager, on behalf of Spark Infrastructure, mustalso undertake the administrative functions of SparkInfrastructure including preparation of financialstatements, preparation of notices and reports tomembers and monitoring of registry services.
8.5.2 ASX Corporate Governance Standards
Listed entities are required to disclose in their annualreports the extent of their compliance with thePrinciples of Good Corporate Governance and BestPractice Recommendations (Standards), released bythe ASX Corporate Governance Council and toidentify any Standard they have not followed and toexplain why they have not adopted the Standard ifthey consider it inappropriate in their particularcircumstances.
The Standards encompass matters such as boardcomposition, roles and responsibilities of board andmanagement and compliance procedures. TheStandards are designed to maximise corporateperformance and accountability in the interests ofinvestors and the broader economy.
Spark Infrastructure is committed to thedevelopment of a set of corporate governancepolicies, having regard to the Standards. SparkInfrastructure’s policies have been adopted to reflectSpark Infrastructure’s structure and relationship withthe Manager. Spark Infrastructure will include on itswebsite full details of its corporate governanceregime and a corporate governance statement willbe included in its next annual report.
A summary description of Spark Infrastructure’s maincorporate governance practices is set out below.
8.5.3 Boards of directors
Board composition, director appointment andshareholder representation on the boardsThe composition of the board of each of theResponsible Entity, Spark Infrastructure Company 1,Spark Infrastructure Company 2 and SparkInstalment is explained in Sections 8.1 to 8.3 whilstthe board for the Manager is set out in Figure 8.2.
The interim board for Spark Infrastructure Company 3comprises Stephen Johns, Eric Kwan and Hing LamKam. The board composition of Spark InfrastructureCompany 3 will be reviewed when a decision ismade to acquire an offshore asset.
CKI and RREEF Infrastructure have the right toappoint directors to the boards of both theResponsible Entity and the Manager. The Managerhas a special voting share (the Special Voting
Share) in each of the Stapled Companies, whichentitles the Manager to appoint and remove one halfof the maximum number of directors to each of theirboards. Holders will elect and remove the remainingdirectors. Further details of the Special Voting Shareare set out in Section 14.
The company secretary of each Stapled Entity andthe Manager will be Ian Thompson. Mr Thompson isthe current Company Secretary at Deutsche AustraliaLimited. This is an interim appointment.
Role and responsibilities of the boardsResponsibility for the performance and governance ofSpark Infrastructure rests with the boards of theResponsible Entity and Stapled Companies. Eachboard has adopted a formal charter of the board’sfunctions and the matters delegated to committees orthe Manager, which are substantially the same foreach entity. A summary of the role and responsibilitiesof these boards include, but are not limited to:• overseeing the activities of Spark Infrastructure,
including its control and accountability systems;• contributing to the development of, and approving
corporate objective for Spark Infrastructure and reviewingand evaluating these strategies from time to time;
• monitoring the performance of the Manager as manager andits implementation of strategy;
• reviewing the performance of the Chief Executive Officer ofthe Manager at least annually and advising the Manager ofthe results of that review;
• considering and approving any investment proposals for theacquisition or disposal of an asset or investment by SparkInfrastructure;
• considering, approving and monitoring capital allocationsand capital management by Spark Infrastructure;
• monitoring financial performance including approval of theannual and half-yearly financial reports;
• appointing and, where appropriate, removing the companysecretary of a Stapled Entity;
• overseeing the operation of Spark Infrastructure’s system ofinternal controls and risk management and compliance withkey policies, laws and regulations;
• reporting to Holders;• implementing corporate governance practices appropriate
to Spark Infrastructure and reviewing the operation ofthose practices;
• overseeing Spark Infrastructure’s policies and practices;• approving the Manager’s fees and costs and monitoring the
calculation of the Manager’s fees; and• approving any third party fees.
IndependenceStephen Johns is the chairman of each of the ResponsibleEntity, Spark Infrastructure Company 1, Spark InfrastructureCompany 2, Spark Infrastructure Company 3 and SparkInstalment and is independent.
Half of the members of the boards of the Responsible Entity,Spark Infrastructure Company 1 and Spark InfrastructureCompany 2 are independent directors. Although this is notconsistent with the Standards released by ASX CorporateGovernance Council which require a majority of independentdirectors, it is considered appropriate given that half of thedirectors are nominated by CKI or RREEF Infrastructure, whichreflects the interests of CKI and RREEF Infrastructure in theManager and the Responsible Entity. Board decisions requirethe approval of a majority of directors.
Section 8.6 provides details on how conflicts of interest will bemanaged by Spark Infrastructure. Separately, CKI and RREEFInfrastructure have each undertaken that while they or anyRelated Bodies Corporate remain indirect shareholders in theResponsible Entity they will act to ensure that their respectiverepresentatives on the boards of the Responsible Entity and theStapled Companies do not participate in any consideration ordecision relating to the exercise of rights under theManagement Agreement (including its termination).
Director remunerationThe directors will be remunerated in line with market practice.The total remuneration of non-executive directors from theStapled Entities in any year shall not be more than $2 million oras otherwise approved by Holders.
8.5.4 Board Committees
The boards will establish two committees in accordance withthe Constituent Documents. These committees are the:• Audit and Risk Management Committee in respect of all the
Stapled Entities; and• Compliance Committee in respect of Spark Infrastructure
Trust.
The functions of the nomination and remuneration committeesrecommended in the Standards will, for the time being, beperformed by each board as a whole.
Compliance CommitteeThe Responsible Entity has lodged a Compliance Plan for SparkInfrastructure Trust with ASIC. The Compliance Plan sets outprocedures to ensure compliance with the Corporations Act andthe Spark Infrastructure Trust Constitution.
The Responsible Entity has appointed a Compliance Committeeto monitor the Responsible Entity’s compliance with theCompliance Plan, regularly assess the adequacy of that plan,and report back on any breach to the Responsible Entity and, ifnecessary, report any significant breach to ASIC. A majority ofthe members constituting the Compliance Committee will beexternal to the Responsible Entity.
The initial members of the Compliance Committee are BrianScullin who will chair the committee, Andy Esteban and PeterCarrigy-Ryan. Andy Esteban and Peter Carrigy-Ryan are externalto the Responsible Entity.
Audit and Risk Management CommitteeSpark Infrastructure has established an Audit and RiskManagement Committee to assist the boards in fulfilling theirresponsibility to ensure that appropriate processes are in placeto support the management of risk and reporting of financialresults throughout the operations of Spark Infrastructure. Theresponsibilities of the Audit and Risk Management Committeewill include reporting to the boards of Spark Infrastructure onthe:
• performance and independence of external auditors;• financial and accounting reporting systems, practices and
policies of Spark Infrastructure;• compliance by Spark Infrastructure and the processes in
place to ensure Spark Infrastructure complies with itsvarious regulatory and legal requirements; and
• risk management of Spark Infrastructure, including theprocesses in place to identify, manage and mitigate any risksarising from Spark Infrastructure’s operations.
The boards of Spark Infrastructure will elect members to andwill review the membership of the Audit and Risk ManagementCommittee as considered appropriate. The majority of membersof the Audit and Risk Management Committee will beindependent directors. Further, at least one member will haverelevant financial expertise while the remaining members will atleast be familiar with the accounting practices utilised.
The initial members will consist of Don Morley (chairman),Peter St George, Cheryl Bart, Eric Kwan and Shaun Mays.The expertise and experience of these directors is outlinedin Section 8.4.
The external auditors will report to the Audit and RiskManagement Committee. In respect of the auditengagement, the Audit and Risk ManagementCommittee will approve at least annually, the scopeof the external auditor’s audit work and the amountof the corresponding audit fees. From time to time,the external auditor may also be requested toprovide additional services to Spark Infrastructure. Toavoid any potential conflicts of interest, the externalauditors will not be engaged to provide any serviceswhich would impair their independence in respect ofSpark Infrastructure, in accordance with the auditorindependence provisions of the Corporations Act andProfessional Statement F.1 “ProfessionalIndependence” (jointly issued by the ICAA and CPAAustralia). In particular, the external auditors will not beengaged to provide the following:• services involving the external auditor acting in a
management role;• information technology consulting services in
To monitor compliance with the above policy, theexternal auditors will be required to regularly submitto the Audit and Risk Management Committee awritten outline of all fees paid by Spark Infrastructureto the external auditor, together with a description ofthe corresponding services.
8.5.6 Policies
It is intended that Spark Infrastructure will aim toadopt best practice policies and codes of practice.These will include a:• Trading Policy;• Disclosure and Holder Communication Policy;• Risk Management Policy;• Code of Conduct; and• Related Party Protocols.
These policies are expected to be further developed.Any changes or update to these policies will beprovided on Spark Infrastructure’s website.
Trading PolicyThe Trading Policy will apply to the directors andemployees of Spark Infrastructure and the Manager.
In summary, the purchase and sale of the StapledSecurities or Instalment Receipts by directors andemployees of the Spark Infrastructure and theManager will generally only be permitted outsideblackout periods in accordance with the proceduresset out in the policy.
Disclosure and Holder Communication PolicyThe Manager is responsible for communications withASX.
The policy will set out procedures to ensurecompliance with the continuous disclosurerequirements of the ASX Listing Rules, and theprocedures to oversee and co-ordinate informationdisclosure to ASX, analysts, brokers, Holders,the media and the public.
Risk Management PolicyRisk management is a key focus area for SparkInfrastructure. The policy is intended to ensure thatrisks in the Spark Infrastructure business areappropriately identified, measured and managed.
Code of ConductIt is envisaged that the Code of Conduct will apply tothe boards of the Stapled Entities and the Manager.
The Code of Conduct will require that at all times therelevant Stapled Entity acts with the utmost integrityand objectivity in compliance with the letter and spiritof the law and Spark Infrastructure’s policies. TheCode of Conduct will govern matters such as theconflict of interest of directors, preventing directorsand executives of the Manager from takingadvantage of corporate opportunities of SparkInfrastructure for personal gain, confidential and fairdealing and other ethical matters. The Code ofConduct is supplemented in relation to conflicts bythe Related Party Protocols.
Related Party ProtocolsAn outline of the Related Party Protocols is set out inSection 8.6.2.
8.6 Related parties
8.6.1 Overview
There are a number of relationships that existbetween the Asset Companies and SparkInfrastructure, CKI, RREEF Infrastructure andDeutsche Bank. The main relationships are:• CKI’s holding of Stapled Securities of Spark
Infrastructure and shareholding in the AssetCompanies;
• CKI’s holding in HKE which also has ashareholding in the Asset Companies;
• the Manager, which provides managementservices to the Stapled Entities, and theResponsible Entity, are ultimately wholly ownedby CKI and RREEF Infrastructure;
• the Manager has entered into Technical ServicesAgreements with each of CKI and RREEFInfrastructure;
• Spark Infrastructure has entered into a FinancialServices Agreement with Deutsche Bank; and
• the arrangements in relation to referral of newinvestment opportunities to Spark Infrastructure.
8.6.2 Related Party Protocols
Spark Infrastructure has adopted Related PartyProtocols designed to ensure that, for all transactionsand service arrangements between SparkInfrastructure, the Manager, CKI, RREEF
Infrastructure and Deutsche Bank (and related parties), theinterests of Holders are safeguarded and any conflicts ofinterest which may arise are handled appropriately. In particular,under the Related Party Protocols, related party transactionsmust be on arm’s length commercial terms and all transactionsand advisory engagements involving related parties must beapproved by the relevant boards of Spark Infrastructure (withoutany director representative of the related party involvedparticipating in the final discussions regarding the engagementor transaction or voting on the particular engagement ortransaction involving the related party).
While Spark Infrastructure will have strong relationshipswith CKI, RREEF Infrastructure and Deutsche Bank, strictprocedures are in place between Spark Infrastructure and CKI,RREEF Infrastructure and Deutsche Bank to appropriatelymanage confidential information.
8.6.3 Technical Services Agreements with CKI and DAML
The Manager has entered into separate Technical ServicesAgreements with each of CKI and DAML, each of which hasagreed to provide certain services to support the managementof Spark Infrastructure. These agreements are described inmore detail in Section 14.
8.6.4 Financial Services Agreement with Deutsche Bank
The Stapled Entities have entered into a Financial ServicesAgreement with Deutsche Bank, under which Deutsche Bankwill provide financial advisory and investment banking services,including:• mergers, acquisition and divestment advice;• capital and debt advisory work; and• debt, equity or equity related raisings.
Under the Financial Services Agreement, no ongoing fees willbe paid but fees will be paid for services provided in relation tospecific transactions. See Section 14 for a discussion of theFinancial Services Agreement.
8.6.5 Asset Companies: shareholding and board
representation
Spark Infrastructure will own 49% of the Asset Companies.The remaining 51% not held by Spark Infrastructure will beowned by CKI and HKE. CKI and HKE both specialise in utilityinfrastructure investments and bring extensive infrastructureand utility experience, both within Australia and globally, to theoperations of the Asset Companies.
The relationship between Spark Infrastructure, CKI and HKE isgoverned by the Asset Company Agreements.
Amongst other things, these agreements state that the boardsof directors which manage the Asset Companies will containnine members, of which:• four will be representatives of Spark Infrastructure (one of
whom will be a representative of CKI);• four will be representatives of HKE; and• one will be the Chief Executive Officer of the relevant Asset
Company.
This is summarised in Figure 8.4 below.
See Section 14 for further information on the Asset CompanyAgreements.
Spark Infrastructure has been established to investin the utility infrastructure sector both in Australiaand internationally. It is seeded by a 49% interestin CitiPower, Powercor and ETSA.
The utilities infrastructure sector includes assetsor entities active in the transmission and distributionof gas, electricity or water and other sectors withsimilar attributes broadly accepted as part of theutilities infrastructure sector.
Over time, Spark Infrastructure intends toaccumulate a portfolio of international utilityinfrastructure assets, with the objective ofdiversifying the future asset portfolio within thesector by region and regulatory regime.
Spark Infrastructure will seek to acquire significantinterests in assets, so as to provide SparkInfrastructure with a level of influence over keystrategic, operating and commercial decisionsaffecting its investments.
Spark Infrastructure aims to optimise Holders’ returns.
9.2 Investment policy
In addition to investment in the utilities infrastructuresector, Spark Infrastructure may invest in other assetsor entities that have similar risk/return characteristicsto the utilities infrastructure sector but only if, at thetime such an investment is made, it is done so withthe unanimous approval of the relevant boards ofSpark Infrastructure and where such investments donot represent in aggregate more than 15% of SparkInfrastructure’s market capitalisation at the time ofapproval.
Spark Infrastructure will seek to invest in OECDcountries and countries which have comparablesovereign credit ratings or level of economicdevelopment.
9.3 Investment criteria
It is intended that investment opportunities willbe benchmarked against defined criteria including:• predictable and stable long term cash flows;• revenue growth potential;• relatively high barriers to entry;• availability of a significant interest or shareholding;• capable operational management; and• a risk/return profile complementary to the existing
Spark Infrastructure investment portfolio.
9.4 Investment approach
Spark Infrastructure’s approach to acquiring,reviewing and managing investment opportunitiesis discussed below.
9.4.1 Partnering options
Spark Infrastructure is well placed to partner withCKI and/or RREEF Infrastructure as co-investors toacquire assets or investments jointly. This facilitatesrisk allocation and potential participation in largeracquisitions where returns may be more favourable.Partnership opportunities with other third parties mayalso arise and such opportunities are required to beprovided to the Manager.
9.4.2 Investment opportunities
Spark Infrastructure will seek investmentopportunities primarily through the following sources:• opportunities identified by the Manager;• opportunities identified by and referred from CKI
and RREEF Infrastructure. CKI and RREEFInfrastructure intend to refer investmentopportunities to Spark Infrastructure on a bestendeavours basis (subject to certain conditionsdescribed in Section 9.5 below); and
• opportunities identified by and referred fromthird parties and such opportunities are requiredto be provided to the Manager.
9.4.3 Investment analysis
Each opportunity identified will be subject to an initialreview by the Manager to determine whether thepotential investment is consistent with SparkInfrastructure’s investment policy. The Managerwill develop and present investment proposals to eachof Spark Infrastructure’s boards. The Manager will alsoprepare and present to the boards investmentproposals based on opportunities referred to it orSpark Infrastructure by CKI, RREEF Infrastructure orany other third party. Each proposal will include theManager’s recommendations on whether or not itshould pursue the proposal. However, SparkInfrastructure has no obligation to accept anyproposal.
9.4.4 Investment due diligence
It is intended that potential investment opportunitieswill be subject to a detailed due diligence processwhich may include but not be limited to the followingreview items:• development of a business plan – this involves
developing strategies for growing the business,reducing costs, managing capital expenditure andoptimising the funding and capital structure of thetarget acquisition;
• asset and market due diligence – undertake areview of all available information in relation tothe potential investment or acquisition that mayidentify material risks and validate assumptionsunderlying the business plan. This is expected toinvolve a review of key risk issues by either theManager or qualified third parties in the areas ofaccounting and tax, legal, technical, insuranceand other specific asset level due diligenceas appropriate;
• valuation – undertake detailed financialassessment and financial modelling of the assetto determine fair value of the investment oracquisition opportunity;
• tax and accounting – a separate tax andaccounting review is expected to be undertakenby Spark Infrastructure for any investment oracquisition to measure the impact on SparkInfrastructure; and
• sensitivity analysis – involves using the businessand financial model to assess the impact ofoperating, financing and risk variables onvaluations, the robustness of cash flows and theability to support a yield based return to SparkInfrastructure.
Spark Infrastructure aims to develop innovative investmentand capital structures to provide incremental returns to Holderswhile managing risks.
Spark Infrastructure has engaged the Manager to monitor itsinvestments and consider the use of capital management toolsto potentially enhance returns to Holders.
9.5 Growth by acquisition
Spark Infrastructure will look to acquisition growth domesticallyand offshore.
Spark Infrastructure will seek to invest in OECD countries andcountries which have comparable sovereign credit ratings orlevel of economic development.
The focus for initial opportunities will be on assets located inAustralia and New Zealand, the United Kingdom, Europe andNorth America.
9.5.1 Australia and New Zealand
In Australia and New Zealand, Spark Infrastructure will seekacquisition opportunities that may arise from the followingfactors:• industry consolidation – acquisition opportunities are
expected to arise from re-aggregation (vertical integration)and consolidation (horizontal integration) reflecting theexpectation of utilities seeking to focus on either thecompetitive or regulated segments of the energy marketand/or critical mass;
• secondary trade sales – during industry privatisation inthe late 1990s, U.S., European and Asian utilities wereactive in accumulating electricity assets in this region.A number of these participants have exited, and if thistrend continues, secondary trade sale opportunities areexpected to arise; and
• sector disaggregation – potential privatisation opportunitiesfrom the sale of utility assets currently owned byGovernment authorities in Australia and New Zealand.
9.5.2 UK and Europe
In Europe, current acquisition trends in the electricity industrycan be characterised by the following factors:• Electricity and gas and industry convergence in the UK –
incumbents in the electricity and gas industries areconsolidating via horizontal integration and verticalintegration. Major players are also converging intomulti-utilities and related infrastructure as the electricityand gas industries evolve and a number of acquisitionopportunities are expected to arise; and
• Privatisation and disaggregation in the Netherlands
and Belgium – the Dutch Government has initiated itsprivatisation process to segment regulated and unregulatedactivities. Minority privatisation of the distribution grids isalso expected to occur, presenting opportunities to takestrategic stakes before expected consolidation amongstregulated businesses. In Belgium, privatisation activitiesin this region are also expected to occur.
9.5.3 North America
Major consolidation is expected in North America in orderto further drive operating performance efficiencies and meetregulatory risk and rising capital and environmental expenditure.Further privatisations and deregulations are expected in themedium to longer term, driven by market improvements andthe need for new generation.
9.6 Referrals by CKI and RREEF Infrastructure
CKI and RREEF Infrastructure intend, on a best endeavoursbasis, to refer global investment opportunities in the utilitiesinfrastructure sector to Spark Infrastructure.
Any referrals will be subject to the following criteria:
• CKI and RREEF Infrastructure referrals will occur where CKI/RREEF Infrastructure (as applicable) considers that aparticular investment opportunity matches the investmentprofile and strategies of Spark Infrastructure and providedthat CKI/RREEF Infrastructure does not consider that such areferral would be inconsistent with the business objectivesof CKI and RREEF Infrastructure or their related parties orwould be inconsistent with the duties of any of those partiesto their clients or funds associated with their business; and
• Spark Infrastructure recognises other potential competingengagements for CKI and RREEF Infrastructure (includingDeutsche Bank) in underwriting, acting as principal, advisoryand arranging roles in connection with these types ofinvestment opportunities.
Spark Infrastructure has no obligation to acceptinvestment opportunities from CKI, RREEF Infrastructure or anyother party.
Any referrals will be subject to Related Party Protocols whichare referred to in Section 8.6.2.
These referral principles apply to each of CKI and RREEFInfrastructure only while they respectively hold at least a 50%interest in the Manager.
CKI and RREEF Infrastructure have a strong global presenceand have a track record of co-investment. Previously, they haveteamed together on a number of acquisitions, including theNorth England gas distribution networks.
CKI is an experienced utility and infrastructure asset ownerand operator, owning and managing over $33 billion of utilityand infrastructure assets globally. RREEF Infrastructure is aglobal investment manager with significant asset and fundsmanagement expertise. RREEF Infrastructure is theinfrastructure investment business of Deutsche AssetManagement. Globally, Deutsche Asset Management has over$875 billion of funds under management. The complementaryexpertise and skill sets of CKI and RREEF Infrastructure areexpected to enhance the growth of Spark Infrastructure.
9.7 Investment considerations
Spark Infrastructure does not have regard to labour standardsor environment, social or ethical considerations in the selection,retention or realisation of investments.
The purpose of this Section is to outline thecategories of fees that are payable by SparkInfrastructure to the Responsible Entity, the Manager,CKI, Deutsche Bank, the Joint Lead Managers andother third parties in relation to the Offer and theongoing management of Spark Infrastructure.
10.2 Fees and expenses of the Offer
The main fees and expenses payable by SparkInfrastructure in connection with the Offer aresummarised in Table 10.1.
ten
fees
and
exp
ense
s
Table 10.1 Fees and expenses of the Offer
1 Assuming a Final Price of $2.00.
In cash from gross equityproceeds of Offer. This is paidwithin 14 days post listing ofSpark Infrastructure
Various third partiesincluding ASX, legaladvisors, accountingadvisors, independentexperts, credit ratingagencies, printers andother providers ofprofessional services
Approximately $14.2 millionOther Offer
costs
In cash from gross proceedsraised by Spark InfrastructureSenior Debt
Deutsche Bank,CommonwealthBank of Australiaand a syndicate offinanciers
Not more than $2 millionof costs pursuant to theunderwriting of the SeniorDebt raised by SparkInfrastructure
Senior Debt
fees and
expenses
In cash from gross equityproceeds of Offer. This is paidon Allotment
Joint Lead Managers2.2875% of gross equityproceeds raised by the Offer.This equates to a payment of$41.6 million. The Joint LeadManagers will pay anycommissions and feespayable to any Co-Manager,Broker or Instalment Creditor
Equity selling
fee
In cash from gross equityproceeds of Offer. This is paidon Allotment
Deutsche Bank0.2125% of gross equityproceeds raised by the Offer.This equates to $3.9 million
Equity
management
fee
In cash from gross equityproceeds of Offer. This is paidon Allotment
Deutsche Bank0.5% of the gross equityproceeds raised by the Offer.This equates to a payment of$9.1 million
The main ongoing fees and expenses payable by SparkInfrastructure are as follows:
107
The Base Fee is calculated andpayable quarterly. The Base Feebecomes due and payable in cashwithin 14 business days after theManager notifies the StapledEntities of the amount due inrespect of the Base Fee.
The Stapled Entities are jointly andseverally liable for the Base Feedue to the Manager. However theStapled Entities may from time totime agree with the Manager thebasis on which such fees are tobe borne between the StapledEntities.
The Management Agreement issummarised in Section 14.
A hypothetical example of thecalculation of the Base Fee is setout at the end of Section 10.6.
See Section 10.4 for anexplanation of the calculation ofthe Base Fee while InstalmentReceipts are quoted on ASX.
A quarterly fee of 0.5% per annum of EnterpriseValue up to and including $2.443 billion plus 1.0%per annum of any amount by which EnterpriseValue exceeds $2.443 billion.
N = the average number of Stapled Securities onissue during the last 15 Trading Days in therelevant quarter
VWP = the volume weighted average trading priceof all Stapled Securities traded on ASX over those15 Trading Days
EB = the aggregate outstanding amount of anyexternal borrowing of the Stapled Entities and theirwholly-owned companies, trusts or other entities(excluding any borrowing of an entity in anoperating group in which directly or indirectly anyof the Stapled Entities invests (including by wayof loan)).
OI = the total value of any equity, debt or hybridinstruments issued by the Stapled Entities andtheir wholly-owned companies, trusts or otherentities (but excluding any instrument issued byan entity in an operating group in which, directlyor indirectly, any of the Stapled Entities invests(including by way of loan))
EB and OI are to be determined at the end ofthe 31 March, 30 June, 30 September and31 December (except in the case of the firstquarter which will be 31 March 2006 and the lastquarter which will be the distribution date ontermination or winding up of the Stapled Entity)
The first Performance Fee willbe calculated from the date oflisting on ASX to 30 June 2006.The Performance Fee insubsequent periods will becalculated half yearly and payablewithin 14 days of the Managernotifying the Stapled Entities ofthe amount due.
The Stapled Entities and theManager must consult on eachoccasion a Performance Feebecomes payable with a view todetermining whether some or allof the amount to be paid shouldbe satisfied by the issue ofStapled Securities. To the extentnot satisfied by the issue ofStapled Securities thePerformance Fee is payable incash. Any agreement to issueStapled Securities to satisfy thePerformance Fee must beconsistent with the CorporationsAct and ASX Listing Rules.
A Performance Fee will only bepayable in respect of a particularperiod if the Return exceeds theBenchmark Return for that Period.
The Performance Fee is to be notless than zero. If the Return is lessthan the Benchmark Return in anyPeriod, the amount of the deficit iscarried forward and taken intoaccount in calculating whether theReturn of the Stapled Securitiesexceeds the Benchmark Returnfor subsequent Periods.
The Stapled Entities are jointlyand severally liable for thePerformance Fee due to theManager. However the StapledEntities may from time to timeagree with the Manager the basison which such fees are to beborne between the StapledEntities.
Hypothetical examples of thecalculation of the PerformanceFee are set out at the end ofSection 10.6.
See Section 10.4 for anexplanation of the calculation ofthe Performance Fee whileInstalment Receipts are quotedon ASX.
The Performance Fee is an incentive fee whichmay be payable under the Management Agreementdepending on the performance of returns on theStapled Securities in each half year period.
The Performance Fee is calculated half yearlyas follows:
Performance Fee = 20% x (Return minusBenchmark Return):
where:
B – CR = A x _____
C
and
D – EBR = A x _____
E
R = Return for the Half Financial Year
BR = Benchmark Return of the Half Financial Year
A = NHY * VWPHY
where
NHY = the average number of Stapled Securitieson issue during the last 15 Trading Days in theprevious Half Financial Year
VWPHY = the volume weighted average tradingprice of all Stapled Securities traded on ASXduring that 15 Trading Days period
or
for the first Half Financial Year, the number ofStapled Securities on issue on listing multipliedby the issue price of the Stapled Securities.
B = the arithmetic average of the Daily ClosingAccumulation Indices for the Stapled Securities overthe last 15 Trading Days of the Half Financial Year.
C = the arithmetic average of the Daily ClosingAccumulation Indices for the Stapled Securitiesover the last 15 Trading Days of the previous HalfFinancial Year;
or
for the first Half Financial Year, the initialaccumulation index figure ascribed to the StapledSecurities by an independent party before the firsttrade on the date of listing.
where:
Daily Closing Accumulation Indices for theStapled Securities = indices calculated for theStapled Securities using the same methodologyused to calculate the Accumulation Index
Accumulation Index = S&P/ASX 200 IndustrialsAccumulation Index
D = the arithmetic average of the AccumulationIndex over the last 15 Trading Days of the HalfFinancial Year.
E = the arithmetic average of the AccumulationIndex over the last 15 Trading Days of theprevious Half Financial Year
or
for the first Half Financial Year, immediately priorto listing.
Performance
Fee
Management Fees – payable to the Manager continued
These fees are payable from timeto time on demand from the assetsof Spark Infrastructure Trust.
The Note Trust Deed issummarised in Section 14.3.7.
The Note Trustee is entitled to be paid orreimbursed for the reasonable costs, charges andexpenses (other than of an overhead oradministrative nature) incurred by the NoteTrustee, its agent, attorney or other delegateappointed pursuant to the Note Trust Deed, and toreceive additional remuneration at reasonablehourly rates if enforcement action is taken.
Reimbursement
of reasonable
costs incurred
by the Note
Trustee in
performing
duties
These fees are payable semiannually in arrears from the assetsof Spark Infrastructure Trust.
The Note Trustee is entitled under the Note TrustDeed to be paid an annual fee of $60,000 for thefirst $1 billion face value of the Loan Notes, then0.005% of the face value of the Loan Notes over$1 billion. This fee will be adjusted to reflectincreases in the consumer price index each fiveyears starting from the issue Date.
Note Trustee
remuneration
Note Trustee Fees
The fee payable to Deutsche Bankfor the provision of fundraisingservices will be agreed betweenthe Stapled Entities and DeutscheBank for each transaction.
The fees payable to Deutsche Bank for theprovision of fundraising services will be agreedbetween the Stapled Entities and Deutsche Bankfor each transaction.
The fees charged must be at market rates oncommercial, arm’s length terms.
Fees for
Fundraising
Assignments
The fee payable to Deutsche Bankfor the provision of advisoryservices will be agreed betweenthe Stapled Entities and DeutscheBank for each transaction. Theagreement also provides forreimbursement of costs.
The fees payable to Deutsche Bank for theprovision of advisory services will be agreedbetween the Stapled Entities and Deutsche Bankfor each transaction.
Fees for
Advisory
Assignments
Financial services fees
These expenses are payable fromtime to time on demand from theassets of Spark Infrastructure Trust.
The Spark Infrastructure TrustConstitution is summarised inSections 14.3.1 and 14.3.2.
Subject to the Corporations Act, the ResponsibleEntity is entitled to be reimbursed out of theassets of Spark Infrastructure Trust for allexpenses incurred by it in relation to the properperformance of its duties in respect of SparkInfrastructure Trust.
Reimbursement
of expenses
incurred by the
Responsible
Entity in
performing
duties
The management fees andreimbursements are payable fromtime to time on demand from theassets of Spark Infrastructure Trust.
The Spark Infrastructure TrustConstitution is summarised inSections 14.3.1 and 14.3.2.
The Responsible Entity is entitled, under the SparkInfrastructure Trust Constitution to be paid aquarterly management fee comprising a fixedamount of $25,000 plus its internal costs nototherwise reimbursed. These expenses includeany fees paid to its directors, any insurancepremiums covering its directors and all otheroverheads incurred by the Responsible Entity inproviding its services.
During the period on and from listing until theInstalment Receipts permanently cease to be quotedon the ASX the Base Fee and the Performance Feeare to be calculated on the following basis:• the number of Stapled Securities on issue on a
relevant day includes both those StapledSecurities that are represented by InstalmentReceipts and those Stapled Securities that are notrepresented by Instalment Receipts (including, toavoid doubt, those Stapled Securities issued toCKI as contemplated in this Offer Document); and
• any actual trading in Stapled Securities is ignoredand instead Stapled Securities are taken for allpurposes under this agreement to have traded onASX on relevant Trading Days:– in the volumes at which Instalment Receipts
trade; and– at a price equal to the aggregate of the price at
which Instalment Receipts trade and the FinalInstalment.
To avoid doubt, this includes for the purpose ofcalculating any accumulation indices for theStapled Securities.
The definitions of “Benchmark Return”, “MarketValue of the Stapled Securities” (referred to above as‘MV’) and “Return” are to be applied on the basisdescribed above during the Instalment Receipttrading period and also to the extent that theiroperation in a subsequent period refers back toTrading Days that fell within the Instalment Receipttrading period.
10.5 GST
If the Manager or a Stapled Entity is or becomesliable to pay GST on fees not described in this OfferDocument as GST inclusive, they are entitled to bereimbursed out of the assets of Spark InfrastructureTrust or working capital of the Stapled Companies(as applicable) for the amount of GST.
10.6 Examples of Base Fee, Performance Fee and
Note Trustee fee
The tables below detail hypothetical examples of themanner in which the Base Fee, Performance Fee andNote Trustee fee will be calculated. For the purposeof each example, it is assumed that the StapledSecurities are quoted for the whole of the relevantPeriod. These examples are for illustrative purposesonly and are not intended to represent any actualBase Fee, Performance Fee or Note Trustee feepayable by Spark Infrastructure or relevant indices.In preparing the Financial Information in Section 11,it is assumed that no Performance Fee will bepayable.
ten
fees
and
exp
ense
s
These fees are payable by theStapled Entities.
The Stapled Entities have agreed to pay on behalfof Spark Instalment all establishment and ongoingexpenses associated with the performance of itsobligations under the Instalment Receipt structureand indemnify Spark Instalment for any liabilities itmay incur under the Instalment Receipt structure.
Spark
Instalment
establishment
and ongoing
expenses
Spark Instalment expenses
These outgoings are payable bySpark Instalment or the StapledEntities.
The Security Trustee is entitled to require paymentby Spark Instalment or the Stapled Entities ofcertain outgoings incurred by it which are listed inthe Securities Administration Deed and includecertain audit fees, accounting, legal andadministrative fees.
Reimbursement
of outgoings
incurred by the
Security Trustee
in performing
duties
These fees are payable from theIssue Date quarterly in arrears bythe Stapled Entities.
The Security Trustee is entitled to be paid anannual fee of $30,000.
IntroductionThis Section contains the pro forma historical financialand forecast financial information in relation to SparkInfrastructure and the Asset Group (Financial
Information). The directors believe that the proforma historical financial information with respect tothe Asset Group contains more detailed equityaccounting disclosures of Spark Infrastructure’s equityaccounted investments in ETSA and CHEDHA thanthat required by A-IFRS on the basis that thisinformation is relevant to potential investors. Allforecast information should be read in conjunctionwith the Material Assumptions on which theforecasts are based set out in Section 11.8, thesensitivity analysis set out in Section 11.12 and therisk factors in Section 13.
Presentation of Financial InformationThe Financial Information is presented in abbreviatedform and does not contain all the disclosures thatare usually provided in an annual report prepared inaccordance with the Corporations Act.
The Financial Information presented in this Sectionis segmented as follows:• financial information in relation to the Asset Group
which comprises the 49% interest in CHEDHAand the 49% interest in ETSA (Asset Group) thatwill be acquired by Spark Infrastructure; and
• financial information in relation to SparkInfrastructure.
This is illustrated in Figure 11.1.
For further information relating to the financial,capital and investment structure of the Asset Groupand Spark Infrastructure, and a description of SparkInfrastructure and the Asset Group entities, Investorsshould refer to Sections 6 and 7.
Pro Forma Historical Financial InformationThe Pro Forma Historical Financial Informationcomprises:• Financial information in respect of the Asset
of pro forma income statement information(presented only to EBITDA) for ETSA andCHEDHA for the three years ended 31December 2002, 2003 and 2004 and the sixmonth periods ended 30 June 2004 and30 June 2005 (Pro Forma Historical
Statements of EBITDA);– Spark Infrastructure’s aggregated 49% share
of pro forma historical cash flow informationfor ETSA and CHEDHA for the three yearsended 31 December 2002, 2003 and 2004 andthe six month periods ended 30 June 2004and 30 June 2005 (Pro Forma Historical Cash
of pro forma balance sheet information forCHEDHA and ETSA as at 30 June 2005,assuming the Offer had been successfullycompleted on that date (Pro Forma Asset
Group Balance Sheet).elev
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Figure 11.1 Spark Infrastructure, Asset Group and Asset Companies
• The pro forma consolidated balance sheet of SparkInfrastructure as at 30 June 2005, assuming the Offer hadbeen successfully completed on that date (Pro Forma
Consolidated Balance Sheet).
No pro forma historical income statement information has beendisclosed in respect of Spark Infrastructure as the calculation ofthe equity accounted profits of the Asset Group on a historicalbasis is not indicative of what such equity accounted profits willbe going forward due to the different asset values, borrowings,and tax profiles of the Asset Group that will be in place uponcompletion of the Offer.
The Pro Forma Consolidated Balance Sheet, the Pro FormaAsset Group Balance Sheet, the Pro Forma HistoricalStatements of EBITDA and the Pro Forma Historical Cash FlowInformation (together the Pro Forma Historical Financial
Information) has been reviewed and reported upon by DeloitteTouche Tohmatsu as Investigating Accountant in Section 12.
Forecast Financial InformationThe forecast Financial Information comprises the Pro FormaForecast Information and the Directors’ Forecast Information(together, the Forecast Information).
The Pro Forma Forecast Information comprises the followingfinancial information:• Spark Infrastructure’s aggregated 49% share of Pro Forma
Forecast income statement information to EBITDA of ETSAand CHEDHA for the year ending 31 December 2005; and
• Spark Infrastructure’s aggregated 49% share of Pro FormaForecast cash flow information for ETSA and CHEDHA forthe year ending 31 December 2005.
The Directors’ Forecast Information comprises:• financial information regarding the Asset Group as follows:
– Spark Infrastructure’s pro forma forecast aggregated 49%share of income statement information (presented only toEBITDA) of ETSA and CHEDHA for the year ending31 December 2005;
– Spark Infrastructure’s forecast aggregated 49% share ofincome statement information for ETSA and CHEDHA forthe year ending 31 December 2006; and
– Spark Infrastructure’s forecast aggregated 49% share ofcash flow information for ETSA and CHEDHA for the yearending 31 December 2006;
• the forecast income statement of Spark Infrastructure forthe period from the Issue Date to 31 December 2005;
• the forecast income statement of Spark Infrastructure forthe year ending 31 December 2006;
• the forecast statement of cash flow for Spark Infrastructurefor the year ending 31 December 2006; and
• the forecast statement of distributions per Stapled Securityfor the period from the Issue Date to 31 December 2005,and the year ending 31 December 2006.
Directors’ expectations of distributions for the year ending31 December 2007, have also been included to illustratethe effects of the Instalment Purchase Arrangements ondistributions.
Basis of preparationThe Financial Information for Spark Infrastructure has beenprepared in accordance with Australian Equivalents toInternational Financial Reporting Standards (A-IFRS), UrgentIssues Group Interpretations and with regard to the materialassumptions set out in Section 11.8. A summary of significantaccounting policies is set out in the Investigating Accountant’sReport in Section 12. The pro forma financial informationcontains more detailed equity accounting disclosures of SparkInfrastructure’s equity accounted investments in ETSA andCHEDHA than that required by A-IFRS on the basis that thisinformation is relevant to potential investors. A description ofthe critical accounting policies as they apply to the Asset Groupand Spark Infrastructure is set out below in Section 11.13.
Pro Forma Historical Financial InformationThe Pro Forma Historical Financial Information assumes thatSpark Infrastructure raises the proceeds from the Offer toacquire a 49% interest in CHEDHA and a 49% interest in ETSA.The Pro Forma Historical Statements of EBITDA and cash flowsassumes that the acquisition occurred on 1 January 2002. ThePro Forma Asset Group Balance Sheet assumes that theacquisition occurred on 30 June 2005.
As Spark Infrastructure did not exist in previous accountingperiods pro forma historical financial information has beenincluded, comprising the pro forma aggregated 49% share ofincome statement information for ETSA and CHEDHApresented on a basis consistent with the ongoing businesses ofCHEDHA and ETSA, with adjustments for:• inter-entity transactions;• one off or non-recurring items of income and expenditure;• adjustments required for the adoption of A-IFRS; and• inconsistent accounting policies between CHEDHA
and ETSA.
The pro forma adjustments to the historical financial statements(prepared under superseded Australian GAAP) are contained inSection 12 in the Investigating Accountants’ Report.
The Pro Forma Historical Financial Information as at and for theyears ended 31 December 2003 and 2004 has been derivedfrom the audited financial statements of CHEDHA and ETSAwhich have financial year end dates of 31 December. ThePro Forma Historical Financial Information for the year ended31 December 2002 has been derived from the audited financialstatements of ETSA, the audited financial statements of CHEDand the audited regulatory accounts of CitiPower, reflecting100% of Powercor and CitiPower for the 2002 year. The proforma information for 2002 assumes that CHEDHA owned bothPowercor and CitiPower for the entire 2002 fiscal year. ThePro Forma Historical Financial Information as at and for the sixmonth periods to 30 June 2004 and 30 June 2005 has beenderived from the reviewed financial statements of CHEDHA andETSA as at and for the six month periods to 30 June 2004 and30 June 2005.
Forecast InformationThe Pro Forma Forecast Financial Information has beenprepared for the 12 months ending 31 December 2005. The ProForma Forecast Financial Information for the 12 months ending31 December 2005 has been based on the reviewed six monthfinancial statements for CHEDHA and ETSA and management
accounts for CHEDHA and ETSA for the two monthperiod ended 31 August 2005, together with forecastfinancial information for the period from 1 September2005 to 31 December 2005. The Directors’ ForecastInformation has been prepared for the period fromthe Issue Date to 31 December 2005 and for theyear ending 31 December 2006 (Forecast Period).
The Forecast Information is based on a number ofassumptions concerning actual and future events,including the Material Assumptions set out in Section11.8. These assumptions have been set out in thisOffer Document to provide potential Investors witha guide to the financial performance of SparkInfrastructure and the Asset Group during theForecast Period. Spark Infrastructure has preparedthis information with proper care and attention. Atthe time of preparing the Offer Document givenprevailing circumstances and market conditions andwith regard to Spark Infrastructure, its equityaccounted investment in the Asset Group and itsstrategy, Spark Infrastructure considers all theassumptions set out in this Offer Document to bereasonable. Refer to Section 11.8.
These assumptions are by their very nature subjectto significant uncertainties and contingencies, manyof which are outside of the control of SparkInfrastructure and the Asset Group and are notcapable of reliable prediction.
The Forecast Information is likely to vary from actualresults and any variation may be material.Accordingly, neither Spark Infrastructure nor itsdirectors can give any assurance that the forecastswill be achieved. Events and outcomes may differ inamount and timing from the assumptions, withmaterial consequential impact on the ForecastInformation.
Subject to the continuous disclosure requirementsimposed upon publicly listed companies on ASX andany obligations under the Corporations Act to issue asupplementary or replacement Offer Document,Spark Infrastructure does not intend to update orotherwise revise the Forecast Information to reflectcircumstances arising since its preparation or toreflect the occurrence of unanticipated events orchanges in general economic or industry conditions.
The Forecast Information presented should be readtogether with the Material Assumptions underlyingits preparation as set out in Section 11.8, thesensitivity analysis as set out in Section 11.12, theReport on directors’ forecasts in Section 12, the riskfactors as set out in Section 13 and other informationcontained in this Offer Document.
Distributions from the Asset Companies to SparkInfrastructureInvestors in Spark Infrastructure will indirectlyparticipate in the aggregated earnings and cash flowsof the Asset Companies through the payment ofdistributions from the Asset Companies to Spark
Infrastructure, with such distributions used as thebasis for payment of distributions by SparkInfrastructure to Holders. The proposed interest thatSpark Infrastructure will have in each of the AssetCompanies upon completion of the Offer has beenstructured with the intent of optimising distributionsfrom the Asset Companies to Spark Infrastructurethrough the payment of interest on subordinated debt,partnership distributions, dividend income and returnsof capital. The main source of Spark Infrastructure’sincome, and thus the main source of funds fordistributions to Holders is expected to be derived fromthe partnership distributions and dividends from theAsset Companies and the payment of interest onsubordinated loans from the entities which hold the49% investment in the Asset Companies.
While net profit or loss will have an impact on theoverall ability of the Asset Companies to paydividends to Spark Infrastructure, the fact that ETSArecorded a net loss for the fiscal years ended31 December 2002 and 2003 and CHEDHA recordeda net loss for the fiscal year ended 31 December2002 is not believed to be indicative of the ability ofthe Asset Companies to pay distributions to SparkInfrastructure. Rather, it is the ability of the AssetCompanies to generate free cash flow fromoperations after funds required for capitalexpenditure and the servicing of Senior Debt thatdetermines the ability of the Asset Companies to paydistributions to Spark Infrastructure. Refer toSection 7 for a description of Spark Infrastructure’sstructure with respect to its investment in the AssetCompanies. For a description of historical andforecast operating cash flows of the Asset Group,see Section 11.2. For a description of the SeniorDebt obligations, and historical debt and Senior Debtinterest expense, of each of the Asset Companies,see Section 11.9. For a description of the historicalcapital expenditures of each of the AssetCompanies, see Section 11.10.
Distributions from Spark Infrastructure to HoldersDistributions payable by Spark Infrastructure toHolders potentially comprise interest income fromthe Loan Notes, distributions from SparkInfrastructure Trust and dividends from the StapledCompanies.
It is expected that distributions payable by SparkInfrastructure to Holders of the Stapled Securitieswill largely be sourced from Preferred CapitalDistributions, ordinary partnership distributions,interest on subordinated debt, returns of loanprincipal and dividends. Refer to the ForecastStatement of Cash Flows for Spark Infrastructure inSection 11.4 for a discussion of the forecast cashflow available for distribution to Holders.
The forecast distributions to Holders from SparkInfrastructure per Stapled Security for the periodfrom the Issue Date to 31 December 2005 and the
year ending 31 December 2006 are discussed in Section 11.5.Directors’ expectations of distributions for the year ending31 December 2007 have also been included to illustratethe effects of the Instalment Purchase Arrangements ondistributions. The forecast distributions from SparkInfrastructure should be read in conjunction with SparkInfrastructure’s distribution policy in Section 7.7.
11.1 The Selected Pro Forma Aggregated Income
Statement Information for the Asset Group
This Section contains the following financial information whichappear in Table 11.1:• the aggregated 49% share of pro forma income statement
information presented to EBITDA for ETSA and CHEDHA forthe years ended 31 December 2002, 2003 and 2004;
• the aggregated 49% share of pro forma income statementinformation to EBITDA for ETSA and CHEDHA for thesix months ended 30 June 2004 and 30 June 2005;
• the forecast aggregated 49% share of pro forma incomestatement information to EBITDA for ETSA and CHEDHA forthe 12 months ending 31 December 2005; and
• the aggregated 49% share of the directors’ forecast incomestatement information for ETSA and CHEDHA for the yearending 31 December 2006.
The pro forma historical aggregated income statementinformation for the Asset Group for the years ended31 December 2002, 2003 and 2004 and for the six monthsended 30 June 2004 and 2005 and the pro forma forecastaggregated income statement information for the Asset Groupfor the year ending 31 December 2005 have been presentedto EBITDA only, due to changes in the carrying values ofnon-current assets as a result of the allocation of the excess ofthe purchase price paid by Spark Infrastructure for 49% of ETSAand CHEDHA over the net assets of the Asset Group andchanges in funding structures and tax structures of the AssetCompanies that will arise from the restructurings contemplatedin connection with the Offer. Accordingly, pro forma historicaldepreciation and amortisation expense, interest expense and taxexpense are not considered meaningful by Spark Infrastructure,as they are not believed to be indicative of the depreciation andamortisation expense that will be recorded by SparkInfrastructure in the calculation of the equity accounted incomefrom the Asset Group, and not indicative of the expenses thatwould have been payable had the Asset Group been subject tothe new capital and tax structures that will apply uponcompletion of the Offer. The contemplated changes with respectto depreciation and amortisation expense, interest expense andtax expense as relevant to the Asset Group are discussed infurther detail below.
Depreciation and amortisation expenseIn connection with Spark Infrastructure’s acquisition of the 49%interest in each of CHEDHA and ETSA, Spark Infrastructure isrequired under A-IFRS to reflect its equity accountedinvestments in CHEDHA and ETSA by reference to its share ofthe fair value of the net assets of CHEDHA and ETSA. Thisassessment of fair value by Spark Infrastructure of its share ofthe net assets of CHEDHA and ETSA will result in a notionalincrease in the carrying value of certain depreciable assets andamortisable intangible assets of CHEDHA and ETSA, which in
turn will impact Spark Infrastructure’s equity accounted shareof the profits of CHEDHA and ETSA by including additionaldepreciation and amortisation expense (only on equityaccounting) to the extent of fair value increments in respectof certain depreciable assets and amortisable intangible assetsrecognised by Spark Infrastructure for equity accountingpurposes.
As a result, Spark Infrastructure will incur higher depreciationand amortisation than simply its share of depreciation andamortisation reflected in the consolidated financial statementsof CHEDHA and ETSA respectively. This higher depreciationand amortisation will be reflected by Spark Infrastructurethrough lower equity accounted profits only.
Accordingly, the historical depreciation and amortisationexpense incurred by CHEDHA and ETSA is not consideredindicative of the depreciation and amortisation expense thatwill be incurred by Spark Infrastructure as it equity accountsits 49% interests in each of CHEDHA and ETSA following thecompletion of the Offer and, accordingly, such information hasnot been disclosed in Table 11.1.
For a discussion of historical pro forma depreciation andamortisation, which is presented to assist Investors tounderstand the impact of the changes described above, seeSection 11.11.
Interest expenseThe historical interest bearing liabilities of the Asset Groupwhich have been described in Section 11.9.1 have been or willbe restructured following completion of the Offer. Previously, aproportion of the borrowing costs incurred by the Asset Groupwere treated as non-deductible due to thin capitalisationconstraints. However, the new funding structure in place asa result of the Offer is expected to reduce these constraints.In addition, new and refinanced interest bearing liabilities havebeen taken out by Spark Infrastructure and therefore netinterest expense that will be recorded by the Asset Group andSpark Infrastructure following completion of the Offer is notcomparable to the historical net interest expense recorded bythe Asset Group and, accordingly, such information has notbeen disclosed in Table 11.1.
Although a substantial portion of the subordinated interestbearing liabilities of the Asset Companies, in particular, a majorityof the existing funding arrangements between CKI and HKE andeach of the Asset Companies, will be restructured followingcompletion of the Offer, the Senior Debt facilities of the AssetCompanies will remain in place following completion of the Offer.A separate discussion of historical Senior Debt and interestexpense for the Asset Companies appears in Section 11.9.
Taxation expenseAs a result of accumulated tax losses, none of the AssetCompanies were required to pay income tax for any year inthe three year period ended 31 December 2004 or for the sixmonth period ended 30 June 2005. Following the completion ofthe Offer, a new tax structure for both Spark Infrastructure andthe Asset Group, including the establishment of two new taxconsolidated groups is expected to occur. The formation of thesegroups is expected to result in a reset of the tax bases of theassets held by the Asset Group. Accordingly, tax depreciation
claimed following completion of the Offer will besignificantly different from tax depreciation previouslyclaimed by the Asset Group. In addition, interestexpense claimed for tax purposes will change fromthat previously claimed by the Asset Group as a resultof the new funding structure and the expectedreduction of thin capitalisation constraints referred to in“Interest expense” above. As a result of all of thesechanges, the taxation expense that will arise for theAsset Group will not be comparable to the historicaltaxation expense recorded by the Asset Group and,accordingly, such information has not been disclosed inTable 11.1.
Accordingly, the pro forma aggregated incomestatement information for the Asset Group for thethree years ended 31 December 2002, 2003 and2004 and the Asset Group for the six months ended30 June 2004 and 30 June 2005 is presented toEBITDA only.
Table 11.1 represents Spark Infrastructure’saggregated 49% interest in the pro forma incomestatement information of ETSA and CHEDHA.Management discussion and analysis of the AssetCompanies that contributed to the Asset Group’spro forma historical and forecast earnings appears inSection 11.1.2.
In preparing the Pro Forma Historical Statements ofEBITDA, adjustments were made to CHEDHA’s andETSA’s EBITDA as set out in their respective financialstatements to eliminate certain non-recurring itemsand to reflect adjustments required for the adoptionof A-IFRS. See the Investigating Accountant’s Reportin Section 12 for a quantification of theseadjustments.
A reconciliation of AGAAP to A-IFRS for Pro formaHistorical Statements of EBITDA also appears in theInvestigating Accountant’s Report in Section 12.
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Table 11.1 Pro forma aggregated income statement information for the Asset Group
11.1.1 Key factors affecting the financial performance
of the Asset Group
While the financial performance of the Asset Group isinfluenced by a number of factors, the following factors areconsidered to be of particular importance.
Regulated distribution revenuesThe two key factors that affect the regulated distributionrevenues of the Asset Group are: (i) the level of networkdistribution tariffs each of the Asset Companies are allowed tocharge customers as established by the relevant regulator; and(ii) load, or the amount of electricity carried through thedistribution networks, which is largely dependent on weatherconditions, population growth and economic growth.
As discussed in detail in Section 5 and the IndependentRegulatory Report in Section 12, the maximum networkdistribution tariffs that may be charged by the Asset Companiesare determined by the relevant state regulators in Victoria andSouth Australia. Under current arrangements in Victoria andSouth Australia, regulated tariffs are established for five yearperiods and are based on benchmark revenue requirements toallow a distributor to continue to provide appropriate servicelevels and obtain a return on assets. Currently, each of theAsset Companies is subject to regulated network tariff levelsthat are set to expire in 2010. The key features of thesearrangements are described in Section 12 in the IndependentRegulatory Report.
Population and economic growth increase the overall use ofelectricity distribution networks by increasing the number ofcustomers that are connected to the relevant distributionnetwork and increasing the overall usage per customer.Weather also influences load, as hot summers and cold winterslead to increases in the demand for electricity as compared toseasons with milder weather conditions.
Because each of the Asset Companies is solely a distributor ofelectricity and the network distribution tariffs charged tocustomers are established by the relevant state regulator andare not affected by changes in the retail price for electricity, theregulated distribution revenues for each of the AssetCompanies are not directly impacted by fluctuations in the retailprice for electricity, although overall demand for electricity maybe impacted by its retail price.
Non-distribution revenuesNon-distribution revenues, which account for approximately17% to 27% of the Asset Companies’ total revenues each yearare comprised of both regulated excluded services, whichincludes services such as public lighting (except for ETSAwhere it is classified as a prescribed service) and meterreading, and non-regulated revenues, which consist of networkrelated construction and management services to externalclients, telecommunications and other engineering andinformation technology services. Non-distribution revenues arealso affected by population and economic growth, as each ofthese may result in additional construction projects.
Operating expensesThe key factors influencing operating expenses for each of theAsset Companies are maintenance and support costsassociated with the network and the costs incurred in providing
non-distribution services to third parties. A key component ofthis expenditure is labour related expenses, includingemployees and contractors. In addition, operating expensesare also affected by materials and services largely relating toincome generating work and the capitalisation of expensesincurred in the expansion and replacement of the distributionnetwork. CitiPower and Powercor operating expenses arepresented on an aggregated basis in this Section due tocommon management and back office operating group.
CitiPower’s and Powercor’s operating expense categories arereported on a gross basis, from this, total capitalised costs arededucted resulting in total operating costs. Alternatively, ETSA’soperating expense categories are reported on a net basis, thatis net to capitalised costs. On an overall basis operatingexpenses are consistent across the Asset Companies.
11.1.2 Discussion and analysis of the Asset Group
income statement
This Section should be read in conjunction with the basis ofpreparation of the Pro Forma Historical Financial Information,the Investigating Accountant’s Report and where it relates toForecast Information, the Material Assumptions in Section 11.8and the risk factors in Section 13. The Forecast Informationdiscussed in this Section is based on a number of estimatesand assumptions that are subject to business and economicand uncertainties and contingencies, which are out of thecontrol of Spark Infrastructure. The Forecast Informationdiscussed in this Section may vary from actual financial resultsfor the periods covered and these variations may be material.The following discussion reflects Spark Infrastructure’s 49%share of the Asset Group’s results for the periods presented.Discussion and analysis for other revenue items does notinclude revenue relating to inter-company transactions that havenot been eliminated in the Asset Group’s pro forma incomestatement information.
Pro Forma Historical Financial Performance – FY2003compared to FY2002Distribution revenueDistribution revenue consists of revenues earned from the useof the Asset Companies’ distribution networks and thecollection of transmission revenues, which are passed throughto operators of the transmission network as TUoS charges. InFY2003, distribution revenue for the Asset Group, increased by7.8% to $608.5 million. Factors that contributed to the AssetCompanies’ distribution revenue, on a 49% basis, included:• gross distribution revenue from CitiPower increased by 8.8%
to $106.7 million, offset by TUoS charges of $17.2 million,resulting in net distribution revenue of $89.5 million. Netdistribution revenue increased by 7.8% ($6.5 million) primarilydue to increased distribution volumes of 2.7%, a 1.4%increase in customer numbers and an increase in averagedistribution tariffs of 4.9%;
• gross distribution revenue from Powercor increased by 8%to $212.7 million, offset by TUoS charges of $22.1 million,resulting in net distribution revenue of $190.6 million. Netdistribution revenue increased by 10.8% ($18.6 million)primarily due to increased distribution volumes of 0.4% dueto a 2.2% increase in customer numbers and an increase inaverage distribution tariffs of 10.3%; and
• gross distribution revenue from ETSA increased by7.7% to $289.1 million, offset by TUoS charges of$69.6 million, resulting in net distribution revenueof $219.5 million. Net distribution revenueincreased by 6.6%, which is mainly due to arevenue pass-through for Full Retail Contestabilityof $13.3 million which was offset by expensesincurred to enable ETSA’s systems toaccommodate Full Retail Contestability. Netdistribution revenue (excluding pass throughrevenue) increased by 0.1% ($0.3 million),primarily due to a 0.4% increase in price, partiallyoffset by a 0.1% decrease in volume.
Other revenue
Other revenue consists of revenue earned by theAsset Companies from excluded services, such asmeter reading, meter data management and publiclighting, and customer contributions that consist ofcertain costs of building new distribution assets thatare recovered from customers. Other revenue alsoincludes revenue from non-regulated activities, suchas interest received (except ETSA) and proceedsfrom the sale of businesses, plant, property andequipment and revenue from the Asset Companies’telecommunications business. In FY2003, otherrevenue for the Asset Group increased by 13.5% to$121.6 million. Factors that contributed to the AssetCompanies’ other revenue, on a 49% basis,included:• for CitiPower, revenue from customer
contributions for capital works increased by11.4% to $5.0 million mainly due to an increasedvolume of customer initiated capital projects.Revenue from excluded services increased by30% to $5.4 million mainly due to increaseddemand for these services;
• for Powercor, revenue from customercontributions for capital works increased by 21%to $18.5 million mainly due to an increase in majorcapital projects. Revenue from excluded servicesdecreased by 5.7% to $13.5 million mainly due tolower demand for construction and connectionservices from network customers; and
• for ETSA, revenue from customer contributionsfor capital works increased by 12.2% to$15.3 million and revenue from construction andmaintenance and asset management servicesincreased by 4.3% to $27.1 million. These werethe main items which increased ETSA OtherRevenue by 6.1% to $53.7 million. Note thatETSA’s Other Revenue does not include interestincome.
Total revenueIn FY2003, the Asset Group’s total revenue increasedby 8.7% to $730.1 million based on the factorsdescribed above.
Operating expensesOperating expenses consist of employee/contractorexpenses, employee benefits, field services,administration and occupancy costs, materials andservices consumed, the carrying amount ofnon-current assets sold (except ETSA) and otherexpenses, partially offset by the capitalisation ofexpenses incurred in the expansion of thedistribution network. In FY2003, operating expensesfor the Asset Group increased by 5.3% to$249.2 million, reflecting increased costs associatedwith increased connections and delivery of higherdistribution volumes. Factors that contributed to theAsset Group’s operating costs, on a 49% basis,included:• for CitiPower and Powercor, internal labour
expenses increased by 12.1% to $61.2 millionmainly due to annual wage increases,redundancies and increased superannuationcontributions. Other cost increases reflectedincreased capital and maintenance volumes; and
• for ETSA, internal labour and contractor operatingcosts increased by 6.8% to $36.9 millionreflecting annual wage increases and increasedemployee entitlements arising from enterpriseagreements. This increased ETSA operatingexpenses by 4.7% to $62.8 million.
EBITDA and EBITDA marginsIn FY2003, EBITDA for the Asset Group increased by10.6% to $480.9 million reflecting both increasedrevenue growth and higher operating costs. Therelatively higher growth in revenue compared tooperating costs increased EBITDA margin from64.8% to 65.9%.
Pro Forma Historical Financial Performance –FY2004 compared to FY2003Distribution revenueIn FY2004, distribution revenue for the Asset Groupincreased by 3.7% to $631.2 million. Factors thatcontributed to that result, on a 49% basis, included:• gross distribution revenue for CitiPower increased
by 10.9% to $118.4 million, offset by TUoScharges of $20.5 million, resulting in netdistribution revenue of $97.9 million. Netdistribution revenue increased by 9.3%($8.4 million) reflecting increased distributionvolume of 5.8%, mainly due to higher thanaverage summer temperatures, a 1.5% increasein customer numbers and an increase in averagedistribution tariffs of 3.3%;
• gross distribution revenue for Powercor increasedby 5.6% to $224.7 million, offset by TUoScharges of $24.6 million, resulting in netdistribution revenue of $200.1 million. Netdistribution revenue increased by 5%($9.5 million) reflecting increased distributionvolume of 1.6% due to colder than averagewinter temperatures, a 2.3% increase in
customer numbers and an increase in average distributiontariffs of 3.4%; and
• gross distribution revenue for ETSA decreased by 2.8% to$281.1 million, offset by TUoS charges of $63 million resultingin net distribution revenue of $218.1 million. Net distributionrevenue, including pass throughs, decreased by 0.6%($1.3 million), due to a 1.2% fall in price, partially offset by a0.5% increase in volume.
Other revenueIn FY2004, other revenue for the Asset Group increased by16.6% to $141.8 million. Factors that contributed to that result,on a 49% basis, included:• for CitiPower, revenue from customer contributions for
capital works increased by 11.8% to $5.6 million mainlydue to an increase in major projects and asset relocations.Revenue from excluded services increased marginally by1.8% to $5.5 million;
• for Powercor, revenue from customer contributions forcapital works decreased marginally by 1.8% to $18.2 million.Revenue from excluded services increased by 14.1% to$15.4 million; and
• for ETSA, revenue from customer contributions for capitalworks increased by 40.6% to $21.6 million and revenuefrom construction and maintenance and asset managementservices increased by 23.5% to $33.5 million. These werethe main items which increased total ETSA Other Revenueby 26.6% to $68 million.
Total revenueIn FY2004, the Asset Group’s total revenue, i.e., the 49%interest in the Asset Companies’ total revenue, increased by5.9% to $773.0 million based on the factors described above.
Operating expensesIn FY2004, operating expenses for the Asset Group increasedby 12.7% to $280.9 million reflecting increased costsassociated with increased connections and delivery of higherdistribution volumes. Specific factors that also influenced thisresult, on a 49% basis, include:• for CitiPower and Powercor, internal labour expenses
increased by 7.4% to $65.7 million due to annual wageincreases and higher employee entitlements arising fromnew EBAs. Other cost increases reflected increasedmaintenance volumes and associated increases in contractorfees;
• for ETSA, internal labour and contractor operating costsincreased by 10.2% to $40.7 million reflecting annual wageincreases and increased employee entitlements arising fromEBAs, and an adjustment to superannuation provisions onimplementation of International Financial ReportingStandards. Additionally, materials and services expenditureincreased by 23.1% to $42.3 million mainly due to anincrease in revenue earning construction and maintenanceactivities.
EBITDA and EBITDA marginsIn FY2004, EBITDA for the Asset Group increased by 2.3% to$492.1 million reflecting both increased revenue growth andrelatively higher operating costs. This reduced EBITDA marginfrom 65.9% to 63.7%.
Pro Forma Historical Financial Performance – six monthperiod to 30 June 2005 compared to six month period to30 June 2004Distribution revenueFor the six months to 30 June 2005, distribution revenue forthe Asset Group increased by 7.3% to $332.1 million over thecorresponding six month period to 30 June 2004. Factors thatcontributed to that result, on a 49% basis, included:• gross distribution revenue from CitiPower increased by
13.1% to $64.7 million, offset by TUoS charges of$17.4 million, resulting in net distribution revenue of$47.3 million. Net distribution revenue decreased by 1.2%($0.6 million) due to the regulated increase in TUoS charges.Distribution volumes increased by 0.2% and customernumbers increased by 1.1%, offset by a decrease in averagedistribution tariffs of 1.4%;
• gross distribution revenue from Powercor increased by14.2% to $124 million, offset by TUoS charges of$22.8 million, resulting in net distribution revenue of$101.2 million. Net distribution revenue increased by 6.6%($6.2 million) reflecting increased distribution volumes of2.3% due to a 2.5% increase in customer numbers and anincrease in average distribution tariffs of 4.2%; and
• gross distribution revenue from ETSA increased by 0.5%to $140.9 million, offset by TUoS charges of $32 million,resulting in net distribution revenue of $108.9 million. Netdistribution revenue, including pass-throughs, increased by0.4% ($0.4 million), due to 0.7% increase in quantity, offsetby a 0.3% fall in price.
Other RevenueFor the six months to 30 June 2005, other revenue for theAsset Group decreased by 8.2% over the corresponding sixmonth period to 30 June 2004, to $64.7 million. Factors thatcontributed to that result, on a 49% basis, included:• for CitiPower, revenue from customer contributions for
capital projects decreased by 3.5% to $2.7 million andexcluded services revenue increased by 10.5% to$3.1 million due to higher demand for these services;
• for Powercor, revenue from customer contributions forcapital projects increased by 22% to $9.5 million primarilydue to a significant one-time capital project and revenuefrom excluded services remained constant at $7.7 million;and
• for ETSA, whilst Other Revenue of $30.5 million to 30 June2005 was in line with the corresponding period, reflecting atemporary interruption in returned services revenue due tothe impact of enterprise bargaining negotiations.
Total revenueFor the six months to 30 June 2005, the Asset Group’s totalrevenue, i.e., the 49% interest in the Asset Companies’ totalrevenue, increased by 4.4% to $396.8 million based on thefactors discussed above.
Operating expensesFor the six months to 30 June 2005, operatingexpenses for the Asset Group increased by 4.5% to$141.6 million over the corresponding six monthperiod to 30 June 2004, reflecting increased costsassociated with increased connections, maintenanceactivities and higher labour costs. Specific factorsthat influenced this result, on a 49% basis, included:• for CitiPower and Powercor, internal labour
expenses increased by 6.7% to $31.8 million dueto increased employee numbers and annual wageincreases; and
• for ETSA, internal labour and contractor expenseswere comparable to the corresponding period.This was largely due to higher labour cost beingoffset by a proportionately greater allocation ofresources to network capital projects. Overalloperating expenses reduced by 13.4% to$31.9 million primarily due to one-off savings inmeter reading and IT service delivery contracts.
EBITDA and EBITDA marginsFor the six months to 30 June 2005, EBITDA for theAsset Group increased by 4.4% over thecorresponding six month period to 30 June 2004 to$255.2 million reflecting increased revenue growth,offset by proportionately higher operating costs.EBITDA margin remained constant at 64.3%.
Pro Forma Forecast Financial Performance forFY2005 compared to Pro Forma HistoricalFinancial Performance FY2004The following discussion and analysis relates to thepro forma forecast of Aggregated Income Statementfor the year ending 31 December 2005 compared tothe pro forma historical aggregated incomestatement for the year ended 31 December 2004.The pro forma forecast financial information for theyear ending 31 December 2005 should be read inconjunction with the Material Assumptions in Section11.8 and the Risk Factors in Section 13.
Distribution revenueBased on the Material Assumptions set out inSection 11.8, for FY2005, distribution revenue for theAsset Group is forecast to increase by 7.5% to$678.4 million. Factors that are expected tocontribute to that result, on a 49% basis, include:• gross distribution revenue for CitiPower is
forecast to increase by 12.9% to $133.7 million,offset by TUoS charges of $34.1 million, resultingin net distribution revenue of $99.7 million. Netdistribution revenue is forecast to increase by1.8% ($1.8 million) due to the regulated increasein TUoS charges. Customer numbers are forecastto increase by 1.6% and average distributiontariffs are forecast to increase by 3.1%;
• gross distribution revenue for Powercor isforecast to increase by 13.6% to $255.2 million,offset by TUoS charges of $44.8 million, resultingin net distribution revenue of $210.4 million. Net
distribution revenue is forecast to increase by5.1% ($10.2 million) reflecting expected increaseddistribution volumes of 1.8% due to a forecast0.7% increase in customer numbers and anincrease in average distribution tariffs of 3.3%;and
• gross distribution revenue for ETSA is forecast toincrease by 3% to $289.5 million, offset by TUoScharges of $65.8 million resulting in netdistribution revenue of $223.7 million. Netdistribution revenue is forecast to increase by2.6% ($5.6 million) due to a 3% increase inquantity, offset by a 0.4% decrease in price.
Other revenueBased on the Material Assumptions set out inSection 11.8, for FY2005, other revenue for theAsset Group is expected to decrease by 3.9% to$136.3 million. Factors expected to contribute to thatresult, on a 49% basis, include:• at CitiPower, revenue from customer
contributions for capital projects is expected toincrease by 13% to $6.4 million. Revenue fromexcluded services is forecast to increase by 1.8%to $5.6 million;
• for Powercor, revenue from customercontributions for capital projects is expected todecrease by 5.9% to $17.1 million. Revenue fromexcluded services is forecast to increase 7.9% to$16.7 million due to higher demand for theseservices; and
• for ETSA, revenue for new connections (includinggifted assets) is forecast to decrease by 10.3% to$26 million in 2005, although revenue fromconstruction and maintenance and assetmanagement services is forecast to increase by3.2% to $34.6 million. Together this is expectedto reduce ETSA other revenue by 1.7% to$66.8 million.
Total revenueFor the pro forma forecast for the year to31 December 2005, the 49% share of aggregatedtotal revenue for the Asset Companies is forecast toincrease by 5.4% to $814.7 million.
Operating expensesBased on the Material Assumptions set out inSection 11.8, for FY2005, operating expenses for theAsset Group are forecast to increase by 7.9% to$303.1 million reflecting increased costs associatedwith expected increased connections and delivery ofhigher distribution volumes. Specific factors that arealso expected to influence this result, on a 49%basis, include:• for CitiPower and Powercor, internal labour
expenses are forecast to increase by 7.4% to$69.2 million mainly due to the impact of a wageincrease and increased staff numbers;
• at ETSA, internal labour and contractor operatingcosts are projected to increase by 4.7% to
$42.6 million reflecting annual wage increases and increasedemployee entitlements arising from enterprise agreements.Overall operating expenses are expected to increase by0.4% due to the diversion of resources to network capitalprojects.
EBITDA and EBITDA marginsBased on the Material Assumptions set out in Section 11.8, forFY2005, EBITDA for the Asset Group is forecast to increase by4.0% to $511.7 million reflecting both increased revenuegrowth and relatively higher operating costs. This is forecast toreduce EBITDA margin from 63.6% to 62.8%.
Directors’ forecast financial performance for FY2006compared to pro forma forecast financial performancefor FY2005The following discussion and analysis relates to the directors’forecast of 49% of the pro forma aggregated income statementfor ETSA and CHEDHA for the year ending 31 December 2006compared to the pro forma forecast for the year ending31 December 2005 and should be read in conjunction with theMaterial Assumptions in Section 11.8 and Risk Factors inSection 13.
Distribution revenueBased on the Material Assumptions set out in Section 11.8,for FY2006, distribution revenue for the Asset Group, isforecast to decrease by 5.7% to $639.6 million. Factorsexpected to contribute to that result, on a 49% basis, include:• gross distribution revenue from CitiPower is forecast to
decrease by 12.1% to $117.7, offset by TUoS charges of$22.7 million, resulting in forecast net distribution revenue of$95.0 million. Net distribution revenue is forecast todecrease by 4.7% reflecting expected increased distributionvolumes of 1%, a forecast 1.4% increase in customernumbers which is expected to be offset by average tariffsreductions of 12.9% reflecting the introduction of the newregulatory pricing.
• gross distribution revenue from Powercor is forecast todecrease by 11.3% to $226.2 million, offset by TUoScharges of $40.3 million, resulting in forecast net distributionrevenue of $185.9 million. Net distribution revenue isforecast to decrease by 11.6% reflecting increaseddistribution volumes of 2.1% due to a 1.6% increase incustomer numbers and a decrease in average distributiontariffs of 13.1% reflecting the introduction of the newregulatory pricing.
• gross distribution revenue from ETSA is forecast to increaseby 2.1% to $295.7 million, offset by TUoS charges of $68.8million resulting in net distribution revenue of $226.9 million.Net distribution revenue is forecast to increase by 1.4%($3.2 million), due to a 2.5% increase in price, offset by a1.1% decrease in distribution volumes.
Other revenueBased on the Material Assumptions set out in Section 11.8, forFY2006, other revenue for the Asset Group, i.e., on a 49% basis,is forecast to increase by 14.6% to $156.2 million. Factors thatare forecast to contribute to that result, on a 49% basis, include:• for CitiPower, revenue from customer contributions for
capital projects is forecast to decrease by 11.5% to$5.6 million and revenue from excluded services is forecastto decrease 33% to $3.7 million;
• for Powercor, revenue from customer contributions forcapital projects is forecast to increase by 5.4% to$18.0 million and revenue from excluded services is forecastto decrease by 32% to $10.9 million; and
• for ETSA, revenue from construction and maintenance andasset management services is forecast to increase by35.3% to $46.8 million. Proceeds from the sale of surplusland is also forecast to increase other revenue by$3.9 million. These are the main items expected to result inETSA other revenue increasing by 22.7% to $82 million.
Operating expensesBased on the Material Assumptions set out in Section 11.8,for FY2006, operating expenses for the Asset Group, i.e., ona 49% basis, are forecast to increase by 6.9% to $324.0 millionreflecting increased costs associated with increasedconnections, delivery of higher distribution volumes andadditional revenue earning activities. Specific factors that arealso expected to influence this result, on a 49% basis, include:• at CitiPower and Powercor, internal labour expenses are
forecast to increase by 10.4% to $76.4 million reflectingboth an annual wage increase and higher staff levels.
• for ETSA, internal labour and contractor operating costs areforecast to increase by 14.8% to $48.9 million reflectingincreased employee costs and employee numbers toundertake revenue earning construction and maintenanceactivities. Materials and services expenditure is also forecastto increase by 23.9% to $51.4 million reflecting theadditional revenue earning activities and new costsintroduced by the Regulator, primarily for guaranteed servicelevels and demand side management.
EBITDA and EBITDA marginsBased on the Material Assumptions set out in Section 11.8,for FY2006, EBITDA is forecast to decrease by 7.8% to$471.8 million reflecting both a 2.3% reduction in revenue andrelatively higher operating costs. This is forecast to decreasethe EBITDA margin from 62.8% to 59.3%.
Depreciation and amortisationBased on the Material Assumptions set out in Section 11.8,for the year to 31 December 2006, forecast depreciation andamortisation is expected to total $145.5 million.
Senior Debt interestBased on the Material Assumptions set out in Section 11.8,for the year to 31 December 2006, interest expense for SeniorDebt is forecast to be $150.9 million. The basis of this forecastappears in the Material Assumptions relating to the AssetCompanies in Section 11.8 and in the Senior Debt summary inSection 11.9.
Based on the Material Assumptions set out inSection 11.8, for the year to 31 December 2006,interest on shareholder loans and subordinated debtprovided to the Asset Group is forecast to total$132.0 million. $96.5 million of this represents theinterest income of Spark Infrastructure.
Net profit before taxBased on the Material Assumptions set out inSection 11.8, for the year to 31 December 2006,net profit before tax for the Asset Group is forecastto be $49.9 million.
Income tax expenseBased on the Material Assumptions set out inSection 11.8, for the year to 31 December 2006,no income tax expense is forecast reflecting theutilisation of tax losses by the Asset Companieswithin their respective tax consolidation groups. Thefuture income tax benefit with respect to availabletax losses has not been recognised in the balancesheets of the Asset Companies. The assumptionsrelating to tax payable by the Asset Companies arediscussed in Section 11.8.
Net profit after tax attributable to SparkInfrastructureBased on the Material Assumptions set out inSection 11.8, for the year to 31 December 2006, NetProfit After Tax for the Asset Group is forecast to be$49.9 million, which after allowance for distributionspayable to Spark Infrastructure for the preferencecapital of ETSA, results in net profit after taxattributable to Spark Infrastructure of $15.8 million.
11.2 The Asset Group’s Historical and Forecast
Statement of Cash Flow Information
Table 11.2 below shows the aggregated 49% shareof the pro forma cash flow information for the AssetGroup for the years ended 31 December 2002, 2003,and 2004 and the six months ended 30 June 2005and 2004, the pro forma forecast aggregated cashflow information for the 12 months ending31 December 2005 and the directors’ forecaststatement of cash flows for the year ending31 December 2006.
The Pro Forma Historical Cash Flow Information andthe Pro Forma Forecast Cash Flow Information forthe year ending 31 December 2005 provided belowincludes pro forma cash flows provided by operatingand investing activities, but does not includemovements in working capital relating to income taxexpense and net financing costs. Upon completion ofthe Offer, the new subordinated fundingarrangements will apply to CitiPower and Powercorand preference capital arrangements will apply toETSA, each as described in Section 11.1 and 11.8.3,and the new tax structures described in Section 11.1will apply to each of the Asset Companies.
Accordingly, movements in working capital relating toincome tax and net financing costs are notconsidered meaningful, as they are not indicative ofwhat such items would have been had the AssetCompanies been operating under the newsubordinated debt, preference capital, and taxstructures that will apply upon completion of theOffer.
11.2.1 The Asset Group’s statement of cash flow
information – discussion and analysis
The cash flow forecasts in Table 11.2 are notpresented in a format consistent with statutorydisclosure, but have been formulated to highlight thecontributions of operating cash flows, capitalexpenditure, debt funding of capital expenditure andthe priority payment of Senior Debt oversubordinated debt and equity, from the Asset Groupto Spark Infrastructure. Below is a discussion andanalysis relating to the directors’ forecast cash flowstatement information. The forecast information islikely to vary from actual results and any variationmay be material. Accordingly, neither SparkInfrastructure nor their directors can give anyassurance that the forecasts will be achieved. For adiscussion of historical EBITDA of the Asset Group,see Section 11.1.2 and for a discussion on historicalinterest expense and capital expenditure, seeSections 11.9 and 11.10.
EBITDARefer to discussion and analysis in Section 11.1.2 asit relates to the year to 31 December 2006.
Working capitalMovements in working capital relate to SparkInfrastructure’s 49% share of changes in workingcapital at ETSA and CHEDHA. For the year to31 December 2006, this working capital movementrepresents an outflow of $1.8 million.
Customer contributionsSpark Infrastructure has a 49% share in gifted assetsand customer contributions that must be subtractedfrom EBITDA to arrive at cash flow from operatingactivities. For the year to 31 December 2006, thesepayments are forecast to total $43.4 million.
OtherOther refers to Spark Infrastructure’s 49% share ofthe funding of the insurance premium reserve duringthe Forecast Period, which is forecast to be apayment of $2.8 million for the year ending31 December 2006.
Tax paidTax paid relates to Spark Infrastructure’s 49% shareof tax payable by the Asset Companies in respect totheir tax consolidation groups during the ForecastPeriod. For the Forecast Period, no income tax isexpected to be payable.
Cash flow from operationsCash flow from operations is forecast to total $423.8 million inthe year to 31 December 2006.
Capital expenditureA discussion of historical and forecast capital expenditure forthe Asset Companies is discussed in Sections 11.8.4 and11.10.
Spark Infrastructure’s 49% share of capital expenditure(excluding customer contributions) is expected to be$214.6 million for the year ending 31 December 2006.
Spark Infrastructure expects that a reasonable portion of capitalexpenditure of the Asset Companies would be funded by debtdrawdowns in future, in accordance with regulatory principlesaround capital structure.
129
Table 11.2 Pro forma aggregated cash flow statement information for the Asset Group
Capital receipts from customersSpark Infrastructure has a 49% indirect share ofcapital receipts from customers that relate to thereceipt of proceeds from customers in relation tonetwork augmentation assets. For the year to31 December 2006, these capital receipts areforecast to be $39.0 million.
Cash flow from investing activitiesCash flow from investing activities is forecast tototal an outflow of $175.6 million in the year to31 December 2006.
Proceeds from borrowingsSpark Infrastructure has a 49% indirect share of thechanges in Senior Debt at the Asset Companies. Adiscussion of historical movements in Senior Debtand the assumptions relating to forecast changes inSenior Debt levels for the Asset Companies arediscussed in Sections 11.8.4 and 11.9.
Spark Infrastructure’s 49% indirect share of proceedsfrom Senior Debt borrowings at the AssetCompanies is forecast to be $51.2 million for theyear ending 31 December 2006.
Repayment of Senior Debt borrowingsSpark Infrastructure has a 49% indirect share ofchanges in Senior Debt at the Asset Companies.A discussion of historical movements in Senior Debtand the assumptions relating to forecast changes inSenior Debt levels for the Asset Companies arediscussed in Sections 11.8.4 and 11.9.
Spark Infrastructure’s 49% indirect share ofrepayment of Senior Debt borrowings at the AssetCompanies is forecast to be $73.5 million for theyear ending 31 December 2006.
Cash flow available for distribution toSpark InfrastructureSpark Infrastructure is entitled to receive 49% ofdistributions from the Asset Companies. Thesedistributions are expected to comprise interestincome, capital returns from subordinated debtarrangements, Preferred Capital Distributions fromthe ETSA partnership and potentially dividends fromCHEDHA.
A total of $187.2 million is expected to be payable bythe Asset Group to Spark Infrastructure in respect ofthe year ending 31 December 2006, calculated asthe sum of the following items:• $96.5 million subordinated interest;• $21.0 million subordinated debt principal; and• $69.7 million Preferred Capital Distribution.
Of the $187.2 million that is expected to be payable,Spark Infrastructure is expected to receive$149.7 million of cash in the year ending31 December 2006. The accrued balance,$37.5 million, is expected to be received in the firstthree months of 2007. In the 2006 year, SparkInfrastructure is also expected to receive cash of
$6.8 million relating to interest and principal accruedfrom the year ending 31 December 2005, resulting ina total of $156.5 million expected to be received forthe year ending 31 December 2006, as shown inTable 11.4. This is described in more detail below.
Subordinated interestThe Asset Group is expected to incur subordinateddebt interest expense of $132.0 million in the yearending 31 December 2006, as shown in Table 11.1.Of this amount, $96.5 million is attributable to SparkInfrastructure and $35.5 million to HKE. Thesubordinated interest cash payments expected to bemade by the Asset Group in the year ending31 December 2006 total $113.7 million, shown inTable 11.2, of which $84.5 million is expected to bereceived by Spark Infrastructure and $29.2 million byHKE. The expected receipt by Spark Infrastructure ofAsset Group subordinated cash payments is shownin Table 11.4. Of the $84.5 million expected to bereceived, $2.7 million relates to interest payable forthe year ended 31 December 2005 while $81.8million relates to interest payable for the 2006 year.The balance ($14.8 million) of interest payable in2006 is expected to be paid in cash in the first threemonths of 2007.
Subordinated Debt principal and interest repaidSubordinated Debt principal and interest totalling$21.0 million is expected to be payable by the AssetGroup in the 12 months to 31 December 2006. TheAsset Group is expected to pay a total of$17.7 million ($8.3 million plus $9.4 million) in theyear ending 31 December 2006, as shown in Table11.2, consisting of $2.2 million of principal relating to2005 and $15.5 million principal relating to 2006. Thebalance of 2006 principal ($5.5 million) is expected tobe received in the first three months of 2007.
Preferred Capital DistributionSpark Infrastructure has contributed 100% of thepreference capital in ETSA. It will therefore receive100% of the expected Preferred Capital Distributionpayable of $69.7 million in 2006. In the year ending31 December 2006, ETSA is expected to pay a totalcash payment of $54.2 million of which $1.9 millionrelates to a distribution from 2005 and $52.2 millionrelates to distributions from 2006. The balance of the2006 distributions, $17.4 million, is expected to bepaid in the first three months of 2007. The AssetGroup payment shown, $26.5 million, representsonly 49% of the $54.2 million that SparkInfrastructure is expected to receive in 2006.
Cash flow from financing activitiesCash flow from financing activities is forecast toequal an outflow of $324.7 million in the year to31 December 2006.
11.3 Spark Infrastructure – Directors’ Forecast Income
Statement Information
This Section contains summary forecast financial informationfor Spark Infrastructure, including:• the directors’ forecast for Spark Infrastructure’s income
statement for the period from the Issue Date to31 December 2005 and for the year ending 31 December2006. Refer to Table 11.3;
• the directors’ forecast for Spark Infrastructure’s statementof cash flows for the period from Issue Date to 31 December2005 and for the year ending 31 December 2006. Refer toTable 11.4; and
• the directors’ forecast for Spark Infrastructure’s distributionsfor the period from Issue Date to 31 December 2005 andthe year to 31 December 2006 and the expecteddistributions for year to 31 December 2007. Refer toTable 11.5.
The Forecast Information is likely to vary from actual resultsand any variation may be material. Accordingly, neither SparkInfrastructure nor their directors can give any assurance that theforecasts will be achieved. Events and outcomes may differ inamount and timing from the assumptions, with materialconsequential impact on the Forecast Information.
11.3.1 Directors’ forecast for Spark Infrastructure’s
income statement
Table 11.3 below shows the directors’ forecast incomestatement for Spark Infrastructure for the period from IssueDate to 31 December 2005 and for the year ending31 December 2006.
11.3.2 Discussion and analysis – income statement
This section should be read in conjunction with the basis ofpreparation of the Financial Information, the Report ondirectors’ forecasts in Section 12 and where it relates toForecast Information, the Material Assumptions in Section 11.8,the commentary in Section 11.1.2 and the risk factors inSection 13.
Interest incomeSpark Infrastructure is expected to earn interest income fromthe provision of subordinated debt to the Asset Group. Theinterest rate is forecast to average approximately 10.85% perannum on these debt facilities during the Forecast Period. Forthe year to 31 December 2006, interest income is expected tototal $96.5 million.
Share of income from Asset GroupSpark Infrastructure is expected to earn equity accountedprofits from its equity investments in the Asset Group, throughits investment in CHEDHA (the holding company for CitiPowerand Powercor), and its partnership interest in ETSA includingits interest in the Preferred Partnership Capital. For the yearto 31 December 2006, Spark Infrastructure’s 49% equityaccounted share of income from the Asset Group is expectedto total $78.7 million. This is equal to the Asset Group NPATof $15.8 million plus $69.7 million of Preferred CapitalDistributions less $6.8 million of additional depreciationand amortisation incurred.
Table 11.3 Spark Infrastructure’s forecast income statement
1 This represents Spark Infrastructure’s share of net profit after tax of the Asset Group, plus Preferred Partnership Capital income of $69.7 millionand less an additional depreciation charge of $6.8 million.
(8.9)(0.9)Net loss after tax attributable to Holders
(1.0)(0.0)Income tax expense
(7.9)(0.9)Net loss before tax attributable to Holders
(137.0)(3.8)Interest expense – Loan Notes (Distribution to Holders)
129.22.9Net profit before tax and loan notes attributable to Holders
(27.9)(0.8)Interest expense – Senior Debt
(5.6)(0.2)Other operating expenses
(12.5)(0.3)Management Fees
175.24.2Total income before Management Fees, Operating Expenses and Interest
78.71.5Share of income from Asset Group (including Preferred PartnershipCapital income)1
Total income before management fees, operatingexpenses and interestFor the year to 31 December 2006, SparkInfrastructure’s total income before management fees,operating expenses and interest is forecast to be$175.2 million.
Management feesFor the year to 31 December 2006, the Manager isforecast to receive a Base Fee of $12.5 millionconsistent with the Material Assumptions as set outin Section 11.8.3. Of this, $9.7 million is expected tobe paid in the year to 31 December 2006, and thebalance is expected to be paid in the year to31 December 2007.
It has been assumed that Spark Infrastructure willperform in line with the Benchmark Index and thatno Performance Fee will be paid. Refer to Section 10for details of the Performance Fee.
Other operating expensesSpark Infrastructure is expected to incur otheroperating expenses which relate to certainadministration costs and in some cases, duediligence costs in relation to potential acquisitionopportunities which are unsuccessful and notrecoverable. For the year to 31 December 2006,other operating expenses are forecast to be $5.6million. The basis for this forecast appears in theMaterial Assumptions relating to Spark Infrastructurein Section 11.8.3.
Interest expense – Senior DebtFor the year to 31 December 2006, interest expensefor Senior Debt is forecast to be $27.9 million. Thebasis of this forecast appears in the MaterialAssumptions relating to Spark Infrastructure inSection 11.8.3 and in the Senior Debt summary inSection 11.9.
Net profit before tax and Loan Notes attributableto HoldersFor the year to 31 December 2006, net profit beforetax and Loan Notes attributable to Holders is forecastto be $129.2 million. The basis for this forecastappears in the Material Assumptions relating toSpark Infrastructure in Section 11.8.3.
Interest Expense – Loan NotesFor the year to 31 December 2006, interest expenseon Loan Notes, which are distributions to Holders areexpected to total $137.0 million. The basis for thisforecast appears in Section 11.8.3.
Net loss attributable to HoldersNet loss after tax attributable to Holders is forecastto total a loss of $8.9 million.
11.4 The Directors’ Forecast for Spark
Infrastructure’s Statement of Cash Flows
Table 11.4 shows the Forecast Statement of CashFlows for Spark Infrastructure over the ForecastPeriod reflecting the formation of SparkInfrastructure and its acquisition of 49% interestin the Asset Group on the Issue Date.
The cash flow forecasts above are not presented in aformat consistent with a statutory disclosure but havebeen formulated to highlight Spark Infrastructure’scash flows that may be distributable to Holders. TheForecast Information is likely to vary from actualresults and any variation may be material. Accordingly,neither Spark Infrastructure nor its directors can giveany assurance that the forecasts will be achieved.Events and outcomes may differ in amount and timingfrom the assumptions, with material consequentialimpact on the Forecast Information.
Non-Recurring ItemsThe following items are one-off non-recurring itemsthat relate to the successful completion of the Offer,the acquisition of the 49% interest in CHEDHA andETSA and the restructuring and refinancing of theshareholder loans:• net offer proceeds from issue of Stapled Securities.• payment for a 49% interest in the Asset
Companies; and• loans to Asset Companies.
Spark Infrastructure will acquire the 49% interest inCHEDHA and ETSA, 100% of the PreferredPartnership Capital in ETSA and make subordinatedloans to CHEDHA and ETSA for an aggregateamount of $2,321.8 million. This will be funded byStapled Securities issued to CKI, proceeds raisedunder this Offer, and bank debt.
The Offer is expected to raise gross proceeds of$1,817.6 million, which together with the 99.9 millionStapled Securities issued to CKI as partialconsideration for the sale of the Asset Companies toSpark Infrastructure, is expected to result in SparkInfrastructure issuing 1,008.7 million StapledSecurities to raise $2,017.3 million.
Spark Infrastructure will also raise $425 million in bankdebt, which together with the equity raised under theOffer will be used to fund the acquisition, lesstransaction costs of $70.5 million (inclusive of GSTwhere applicable).
Please refer to the sources and application of fundssummary in the Offer summary for more information.
Distributions from the Asset GroupSpark Infrastructure is forecast to receive interestincome on the subordinated debt and partnershipdistributions from the Asset Group, based on theMaterial Assumptions outlined in Section 11.8. Forthe year to 31 December 2006, interest income anddistributions from the Asset Group are expected tototal $156.5 million.
–425.0Movement in borrowings – Spark Infrastructure
–2,017.3Net proceeds from issue of Securities (including CKI 9.9%)
–(2,442.3)Payment for purchase of 49% interest in Asset Companies (includingcapitalised transaction costs)
143.0–Cash flow from Operations
––Movements in working capital
(3.8)–Other operating expenses
(9.7)–Management fees
156.5Total Distributions and income from the Asset Group
8.3–Amortisation of accrued interest
9.4–Amortisation of loan principal
84.5–Interest received
54.2–Distributions from the Asset Group
20062005$ million
Directors’ forecast
for the year ending
31 December
Directors’ forecast
for the period from
Issue Date to
31 December
Management FeesFor the year to 31 December 2006, Spark Infrastructure isforecast to pay a Base Fee of $9.7 million consistent with theMaterial Assumptions.
Movement in borrowingsAs discussed in Section 11.8, Spark Infrastructure will raise$425 million in Senior Debt underwritten by Deutsche Bank andCBA. The debt is used to partially finance the acquisition ofSpark Infrastructure’s 49% interest in the Asset Companies. Inaddition, Spark Infrastructure will have access to a $50 millionworking capital facility which is expected to be undrawn. SparkInfrastructure is not forecast to raise additional debt or repaydebt during the Forecast Period.
Senior Debt interest – Spark InfrastructureFor the year to 31 December 2006, interest expense paid onthe Spark Infrastructure Senior Debt is forecast to be$27.5 million. The basis of this forecast appears in theassumptions relating to Spark Infrastructure in Section 11.8.3.
Cash Flow attributable to HoldersCash flow attributable to Holders is forecast to total$115.5 million for the year to 31 December 2006. This isexpected to be used to pay the March 2006 and September2006 distributions which total $74.9 million.
11.5 Directors’ Forecast and Expected Distributions for
Spark Infrastructure
Table 11.5 below shows the directors’ forecast statement ofdistributions for Spark Infrastructure over the Forecast Period and the expected distributions for the year to 31 December 2007.
Spark Infrastructure is forecasting a cash distribution of0.39 cents per Stapled Security for the period from the IssueDate to 31 December 2005.
Spark Infrastructure is forecasting a cash distribution of14.07 cents per Stapled Security for the 12 months to31 December 2006. This represents a cash distribution yieldof 10.05% per annum based on the payment of the Retail FirstInstalment of $1.40.
The directors expect a cash distribution of17.06 cents per Stapled Security for the 12 monthsto 31 December 2007. This represents a cashdistribution yield of 8.3% per annum based on aRetail Application Price of $2.00, assuming paymentof Instalment Interest at a rate of 7.39% per annum(equating to approximately 6 cents) and treatingInstalment Interest as an addition to the RetailApplication Price. For details of how InstalmentInterest is calculated and how the Instalment InterestRate will be determined, refer to Section 1.4.4.
The forecast cash distribution for the 12 monthsto 31 December 2006 is based on the ForecastInformation as set out in this Section 11.
The expected distribution for the 12 months to31 December 2007 has been provided as a guidefor Investors, primarily to illustrate the effect of theInstalment Purchase Arrangements on distributionyields. Detailed financial forecast information has notbeen presented for that year and the IndependentReview of Directors’ Financial Forecasts in Section12.2 does not cover that period.
The expected cash distribution for the 12 months to31 December 2007 has been estimated by referenceto a cashflow model prepared by the AssetCompanies and Spark Infrastructure which has beenassessed for consistency with the recent regulatorydeterminations. The directors have assessed the
anticipated cashflows against a number of materialvariables affecting the expected operating results andcashflows of the Asset Companies and SparkInfrastructure, including the ongoing working capitaland capital expenditure requirements of the AssetCompanies. They have also had regard to thefinancing facilities available and likely to be available tothe Asset Companies and Spark Infrastructure. Whilethe distribution for the period to 31 December 2007 isinherently more difficult to assess than for 2006, thedirectors believe that the expected distribution is anappropriate guide to likely distributions for that period.
The ability to pay future distributions will depend on arange of factors, including the results of operations ofthe Asset Companies, availability of distributable cashflow, availability of new or continued debt facilities,Spark Infrastructure’s financial position, taxationconsiderations, the ongoing capital and cashrequirements of the Asset Companies and such otherfactors that the boards of the Stapled Entitiesconsider relevant. It is not certain that thedistributions or the cash distribution yields set outin the table or described above will be achieved.Investors should carefully read this Section 11 in itsentirety, as this section details the assumptions onwhich the forecasts and the expected distribution forthe 12 months to 31 December 2007 in this OfferDocument are based, and Section 13 relating to therisks associated with an investment in the Securities.el
even fin
anci
al in
form
atio
n
Table 11.5 Forecast and expected distributions1
Note:1 All financial forecasts have been prepared by Spark Infrastructure. It is not certain that the forecast information including
distributions will be achieved. Refer to Sections 11 and 13 for more information. 2 Instalment Interest is based on an assumed rate of 7.39% per annum and the expected Final Instalment Payment Date of
15 March 2007. The actual Instalment Interest Rate will be calculated as set out in Section 1.4.4. The Final Instalment PaymentDate may be earlier in certain limited circumstances as set out in Section 13.5.
3 Tax deferred component relates to a capital return component of the distribution and is expected to be funded from cash flowdistributed from the Asset Companies. Refer to the Taxation Report in Section 12 for more information.
4 Assumes that no Performance Fee is payable during this period and the Base Fee is calculated using a market capitalisation based on the Retail Application Price of $2.00.
8.30%n/an/a
Cash Yield on Retail Application Priceof $2.00 plus Instalment Interest of6 cents per Stapled Security2
assuming the Instalment Interest as anaddition to the Retail Application Price
n/a10.05%n/aYield on payment of Retail FirstInstalment of $1.40
20.40%3.45%3.45%Average % tax deferred
3.48 cents0.49 cents0.01 cents– Tax deferred3
13.58 cents13.58 cents0.38 cents– Taxable
17.06 cents14.07 cents0.39 centsCash distributions per Stapled Security
Assumptions underlying distributions expected for FY2007 In estimating the expected FY2007 distribution, the directorshave considered a number of material variables, including theexpected operating results and cashflows of the AssetCompanies and Spark Infrastructure, the ongoing workingcapital and capital expenditure requirements of the AssetCompanies and the financing facilities available and likely to beavailable to the Asset Companies and Spark Infrastructure.
The FY2007 expected distribution is based on a cashflow modelprepared by the Asset Companies and Spark Infrastructure. Inestimating the expected FY2007 distribution the directors haveconsidered:
• the estimated income of the Asset Companies which ispredominantly regulated in nature and consistent with recentregulatory determinations;
• whether the material variables affecting the expected resultsof operations of the Asset Companies and SparkInfrastructure in FY2007 are materially consistent with thoseused for the FY2006 financial forecasts and the basis forthose differences;
• the general risks (as considered in Section 13) as they mightapply to the expected FY2007 cashflows of the AssetCompanies and Spark Infrastructure and the financingfacilities available to pay the expected distribution; and
• the results of sensitivity analyses undertaken on the materialvariables in respect of the expected FY2007 cashflows ofthe Asset Companies and Spark Infrastructure.
The factors underlying the expected results of operations ofthe Asset Companies in FY2007 and the cashflows of SparkInfrastructure are materially consistent with those used for theFY2006 financial forecasts, except for the following additionalassumptions:
Revenue• expected FY2007 revenue growth is in accordance with
recent regulatory determinations;
• additional revenue growth will occur through ETSA’s non-distribution income generated from construction andmaintenance services provided to Powercor and thirdparties. The additional profit margin on this income is notexpected to be material;
Operating Expenses• a 6% increase in CHEDHA operating costs, that will be
impacted by higher levels of capital expenditure andassociated ancillary costs;
• a 11% increase in ETSA operating expenses, in accordancewith increased construction and maintenance services tothird parties and salary increments under the EBAs;
Capital Expenditure• a 21% increase in CHEDHA’s capital expenditure,
predominantly due to increased asset replacement, networkdevelopment and metering programs;
• ETSA’s capital expenditure is expected to remain relativelysteady relative to FY2006 due to completion of a capitalintensive outage system by the end of FY2006 offset by anincrease in network capacity upgrade projects;
Funding• an increase in debt levels is anticipated by CHEDHA. Also,
impacting CHEDHA funding are anticipated dividenddistributions;
Management Fees• the Base Fees are calculated in accordance with a market
capitalisation based on the Retail Application Price; and
• no Performance Fees are assumed to be payable.
11.6 Pro Forma Aggregated Balance Sheet Information
for the Asset Group
Spark Infrastructure’s consolidated 49% share of pro formaassets and liabilities in CHEDHA and ETSA as at 30 June 2005is shown in Table 11.6. It has been prepared on the basis thatthe Offer and the other assumed transactions described belowhad already occurred as at that date.
Transactions and adjustments underlying the preparation ofthe pro forma aggregated balance sheet for the AssetGroupThe pro forma aggregated balance sheet information of theAsset Group as at 30 June 2005 is based on the actual positionof CHEDHA and ETSA as at 30 June 2005.
Pro forma adjustments have also been made to the financialposition as at 30 June 2005 that had been prepared inaccordance with AGAAP to present the information inaccordance with A-IFRS (excluding AASB 132 “FinancialInstruments: Presentation and Disclosure” and AASB 139“Financial Instruments: Recognition and Presentation”).
Adjustments which have been made include:• adjustments for inter-entity transactions;• one off or non-recurring items of income and expenditure,
including the sale of CitiPower retailing business in 2002;• adjustments for inconsistent accounting policies between
CHEDHA and ETSA; and• adjustments required for the adoption of A-IFRS.
Further discussions of these adjustments appear in theInvestigating Accountant’s Report in Section 12.
Non-current interest bearing liabilitiesThe total of the non-current interest bearing liabilities consistsof senior debt of $1,989.4 million, finance lease liabilities of$2.7 million and subordinated debt from related parties of$1,513.1 million.
Preferred Partnership CapitalThe $622.3m of Preferred Partnership Capital (PPC) shown inTable 11.6 is preferred equity capital issued by ETSA. The PPCis wholly owned by Spark Infrastructure and for that reason isshown separately to the net assets of the Asset Group.
The PPC is a perpetual instrument that has no rights ofredemption by Spark Infrastructure. Distributions on the PPCare made entirely at the discretion of the ETSA board butPreferred Capital Distributions are cumulative and must be paidin full before any ordinary partnership distributions are made.
For the reasons set out above, the PPC has been treated asequity by ETSA, albeit a different class of equity which ranks inpriority to ordinary partner capital.
The PPC entitles Spark Infrastructure to equity account 100%of net profit after tax of ETSA up to a “cap” as prescribed bythe contractual arrangement governing the PPC. The “cap” iscalculated based on the rate of interest paid on ETSA’ssubordinated debt, averaging approximately 11.19% during theForecast Period. After this amount has been ascribed to thePPC, the residual profits will be equity accounted by theordinary partners (including 49% attributable to SparkInfrastructure).
Spark Infrastructure has treated its interest in ETSA pursuant toits holding of the PPC as an investment in a partnership. A-IFRS,in particular AASB 131: “Interests in Joint Ventures” prescribesthat an interest in a partnership must be accounted for using theequity method. Accordingly, this investment in PPC which hasbeen disclosed separately will be accounted for by SparkInfrastructure using the equity method.
On liquidation the PPC ranks behind all other creditors of ETSA,including subordinated debt holders.
Given the discretionary nature of the payments under the PPCand the subordinated ranking in relation to the subordinateddebt from CKI/HKE, Spark Infrastructure and CKI/ HKE haveentered into the Adjustment Deed (which is summarised inSection 14.7.4) to ensure that all parties are treated non-preferentially on a cash flow basis. Under that deed, to theextent that CKI/HKE receive payments under their subordinateddebt holding which exceed their proportionate share ofdistributed cashflows from ETSA, they are required to turn-oversufficient funds to Spark Infrastructure with the effect thatSpark Infrastructure and CKI/HKE each receive at the same timetheir proportionate share of those distributed cashflows fromETSA. The relative proportions reflect the respective ordinaryholdings of each of Spark Infrastructure and CKI/HKE in ETSA(that is, 49% / 51%). If such a turn-over payment is made, thepayment is treated as a limited recourse loan by CKI/HKE to asubsidiary of Spark Infrastructure – recourse is limited to futurereceipts by the PPC holder from ETSA in excess of theproportionate share of distributed cashflows.
The rights attaching to the PPC cannot be changed without aspecial majority decision of the ETSA partners.
11.7 Spark Infrastructure’s Pro Forma Balance Sheet
Information
Table 11.7 shows Spark Infrastructure’s pro forma consolidatedbalance sheet information as at 30 June 2005, assuming theOffer had occurred as at that date. Assets and liabilitiesattributable to Holders at Spark Infrastructure level are shownseparately in order to distinguish the assets and liabilities of theAsset Companies.
The directors are of the reasonable opinion that, after takinginto account Spark Infrastructure’s cash flows, the availability toSpark Infrastructure of debt financing and Spark Infrastructure’scash and cash equivalents, Spark Infrastructure has sufficientworking capital available to meet its stated objectives.The pro forma consolidated balance sheet information of SparkInfrastructure has been prepared based on completion of all ofthe transactions proposed in the Offer as if they occurred as at30 June 2005. These assumptions include:• Spark Infrastructure has issued $2,017 million of Stapled
Securities, the value of which has been allocated to theinstruments comprising the Stapled Securities and on lent toits controlled entities as described in Section 7;
• Spark Infrastructure has incurred $45.4 million in costspursuant to the issue of Stapled Securities which have beenallocated against each of the Stapled Securities on aproportional basis and have either been netted against theproceeds raised or included in the initial measurement of theliability at amortised cost, depending on classification;
• Spark Infrastructure has obtained $425 million in Senior Debtfinancing from Deutsche Bank and CBA and a $50 millionworking capital facility (which is not expected to be drawn);and
• Spark Infrastructure has incurred no more than $2 million incosts pursuant to the underwriting of Senior Debt financing,the costs of which have been included in the initialmeasurement of the liability at amortised cost.
Further discussions of these adjustments appear in theInvestigating Accountant’s Report in Section 12.
The Forecast Information has been prepared basedon certain assumptions about future events.A summary of the material assumptions underlyingthe Forecast Information as it relates from IssueDate to the year to 31 December 2006 is set outbelow. This summary is intended to assist investorsin assessing the reasonableness and likelihood ofthose future events occurring. Investors should beaware that the impact of future events may have amaterially different positive or negative effect on theForecast Information.
The Forecast Information is sensitive to changes inkey assumptions used in preparing those forecasts.Accordingly, potential investors should carefullyreview the Material Assumptions in conjunction withthe sensitivity analysis. The sensitivity analysis setout in Section 11.12 is designed to indicate to
investors one possible outcome given a change inone key assumption, holding all other assumptionsconstant. Investors should note that this analysis ismeant as a guide only and that the actual impactmay exceed the indicated level. The sensitivityanalysis should be reviewed with caution asassumption changes are unlikely to occur in isolation.The potential result of more than one assumptionchange occurring simultaneously has not beenpresented, nor has the potential impact of oneassumption change on changes in otherassumptions.
In most scenarios, given an adverse change to anassumption, Spark Infrastructure or the AssetCompanies would be expected to undertakeproactive steps to mitigate the impact of anypotential negative impact on earnings.
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Table 11.7 Spark Infrastructure pro forma consolidated balance sheet information
737.4Total equity
441.7Minority interest issued capital of other entities in the Stapled Group
295.7Issued capital of parent entity
Equity attributable to Stapled Security Holders
Equity
737.4Net assets
1,657.6Total liabilities
1,657.6Total non-current liabilities
423.2Borrowings
1,234.4Loan notes attributable to Stapled Security Holders
Non-current liabilities
–Borrowings
–Payables
Current liabilities
2,395.0Total assets
2,395.0Total non-current assets
1,451.5Investments accounted for under equity method
Asset Group holdings At completion of the Offer, Spark Infrastructure will own a 49% interest in each of ETSA andCHEDHA, which comprise the Asset Group. Economic interests in these Asset Companies are heldthrough a variety of instruments including equity, Preferred Partnership Capital, shareholder loansand subordinated debt.
Continuity of operations There will be no significant disruptions to the continuity of operations of any of Spark Infrastructure’sentities or the Asset Companies.
Insurance The Asset Companies maintain insurance policies which will assist to mitigate operational risks(e.g. bushfires) during the Forecast Period. It is assumed that insurance premiums will not increaseduring the forecast period. It should be noted, as a result of the effects of natural disasters such asHurricane Katrina, which caused severe losses in south-eastern United States in September 2005,general insurance premiums may increase and the Asset Companies may be required to pay higherinsurance premiums in the period post the Forecast Period.
Accounting policies The accounting policies have been adopted in accordance with A-IFRS and other mandatoryprofessional reporting requirements (such as the Urgent Issues Group) and the Corporations Act.
It has been assumed that there will be no material changes in these reporting requirements that willhave a material effect on the Asset Companies’ financial performance and reported cash flowsduring the Forecast Period.
The Financial Information presented is made in abbreviated form and does not comply with therequirements and standards applicable to annual reports prepared in accordance with theCorporations Act.
Legislation There will be no change in Federal, State or local Government laws, regulations or policies, or intaxation legislation that will have a material effect on the Asset Companies’ financial performanceand reported cash flows during the Forecast Period.
Economic and political There will be no significant change in prevailing economic and political conditions or the rate of environment economic growth in Victoria or South Australia.
Inflation There will be a general CPI increase of 2.5% per annum in Victoria and 2.5% per annum in SouthAustralia during the Forecast Period. CPI on network revenue for CitiPower and Powercor has beenforecast at 3.03%.
Acquisitions and investments There are no acquisitions or investments undertaken during the Forecast Period that will have amaterial impact on the financial performance and reported cash flows on the Asset Companies orthe Asset Group.
It should be noted that although no current plan exists to acquire new assets or businesses, it is theintention of Spark Infrastructure to make acquisitions should suitable opportunities arise.
Divestments There are no divestments of businesses assumed during the Forecast Period although SparkInfrastructure is considering the sale of CitiPower, Powercor and ETSA’s telecommunications assets.
Litigation and contingent Neither the Asset Companies nor Spark Infrastructure will incur any material liability in relation toliabilities the matters disclosed in the Additional Information.
No material litigation, negative findings from the current ATO audit or contingent liabilities areexpected to arise during the Forecast Period.
Issue Price The Final Price is $2.00 per Stapled Security which is the Retail ApplicationPrice.
Securities issued Post completion of the Offer, there will be 1,008,651,308 Stapled Securities onissue comprising 908,794,289 to be issued under the Offer and 99,856,479 tobe issued to CKI pursuant to sale of its 49% interest.
It is assumed that no Stapled Securities will be issued pursuant to the DRP orthe potential payment of Base or Performance Fees. The Performance Feesare not assumed to occur.
Capital raising Total funds raised are expected to be $2,242.6 million and are expected to beraised from the following sources:• $1,817.6 million pursuant to the Offer; and• $425 million pursuant to Spark Infrastructure Senior Debt financing.
These funds will be used to fund the acquisition of the 49% interest in theAsset Companies, repay $50 million of Senior Debt at CitiPower and to fundtransaction costs.
Instalment Interest It is assumed that the interest payable on the Final Instalment is equal to amargin of 1.5% over the Market Rate. This interest rate, which is set at thecompletion of the Bookbuild, is anticipated to total 7.39%.
Implementation Deed Spark Infrastructure will acquire the 49% interest in the Asset Companies,100% of the Preferred Partnership Capital in ETSA and make subordinatedloans to CHEDHA and ETSA for an aggregate amount of $2,321.8 million.This includes the 99.9 million Stapled Securities to be issued to CKI asconsideration for the sale.
Transaction expenses Total transaction expenses described in the Offer Document are deductedfrom gross proceeds and are estimated to total $70.5 million (including of GSTwhere applicable).
Acquisition date It is assumed that Spark Infrastructure will acquire the 49% interest in theAsset Companies on or near 21 December 2005.
This date is different from the acquisition date assumed for the pro formaadjustments assumed for the presentation of pro forma historical informationand the pro forma balance sheet. It reflects the actual date that SparkInfrastructure will acquire its 49% interest in the Asset Companies.
Issue Date Securities will be allotted to Applicants on or near 21 December 2005.
11.8.3 Specific assumptions – Spark Infrastructure assumptions
Distributions from Asset Spark Infrastructure expects to receive interest income from the SubordinatedCompanies Debt, return of loan principal, Preferred Capital Distributions, and ordinary
partnership distributions.
Loan Notes Loan Notes are expected to account for the majority of the distributionsduring the Forecast Period.
The Loan Notes have a 100 year, non-amortising term and accrue interestat 10.85% of the face value on a cumulative basis. $1,262.8 million under theOffer will be allocated to Spark Infrastructure as Loan Notes which will beused to subscribe for Subordinated Debt in CHEDHA and Preferred PartnershipCapital in ETSA. Interest will be payable semi-annually on the 15 March and15 September.
Subordinated Debt Spark Infrastructure provides a series of subordinated loans to holdingcompanies of the Asset Companies from which it accrues interest income.These subordinated loan facilities total $1,262.8 million and earn 10.85% perannum over the Forecast Period.
Management Fees Management Fees have been calculated based on the terms set out in theSpark Infrastructure Trust Constitution and the Management Agreement.It has been assumed that Spark Infrastructure will perform in line with theBenchmark Index and that no Performance Fees will be paid. Refer toSection 10 for details of the Performance Fees including those circumstancesunder which they will be paid and how they will be calculated. The Base Fee iscalculated using a market capitalisation based on the Retail Application Price.
Other operating expenses Other operating expenses include amortisation of loan note and debt underwriting fees as well asfailed due diligence costs, listing fees and the general ongoing costs of a listed entity.
Debt and interest expense Spark Infrastructure will borrow $425 million of Senior Debt from Deutsche Bank and CBA and willhave access to a $50 million working capital facility. The bank facilities provided comprise a:• $200 million three year term;• $225 million five year term; and• $50 million working capital facility which is not expected to be drawn.
This interest rate will be set at the Issue Date and the Senior Debt is assumed to be at least 95%hedged over the term of the respective facilities. Interest on $425 million facilities is expected tototal 6.58% per annum.
Investors should refer to Section 7.9 for the borrowing policy of Spark Infrastructure.
Income tax Spark Infrastructure is not expected to pay tax during the Forecast Period. Unless otherwisedetermined by the Responsible Entity, 100% of distributions from the Loan Notes and SparkInfrastructure Trust will be passed to Holders on a pre-tax basis.
Distribution policy Potential investors should refer to the Offer Summary and Section 7.7 for a summary of thedistribution policy of Spark Infrastructure.
Distributions are only payable to Spark Infrastructure from the Asset Companies if cash flow afterservicing Senior Debt at the Asset level is satisfied and distributions to equity are not limited orconstrained by financial covenants that restrict the payment of distributions.
Distribution tests and covenants that also exist in the Spark Infrastructure bank facilities areassumed to be met. A summary of the debt facilities is included in Section 14.16.
Holders are entitled to distributions from the Asset Companies payable to Spark Infrastructure fromthe Issue Date.
11.8.4 Specific assumptions – Asset Company assumptions
11.8.4.1 CitiPowerFinal Regulatory Decision The price determination delivered by the ESC on 19 October 2005 (Victorian Final Regulatory
Decision) is the basis of regulatory revenue forecasts for CitiPower over the Forecast Period.
No outcome, positive or negative from an appeal to either the Appeal Panel or the Supreme Courtrelating to the Victorian Final Regulatory Decision as it relates to CitiPower is assumed.
Regulated distribution tariffs There will be no substantial change to the regulatory environment as it relates to distribution tariffs,as described by the Victorian Final Regulatory Decision during the Forecast Period.
Distribution volumes The volume of electricity distributed by CitiPower is based on the assumptions of the Victorian FinalRegulatory Decision.
The actual distribution volumes and load growth may change if other factors that drive distributionvolumes differ from the assumptions made in the Victorian Final Regulatory Decision.
Revenue from non-distribution There will be no material change to the nature of non-distribution revenue which includes items activities such as the provision of public lighting and metering services. Revenue from this segment is
expected to grow at CPI over the Forecast Period.
Revenue from non-regulated Revenue from non-regulated activities relating to external construction and network maintenance activities activities and information technology and telecommunication services is expected to eventuate over
the Forecast Period in line with the organisation’s strategies relating to its non-regulated business.
Operating expenditure Operating expenditure associated with the operation, management and maintenance of the networkhas been forecast on the basis of the ability to execute the operating plan to meet planned networkavailability and performance more efficiently over the Forecast Period relative to the Victorian FinalRegulatory Decision.
Capital expenditure Capital expenditure associated with the expansion, rectification and safeguarding of the network hasfactored in the Victorian Final Regulatory Decision, historical expenditure and the ability to executethe capital plan to meet planned network availability and performance over the Forecast Period. Aportion of the capital expenditure has been funded using drawdowns of borrowings and it isassumed that Senior Debt facilities are available for this purpose.
Depreciation Depreciation is calculated on a straight line basis to amortise the cost of property, plant andequipment (excluding land) over its expected useful life to the Asset Group.
Senior Debt Citipower’s Senior Debt over the Forecast Period has been forecast on the basis of expectedborrowings and financing facilities and the refinancing of those facilities.
A description of the financing facilities for CitiPower as at 30 June 2005 are described inSection 11.9.1 and in Section 14.
Senior Debt interest expense Interest expense over the Forecast Period has been forecast on the basis ofexpected borrowings and financing facilities, current interest rates and timingof interest payments and assuming that CitiPower retains its A– credit ratingfor its senior unsecured obligations from S&P.
CitiPower’s Senior Debt is predominantly floating rate debt with varying termsto maturity. The floating rate debt has been hedged with interest rate swapsthat fix the interest rate through to the end of the regulatory period (excludingits working capital facilities). Over the Forecast Period, CitiPower will haveapproximately 98% of its Senior Debt hedged.
Income tax A financial year ending 31 December is adopted for taxation purposes and atax rate of 30% is applicable.
Tax payable has been calculated on the assumptions that:• CHEDHA, which holds 100% of both CitiPower and Powercor, is a tax
consolidation group;• no liability arises from the ATO audit of Powercor which is referred to in
Section 13; and• as at 30 June 2005, CHEDHA had gross carry forward tax losses of
$601 million.
11.8.4.2 PowercorFinal Regulatory Decision The price determination delivered by the ESC on 19 October 2005 (Victorian
Final Regulatory Decision) is the basis of regulatory revenue forecasts forPowercor over the Forecast Period.
No outcome, positive or negative from an appeal to either the Appeal Panel orthe Supreme Court relating to the Victorian Final Regulatory Decision as itrelates to Powercor is assumed.
Regulated distribution tariffs There will be no substantial change to the regulatory environment, as it relatesto distribution tariffs, as described by the Victorian Final Regulatory Decisionduring the Forecast Period.
Distribution volumes The volume of electricity distributed by Powercor is based on the assumptionsof the Victorian Final Regulatory Decision.
The actual distribution volumes and load growth may change if other factorsdiffer from the assumptions made in the Victorian Final Regulatory Decision.
Revenue from non-distribution There will be no material change to the nature of non-distribution revenue activities which includes items such as the provision of public lighting and meter
services. Revenue from this segment is expected to grow at CPI over theForecast Period.
Revenue from non-regulated Revenue from non-regulated activities relating to external construction and activities network maintenance activities and information technology and
telecommunication services is expected to eventuate over the Forecast Periodin line with the organisation’s strategies relating to its non-regulated business.
Operating expenditure Operating expenditure associated with the operation, management andmaintenance of the network has been forecast on the basis of the ability toexecute the operating plan to meet planned network availability andperformance more efficiently over the Forecast Period relative to the VictorianFinal Regulatory Decision.
Capital expenditure Capital expenditure associated with the expansion, rectification andsafeguarding of the network has factored in the Victorian Final RegulatoryDecision, historical capital expenditure and the ability to execute the capitalplan to meet planned network availability and performance over the ForecastPeriod. A portion of the capital expenditure has been funded using drawdownsof borrowings and it is assumed that Senior Debt facilities are available forthis purpose.
Depreciation Depreciation is calculated on a straight line basis to amortise the cost of property, plant andequipment (excluding land) over its expected useful life to the Asset Group.
Senior Debt Senior Debt over the Forecast Period has been forecast on the basis of expected borrowings andfinancing facilities and the refinancing of those facilities.
A description of the financing facilities for Powercor as at 30 June 2005 are described inSection 11.9.1 and in Section 14.
Senior Debt Interest Expense Interest expense over the Forecast Period has been forecast on the basis of expected borrowingsand financing facilities, current interest rates and timing of interest payments and assuming thatPowercor retains its A– credit rating from S&P.
Powercor’s Senior Debt is predominantly floating rate debt with varying terms to maturity. Thefloating rate debt has been hedged with interest rate swaps that fix the interest rate through to theend of the regulatory period (excluding its working capital facilities). Over the Forecast Period,Powercor will have approximately 88% of its Senior Debt hedged.
Income tax A financial year ending 31 December is adopted for taxation purposes and a tax rate of 30% isapplicable.
Tax payable has been calculated on the assumptions that:• CHEDHA, which holds 100% of both CitiPower and Powercor, is a tax consolidation group;• no liability arises from the ATO audit of Powercor which is referred to in Section 13; and• as at 30 June 2005, CHEDHA had gross carry forward tax losses of $601 million.
11.8.4.3 ETSAFinal Regulatory Decision The Final Electricity Distribution (Variation) Price Determination delivered by the ESCOSA in June
2005 (ETSA Final Regulatory Decision) is the basis of regulatory revenue forecasts for ETSA overthe Forecast Period.
Regulated distribution tariffs There will be no substantial change to the regulatory environment as it relates to distribution tariffs,as described by the ETSA Regulatory Decision during the Forecast Period.
Distribution volumes and The volume of electricity distributed by ETSA is based on the assumptions of the ETSA Final load growth Regulatory Decision.
Distribution revenue in the financial plan for 2006 includes sales growth of 0.2% above the growthassumed in the Regulator’s determination. This is within the tolerance allowed in the Regulator’scap and collar arrangement.
The actual distribution volumes and load growth may change if other factors that drive distributionvolumes differ from the assumptions made in the ETSA Final Regulatory Decision.
Revenue from excluded There will be no material change to the nature of excluded services revenue which is generatedservices from a number of services including the provision of metering and public lighting.
Revenue from non-regulated Revenue from non-regulated activities including performance of construction and network activities maintenance activities for third parties is expected to increase over the Forecast Period in line with
the organisation’s strategies to grow its non-regulated business.
Operating expenditure Operating expenditure associated with the operation, management and maintenance of the networkhas been forecast on the basis of the ability to execute the operating plan to meet planned networkavailability and performance efficiency over the Forecast Period.
Capital expenditure Capital expenditure associated with the expansion, rectification and safeguarding of the network hasbeen forecast on the basis of the ETSA Final Regulatory Decision, historical capital expenditure andthe ability to execute the capital plan to meet planned network availability and performance over theForecast Period. A portion of the capital expenditure has been funded using drawdowns ofborrowings and it is assumed that Senior Debt facilities are available for this purpose.
ion Depreciation Depreciation is calculated on a straight line basis to amortise the cost of
property, plant and equipment (excluding land) over its expected useful life tothe Asset Group.
Senior Debt Senior Debt over the Forecast Period has been forecast on the basis ofexpected borrowings and financing facilities and the refinancing of thosefacilities.
Net borrowings are forecast to increase reflecting the requirement that debtwill be used to partially fund forecast ancillary capital expenditure expected tobe incurred over the Forecast Period. A summary of Senior Debt is provided inSection 11.9.1.
A description of the financing facilities for ETSA as at 30 June 2005 is providedin Section 11.9.1 and in Section 14.
Senior Debt Interest expense Interest expense over the Forecast Period has been forecast on the basis ofexpected borrowings and financing facilities, current interest rates and timing ofinterest payments and assuming that ETSA retains its A– credit rating from S&P.
Senior Debt is predominantly floating rate debt with varying terms to maturity.The majority of floating rate debt has been hedged with interest rate swapsthat fix the interest rate through to the end of the regulatory period (excludingits working capital facilities). Over the Forecast Period, ETSA will haveapproximately 96% of its Senior Debt hedged.
A detailed description of the financing facilities for ETSA as at 30 June 2005 isprovided in Section 11.9.1 and in Section 14.
Income tax A financial year ending 31 December is adopted for taxation purposes and atax rate of 30% is applicable.
Tax payable has been calculated on the assumptions that:• ETSA is a reporting but not a tax paying entity. The partners pay tax on their
share of the partnership’s income and are entitled to their share of anypartnership losses;
• no deductions in relation to the lease premiums, which are described inSection 13 and Section 14, are assumed;
• no additional liability arises from the ATO Audit of ETSA, which is describedin Section 13; and
• as at 30 June 2005, the partnership interest in ETSA had gross carryforward tax losses of $419 million.
11.9 Senior Debt and interest expense – Asset Companies
11.9.1 Senior Debt facilities
A summary of the Asset Companies’ Senior Debt facilities as at30 June 2005 is summarised in the table below. A summary ofeach of the debt facilities is set out in Section 14.
As at 30 June 2005, CitiPower had $1,082 million in debt drawnacross a range of capital market and bank debt facilities and$73 million in undrawn facilities available. CitiPower, whichcurrently has, and following completion of the Offer is expectedto have its unsecured Senior Debt rated A– by S&P, is geared
on a net debt basis at 68% of book capitalisation (defined asnet debt divided by total assets).
As at 30 June 2005, Powercor had $1,152 million in debt drawnacross a range of capital market and bank debt facilities and$120 million in undrawn facilities available. Powercor, whichcurrently has, and following completion of the Offer is expectedto have its unsecured Senior Debt rated A– by S&P, is gearedon a net debt basis at 43% of book capitalisation.
As at 30 June 2005, ETSA had $2,703 million in debtdrawn across a range of capital market and bankdebt facilities and $36 million in undrawn facilitiesavailable. $300 million in Wrapped Notes were drawndown in July 2005. Proceeds from this issue, andthe $265 million and $269 million U.S. PrivatePlacement, were used to repay the $225 million and$275 million Medium Term Notes and the Euro$258 million tranche that matured in July 2005.ETSA, which currently has, and post completion ofthe Offer is expected to have its unsecured SeniorDebt rated A– by S&P, is geared on a net debt basisat 57% of book capitalisation.
The current debt facilities provide terms of up to14 years and are subject to financial covenants whichin some cases limit the ability to pay distributions.Refer to the Material Contract Summary inSection 14 for a summary of the Senior Debt termsand conditions.
The Asset Companies are expected to remain activeparticipants in the debt markets and will seek topartially fund future capital expenditure withadditional debt subject to the intentions of theirrespective boards of directors regarding retainingtheir current respective credit ratings.
11.9.2 Historical Senior Debt interest expense
Historical movements in Senior Debt levels for eachof the Asset Companies on a 100% and 49% basisis summarised in Table 11.9.
Historical interest expense for Senior Debt at theAsset Companies on a 100% and 49% basis issummarised in Table 11.10.
Discussion and analysis – Senior Debt interestexpenseThis Section should be read in conjunction with thebasis of preparation of the selected Pro FormaHistorical Information and the InvestigatingAccountants’ Report.
FY2003 compared to FY2002Spark Infrastructure’s 49% interest in the SeniorDebt interest expense for the year to 31 December2003 increased by 13.1% to $155 million. Factorsthat contributed to interest expense for the AssetCompanies, on a 100% basis, included:• at CitiPower, Senior Debt of $673 million was
raised during February to replace bridging financefollowing the acquisition by CKI and HKE whichincreased debt to $1,073 million. The Senior Debtinterest at CitiPower for 2003 was $63.2 million;
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Table 11.10 Historical interest expense for Asset Companies
847916015513749% interest
171161327317280Total
9381167162161ETSA
4244889293Powercor
3636726327CitiPower
Asset Companies
20052004200420032002$ millions
For 6 months ended
30 June
Year ended
31 December
Table 11.9 Historical debt levels for Asset Companies
Table 11.11 Historical asset replacement capital expenditure for Asset Group
34.432.685.376.166.0Total
6.811.817.914.28.5ETSA
23.716.446.645.738.7Powercor
3.94.420.816.218.8CitiPower
Asset Companies
20052004200420032002$ millions
For 6 months ended
30 June
Year ended
31 December
Table 11.12 Historical growth capital expenditure for Asset Group
57.359.2117.6105.9104.6Total
25.334.365.152.752.9ETSA
21.115.431.732.631.2Powercor
10.99.520.820.620.5CitiPower
Asset Companies
20052004200420032002$ millions
For 6 months ended
30 June
Year ended
31 December
• at Powercor, Senior Debt decreased by $31 million mainlydue to surplus cash being used to repay commercial paperborrowings. Senior Debt interest at Powercor remainedconstant at $92.2 million; and
• at ETSA, Senior Debt increased by $61.6 million due to thedebt funding of ancillary capital expenditure. This resulted inan increase in Senior Debt interest expense by $0.6 millionto $161.6 million.
FY2004 compared to FY2003Spark Infrastructure’s 49% interest in the Senior Debt interestexpense for the year to 31 December 2004 increased by 3.2%to $160 million. Factors that contributed to interest expense forthe Asset Companies, on a 100% basis, included:• CitiPower Senior Debt remained constant at $1,073 million.
Senior Debt interest at CitiPower was $71.8 million, anincrease of $8.6 million. This increase was mainly due to afull year of interest in FY2004 following the raising of$673 million of additional Senior Debt in February 2003;
• at Powercor, Senior Debt decreased by $86 million due tothe repayment of commercial paper from surplus cash. As aresult, Senior Debt interest decreased by $3.9 million to$88.4 million; and
• at ETSA, Senior Debt increased by $569.6 million due to theissue of $534.5 million of U.S. Private Placement Notes inNovember 2004 to partially refinance debt maturing in July2005 and the debt funding of ancillary capital expenditure. Asa result, Senior Debt interest expense increased at ETSA by$4.9 million to $166.5 million.
Six month period to 30 June 2005 compared to six monthperiod to 30 June 2004Spark Infrastructure’s 49% interest in the Senior Debt interestexpense for the six months to 30 June 2005 increased by 6.3%over the corresponding period to $84 million. Factors thatcontributed to interest expense for the Asset Companies, ona 100% basis, included:• at CitiPower, Senior Debt increased by $9 million to
$1,082 million. Senior Debt interest expense at CitiPowerdecreased marginally to $35.5 million;
• at Powercor, Senior Debt decreased by $38 million principallydue to repayment of commercial paper. As a result, SeniorDebt interest at Powercor decreased by $2.0 million to$42.4 million; and
• at ETSA, Senior Debt increased by $590 million between30 June 2004 and 30 June 2005 due to the issue of$534.5 million of US Private Placement Notes in November2004 to partially refinance debt maturing in July 2005 and thedebt funding of ancillary capital expenditure. Senior DebtInterest expense increased by $12.4 million to $93.2 million dueto the timing of the issue of the US Private Placement Notes.
11.10 Capital expenditure – Asset Companies
11.10.1 Asset replacement capital expenditure
Spark Infrastructure’s 49% interest in the historical assetreplacement capital expenditure for the Asset Companiesappears in Table 11.11.
11.10.2 Growth capital expenditure – Asset Companies
Spark Infrastructure’s 49% interest in the historical growth capitalexpenditure for the Asset Companies appears in Table 11.12.
This Section should be read in conjunction with thebasis of preparation of the selected Pro FormaHistorical Financial Information, the InvestigatingAccountant’s Report.
FY2003 compared to FY2002Spark Infrastructure’s 49% interest in the respectiveAsset Companies’ capital expenditure for the yearto 31 December 2003 increased by 6.4% to$183 million due to:• at CitiPower, asset replacement capital
expenditure decreased by 13.8% to $16.2 million.Included in this expenditure was major capitalaugmentation programs and the commencementof a major overhead reliability improvementprogram. Growth replacement capital expendituremainly associated with customer connectionprojects remained constant at $20.6 million. Thetotal capital expenditure at CitiPower decreasedby 6.4% to $36.8 million;
• at Powercor, asset replacement expenditureincreased 18.1% to $45.7 million due to increasedoverhead and underground line replacementprograms. Customer connection activity increasedgrowth capital expenditure by 4.5% to$32.6 million due to higher demand for customerinitiated capital projects. Capital expenditure atPowercor increased by 12.1% to $78.3 million;and
• at ETSA, asset replacement expenditure increasedby 66.5% to $14.2 million due to increasedspending on line undergrounding projects andaging infrastructure, whilst growth capitalexpenditure associated with network expansiondecreased by 0.4% to $52.7 million due tomarginally lower customer demand for connectionactivities. Together this increased total capitalexpenditure at ETSA by 8.9% to $66.9 million.
FY2004 compared to FY2003Spark Infrastructure’s 49% interest in the respectiveAsset Companies’ capital expenditure for the year to31 December 2004 increased by 11.5% to$225 million due to:• at CitiPower, asset replacement expenditure
increased 28.3% to $20.8 million due to thereplacement of zone substation protectionequipment and refurbishment of zonesubstations. Growth capital expenditure remainedconstant at $20.8 million. Together this increasedtotal capital expenditure at CitiPower by 13.0%to $41.6 million;
• at Powercor, asset replacement expenditureincreased by 2.0% to $46.6 million due to thecontinued program of overhead and undergroundline replacements and cross-arms replacements.Customer connections capital expendituredecreased by 2.9% to $31.7 million. Togetherthis resulted in constant capital expenditure atPowercor at $78.3 million; and
• at ETSA, asset replacement expenditureincreased by 26.1% to $17.9 million due toincreased expenditure on replacing aginginfrastructure, whilst growth capital expenditureassociated with network expansion increased by23.5% to $65.1 million due to an increase incapacity upgrade and customer connectionactivities. Together this increased total capitalexpenditure at ETSA by 24.1% to $83 million.
Six month period to 30 June 2005 compared tosix month period to 30 June 2004Spark Infrastructure’s 49% interest in the respectiveAsset Companies’ capital expenditure for the sixmonths to 30 June 2005 increased by 2.0% to$103 million due to:• at CitiPower, asset replacement expenditure
decreased by 11.2% to $3.9 million due to thetiming of capital replacement programs, althoughthis was partially offset by costs associated withthe impact of a large storm in January 2005.Growth capital expenditure increased by 14.7% to$10.9 million reflecting higher customer connectionactivity. Together this increased total capitalexpenditure at CitiPower by 6.5% to $14.8 million;
• at Powercor, asset replacement expenditureincreased by 44.9% to $23.7 million due to timingof capital replacement programs and costsassociated with a large storm in January 2005.Growth capital expenditure increased 37% to$21 million due to increased demand forcustomer initiated capital projects. Together thisincreased total capital expenditure at Powercor by41% to $44.8 million; and
• at ETSA, asset replacement expenditure decreasedby 42.4% to $6.8 million mainly due to a reductionin the fleet replacement program, whilst growthcapital expenditure associated with networkexpansion decreased by 26.2% to $25.3 millionprimarily due to having completed theimplementation of Full Retail Contestability Systemsin early 2004. Together this decreased total capitalexpenditure at ETSA by 30.4% to $32.1 million.
11.11 Depreciation and amortisation expense – Asset
Companies
As discussed in Section 11.1, pro forma historical informationfor depreciation and amortisation expense was not prepared forinclusion in Table 11.1 as it was not considered to be indicativeof depreciation and amortisation expense for SparkInfrastructure in respect of its 49% equity accounted interest ineach of CHEDHA and ETSA going forward due to a notional fairvalue increase in the carrying value of certain depreciableassets and amortisable intangible assets of CHEDHA and ETSAas required under A-IFRS. The information presented in Table11.13 and the discussion and analysis that follows has beenprepared to assist Investors understand the impact of historicaldepreciation and amortisation as it relates solely to the AssetCompanies.
Spark Infrastructure’s 49% share of historical depreciation andamortisation expense of the Asset Companies appears inTable 11.13.
Discussion and analysis – depreciation and
amortisation expense
FY2003 compared to FY2002 Spark Infrastructure’s 49% interest in the respective AssetCompanies’ depreciation and amortisation expenses for theyear to 31 December 2003 increased by 18.4% to$140.1 million due to:• at CitiPower, following the acquisition in August 2002, asset
values and useful lives of distribution system assets andplant and equipment assets were reset. As a resultdepreciation expense for the four months to December 2002amounted to $7.7 million. On an annualised basisdepreciation expense increased by 5.9% to $24.5 millionmainly due to asset additions during the year. Also, followingthe acquisition, intellectual property asset values and usefullives were assessed and on an annualised basis amortisationexpense decreased by 8.8% to $2.0 million;
• at Powercor, depreciation expense increased by 2.4% to$46.5 million mainly due to the asset additions during theyear. Amortisation expense remained constant at $1.2 million;and
• at ETSA, depreciation and amortisation increased by 4.3% to$65.9 million. The increase of $2.7 million was due to higherdepreciation costs mainly as a result of an increase in capitalexpenditure and higher amortisation costs due to the write-off of loan fees associated with the refinancing ofsubordinated debt.
FY2004 compared to FY2003 Spark Infrastructure’s 49% interest in the respective AssetCompanies’ depreciation and amortisation expense for the year to31 December 2004 decreased by 6.1% to $131.6 million due to:• at CitiPower, depreciation expense decreased by 19% to
$21.6 million. Following the acquisition of CitiPower inAugust 2002 the working life of a number of CitiPower’s ITsystems was re-assessed. The working life of certain ofthese assets expired in August 2003 and as a consequencea $5.0 million depreciation charge for these assets in 2003did not arise in 2004. CitiPower’s IT systems that were fullydepreciated in 2003 consisted of Customer InformationSystem and Financial and Human Resource Systemsfollowing migration onto Powercor’s IT platforms.Amortisation expense decreased by 61% to $0.8 millionmainly due to a reassessment of remaining useful lives ofintellectual property assets;
• at Powercor, depreciation expense increased by 4.3% to$48.6 million mainly due to the asset additions during theyear. Amortisation expense remained constant at $1.2 million;and
• at ETSA, depreciation and amortisation decreased by 9.9%to $59.4 million. The decrease of $6.5 million was mainlydue to an increase in the asset lives of network distributionand sub-transmission lines of approximately 15 years.
Six month period to 30 June 2005 compared tosix month period to 30 June 2004 Spark Infrastructure’s 49% interest in the respectiveAsset Companies’ depreciation and amortisationexpense for the six months to 30 June 2005decreased by 4.9% to $64.3 million due to:• at CitiPower, depreciation expense remained
constant at $10.2 million. Amortisation expensealso remained constant at $0.7 million;
• at Powercor, depreciation expense increased by5.6% to $25.0 million mainly due to assetadditions over the 12 months to June 2005.Amortisation expense remained constant at$0.6 million; and
• at ETSA, depreciation and amortisation decreasedby 14.2% to $27.8 million. The decrease of$4.6 million was mainly due to an increase inthe asset lives of network distribution andsub-transmission lines of approximately 15 yearsin the second six months of 2004.
11.12 Sensitivity analysis
The Forecast Information is based on certainassumptions about events and actions, detailed inSection 11.8. Potential investors should be awarethat where assumptions have been made about
future events, the outcome of such events cannot bepredicted with certainty, and as a result, deviationsfrom the forecasts presented are expected.
Set out below is a summary of the sensitivity ofthe Financial Information for the year ending31 December 2006 to movements in a number ofMaterial Assumptions. Sensitivity analysis of theforecast period to 31 December 2005 is notpresented due to the expectation that variations tothe Material Assumptions are not expected to arise.
Due to the regulated nature of the Asset Companies,Spark Infrastructure is subject to less operatingvariations. The principal variations to which SparkInfrastructure and Holders under this Offer areexposed include:• change in distribution volumes;• changes in CPI;• changes in interest rates on unhedged borrowings;• changes in operating expenditure;• changes in capital expenditure;• the impact of Performance Fees payable to the
Manager as outlined under Section 14; and• the impact of the potential sale of the
telecommunication assets from CHEDHA andETSA to CKI and HKE.
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Table 11.14 Distribution volumes sensitivity analysis
(0.22)(2.21)(2.21)Distribution Volumes –0.5%
0.181.791.79Distribution Volumes +0.5%
200620062006$ million
Impact on the
Stapled Security
distributions
cents per
Stapled Security
year to
31 December
Impact on
Asset Group
net profit for
for year to
31 December
Impact on the
Asset Group
revenue
for year to
31 DecemberCase
Table 11.15 CPI sensitivity analysis
(0.04)(0.37)(0.37)CPI –0.5% per annum in both Victoriaand South Australia
0.040.370.37CPI +0.5% per annum in both Victoriaand South Australia
The most significant factor that impacts distribution volumes ofeach of the Asset Companies is weather. Changes in weatherpatterns from mild to extreme conditions directly impactelectricity demand which in turn directly impacts revenue.
The Forecast Information assumes average weather andelectricity consumption data. This has formed the basis of theelectricity distribution volumes assumed in the VictorianRegulatory Decision in October 2005 and the ETSA RegulatoryDecision in June 2005 which has also been assumed during theForecast Period. As weather is difficult to predict, revenue,earnings and distributions have been sensitised to changes indistribution volumes over the year to 31 December 2006.
In relation to ETSA, there is a revenue collar for distributionrevenues which will be maintained for the next five years. Thismeans that ETSA is only affected by the first 0.5% variance insales volume and 15% of any variance in excess of this level,for each sales category, per each regulatory year.
Table 11.14 identifies the impact of a ±0.5% change indistribution volumes on Asset Group revenue, Asset GroupNPAT and distributions to Holders.
11.12.2 CPI sensitivity
Movements in inflation impacts distribution revenue whichcomprise tariffs that are escalated at a proportion of CPI andother items such as certain operating expenditure items suchas wages and salaries. Table 11.15 identifies the impact of a0.5% movement in CPI for the year to 31 December 2006.
11.12.3 Interest rate sensitivity
Movements in interest rates affect the unhedged portion ofdebt, which for the Asset Group is less than 10% for the SeniorDebt. Spark Infrastructure’s debt is fixed rate and is not subjectto movements in interest rates. Table 11.16 identifies theimpact of a 0.5% movement in interest rates on unhedged debtfor the year to 31 December 2006.
11.12.4 Operating expenditure sensitivity
Unbudgeted changes in operating expenditure may arise froma number of factors, including changes in demand and load,higher wages claims by contractors or employees or industrialaction, and changes in material and supply costs.
The Asset Companies have the ability to manage the timing andlevel of certain operating expenditure items but not all items.Table 11.17 identifies the impact of changes in operatingexpenditure levels in each of the Asset Companies.
Changes in capital expenditure may arise due to anumber of factors including, but not limited to higherthan expected customer connections, damage to thenetwork and changes in demand and load.
The Asset Companies have the ability to manage thetiming and level of asset replacement capitalexpenditure, which permits some flexibility whenmanaging capital expenditure programs, but haveless control over growth capital expenditure. Table11.18 identifies the impact of changes in capitalexpenditure levels in each of the Asset Companies.
11.12.6 Performance Fee sensitivity
The Manager may be entitled to a Performance Feein any half year period in which Spark Infrastructure’saccumulated return exceeds the performance of theS&P ASX 200 Industrials Accumulation Index. Referto Section 10 for details of calculating thePerformance Fee.
The Forecast Information assumes the payment ofBase Fees as described in the Material Assumptionsbut assumes that Performance Fees are not payable.
Spark Infrastructure’s capacity to pay distributionsto Holders may be negatively affected by the impactof Performance Fees. Should Performance Feesbe payable during the Forecast Period, SparkInfrastructure may discuss with the Manager payingthese fees in the form of Stapled Securities tominimise dilution of yields, although this may resultin equity dilution.
The impact of Performance Fees, based on a range ofrelative out performance levels to the S&P ASX 200Industrials Accumulation Index, based on paymentsin cash, appear in Table 11.19. The impact ofPerformance Fees, paid in Stapled Securities,appears in Table 11.20. Refer to Section 10.6 for theexamples used in those tables.
11.12.7 Sale of the telecommunication assets
CHEDHA and ETSA are currently considering thepotential sale of their telecommunications businessto a company owned 50% by CKI and 50% by HKE.Although the telecommunications business isrelatively small and has to date not generated anymaterial revenue, the sale is expected to reduce theAsset Group’s earnings. However, this will be offsetby proceeds that the Asset Group would beexpected to receive. This in turn may impact SparkInfrastructure’s ability to pay distributions.
Table 11.21 identifies the earnings impact of a saleon the Asset Group and Spark Infrastructure andshows the impact on Spark Infrastructure’sdistributions to Holders.
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A description of the significant accounting policies ofSpark Infrastructure and the Asset Companies isgiven in the Investigating Accountant’s Report. Theapplication of these accounting policies requiresmanagement to make estimates, judgements andassumptions regarding expected outcomes oruncertainties in the determination of certainrevenues, expenses, assets and liabilities. Materiallydifferent financial results can occur if differentassumptions or conditions were to prevail in theapplication of these accounting policies or ascircumstances change and additional informationbecomes known.
The critical accounting policies and the areas thatrequire the most significant estimates, judgementsand assumptions to be used in relation to thepreparation of Spark Infrastructure’s FinancialInformation include:• impairment of assets;• income tax;• intangibles;• property, plant and equipment; and• revenue recognition.
Refer to the Investigating Accountant’s Report inSection 12 for more information.
11.13.1 Impairment of assets
At each reporting date, the Asset Companies willreview the carrying amounts of tangible andintangible assets to determine whether its assetshave experienced any event which may havetriggered an impairment. If any trigger of theimpairment exists, the recoverable amount of theasset is estimated to determine the extent of theimpairment loss (if any). Where an asset does notgenerate cash flows that are independent from otherassets, the Asset Companies will estimate therecoverable amount of the cash-generating unit towhich the asset belongs.
Recoverable amount is the higher of fair value lesscosts to sell and value in use. In assessing value inuse, the estimated future cash flows are discountedto their present value using a pre-tax discount ratethat reflects current market assessments of the timevalue of money and the risks specific to the asset forwhich the estimates of future cash flows have notbeen adjusted. If the recoverable amount of an asset(or cash-generating unit) is estimated to be less thanits carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverableamount. An impairment loss is recognised in theprofit and loss immediately, unless the asset iscarried at fair value, in which case the impairmentloss is treated as a revaluation decrease.
11.13.2 Income tax
Current taxCurrent tax is calculated by reference to the amountof income taxes payable or recoverable in respect ofthe taxable profit or tax loss for the period. It iscalculated using tax rates and tax laws that havebeen enacted or substantively enacted by thereporting date. Current tax for current and priorperiods is recognised as a liability (or asset) to theextent that it is unpaid (or refundable).
Deferred taxDeferred tax is accounted for using thecomprehensive balance sheet liability method inrespect of temporary differences arising fromdifferences between the carrying amount of assetsand liabilities in the financial statements and thecorresponding tax base of those items.
Deferred tax assets and liabilities are measured attax rates that are expected to apply to the periodswhen the asset and liability giving rise to them arerealised or settled, based on the tax rates (and taxlaws) that have been enacted or substantivelyenacted by the applicable reporting date. Themeasurement of deferred tax liabilities and assetsreflects the tax consequences that would followfrom the manner in which management expects, atthe applicable reporting date, to recover or settle thecarrying amount of its assets and liabilities.
Current and deferred tax for the periodCurrent and deferred tax is recognised as anexpense or income in the income statement, exceptwhen it relates to items credited or debited directlyto equity, in which case the deferred tax is alsorecognised directly in equity.
Tax consolidation legislationTwo tax consolidated groups are being formed withinthe Asset Group. The tax consolidated groups willcomprise wholly owned Australian resident entities.Each tax consolidated group will be taxed underAustralian taxation law as if it was a single entityrather than individual members being taxed. Taxexpense/income, deferred tax liabilities and deferredtax assets arising from temporary differences ofmembers of a tax consolidated group are recognisedin the separate financial statement of the membersof the tax consolidated group using the “separatetaxpayer within group” approach. Current taxliabilities and assets and deferred tax assets arisingfrom unused tax losses and tax credits of themembers of the tax consolidated group arerecognised by the head entity in the relevant taxconsolidated group.
Distribution LicenceCHEDHA’s/Powercor and Citipower’s Distribution Licences arerecorded at the cost of acquisition. The Distribution Licencesare considered to have an indefinite life as they were issued inperpetuity and as such, there is no requirement for them to beamortised. Impairment is reviewed at each reporting date andwhenever there is an indication that a Distribution Licence maybe impaired.
Lease PremiumETSA’s Lease Premium represents the difference between thepurchase price and the net assets acquired at thecommencement of the Lease. The Lease Premium is amortisedon a straight line basis over the Lease period of 200 years.
11.13.4 Property, plant and equipment
Land and buildings are stated as cost less accumulateddepreciation and impairment (if any). Cost includes expenditurethat is directly attributable to the acquisition of the item. Plantand equipment are stated as cost less accumulateddepreciation and impairment (if any). Cost includes expenditurethat is directly attributable to the acquisition of the item.
Depreciation is provided on property, plant and equipment,including freehold buildings but excluding land. Depreciation iscalculated on a straight line basis so as to write off the net costor other revalued amount of each asset over its expected usefullife to its estimated residual value. The estimated useful lives,residual values and depreciation method are reviewed at theend of each reporting period. The following estimated usefullives are used in the calculation of depreciation:
Category Useful life
Buildings 40 yearsPlant and equipment 5 – 15 yearsDistribution system 35 – 71 years
11.13.5 Revenue recognition
Distribution revenue is recognised at the point of consumption.Distribution revenue comprises accounts rendered and a netaccrual for unbilled and unread revenue. Revenue from acontract to provide services is recognised by reference to thestage of completion of the contract.
11.14 Market risk
Market risk refers to the potential loss that Spark Infrastructureor the Asset Companies may incur as a result of changes in themarket or fair value of a particular instrument or commodity. TheAsset Companies are, and Spark Infrastructure expects to be,exposed to market risks associated with interest rates andforeign currency exchange rates. This exposure to market risk isaffected by a number of factors, including the absolute andrelative levels of interest rates and foreign currency exchangerates. The Asset Companies enter into derivative instruments fornon-trading purposes such as swaps and option contracts, inorder to manage exposures to changes in the interest rates andforeign currency exchange rates. Derivative financial instrumentsare not held for speculative purposes. Spark Infrastructureexpects to enter into similar derivative instruments for non-trading purposes to manage its exposures to changes in interestrates and foreign currency exchange rates. For a discussion ofSpark Infrastructure’s hedging policy, refer to Section 7.8.
11.15 Interest rate risk
The Asset Companies each have a policy of managing interestrates through the use of a combination of fixed and floating ratedebt and, as part of this process, interest rate swaps are usedto mitigate the cash flow variability caused through interest ratefluctuations. Interest rate swap agreements are used to convertfloating rate exposures to fixed rates. These swaps entitle theAsset Companies to receive, or obligate them to pay, theamount, if any, by which actual interest payments on nominatedloan amounts exceed or fall below specified interest amounts.
Interest rate option agreements are purchased or sold tomanage the interest rate exposures of the Asset Companies.These options only take effect when interest rates exceed orfall short of the contracted rate, in which case the AssetCompanies receive or pay the difference, if any, between thecontracted rate and the actual rate of interest.
It is the policy of each Asset Company to protect part of itsvariable interest rate loans from exposure to increasing interestrates through the purchase of interest rate swap agreementsunder which each Asset Company is obliged to receive interestat variable rates and pay interest at fixed rates. These interestrate swap agreements require settlement of the net interestreceivable or payable at varying times during the year inaccordance with the terms of the various interest rate swapagreements.
11.16 Foreign currency risk
Each of the Asset Companies has borrowings denominated inforeign currencies. All foreign currency exposures on suchborrowings have been fully hedged to Australian dollars withthe purchase of long term currency swaps that convert theexposure in the relevant currency in respect of the paymentsdue under such borrowings into Australian dollar exposure.
We have prepared this report and its Annexures for inclusion in the replacement combined prospectus andproduct disclosure statement (“Offer Document”) to be dated on or about 18 November 2005 regarding theinitial public offering (“Offer” or “IPO”) of up to 1,008.7 million stapled securities in Spark Infrastructure.Spark Infrastructure will use the net proceeds raised to acquire a 49% interest in CKI/HEH ElectricityDistribution Holdings (Australia) Pty Limited (“CHEDHA”) and a 49% interest in the ETSA UtilitiesPartnership (“ETSA”).
A number of defined words and terms used in this report have the same defined meaning as set out in theGlossary contained in the Offer Document.
Background Information
Spark Infrastructure will comprise the following stapled entities:
o Spark Infrastructure Holdings No. 1 Limited (“Spark Infrastructure Company 1”) which willacquire the interest in CHEDHA;
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o Spark Infrastructure Holdings No. 2 Limited (“Spark Infrastructure Company 2”) which willacquire the interest in ETSA;
o Spark Infrastructure Holdings International Limited (“Spark Infrastructure Company 3”) which iscurrently dormant; and
o Spark Infrastructure Trust which will provide financing to both Spark Infrastructure Company 1and Spark Infrastructure Company 2 to enable them to finance the acquisition of the interests in CHEDHA and ETSA respectively.
Other entities to be established but will not form part of Spark Infrastructure, include:
o Spark Infrastructure RE Limited (“Responsible Entity”) which will act as responsible entity of theSpark Infrastructure Trust;
o Spark Infrastructure Instalment Limited which will arrange financing pursuant to the instalmentreceipts structure; and
o Spark Infrastructure Management Limited which will act as manager of Spark Infrastructure.
The Annexures contain the following information:
• Annexure A contains the pro forma historical financial information of Spark Infrastructure presented ona basis consistent with the ongoing business to be conducted by Spark Infrastructure assuming that alltransactions stated to occur as a consequence of this Offer are completed;
• Annexure B contains pro forma supplementary financial information, being more detailed equityaccounting disclosures than those required by Australian Accounting Standard AASB 128:“Investments in Associates” (“AASB 128”) on the basis that this information is relevant to potential investors. This information, presented on an aggregated basis includes information in respect of SparkInfrastructure’s equity accounted 49% interests in CHEDHA and ETSA (together the “Asset Group”) assuming that all transactions stated to occur as a consequence of this Offer are completed; and
• Annexure C contains a reconciliation of the pro forma supplementary financial information of the Asset Group contained in Annexure B to information contained in the audited financial statements of both CHEDHA and ETSA for the years ended 31 December 2004, 31 December 2003 and 31 December2002 and the reviewed financial statements of CHEDHA and ETSA for the six months ended 30 June2005 (including 30 June 2004 comparative financial information).
Scope of Report
You have requested that we prepare an Investigating Accountants’ Report reviewing the following financial information:
i) The pro forma consolidated balance sheet for Spark Infrastructure as at 30 June 2005 presented inaccordance with Australian equivalents to International Financial Reporting Standards (“A-IFRS”),other mandatory professional reporting requirements in Australia and the accounting policies described in Annexure A to this report, on the assumption that all transactions stated which haveoccurred or will occur as proposed in the Offer Document are undertaken as at that date. This pro forma consolidated balance sheet for Spark Infrastructure is set out in Annexure A to this report;
ii) Notes to the above pro forma historical financial information including, but not limited to, significantaccounting policies of Spark Infrastructure including equity accounting disclosures in respect ofSpark Infrastructure’s equity accounted investments as included in the Offer;
Together we refer to the above hereafter as the “pro forma historical financial information”.
iii) The pro forma supplementary financial information, representing:
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• The pro forma aggregated balance sheet of the Asset Group as at 30 June 2005, which willrepresent Spark Infrastructure’s 49% equity accounted share of the assets and liabilities of theaggregated assets and liabilities of CHEDHA and ETSA. The individual balance sheets of CHEDHA and ETSA as at 30 June 2005, which form the basis of the pro forma aggregatedbalance sheet of the Asset Group, have been prepared in accordance with the measurement andrecognition requirements of A-IFRS and other mandatory professional reporting requirements inAustralia and the accounting policies described in Annexure B to this report, on the assumptionthat all transactions stated which have occurred or will occur as proposed in the Offer areundertaken as at that date. This pro forma aggregated balance sheet for the Asset Group is setout in Annexure B to this report;
• The pro forma aggregated income statement information (including pro forma aggregated cashflow information) of the Asset Group for the financial years ended 31 December 2004, 31December 2003 and 31 December 2002 and the half years ended 30 June 2005 and 30 June2004, which will represent Spark Infrastructure’s 49% equity accounted share of the revenues and expenses of the aggregated revenues and expenses of CHEDHA and ETSA presented in accordance with the measurement and recognition requirements of A-IFRS and other mandatoryprofessional reporting requirements in Australia and the accounting policies described in Annexure B to this report, disclosed to earnings before depreciation, amortisation, interest and taxation (“EBITDA”). The pro forma aggregated income statement information (including proforma aggregated cash flow information) are derived from the audited financial statements ofboth CHEDHA and ETSA for the financial years ended 31 December 2004, 31 December 2003, and 31 December 2002 and the reviewed financial statements of both CHEDHA and ETSA for the half-year ended 30 June 2005 (including 30 June 2004 comparative financial information).The pro forma aggregated income statement information (including pro forma aggregated cashflow information) is set out in Annexure B to this report.
The pro forma aggregated income statement information (including pro forma aggregated cashflow information) is presented on a basis consistent with the ongoing businesses of CHEDHAand ETSA including adjustments for:
a. Inter-entity transactions; b. Inconsistent accounting policies between CHEDHA and ETSA; c. Consolidated historical operating results of both CHEDHA and ETSA restated in
accordance with A-IFRS; and d. Other one-off or non-recurring items of income and expenditure.
• Notes to the above pro forma supplementary financial information including, but not limited to,significant accounting policies of the Asset Group.
Together we refer to the above hereafter as the “pro forma supplementary financial information”.
The pro forma historical financial information has been prepared by the management of Spark Infrastructure, CHEDHA and ETSA on behalf of the directors of Spark Infrastructure Company 1, SparkInfrastructure Company 2, Spark Infrastructure Company 3 and the Responsible Entity of SparkInfrastructure Trust in accordance with A-IFRS, other mandatory professional reporting requirements inAustralia and the accounting policies described in Annexure A to this report.
The pro forma supplementary financial information has been prepared by the management of SparkInfrastructure, CHEDHA and ETSA on behalf of the directors of Spark Infrastructure Company 1, SparkInfrastructure Company 2, Spark Infrastructure Company 3 and the Responsible Entity of SparkInfrastructure Trust in accordance with the measurement and recognition requirements of A-IFRS and other mandatory professional reporting requirements in Australia and the accounting policies described in Annexure B to this report.
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The pro forma historical financial information presented in this Investigating Accountants’ Report does notinclude all the financial statement disclosures that Spark Infrastructure will present for half-yearly and annual financial reporting requirements. The pro forma supplementary financial information contains moredetailed equity accounting disclosures of Spark Infrastructure’s equity accounted investments than thatrequired by AASB 128 on the basis that this information is relevant to potential investors.
The pro forma historical financial information and supplementary financial information has been preparedon the basis of A-IFRS as at the date of this report. Further developments in A-IFRS, such as the release of further pronouncements by the Australian Accounting Standards Board and interpretations by the UrgentIssues Group, if any, may result in changes to the financial information that Spark Infrastructure willpresent for half-yearly and annual financial reporting requirements.
Deloitte Touche Tohmatsu (“Deloitte”) is the auditor of CHEDHA, ETSA, CHED (a controlled entity of CHEDHA) and CitiPower. The historical financial information in respect of CHEDHA, ETSA, CHED andCitiPower upon which the pro forma historical financial information and the pro forma supplementaryfinancial information are based has been audited by Deloitte for each of the financial years ended 31 December 2004, 31 December 2003, and 31 December 2002 and reviewed by Deloitte for the half-yearended 30 June 2005 (including 30 June 2004 comparative financial information).
The audits for the financial years ended 31 December 2004, 31 December 2003, and 31 December 2002 have been conducted in accordance with Australian Auditing Standards, to provide reasonable assurance asto whether the financial reports were free of material misstatement. Our audit opinions issued to the members of CHEDHA, ETSA, CHED and CitiPower were unqualified. The review for the half-year ended 30 June 2005 (including 30 June 2004 comparative financial information) was conducted in accordance with Australian Auditing Standards applicable to review engagements. The review statements issued to the members of CHEDHA and ETSA were unqualified.
In our role as Investigating Accountants:
• we have reviewed the pro forma historical financial information in order to state whether, on thebasis of the procedures described, anything has come to our attention which would indicate that the pro forma historical financial information is not presented fairly in accordance with A-IFRS,other mandatory professional reporting requirements in Australia and the accounting policies ofSpark Infrastructure as described in Annexure A to this report; and
• we have reviewed the pro forma supplementary financial information in order to state whether, on the basis of the procedures described, anything has come to our attention which wouldindicate that the pro forma supplementary financial information is not presented fairly inaccordance with the measurement and recognition requirements of A-IFRS and other mandatoryprofessional reporting requirements in Australia and the accounting policies of the Asset Groupas described in Annexure B to this report.
Our review of the pro forma historical financial information and the pro forma supplementary financialinformation has been conducted in accordance with Australian Auditing Standards applicable to review engagements. Our review was limited to:
enquiries of CHEDHA and ETSA management; enquiries of management of Spark Infrastructure and its advisors; examination of audited and reviewed financial statements; review of historical non-recurring transactions and supporting documentation; analytical procedures applied to the financial data; and the evaluation of accounting policies used.
These procedures do not provide all the evidence that would be required in an audit, thus the level ofassurance we provide is less than given in an audit. We have not performed an audit and, accordingly, wedo not express an audit opinion.
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Page 5
Statement
Based on our review, which is not an audit, we have not become aware of any matter that makes us believethat:
• the pro forma historical financial information set out in Annexure A does not present fairly the pro forma consolidated balance sheet of Spark Infrastructure as at 30 June 2005, assuming completion of all the proposed transactions as at that date, in accordance with A-IFRS, other mandatoryprofessional reporting requirements in Australia and the accounting policies described inAnnexure A to this report; and
• the pro forma supplementary financial information set out in Annexure B does not present fairly:
o the pro forma aggregated balance sheet of the Asset Group as at 30 June 2005, assumingcompletion of all the proposed transactions as at that date. The pro forma aggregatedbalance sheet represents the summarised financial information, being the assets and liabilities of the Asset Group as if Spark Infrastructure had acquired 49% interests in both CHEDHA and ETSA as at 30 June 2005; and
o the pro forma aggregated income statement information (including pro forma aggregated cash flow information) of the Asset Group for the financial years ended 31 December2004, 31 December 2003 and 31 December 2002 and the half-years ended 30 June 2005and 30 June 2004. The pro forma aggregated income statement information (including pro forma aggregated cash flow information) represent the summarised financial information, being the revenue and expenses and certain cash flow items of the Asset Group as if Spark Infrastructure had always owned 49% interests in both CHEDHA and ETSA;
in accordance with the measurement and recognition requirements of A-IFRS and other mandatory professional reporting requirements in Australia and the accounting policies of the Asset Group described in Annexure B to this report.
Subsequent Events
Subsequent to 30 June 2005 and up to the date of this report, nothing has come to our attention that would cause us to believe material transactions or events outside of the ordinary course of business of SparkInfrastructure and its controlled entities or CHEDHA and ETSA and their controlled entities have occurred, other than the matters dealt with in this report or the Offer Document, which would require comment on, oradjustment to, the information contained in this report, or which would cause the information contained inthis report to be misleading.
Yours faithfully
DELOITTE TOUCHE TOHMATSU
James H W Riddell Partner
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PRO FORMA HISTORICAL FINANCIAL INFORMATION
SPARK INFRASTRUCTURE - PRO FORMA CONSOLIDATED BALANCE SHEET
Note Consolidated
SparkInfrastructure30 June 2005
$ million
Non-current assetsOther financial assets 3 943.5 Investments 4 1,451.5 Total non-current assets 2,395.0 Total assets 2,395.0
Non-current liabilities Loan notes attributable to stapled security holders 1,234.4Borrowings 5 423.2 Total non-current liabilities 1,657.6 Total liabilities 1,657.6 Net assets 737.4
EquityEquity attributable to stapled security holders Issued capital of parent entity 6 295.7 Minority interest Issued capital of other entities in the stapled group 6 441.7 Total Equity 737.4
Notes to and forming part of Spark Infrastructure’s pro forma consolidated balance sheet are set out on thefollowing pages.
No pro forma historical income statements have been disclosed in respect of Spark Infrastructure as thecalculation of equity accounted profits on a historical basis with different asset values, borrowings, taxprofiles and equity is not relevant.
Pro forma supplementary financial information is set out in Annexure B which includes AASB 128disclosures as well as additional information.
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NOTES TO THE PRO FORMA HISTORICAL FINANCIAL INFORMATION
1. Basis of Preparation of the Pro Forma Consolidated Balance Sheet of Spark Infrastructure
The pro forma consolidated balance sheet of Spark Infrastructure has been prepared based on completion ofall of the transactions proposed in the Offer as if they occurred as at 30 June 2005. These assumptions include:
• Spark Infrastructure has issued 1,008.7 million stapled securities to the value of $2,017 million, which has been allocated to the instruments comprising the stapled securities, being ordinary shares in SparkInfrastructure Company 1, ordinary shares in Spark Infrastructure Company 2, ordinary shares in SparkInfrastructure Company 3, ordinary units in Spark Infrastructure Trust and loan notes issued by SparkInfrastructure Trust. These instruments have been stapled to each other pursuant to the Stapling Agreement referred in section 5 of the Offer Document;
• Spark Infrastructure has incurred $45.4 million in costs pursuant to the issue of stapled securities which have been allocated against each of the stapled securities on a proportional basis and have either beennetted against the proceeds raised or included in the initial measurement of the liability at amortisedcost, depending on classification;
• Spark Infrastructure has obtained $425 million in bank loans from various financial institutions;
• Spark Infrastructure has incurred costs in relation to the underwriting of bank loans, the costs of whichhave been included in the initial measurement of the liability at amortised cost;
• Spark Infrastructure has loaned $943.5 million to CHEDHA and ETSA and invested $622.3 million aspreferred partner capital in ETSA to refinance various subordinated loan facilities maintained by these entities; and
• Spark Infrastructure has paid $805.9 million to CKI to acquire 49% of the ownership of CHEDHA andETSA and has also incurred $23.3 million in transaction costs relating to the acquisition, which havebeen capitalised into the cost of these investments.
2. Summary of Accounting Policies
a) Basis of Preparation
The pro forma consolidated balance sheet of Spark Infrastructure as at 30 June 2005 has been drawn up inaccordance with A-IFRS and other mandatory professional reporting requirements in Australia. This reportdoes not comply with all the disclosure requirements set out in the Corporations Act 2001, applicable A-IFRS and other mandatory professional reporting requirements in Australia, but in our opinion containsadequate information for the purposes of this Offer Document.
The pro forma historical financial information has been prepared on the basis of historical cost. Cost isbased on the fair values of the consideration given in exchange for the assets.
Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions and other events is reported.
The following significant accounting policies have been adopted in the preparation and presentation of the pro forma historical financial information for Spark Infrastructure:
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b) Principles of Consolidation
Spark Infrastructure is a stapled structure, whereby the ordinary shares in Spark Infrastructure Company 1, the ordinary shares in Spark Infrastructure Company 2, the ordinary shares in Spark InfrastructureCompany 3, the ordinary units in the Spark Infrastructure Trust and the loan notes issued by SparkInfrastructure Trust have been stapled pursuant to the Stapling Agreement and once listed on the Australian Stock Exchange, the stapled securities of Spark Infrastructure will be traded as if it was a single security.
Spark Infrastructure is a business combination by contract alone and thus is, prima facie, not a businesscombination for the purposes of the application of Australian Accounting Standard AASB 3: “BusinessCombinations” (“AASB 3”). However, on the basis that there exists no alternative guidance on how to account for business combinations by contract alone, the principles of AASB 3 have been applied.
In preparing the pro forma consolidated balance sheet, Spark Infrastructure Company 1 has been identifiedas the parent entity of Spark Infrastructure, on the basis that it has issued the largest amount of ordinaryequity. Accordingly, since Spark Infrastructure Company 1 does not own any shares in Spark Infrastructure Company 2 or Spark Infrastructure Company 3 or any of the units in the Spark Infrastructure Trust, theentire amount of issued equity represented by the shares in Spark Infrastructure Company 2 and Spark Infrastructure Company 3 and the units in the Spark Infrastructure Trust have been reflected as minorityinterest in the pro forma consolidated balance sheet of Spark Infrastructure.
The pro forma consolidated balance sheet has been prepared by consolidating the financial statements of allthe entities that comprise Spark Infrastructure being Spark Infrastructure Company 1 and its controlled entities by ownership interest and its controlled entities by contract alone being Spark Infrastructure Company 2 (and its controlled entities), Spark Infrastructure Company 3 and the Spark Infrastructure Trust. Consistent accounting policies have been employed in the preparation and presentation of the pro forma consolidated balance sheet.
c) Acquisition of Assets
Cost method The purchase method of accounting is used for all acquisitions of assets. Cost is determined as the fairvalue of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition.
d) Borrowings
Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition,borrowings are measured at amortised cost with any difference between the initial recognised amount andthe redemption value being recognised in profit and loss over the period of the borrowing using theeffective interest rate method.
e) Creditors and accruals
Trade creditors and accruals are recognised when there is an obligation to make future payments resulting from the purchase of goods and services.
f) Impairment of assets
At each reporting date, Spark Infrastructure will review the carrying amounts of its tangible assets todetermine whether there is any indication that those assets have suffered an impairment loss.
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f) Impairment of assets (cont)
If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independentfrom other assets, Spark Infrastructure will estimate the recoverable amount of the cash-generating unit towhich the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risks specific to the asset for whichthe estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carryingamount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Animpairment loss is recognised in the income statement immediately, unless the asset is carried at fair value,in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) isincreased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss isrecognised in the income statement immediately, unless the relevant asset is carried at fair value, in whichcase the reversal of the impairment loss is treated as a revaluation increase.
g) Income Tax
Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect ofthe taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have beenenacted or substantively enacted by the reporting date. Current tax for current and prior periods isrecognised as a liability (or asset) to the extent that it is unpaid (or refundable).
Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect oftemporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.
In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available againstwhich deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arisefrom the initial recognition of assets and liabilities (other than as a result of a business combination) whichaffects neither taxable income nor accounting profit.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s)when the asset and liability giving rise to them are realised or settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred taxliabilities and assets reflects the tax consequences that would follow from the manner in which Spark Infrastructure expects, at the reporting date, to recover or settle the carrying amount of its assets andliabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the sametaxation authority and Spark Infrastructure intends to settle its current tax assets and liabilities on a net basis.
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g) Income Tax (cont)
Current and deferred tax for the period Current and deferred tax is recognised in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity.
Tax consolidation legislation Tax consolidated groups are being formed within Spark Infrastructure, whereby wholly-owned Australianresident entities will combine together to form a tax consolidated group that will be taxed under Australiantaxation law as if it was a single entity. Tax expense/income, deferred tax liabilities and deferred tax assetsarising from temporary differences of members of a tax consolidated group are recognised in the separatefinancial statements of the members of the tax consolidated group using the ‘separate taxpayer within group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the head entity in therelevant tax consolidated group.
h) Investments
Investments in associates are accounted for initially at cost and adjusted thereafter for the post-acquisitionchange in Spark Infrastructure’s share of net assets of the associates. Spark Infrastructure’s incomestatement includes its share of the profit or loss of the associates. Investments in controlled entities are recorded at cost. Dividend revenue is recognised on declaration by the controlled entity.
Consolidated Spark
Infrastructure 30 Jun 2005
$ million
3. Other financial assets
Loans receivable from associates – non-interest bearing 51.0 Loans receivable from associates – interest bearing 892.5 943.5
The loans receivable from associates have been utilised to refinance existing subordinated debt facilities. These loans receivable have terms to maturity of 100 years. The interest bearing loans receivable have afixed interest rate of 10.85%.
4. Investments accounted for using the equity method
At cost: Investment in CHEDHA 286.4 Investment in ETSA ordinary capital 542.8 Investment in ETSA preferred capital 622.3 1,451.5
The pro forma equity accounting disclosures required by AASB 128 and AASB 131 as applicable are set out together with additional supplementary financial information in Annexure B to this report. The termsand conditions of the ETSA preferred capital are set out in Section 11 of the Offer Document.
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Consolidated Spark
Infrastructure 30 Jun 2005
$ million
5. Interest-bearing liabilities (non-current)
Unsecured: At amortised cost Bank loans 423.2 423.2
Spark Infrastructure has obtained bank loans with a facility limit of $425 million. Included in the initialmeasurement of the bank loans are costs in relation to the underwriting of $1.8 million.
The bank loans disclosed above are repayable in two tranches; $200 million is repayable in 2008 with theremainder due and payable in 2010.
Spark Infrastructure will enter into interest rate swaps that match the relevant terms and maturity dates of the bank loans to fix the interest rate at 6.58%.
In addition, Spark Infrastructure has obtained a working capital facility of $50 million. This is expected toremain undrawn.
6. Contributed equity
Issued capital (1,008.7 million ordinaryshares in Spark Infrastructure Company 1)fully paid 295.7Minority interest
Issued capital (1,008.7 millionordinary shares in Spark InfrastructureCompany 2) fully paid 216.9Issued units (1,008.7 million units inSpark Infrastructure Trust) fully paid 224.8
737.4
The shares disclosed as issued capital and the shares and units disclosed as minority interest have all been issued to the stapled security holders and are stapled pursuant to the Stapling Agreement.
The equity instruments have been disclosed as fully paid. The stapled security holders have paid $1.40 foreach stapled security, with the remaining $0.60 for each stapled security being contributed by SparkInfrastructure Instalment Limited, pursuant to the Securities Administration Deed detailed in Section 14.5 of the Offer Document.
Spark Infrastructure Instalment Limited has no recourse to Spark Infrastructure in the event of default bystapled security holders in respect of the final instalment.
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ASSET GROUP - PRO FORMA AGGREGATED INCOME STATEMENT INFORMATION
Other financial liabilities 17 107.5 Deferred tax liabilities 0.0
Provisions 18 68.9 Other 6.3 Total non-current liabilities 3,719.5 Total liabilities 4,266.9 Net assets before preferential partner capital 829.2 Preferential partner capital 622.3 Net assets attributable to Spark Infrastructure 1,451.5
Notes to and forming part of the Asset Group’s pro forma aggregated balance sheet are set out on thefollowing pages.
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ASSET GROUP - PRO FORMA AGGREGATED CASH FLOW INFORMATION
Aggregated
49% Share
Year
ended
31 Dec 2002
$ million
Aggregated
49% Share
Year
ended
31 Dec 2003
$ million
Aggregated
49% Share
Year
ended
31 Dec 2004
$ million
Aggregated
49% Share
Half Year
ended
30 Jun 2004
$ million
Aggregated
49% Share
Half Year
ended
30 Jun 2005
$ million
Pro forma cash flow from operating activities
Pro forma profit fromordinary activities before interest, borrowing costs,income tax, depreciation andamortisation 434.9 480.9 492.1 244.4 255.2
Other adjustments Movement in workingcapital receivables (9.0) 14.9 11.2 (1.6) (4.5)Movement in workingcapital payables 1.8 (7.8) (1.4) 3.9 (0.4)Customer contribution revenue, net of trust funddeposits (32.7) (40.0) (50.5) (7.8) (10.3)Other 0.3 (2.5) (7.6) 4.4 (3.6)
Pro forma net cash provided by operating activities (priorto movements in workingcapital relating to income taxand net financing costs) 395.3 445.5 443.8 243.3 236.4
Pro forma cash flow from investing activities
Payments for property, plantand equipment (168.5) (182.6) (194.3) (87.6) (91.9)Receipts from customers for capital works 30.3 35.4 39.9 8.8 8.8 Proceeds from sale of property, plant and equipment 3.9 2.0 2.2 1.2 0.8
Pro forma net cash used in investing activities (134.3) (145.2) (152.2) (77.6) (82.3)
Total pro forma cash flowsprovided by operating (priorto movements in workingcapital relating to income taxand net financing costs) andinvesting activities 261.0 300.3 291.6 165.7 154.1
Notes to and forming part of the Asset Group’s pro forma aggregated cash flow information are set out on the following pages.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
1. Basis of Preparation of the Pro Forma Supplementary Financial Information
a) Basis of Preparation of the Pro Forma Aggregated Income Statement Information of the AssetGroup
Spark Infrastructure did not exist in prior financial periods. Consequently, in order to present historicaloperating results of the Asset Group, this pro forma supplementary financial information has been included which sets out more detailed equity accounting disclosures than that required by AASB 128 on the basis that this information is relevant to potential investors.
Consistent with AASB 128, this pro forma supplementary financial information is presented on an aggregate basis and includes information in respect of Spark Infrastructure’s equity accounted 49% interests in CHEDHA and ETSA (together the “Asset Group”) assuming that all transactions stated to occur as a consequence of this Offer are completed.
The pro forma supplementary financial information is presented on a basis consistent with the ongoing operations, management, financial and ownership structure of the Asset Group. Accordingly, certain pro forma adjustments have been made to the historical financial information as set out in the audited financial statements of CHEDHA and of ETSA for the years ended 31 December 2004, 2003 and 2002 and thereviewed financial statements of CHEDHA and of ETSA for the half-year ended 30 June 2005 (including 30 June 2004 comparatives). Spark Infrastructure will acquire 49% of both CHEDHA and of ETSA andthe pro forma adjustments are set out in Note 2.
The pro forma aggregated income statement information (including related disclosures) of the Asset Groupis presented before interest income, borrowing costs, income tax, depreciation and amortisation.
b) Basis of Preparation of the Pro Forma Aggregated Balance Sheet of the Asset Group
The pro forma aggregated balance sheet of the Asset Group has been prepared based on completion of all ofthe transactions proposed in the Offer as if they occurred as at 30 June 2005. These pro forma adjustmentsare set out in Note 2.
c) Basis of Preparation of Pro Forma Aggregated Cash Flow Information of the Asset Group
The pro forma supplementary financial information includes pro forma aggregated cash flow information. The estimated cash provided by operating activities has been derived by adjusting pro forma profit from ordinary activities before interest income, borrowing costs, income tax, depreciation and amortisation for movements in working capital excluding those relating to income tax and net financing costs. The cash provided from investing activities has been extracted from the audited financial statements of CHEDHAand of ETSA for the years ended 31 December 2004, 2003 and 2002 and the reviewed financial statementsof CHEDHA and of ETSA for the half-year ended 30 June 2005 (including 30 June 2004 comparatives).
2. Pro Forma Adjustments to the Asset Group
The pro forma aggregated income statement information, the pro forma aggregated cash flow informationand the pro forma aggregated balance sheet are based on the audited financial statements of CHEDHA andETSA for the years ended 31 December 2004, 31 December 2003 and 31 December 2002 and the reviewed financial statements for the half-years ended 30 June 2005 and 30 June 2004.
Pro forma adjustments have been made to the historical financial information, which was prepared inaccordance with superseded Australian GAAP, to reflect this financial information as if it was prepared in accordance with the measurements and recognition requirements of A-IFRS (excluding AASB 132 “Financial Instruments: Presentation and Disclosure” (“AASB 132”) and AASB 139 “Financial
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Instruments: Recognition and Presentation”) (“AASB 139”) for each of the pro forma aggregated incomestatements for the half-year ended 30 June 2004 and the years ended 31 December 2004, 31 December2003, and 31 December 2002.
With respect to the half-year ended 30 June 2005 the financial statements of CHEDHA and ETSA havebeen prepared in accordance with A-IFRS, including the adoption of AASB 139 and AASB 132 from 1 January 2005.
Other adjustments have been made to the historical financial information of CHEDHA and ETSA toeliminate intercompany transactions and non-recurring items. The pro forma adjustments outlined belowhave been reconciled back to the audited financial statements of CHEDHA and ETSA for the years ended 31 December 2004, 2003 and 2002 and the reviewed financial statements of CHEDHA and of ETSA for thehalf-year ended 30 June 2005 (including 30 June 2004 comparatives) in Annexure C to this report.
a) Pro Forma Aggregated Income Statement Information
(i) Establishment of CHEDHA and Acquisition of CHED and CitiPower
In August 2002, CHEDHA acquired the CHED electricity distribution business and CitiPowerelectricity distribution business with operations based in Melbourne. The pro forma supplementaryfinancial information for CHEDHA for the financial year ended 31 December 2002 includes the results from both the Powercor and CitiPower electricity distribution businesses as if CHEDHA had acquiredCHED and CitiPower from 1 January 2002.
(ii) Disposal of Retail Businesses
Prior to the acquisition by CHEDHA, Powercor and CitiPower had conducted energy retail and distribution businesses. At the time of acquisition by CHEDHA, CitiPower disposed of its energy retailbusiness. The pro forma supplementary financial information presented excludes the financial results ofthe CitiPower retail business for financial year ended 31 December 2002. Powercor disposed of its energy retail business during the financial year ended 31 December 2001.
In connection with the sale of the Powercor and CitiPower energy retail businesses, Powercor and CitiPower agreed to provide certain ongoing support services and sold certain intellectual property tothe purchaser. Pro forma adjustments have been made to exclude these transactions as they relatespecifically to the Powercor and CitiPower energy retail businesses sold.
Following the sale of the Powercor and CitiPower energy retail businesses, certain adjustments wererequired as a result of the post completion review and negotiations between Powercor/CitiPower andthe purchaser. These adjustments included write-off of certain bad debts and an adjustment on the margin payments relating to the energy retail businesses. As these transactions relate to the energyretail businesses, their impact has been excluded from the pro forma supplementary financialinformation.
(iii) Doubtful Debt Provision reversals
Pro forma adjustments have been made to exclude the effects of write backs of provision for doubtfuldebts where the debts have subsequently been recovered.
(iv) Reclassification of unwinding of discount
Under superseded Australian GAAP, the unwinding of discounts of assets and liabilities recorded at netpresent value was recognised in the expense category to which the underlying expense related.
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(iv) Reclassification of unwinding of discount (cont)
As a consequence, the unwinding of discounts in relation to long term employee provisions wasreflected in the operating expenses category of the income statement. Under A-IFRS, the unwinding ofdiscounts is required to be classified as borrowing costs. Pro forma adjustments have been made toreflect this presentation.
(v) Reclassification of profit on sale
Under superseded Australian GAAP, the sale of assets was recorded on a gross basis in the incomestatement, with the proceeds on sale recognised as revenue and the written down value of the asset disposed of recorded as an expense. Under A-IFRS, the profit or loss on the sale of assets is recorded on a net basis. Pro forma adjustments have been made to reflect this presentation.
b) Pro Forma Aggregated Balance Sheet
(i) Formation of new tax consolidated group
Following completion of the transaction, CHEDHA will form a new tax consolidated group.Accordingly, the tax base of these assets and liabilities will be reset for tax purposes at this date, resulting in adjusted values for deferred tax liabilities. Pro forma adjustments have been made toreflect the adjustment to the deferred tax liabilities.
(ii) Allocation of purchase price
Following completion of the transaction, the excess of the purchase price over the net assets acquiredhas been allocated to intellectual property, property, plant and equipment, licence and lease premium,on the basis of the assessment of fair value of those assets by an independent valuer. It has beenassumed that the fair value of the remaining assets and liabilities acquired by Spark Infrastructureequates to the book value as recognised in the reviewed financial statements of the Asset Group as at30 June 2005.
(iii) Refinancing of borrowings
Following completion of the transaction $943.5 million of borrowings, being $51 million in non-interest bearing borrowings and $892.5 million in interest bearing borrowings previously provided byCKI have been refinanced by Spark Infrastructure with terms to maturity of 100 years. The interestrate in respect of the interest bearing borrowings is fixed at 10.85%.
(iv) Subscription for preferred partnership capital
Following completion of the transaction Spark Infrastructure subscribed for $622.3 million in preferred partner capital in ETSA. The proceeds raised pursuant to this issue have repaid subordinatedborrowings previously owed to CKI. The preferred partner capital has been classified as equity.
(v) Derecognition of tax losses and deductible temporary differences
An adjustment has been made to derecognise certain tax losses and deductible temporary differencespreviously recognised, on the basis that their eventual use is no longer probable following the formation of the new tax consolidated group discussed above. The deferred tax balances have been derecognised as there is a net deferred tax asset which is unrecognised as its recovery is not probable atthis time.
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(vi) Cash to be retained by Asset Group
Following completion of the transaction, CHEDHA will have $50 million in additional cash balances(Spark Infrastructure’s 49% share: $24.5 million) which will be ultimately used by CHEDHA to repay$50 million in senior debt facilities.
3. Summary of Accounting Policies
a) Basis of Preparation
The pro forma aggregated balance sheet of the Asset Group as at 30 June 2005, the pro forma aggregated income statement information and the pro forma aggregated cash flow information of the Asset Group for the financial years ended 31 December 2004, 31 December 2003 and 31 December 2002 and the half-years ended 30 June 2005 and 30 June 2004 have been drawn up in accordance with the measurement and recognition requirements of A-IFRS and other mandatory professional reporting requirements in Australia. The pro forma supplementary financial information does not comply with all the disclosure requirements set out in the Corporations Act 2001, applicable A-IFRS and other mandatory professional reporting requirements in Australia, but in our opinion contains adequate information for the purposes of this Offer Document.
The pro forma supplementary financial information has been prepared on the basis of historical cost, except for the fair values ascribed to financial instruments. Cost is based on the fair values of the consideration given in exchange for the assets.
In the application of A-IFRS, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates andassociated assumptions are based on historical experience and various other factors that are believed to bereasonable under the circumstance, the results of which form the basis of making the judgments. Actualresults may differ from these estimates. The estimates and underlying assumptions are reviewed on anongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate isrevised if the revision affects only that period or in the period of the revision and future periods if therevision affects both current and future periods.
Judgments made by management in the application of A-IFRS that have significant effects on the financialinformation and estimates with a significant risk of material adjustments in the next year are disclosed,where applicable, in the relevant notes to the pro forma supplementary financial information. Accountingpolicies are selected and applied in a manner which ensures that the resulting financial information satisfiesthe concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions and other events is reported.
CHEDHA and ETSA changed their accounting policies on 1 January 2005 to comply with A-IFRS. Thetransition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’, with 1 January 2004 asthe date of transition. An explanation of how the transition from superseded Australian GAAP to A-IFRShas affected the Asset Group’s pro forma aggregated income statement information is set out in Annexure C. Details of how the transition from superseded Australian GAAP to A-IFRS has affected theconsolidated balance sheets of CHEDHA and ETSA is set out in their respective reviewed half-year financial statements which have been attached as an Annexure to the Offer Document.
The directors have also elected under s.334(5) of the Corporations Act 2001 to apply Accounting StandardAASB 119 “Employee Benefits” and AASB 2004-3 “Amendments to Australian Accounting Standards”, even though the Standards are not required to be applied until annual reporting periods beginning on or after 1 January 2006.
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a) Basis of Preparation (cont)
The Asset Group has not restated comparative financial information for financial instruments, including derivatives, as permitted under the first-time adoption transitional provisions. The accounting policies for financial instruments applicable for the comparative information and the impact of changes in theseaccounting policies on 1 January 2005, the date of transition for financial instruments, is discussed further in note 3(z).
The following significant accounting policies have been adopted in the preparation and presentation of the pro forma supplementary financial information of the Asset Group:
b) Principles of Aggregation
The pro forma aggregated balance sheet has been prepared by aggregating Spark Infrastructure’s 49% equity accounted share of the assets and liabilities of CHEDHA and ETSA as presented in the consolidatedbalance sheets of CHEDHA and ETSA. All intercompany balances and transactions and unrealised profitsarising within the consolidated entities of the Asset Group have been eliminated in full.
For the Asset Group, on acquisition, the assets, liabilities and contingent liabilities of the subsidiaries of the Asset Group were measured at their fair values at the date of acquisition, being Spark Infrastructure’s cost of acquisition. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired has been allocated to the distribution licence for CHEDHA and the lease premium for ETSA (refer note 3(n)). The pro forma supplementary financial information includes the information and results of eachcontrolled entity from the date on which the Asset Group obtains control and until such time as the AssetGroup ceases to control such entity.
c) Acquisition of assets
Cost method The purchase method of accounting is used for all acquisitions of assets. Cost is determined as the fairvalue of the assets given up, shares issued or liabilities undertaken at the date of acquisition plus incidental costs directly attributable to the acquisition.
Construction work in progress Construction work in progress is stated at cost plus attributable overheads. Cost includes all costs directlyrelated to specific projects and an allocation of overhead expenses.
Capitalisation of overheads Services provided by the corporate units of the Asset Group are charged to the operating units. That portion of those costs that is attributable to the function of preparing an asset ready for use is included in the costbase of the asset.
d) Borrowings
Borrowings are recorded initially at fair value, net of transaction costs. Subsequent to initial recognition,borrowings are measured at amortised cost with any difference between the initial recognised amount andthe redemption value being recognised in profit and loss over the period of the borrowing using theeffective interest rate method.
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e) Cash assets
Cash assets include cash on hand, cash at bank and deposits at call with financial institutions, net ofoutstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.
f) Contributions for capital works
It is commercial practice for the Asset Group to secure contributions from customers towards the cost ofconstructing augmentation assets. These contributions may be in the form of cash or non-current assets.Cash contributions are accounted for as revenue in the income statement. Non-current assets, which havebeen contributed as part of a customer contribution scheme, are recognised at fair value with acorresponding increase in revenue.
The 'Network Connections' policy also incorporates Regulatory requirements in relation to developers of sub-divisions and large customers (based on demand). Contributions must be refunded if specified contractual requirements are met. Monies received are placed in a trust fund. This trust fund is split between current and non-current depending on when the contributions are anticipated to be refunded and reviewed on a regular basis. Deposits are brought to account as revenue when the customer is no longer eligible to the refund of the deposit.
g) Creditors and accruals
Trade creditors and accruals are recognised when there is an obligation to make future payments resulting from the purchase of goods and services.
h) Derivative financial instruments
The Asset Group enters into a variety of derivative financial instruments to manage their exposure to interest rate and foreign exchange risk, including forward foreign exchange contracts, interest rate swaps and cross currency swaps. Further details of derivative financial instruments are disclosed in note 3(z).
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and aresubsequently measured to their fair value at each reporting date. The resulting gain or loss is recognised inthe income statement immediately unless the derivative is designated and effective as a hedging instrument, in which case the timing of the recognition in the income statement depends on the nature of the hedgerelationship. The Asset Group designates certain derivatives as either hedges of the fair value of recognisedassets or liabilities or firm commitments (fair value hedges) or hedges of highly probable forecasttransactions (cash flow hedges).
Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded inthe income statement immediately, together with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Hedge accounting is discontinued when the hedge instrumentexpires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. The adjustment to thecarrying amount of the hedged item arising from the hedged risk is amortised to the income statement from that date.
Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualified as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognisedimmediately in the income statement. Amounts deferred in equity are recycled to the income statement inthe periods when the hedged item is recognised in the income statement.
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h) Derivative financial instruments (cont)
However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or anon-financial liability, the gain or loss previously deferred in equity is transferred from equity and included in the initial measurement of the cost of the asset or liability.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss deferred in equityremains in equity and is recognised when the forecast transaction is ultimately recognised in the incomestatement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that wasdeferred in equity is recognised immediately in the income statement.
Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of anyderivative instruments that do not qualify for hedge accounting are recognised immediately in the incomestatement.
Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separatederivatives when their risks and characteristics are not closely related to those of host contracts and the hostcontracts are not measured at fair value with changes in fair value recognised in the income statement.
i) Employee benefits
The Asset Group makes provision for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Asset Group in respect of the services provided by the employees up to the reporting date.
Defined contribution plans Contributions made by the Asset Group to defined contribution superannuation plans are expensed whenincurred.
Defined benefit plans For defined benefit superannuation plans, the cost of providing benefits by the Asset Group is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each reporting date. Actuarial gains and losses are recognised in full, directly in equity, in the period in which they occur, andare presented in the statement of recognised income and expense. Past service cost is recognisedimmediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-linebasis over the average period until the benefits become vested.
The defined benefit obligation recognised in the balance sheet represents the present value of the definedbenefit obligation adjusted for unrecognised past service cost, net of the fair value of plan assets. Any assetresulting from this calculation is limited to the past service cost, plus the present value of available refunds and reductions in future contributions to the plan.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
j) Financial instruments
Debt and equity instrumentsDebt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.
Interest and dividends Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instruments.
k) Goods and Services Tax
Revenues, expenses, and assets are recognised net of the amount of Goods and Services Tax ("GST"),except:i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised
as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised inclusive of GST.
The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. No adjustment has been made to the pro forma aggregated information on certaincash flow items set out in Annexure B for the impact of GST.
l) Impairment of assets
At each reporting date, the entities that comprise the Asset Group will review the carrying amounts of their tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order todetermine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Asset Group will estimate the recoverable amount of the cash-generating unit to which the asset belongs.
The licence and other intangible assets with indefinite useful lives are tested for impairment at each reporting date and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risks specific to the asset for whichthe estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carryingamount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. Animpairment loss is recognised in the income statement immediately, unless the asset is carried at fair value,in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) isincreased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss isrecognised in the income statement immediately.
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m) Income tax
Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect ofthe taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have beenenacted or substantively enacted by the reporting date. Current tax for current and prior periods isrecognised as a liability (or asset) to the extent that it is unpaid (or refundable).
Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect oftemporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.
In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available againstwhich deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arisefrom the initial recognition of assets and liabilities (other than as a result of a business combination) whichaffects neither taxable income nor accounting profit.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s)when the asset and liability giving rise to them are realised or settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred taxliabilities and assets reflects the tax consequences that would follow from the manner in which the AssetGroup expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxationauthority and the Asset Group intends to settle its current tax assets and liabilities on a net basis.
Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the income statement, except when itrelates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity.
Tax consolidation legislation Tax consolidated groups are being formed within the Asset Group, whereby wholly-owned Australian resident entities will combine together to form a tax consolidated group that will be taxed under Australiantaxation law as if it was a single entity. Tax expense/income, deferred tax liabilities and deferred tax assetsarising from temporary differences of members of a tax consolidated group are recognised in the separatefinancial statements of the members of the tax consolidated group using the ‘separate taxpayer within group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the head entity in therelevant tax consolidated group.
n) Intangibles
Distribution Licence The Distribution Licence is stated at cost less accumulated impairment (if any). The Licence is considered to have an indefinite life as it was issued in perpetuity and as such, there is no requirement for it to beamortised. Impairment is reviewed at each reporting date and whenever there is an indication that the Distribution Licence may be impaired.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
n) Intangibles (cont)
Lease premiumThe lease premium is recognised as an asset and amortised on a straight line basis over 200 years and tested for impairment whenever there is an indication that the lease premium may be impaired.
Intellectual property and other intangible assets Intellectual property is amortised on a straight-line basis over a period of 20 years, during which thebenefits are expected to arise. Impairment is reviewed at each reporting date and whenever there is anindication that the asset may be impaired.
o) Inventories
Inventories are valued at the lower of cost or net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventory on hand on the basis of weighted average costs and, where appropriate, specific identification.
p) Investments
Investments in controlled entities are recorded at cost. Dividend revenue is recognised on declaration bythe controlled entity.
q) Leased assets
Leased assets are classified as finance leases whenever the terms of the lease transfer the majority of the risks and rewards of ownership to the lessee.
Amounts due under finance leases are recorded as receivables. Finance lease receivables are initiallyrecognised at amounts equal to the present value of the minimum lease payments receivable plus thepresent value of any unguaranteed residual value expected to accrue at the end of the lease term. Finance lease payments are allocated between interest revenue and reduction of the lease receivable over the term of the lease in order to reflect a constant periodic rate of return on the net investment outstanding in respect of the lease.
Rental income from operating leases is recognised on a straight line basis over the term of the relevantlease. Operating lease payments are recognised as an expense on a straight line basis over the term of the lease, except where another systematic basis is more representative of the time pattern in which the economic benefits of the leased asset are consumed.
In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on astraight line basis, except where another systematic basis is more representative of the time pattern in whicheconomic benefits from the leased asset are consumed.
r) Maintenance and repairs
Maintenance and repair costs and minor renewals are charged as expenses as incurred, except where theyrelate to the replacement of a component of an asset, in which case the costs are capitalised and depreciated.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
s) Property, plant and equipment
Land and buildings are stated as cost less accumulated depreciation and impairment (if any). Cost includesexpenditure that is directly attributable to the acquisition of the item.
Plant and equipment are stated as cost less accumulated depreciation and impairment (if any). Cost includes expenditure that is directly attributable to the acquisition of the item.
Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land.Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued amount ofeach asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period. The following estimateduseful lives are used in the calculation of depreciation:
Category Useful life Buildings 40 years Plant and equipment 5 - 15 years Distribution System 20 - 71 years
t) Provisions
Provisions are recognised when the Asset Group has a present obligation, the future sacrifice of economicbenefits is probable, and the amount of the provision can be measured reliably.
The amount recognised as a provision is the best estimate of the consideration required to settle the presentobligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
u) Receivables
Trade and non-trade receivables are recognised at the amounts receivable less any provision for doubtful debts.
v) Refundable contributions and advances for capital works
Where customers are required to lodge security deposits for electricity connection works, the deposits willbe refunded with interest over the period specified in each individual contract.
w) Revenue recognition
Network revenue is recognised at the point of consumption. Network revenue comprises accounts renderedand a net accrual for unbilled and unread revenue. Revenue from a contract to provide services isrecognised by reference to the stage of completion of the contract.
x) Safety regulation compliance
Entities within the Asset Group provide for future expenditure as required to comply with the Office of theChief Electrical Inspector ("OCEI") 'Electrical Regulations' where this is not provided for by the 2001-05Electricity Distribution Price Review.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
y) Security arrangements on contracts
Cash retentions and security deposits from contractors are withheld to ensure some control overnon-performance. Retentions and deposits are recognised as liabilities until works have been completed to a satisfactory standard. Where retentions and deposits are not returned to the contractor then the liability is recognised as revenue for the period.
z) Comparative information – Financial instruments
The Asset Group has elected not to restate comparative information for financial instruments within the scope of Accounting Standards AASB 132 ‘Financial Instruments: Disclosure and Presentation’ and AASB139 ‘Financial Instruments: Recognition and Measurement’, as permitted on the first-time adoption of A-IFRS.
The accounting policies applied to accounting for financial instruments in the current financial year are detailed in notes 3(h) and (j). The following accounting policies were applied to accounting for financial instruments in the comparative financial year:
(i) Creditors and accruals Trade payables and other payables are recognised when there is an obligation to make future payments resulting form the purchase of goods and services.
(ii) Derivative financial instruments Interest Rate Swaps The net amount receivable or payable under interest rate swap agreements and cross currency swapagreements is progressively brought to account over the period to settlement. These derivatives arenot recognised in the financial statements on inception. The amount recognised is accounted for as interest expense during the period.
Exchange Rate Contracts Hedging is undertaken in order to avoid or minimise possible adverse financial effects ofmovements in exchange rates. Gains or costs arising upon entry into a hedging transactionintended to hedge the purchase or sale of goods or services, together with subsequent exchangegains or losses resulting from those transactions are deferred in equity from the inception of the hedging transaction up to the date of the purchase or sale and included in the measurement of thepurchase or sale. The net amounts receivable or payable under the hedging transaction are alsorecorded in the balance sheet. Any gains or losses arising on the hedging transactions after therecognition of the hedged purchase or sale are included in the income statement.
In the case of hedges of monetary items, exchange gains or losses are brought to account in thefinancial year in which the exchange rates change. Gains or costs arising at the time of entering into such hedging transactions are brought to account in the income statement over the lives of thehedges.
(iii) Financial instruments Debt and equity instrumentsDebt and equity instruments are classified as either liabilities or as equity in accordance with thesubstance of the contractual arrangement.
Interest and dividends Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instruments or component parts ofcompound instruments.
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z) Comparative information – Financial instruments (cont)
(iv) Borrowings Bank loans and other loans are recorded at an amount equal to the net proceeds received. Interestexpense is recognised on an accrual basis. Ancillary costs incurred in connection with thearrangement of borrowing are deferred and amortised over the period of the borrowing. Borrowing costs are recognised as expenses in the period in which they are incurred.
(v) Receivables All trade and non-trade receivables are recognised at the amounts receivable less any provision fordoubtful debts.
4. Pro Forma Expenses from ordinary activities excluding borrowing costs, depreciation andamortisation
AggregatedAsset Group 49% shareYear ended 31 Dec 2002
$ million
AggregatedAsset Group 49% shareYear ended 31 Dec 2003
$ million
AggregatedAsset Group 49% shareYear ended 31 Dec 2004
$ million
AggregatedAsset Group 49% share
Half Year ended 30 Jun 2004
$ million
AggregateAsset Group 49% share
Half Year ended 30 Jun 2005
$ million
Transmission useof system charges
97.0 102.2 115.0 60.1 69.4
Other operatingexpenses
139.6 147.0 165.9 75.4 72.2
236.6 249.2 280.9 135.5 141.6
AggregatedAsset Group 49% Share 30 Jun 2005
$ million
5. Cash
Cash 323.8 Cash – restricted to service interest-bearing liabilities 14.1
337.9
6. Receivables (current)
Trade receivables (net of provisions for doubtful debts) 71.3Accrued revenue 53.5
NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
AggregatedAsset Group 49% Share 30 Jun 2005
$ million
7. Other Assets (current)
Inventories 11.1 Other assets 3.1
14.2
8. Property, plant and equipment (non-current)
Freehold land at cost 69.7 Easements at cost 2.1 Buildings at cost 41.5 Distribution network system assets – atcost 1,764.6Plant and equipment at cost 119.1 Capital works in progress at cost 61.8 Vehicles under finance lease at cost 3.5 Distribution network system assets underfinance lease at cost 1,053.5 3,115.8
9. Intangibles (non-current)
Lease premium at cost 875.6 Licence at cost 292.0 Intellectual property at cost 120.4 1,288.0
10. Other Assets (non-current)
Prepaid land lease 202.0 Other 1.7
203.7
11. Payables (current)
Trade creditors 56.8 Interest payable 84.1 Other creditors 24.7 165.6
12. Other financial liabilities(current)
Interest rate swaps 1.1 Currency swaps 28.0 29.1
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
Employee benefits 59.5 Safety compliance 7.8 Other 1.6 68.9
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
19. Financial Instruments
a) Financial Risk Management Objectives
The Asset Group’s respective Corporate Treasury functions provide services to the businesses, co-ordinate access to domestic and international financial markets, and manage the financial risks relating to theoperations of the businesses.
The Asset Group does not enter into or trade derivative financial instruments, including derivative financial instruments, for speculative purposes. The use of financial derivatives is governed by the Asset Group's policies approved by their respective board of directors, which provide written principles on the use offinancial derivatives. Compliance with policies and exposure limits are reviewed on a regular basis.
The Asset Group’s activities expose it primarily to the financial risks of changes in foreign currencyexchange rates and interest rates. The Asset Group enters into the following derivative financial instrumentsto manage their exposure to interest rate and foreign currency risk:
• forward foreign exchange contracts and options to hedge the exchange rate risk arising in respectof foreign currency payables & receivables;
• interest rate swaps and options to mitigate the risk of rising interest rates; and • cross currency swaps to manage the foreign currency risk associated with foreign currency
denominated borrowings.
b) Significant Accounting Policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition,the basis of measurement and the basis on which revenues and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the pro forma supplementary financial information.
c) Foreign Currency Risk Management
The Asset Group undertakes certain transactions denominated in foreign currencies, hence exposures toexchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parametersutilising forward foreign exchange contracts and currency swap agreements.
d) Forward Foreign Exchange Contracts and Options
It is the policy of the Asset Group to enter into forward foreign exchange contracts or options to cover significant foreign currency payments and receipts. These entities may also enter into these contracts oroptions to manage the foreign currency risk associated with anticipated transactions.
e) Cross Currency Swaps
Under cross currency swaps, the Asset Group agrees to exchange specified principal and interest foreigncurrency amounts at an agreed future date at a specified exchange rate. Such contracts:
• hedge the exchange rate for the contracted cash flows (the commencing principal exchanged,foreign currency interest commitments over the term of the underlying borrowing and the exchange of principal on maturity of the borrowing); and
• determine the interest rate reference for the life of the borrowing.
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f) Interest Rate Risk Management
The Asset Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates.This risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings, by the use of interest rate swap contracts and forward interest rate contracts.
g) Interest Rate Swaps Contracts
Under interest rate swap contracts, the Asset Group agrees to exchange (on a quarterly basis) the differencebetween fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Asset Group to mitigate the risk of changing interest rates on debt held. The fair valueof interest rate swaps are based on market values of equivalent instruments at the reporting date and aredisclosed below. The average interest rate is based on the outstanding balances at the start of the financialperiod.
From 1 January 2005, interest rate swap contracts exchanging floating rate interest amounts for fixed rateinterest amounts are designated and effective as cash flow hedges. Interest rate swaps outstanding at 31 December 2004 were recognised as financial assets on adoption of the accounting policies specified in note 3 (h).
The following table details the Asset Group's aggregated 49% share of exposure to interest rate risk as at 30 June 2005:
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss. To manage its exposure to credit risk, a policy has been adopted to deal only withcreditworthy counterparties and where appropriate, obtaining sufficient collateral or other security as ameans of mitigating the risk of financial loss from defaults.
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NOTES TO THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
h) Credit Risk Management (cont)
The carrying amount of financial assets recorded in the pro forma supplementary financial information, netof any provision for losses, represents the Asset Group's maximum exposure to credit risk in respect offinancial instruments.
AggregatedAsset Group 49% Share 30 Jun 2005
$ million
20. Expenditure Commitments
(a) Operating leases
Non-cancellable operating leases contracted for, but not recognised in thebalance sheet:
Payable not later than one year 2.1 Later than one year and not later than five years
9.4
Later than five years 19.8 31.3
(b) Other expenditure contractually committed at year end and not recorded in the balance sheet
Capital expenditure Payable not later than one year 14.0 Later than one year and not later than five years
0.3
Later than five years - 14.3
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Page C1ANNEXURE C
RECONCILIATION OF THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
A reconciliation between the pro forma supplementary financial information of CHEDHA and ETSA for the financial years ended 31 December 2004, 31 December 2003, 31 December 2002 and for the half-yearsended 30 June 2005 and 30 June 2004 to the audited financial statements for the financial years and the reviewed financial statements for the half-years of CHEDHA and ETSA has been prepared to reflect the operation of CHEDHA and ETSA over this period on a basis consistent with the ongoing business to beconducted by CHEDHA and ETSA.
Total non-current liabilities 3,708.7 10.8 3,719.5 Total liabilities 4,256.1 10.8 4,266.9 Net assets before preferential partner capital 454.8 374.4 829.2
Preferential partner capital 622.3 2 (b)(iv) 622.3
Net Assets attributable to SparkInfrastructure 996.7 1,451.5
The basis for these pro forma adjustments is described in Note 2(b) of Annexure B.
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Page C2ANNEXURE C
RECONCILIATION OF THE PRO FORMA SUPPLEMENTARY FINANCIAL INFORMATION
Schedule 2: Income Statements
Aggregated49% Share
Asset Group Yearended
31 Dec 2002 $ million
Aggregated49% Share
Asset Group Yearended
31 Dec 2003 $ million
Aggregated49% Share
Asset Group Yearended
31 Dec 2004 $ million
Aggregated49% Share
Asset Group Half Year
ended30 Jun 2004
$ million
Aggregated49% Share
Asset Group Half Year
ended30 Jun 2005
$ million Profit from ordinary activitiesbefore interest income,borrowing costs, income tax,depreciation and amortisationexpense 450.0 481.5 491.7 245.0 258.2
A-IFRS adjustments
Reclassification of profit onsale (1.7) (3.3) (2.3) Reclassification of profit onsale 1.7 3.3 2.3 Recognition of pension costs 1.0 1.0 (0.4)
Pro forma adjustments
Elimination of intercompanyprofit between ETSA and CHEDHA (2.4) (0.7)Disposal of retail business (21.3) (2.0)Doubtful debts relating topre-2002 5.2 (1.3) (0.6) (0.6)Reclassification of unwindingof discount 1.6 1.5 Other 2.3 (2.3)
Pro forma profit fromordinary activities beforeinterest income, borrowingcosts, income tax,depreciation and amortisationexpense 434.9 480.9 492.1 244.4 255.2
The basis for these pro forma adjustments is described in Note 2(a) of Annexure B.
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Liability limited by a scheme approved under Professional Standards Legislation
Note: This report consists of both a Financial Services Guide and a Reviewof Directors’ Forecasts
Part 1 - Financial Services Guide 18 November 2005
What is a Financial Services Guide?
This Financial Services Guide (FSG) is an important
document whose purpose is to assist you in deciding
whether to use any of the general financial product
advice provided by Deloitte Corporate Finance Pty
Limited (ABN 19 003 833 127). The use of “we”, “us”
or “our” is a reference to Deloitte Corporate Finance
Pty Limited as the holder of Australian Financial
Services Licence (AFSL) No. 241457. The contents of
this FSG include:
who we are and how we can be contacted
what services we are authorised to provide under
our AFSL
how we (and any other relevant parties) are
remunerated in relation to any general financial
product advice we may provide
details of any potential conflicts of interest
details of our internal and external dispute
resolution systems and how you can access them.
Information about us
We have been engaged by the Directors of Spark
Infrastructure to give general financial product advice in
the form of an independent review report on theDirectors’ financial forecasts to be provided to you in
connection with the issue of stapled securities in Spark
Infrastructure . You are not the party or parties who
engaged us to prepare this report. We are not acting for
any person other than the party or parties who engaged
us. We are required to give you an FSG by law because
our report is being provided to you. You may contact us
using the details located above.
Deloitte Corporate Finance Pty Limited is ultimately
owned by the Australian partnership of Deloitte Touche
Tohmatsu. The Australian partnership of DeloitteTouche Tohmatsu and its related entities provide
services primarily in the areas of audit, tax, consulting,
and financial advisory services. Our directors may be
partners in the Australian partnership of Deloitte
Touche Tohmatsu.
The Australian partnership of Deloitte Touche
Tohmatsu is a member firm of the Deloitte Touche
Tohmatsu Verein. As the Deloitte Touche Tohmatsu
Verein is a Swiss Verein (association), neither it nor any
of its member firms has any liability for each other's
acts or omissions. Each of the member firms is a
separate and independent legal entity operating under
the names "Deloitte," "Deloitte & Touche," "Deloitte
Touche Tohmatsu," or other related names.
The financial product advice in our report is provided
by Deloitte Corporate Finance Pty Limited and not by
the Australian partnership of Deloitte Touche
Tohmatsu, its related entities, or the Deloitte Touche
Tohmatsu Verein.
We do not have any formal associations or relationships
with any entities that are issuers of financial products.
However, you should note that we and the Australian
partnership of Deloitte Touche Tohmatsu (and its
related bodies corporate) may from time to time provide
professional services to financial product issuers in the
ordinary course of business.
What financial services are we licensedto provide?
The AFSL we hold authorises us to provide the following
financial services to both retail and wholesale clients:
to provide general financial product advice in
respect of:
debentures, stocks or bonds to be issued or
proposed to be issued by a government
interests in managed investment schemesincluding investor directed portfolio services
securities.
to deal in a financial product by arranging for
another person to apply for, acquire, vary ordispose of financial products in respect of:
debentures, stocks or bonds issued or to beissued by a government
interests in managed investment schemesincluding investor directed portfolio services
securities.
Information about the general financial product advice we provide
The financial product advice provided in our report is
known as “general advice” because it does not take intoaccount your personal objectives, financial situation or
needs. You should consider whether the general advice
contained in our report is appropriate for you, having
regard to your own personal objectives, financial
situation or needs.
Deloitte Corporate Finance Pty Limited
A.B.N. 19 003 833 127
AFSL No. 241457
Grosvenor Place
225 George Street
Sydney NSW 2000
PO Box N250
Sydney NSW 1220 Australia
Tel: +61 (0) 2 9322 7000
Fax: +61 (0) 2 9322 7001
www.deloitte.com.au
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Liability limited by a scheme approved under Professional Standards Legislation
If our advice is being provided to you in connectionwith the acquisition or potential acquisition of a
financial product issued another party, we recommend
you obtain and read carefully the relevant offer
document provided by the issuer of the financial
product. The purpose of the offer document is to help
you make an informed decision about the acquisition of
a financial product. The contents of the offer document
will include details such as the risks, benefits and costs
of acquiring the particular financial product.
How are we and our employees remunerated?
Our fees are usually determined on an hourly basis;
however they may be a fixed amount or derived using
another basis. We may also seek reimbursement of any
out-of-pocket expenses incurred in providing the
services.
Fee arrangements are agreed with the party or parties
who actually engage us, and we confirm our
remuneration in a written letter of engagement to theparty or parties who actually engage us.
Neither Deloitte Corporate Finance Pty Limited nor its
directors and officers, nor any related bodies corporate
or associates and their directors and officers, receives
any commissions or other benefits, except for the fees
for services rendered to the party or parties who actually
engage us. Our fee is $375,000 and will also be
disclosed in the Section 15.4 of this Offer Document,
prepared by the issuer of the financial product.
All of our employees receive a salary. Our employees
are eligible for annual salary increases and bonusesbased on overall performance but do not receive any
commissions or other benefits arising directly from
services provided to you. The remuneration paid to our
directors reflects their individual contribution to the
company and covers all aspects of performance. Our
directors do not receive any commissions or other
benefits in connection with our advice.
We do not pay commissions or provide other benefits to
other parties for referring prospective clients to us.
Responsibility
The liability of Deloitte Corporate Finance Pty Limited
is limited to the contents of this FSG and our report
referred to in this FSG.
What should you do if you have a complaint?
If you have any concerns regarding our report, you may
wish to advise us. Our internal complaint handling
process is designed to respond to your concerns
promptly and equitably. Please address your complaint in writing to:
The Complaints Officer
Practice Protection Group
PO Box N250
Grosvenor Place
Sydney NSW 1220
If you are not satisfied with the steps we have taken to
resolve your complaint, you may contact the Financial
Industry Complaints Service (“FICS”). FICS provides
free advice and assistance to consumers to help themresolve complaints relating to members of the financial
services industry. Complaints may be submitted to FICS
at:
Financial Industry Complaints Service
PO Box 579
Collins Street West
Melbourne VIC 8007
Telephone: 1300 780 808
Fax: +61 3 9621 2291
Internet: http://www.fics.asn.au
If your complaint relates to the professional conduct of
a person who is a Chartered Accountant, you may wishto lodge a complaint in writing with the Institute of
Chartered Accountants in Australia (“ICAA”). The
ICAA is the professional body responsible for setting
and upholding the professional, ethical and technical
standards of Chartered Accountants and can be
contacted at:
The Institute of Chartered Accountants
GPO Box 3921
Sydney NSW 2001
Telephone: +61 2 9290 1344
Fax: +61 2 9262 1512
Specific contact details for lodging a compliant with the
ICAA can be obtained from their website at
http://www.icaa.org.au/about/index.cfm.
The Australian Securities and Investments Commission
(“ASIC”) regulates Australian companies, financial
markets, financial services organisations and
professionals who deal and advise in investments,
superannuation, insurance, deposit taking and credit.
Their website contains information on lodging
complaints about companies and individual persons and
sets out the types of complaints handled by ASIC. You
The DirectorsSpark Infrastructure Holdings No. 2 Limited
c/o Level 19, 83 Clarence Street, Sydney, 2000.
The Directors
Spark Infrastructure Holdings International Limited
c/o Level 19, 83 Clarence Street, Sydney, 2000.
The Directors
Spark Infrastructure Instalment Limited
c/o Level 19, 83 Clarence Street, Sydney, 2000.
Dear Sirs
INDEPENDENT REVIEW OF DIRECTORS’ FINANCIAL FORECASTS
Introduction
This report has been prepared at the request of the Directors of Spark Infrastructure for inclusion in the
replacement combined Prospectus and Product Disclosure Statement (“Offer Document”) to be issued by Spark Infrastructure in respect of the offer of up to 1,008.7 million stapled securities in Spark
Infrastructure comprising:
one unit in the Spark Infrastructure Trust
one share in Spark Infrastructure Holdings No 1 Limited
one share in Spark Infrastructure Holdings No 2 Limited
an interest in one share in Spark Infrastructure Holdings No 3 Limited.
The above entities together form Spark Infrastructure.
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DEU109 SPARKS Prosp-Sect 12_D14 18/11/05 10:01 AM Page 194
Spark Infrastructure will use the net proceeds of the offer to acquire a 49% interest in CKI/HEH
Electricity Distribution Holdings (Australia) Pty Limited (“CHEDHA”) and a 49% interest in the ETSA
Utilities Partnership (“ETSA”), together defined as the Asset Group.
Deloitte Corporate Finance Pty Limited is wholly owned by Deloitte Touche Tohmatsu and holds the
appropriate Australian Financial Services licence for the issue of this report.
References to Spark Infrastructure and other terminology used in this report have the same meaning as
defined in the Glossary.
The Directors are solely responsible for the preparation and presentation of the financial forecasts of Spark
Infrastructure for the period ending 31 December 2005 and the year ending 31 December 2006 as set out
in Section 11 of the Offer Document (“the Spark Forecasts”) and the information contained therein,including the assumptions on which they are based.
In addition, the Directors have prepared supplementary financial information regarding the financial
forecasts of the Asset Group for the six months ending 31 December 2005 and the year ending 31 December 2006 (“the Asset Group Forecasts”). The Asset Group Forecasts comprise an aggregation of
49% of the CHEDHA and the ETSA financial forecasts (the “Asset Company Forecasts”), consistent with
Spark Infrastructure’s 49% interest in CHEDHA and ETSA.
The supplementary financial information represents more detailed equity accounting disclosures relating
to the Asset Group than that required by Australian Accounting Standard AAS1028: Investments in
Associates (“AASB 1028”) on the basis that this information is relevant to potential investors. Thesupplementary financial information has been prepared in accordance with the measurement and
recognition requirements of the Australian equivalents to International Financial Reporting Standards and
other mandatory professional reporting requirements and the accounting policies of the Asset Group asdisclosed in the Investigating Accountants’ Report set out in Section 12 of the Offer Document.
The Directors are solely responsible for the preparation and presentation of the Asset Group Forecasts asset out in Section 11 of the Offer Document and the information contained therein, including the
assumptions on which they are based.
Scope of Report
This report has been prepared having regard to the guidance set out in AGS 1062 “Reporting in
Connection with Proposed Fundraisings”, PS 170 “Prospective Financial Information” and AUS 804 “TheAudit of Prospective Financial Information”.
We have reviewed the Spark Forecasts and the Asset Group Forecasts together with the assumptions on which they are based as set out in Section 11.8 of the Offer Document in order to give a statement thereon
to the Directors.
Our review of the Spark Forecasts and the Asset Group Forecasts has been conducted in accordance withAUS 902 “Review of Financial Reports” applicable to review engagements. Our review consisted
primarily of enquiry, comparison, and analytical review procedures including discussions with
management and the Directors of Spark Infrastructure and the Asset Group of the factors considered in determining their assumptions. Our procedures included examination, on a test basis, of evidence
supporting the assumptions, amounts and other disclosures in the Spark Forecasts and the Asset Group
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DEU109 SPARKS Prosp-Sect 12_D14 18/11/05 10:01 AM Page 195
Forecasts and the evaluation of accounting policies used in the Spark Forecasts and the Asset Group
Forecasts.
These procedures have been undertaken in order to state whether anything has come to our attention which
causes us to believe that:
i) the Directors’ best-estimate assumptions do not provide reasonable grounds for the preparation of
the Spark Forecasts and the Asset Company Forecasts which form the basis of the Asset Group
Forecasts.
ii) in all material respects, the Spark Forecasts are not properly compiled on the basis of the Directors’
best-estimate assumptions, consistent with the accounting policies adopted and used by Spark
Infrastructure and in accordance with Australian equivalents to International Financial Reporting Standards and other mandatory professional reporting requirements in Australia.
iii) in all material respects, the Asset Company Forecasts, which have been aggregated to form theAsset Group Forecasts, are not properly compiled on the basis of the Directors’ best-estimate
assumptions, consistent with the accounting policies adopted and used by the Asset Group and in
accordance with Australian equivalents to International Financial Reporting Standards and other
mandatory professional reporting requirements in Australia.
iv) in all material respects, the Asset Group Forecasts are not properly compiled as 49% of the
aggregated Asset Company Forecasts.
v) the Directors’ Spark Forecasts and the Asset Group Forecasts are not based on reasonable grounds.
Our review is substantially less in scope than an audit examination conducted in accordance with Australian Auditing Standards and provides less assurance than an audit. In addition, prospective
financial information, such as the Spark Forecasts and the Asset Company Forecasts (which form the basis
of the Asset Group Forecasts), relate to events and actions that have not yet occurred and may not occur.While evidence may be available to support the assumptions on which the Spark Forecasts and the Asset
Company Forecasts are based, those assumptions are generally future-orientated and therefore speculative
in nature. Accordingly, actual financial performance may vary from the prospective financial information presented in the Offer Document and such variations may be material.
Directors’ Financial Forecasts
The Spark Forecasts and the Asset Group Forecasts have been prepared by management and adopted by
the Directors in order to provide prospective investors with a guide to the potential financial performance
of Spark Infrastructure and the Asset Group for the period ending 31 December 2005 and the year ending 31 December 2006.
There is a considerable degree of subjective judgement involved in preparing forecasts. The underlying assumptions are also subject to uncertainties and contingencies which are often outside the control of
Spark Infrastructure and the Asset Companies. The Spark Forecasts and Asset Company Forecasts have
been prepared using assumptions summarised in the Offer Document which are based on best-estimate
assumptions relating to future events that management expect to occur and actions that management expect to take.
The sensitivity analysis set out in Section 11.11 of the Offer Document demonstrates the impacts on theforecast financial performance of changes in key assumptions. The prospective financial information is
therefore only indicative of the financial performance which may be achievable.
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Prospective investors should be aware of the material risks and uncertainties relating to an investment in
Spark Infrastructure, which are detailed in the Offer Document, and the inherent uncertainty relating to the
prospective financial information.
Statement
Based on our review of the Spark Forecasts and the Asset Group Forecasts, nothing has come to our
attention which causes us to believe that:
i) the Directors’ best-estimate assumptions, as set out in the Offer Document, do not providereasonable grounds for the preparation of the Spark Forecasts and the Asset Company Forecasts
which form the basis of the Asset Group Forecasts.
ii) in all material respects, the Spark Forecasts are not properly compiled on the basis of the Directors’
best-estimate assumptions, consistent with the accounting policies adopted and used by Spark
Infrastructure and in accordance with Australian equivalents to International Financial Reporting Standards and other mandatory professional reporting requirements in Australia.
iii) in all material respects, the Asset Company Forecasts, which have been aggregated to form the
Asset Group Forecasts, are not properly compiled on the basis of the Directors’ best-estimateassumptions, consistent with the accounting policies adopted and used by the Asset Group and in
accordance with Australian equivalents to International Financial Reporting Standards and other
mandatory professional reporting requirements in Australia.
iv) in all material respects, the Asset Group Forecasts are not properly compiled.
v) the Directors’ Spark Forecasts and the Asset Group Forecasts are not based on reasonable grounds.
Actual financial performance is likely to be different from the Spark Forecasts and the Asset Group
Forecasts since anticipated events frequently do not occur as expected and the variations may be material.Accordingly, we express no opinion as to whether these forecasts will be achieved.
We disclaim any responsibility for any reliance on this statement or on the Spark Forecasts and the AssetGroup Forecasts to which it relates for any purpose other than that for which it was prepared.
Yours faithfully
Johan Duivenvoorde
Director
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Liability limited by a scheme approved under Professional Standards Legislation.
Deloitte Corporate Finance Pty Limited
ABN 19 003 833 127
AFSL 241457
Grosvenor Place
225 George Street
Sydney NSW 2000
PO Box N250 Grosvenor Place
Sydney NSW 1217 Australia
DX 10307SSE
Tel: +61 (0) 2 9322 7000
Fax: +61 (0) 2 9322 7019
www.deloitte.com.au
Note: This report consists of both a Financial Services Guide and anIndependent Regulatory Report
Part 1 - Financial Services Guide 18 November 2005
What is a Financial Services Guide?
This Financial Services Guide (FSG) is an important
document whose purpose is to assist you in deciding
whether to use any of the general financial product advice
provided by Deloitte Corporate Finance Pty Limited
(ABN 19 003 833 127). The use of “we”, “us” or “our” is
a reference to Deloitte Corporate Finance Pty Limited as
the holder of Australian Financial Services Licence
(AFSL) No. 241457. The contents of this FSG include:
who we are and how we can be contacted
what services we are authorised to provide under
our AFSL
how we (and any other relevant parties) are
remunerated in relation to any general financial
product advice we may provide
details of any potential conflicts of interest
details of our internal and external dispute
resolution systems and how you can access them.
Information about us
We have been engaged by the Directors of Spark
Infrastructure to give general financial product advice in
the form of an Independent Regulatory Report to be
provided to you in connection with the issue of stapled
securities in Spark Infrastructure. You are not the party or
parties who engaged us to prepare this report. We are not
acting for any person other than the party or parties who
engaged us. We are required to give you an FSG by law
because our report is being provided to you. You may
contact us using the details located above.
Deloitte Corporate Finance Pty Limited is ultimately
owned by the Australian partnership of Deloitte Touche
Tohmatsu. The Australian partnership of Deloitte Touche
Tohmatsu and its related entities provide services
primarily in the areas of audit, tax, consulting, and
financial advisory services. Our directors may be partners
in the Australian partnership of Deloitte Touche
Tohmatsu.
The Australian partnership of Deloitte Touche Tohmatsu
is a member firm of the Deloitte Touche Tohmatsu
Verein. As the Deloitte Touche Tohmatsu Verein is a
Swiss Verein (association), neither it nor any of its
member firms has any liability for each other's acts or
omissions. Each of the member firms is a separate and
independent legal entity operating under the names
"Deloitte," "Deloitte & Touche," "Deloitte Touche
Tohmatsu," or other related names.
The financial product advice in our report is provided by
Deloitte Corporate Finance Pty Limited and not by the
Australian partnership of Deloitte Touche Tohmatsu, its
related entities, or the Deloitte Touche Tohmatsu Verein.
We do not have any formal associations or relationships
with any entities that are issuers of financial products.
However, you should note that we and the Australian
partnership of Deloitte Touche Tohmatsu (and its related
bodies corporate) may from time to time provide
professional services to financial product issuers in the
ordinary course of business.
What financial services are we licensedto provide?
The AFSL we hold authorises us to provide the following
financial services to both retail and wholesale clients:
to provide general financial product advice in respect of:
debentures, stocks or bonds to be issued or proposed
to be issued by a government
interests in managed investment schemes including
investor directed portfolio services
securities.
to deal in a financial product by arranging for another
person to apply for, acquire, vary or dispose of financial
products in respect of:
debentures, stocks or bonds issued or to be issued
by a government
interests in managed investment schemes including
investor directed portfolio services
securities.
Information about the general financial product advice we provide
The financial product advice provided in our report is
known as “general advice” because it does not take into
account your personal objectives, financial situation or
needs. You should consider whether the general advice
contained in our report is appropriate for you, having
regard to your own personal objectives, financial situation
or needs.
If our advice is being provided to you in connection with
the acquisition or potential acquisition of a financial
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DEU109 SPARKS Prosp-Sect 12_D14 18/11/05 10:01 AM Page 198
product issued another party, we recommend you obtain
and read carefully the relevant offer document provided
by the issuer of the financial product. The purpose of the
offer document is to help you make an informed decision
about the acquisition of a financial product. The contents
of the offer document will include details such as the
risks, benefits and costs of acquiring the particular
financial product.
How are we and our employees remunerated?
Our fees are usually determined on an hourly basis;
however they may be a fixed amount or derived using
another basis. We may also seek reimbursement of any
out-of-pocket expenses incurred in providing the services.
Fee arrangements are agreed with the party or parties who
actually engage us, and we confirm our remuneration in a
written letter of engagement to the party or parties who
actually engage us.
Neither Deloitte Corporate Finance Pty Limited nor its
directors and officers, nor any related bodies corporate or
associates and their directors and officers, receives any
commissions or other benefits, except for the fees for
services rendered to the party or parties who actually
engage us. Our fee is $80,000 and will also be disclosed in
the Section 15.4 of this Offer Document, prepared by the
issuer of the financial product.
All of our employees receive a salary. Our employees are
eligible for annual salary increases and bonuses based on
overall performance but do not receive any commissions
or other benefits arising directly from services provided to
you. The remuneration paid to our directors reflects their
individual contribution to the company and covers all
aspects of performance. Our directors do not receive any
commissions or other benefits in connection with our
advice.
We do not pay commissions or provide other benefits to
other parties for referring prospective clients to us.
Responsibility
The liability of Deloitte Corporate Finance Pty Limited is
limited to the contents of this FSG and our report referred
to in this FSG.
What should you do if you have a complaint?
If you have any concerns regarding our report, you may
wish to advise us. Our internal complaint handling process
is designed to respond to your concerns promptly and
equitably. Please address your complaint in writing to:
The Complaints Officer
Practice Protection Group
PO Box N250
Grosvenor Place
Sydney NSW 1220
If you are not satisfied with the steps we have taken to
resolve your complaint, you may contact the Financial
Industry Complaints Service (“FICS”). FICS provides free
advice and assistance to consumers to help them resolve
complaints relating to members of the financial services
industry. Complaints may be submitted to FICS at:
Financial Industry Complaints Service
PO Box 579
Collins Street West
Melbourne VIC 8007
Telephone: 1300 780 808
Fax: +61 3 9621 2291
Internet: http://www.fics.asn.au
If your complaint relates to the professional conduct of a
person who is a Chartered Accountant, you may wish to
lodge a complaint in writing with the Institute of
Chartered Accountants in Australia (“ICAA”). The ICAA
is the professional body responsible for setting and
upholding the professional, ethical and technical standards
of Chartered Accountants and can be contacted at:
The Institute of Chartered Accountants
GPO Box 3921
Sydney NSW 2001
Telephone: +61 2 9290 1344
Fax: +61 2 9262 1512
Specific contact details for lodging a compliant with the
ICAA can be obtained from their website at
http://www.icaa.org.au/about/index.cfm.
The Australian Securities and Investments Commission
(“ASIC”) regulates Australian companies, financial
markets, financial services organisations and professionals
who deal and advise in investments, superannuation,
insurance, deposit taking and credit. Their website
contains information on lodging complaints about
companies and individual persons and sets out the types of
complaints handled by ASIC. You may contact ASIC as
The directors of Spark Infrastructure have in respect of Powercor, CitiPower and ETSA used the X-
factors and prices from the 2006 EDPR and 2005 EDPD as the basis for the estimated forecast
regulated revenue included in the Director’s Forecasts for the year ending 31 December 2006 as set
out in Section 11 of the Offer Document.
The following adjustments have been made by the directors of Spark Infrastructure to the regulated
revenue from the regulatory decisions:
escalated for inflation - to convert the decisions’ real (non-inflated) amounts into nominal
(inflated) amounts;
adjusted base volumes – for Powercor and CitiPower’s the base year for volumes of 2005 was
updated for expectations of the 2005 outcomes (the 2006 EDPR is based on 2004 actual volumes
plus growth for 2005), based on August 2005 year to date results;
volume growth assumptions for 2006 have been kept consistent with the growth rates assumed by
the ESC in the 2006 EDPR;
S-factor adjustment –Powercor and CitiPower have included an adjustment to the regulated
revenue in accordance with the S-factor provisions of the 2006 EDPR Price Controls, using actual
network performance for 2004.
2 Including metering.
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12.4 Taxation Report
Liability limited by the Accountants’ Scheme,
approved under the Professional Standards Act 1994 (NSW).
Deloitte Touche Tohmatsu Ltd
A.B.N. 41 092 223 240
AFSL 244541
Grosvenor Place
225 George Street
Sydney NSW 2000
PO Box N250 Grosvenor Plac
Sydney NSW 1217 Australia
DX 10307SSE
Tel: +61 (0) 2 9322 7000
Fax: +61 (0) 2 9322 7001
www.deloitte.com.au
18 November 2005
The Directors
Spark Infrastructure RE Limited
As responsible entity of the Spark Infrastructure Trust
Level 19, 83 Clarence Street
Sydney 2000
The Directors
Spark Infrastructure Holdings No.1 Limited
Level 19, 83 Clarence Street
Sydney 2000
The Directors
Spark Infrastructure Holdings No.2 Limited
Level 19, 83 Clarence Street
Sydney 2000
The Directors
Spark Infrastructure Holdings International Limited
Level 19, 83 Clarence Street
Sydney 2000
The Directors
Spark Infrastructure Instalment Limited
Level 19, 83 Clarence Street
Sydney 2000
Dear Directors
SPARK INFRASTRUCTURE: AUSTRALIAN TAXATION REPORT
We have been requested to comment on the Australian income tax and capital gains tax (“CGT”) issues
associated with an investment in the Securities (i.e. the Stapled Securities and Instalment Receipts),
pursuant to the Project Spark replacement combined prospectus and product disclosure statement (“the
Offer Document”) dated on or about 18 November 2005. Terms used in this report are as defined in the
Offer Document, unless otherwise indicated.
1.0 Limited scope of this report
The purpose of this report is to provide a general summary of the major Australian tax implications for a
Holder who acquires Securities pursuant to the terms of the Offer Document and holds them on capital
account. This report does not consider the tax consequences for Holders who hold Securities on revenue
account or as trading stock or who are exempt from Australian income tax. In addition, this report does
not consider the tax consequences for non-Australian resident Holders who have a permanent
establishment in Australia.
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Page 2
18 November 2005
2.0 Nature of Investment
An investment in the Stapled Securities should be treated for Australian taxation purposes as an
investment in each of the individual securities. As such, a Holder of a Stapled Security should be
regarded for Australian taxation purposes as holding one unit in the Spark Infrastructure Trust, one
ordinary share in each of Spark Infrastructure Company 1 and Spark Infrastructure Company 2, a CHESS
Depository Interest issued by Spark Infrastructure Company 3 and a Loan Note issued by the Responsible
Entity on behalf of the Spark Infrastructure Trust.
It should be noted that although the securities are stapled, the nature of the returns on each of the Stapled
Securities will be dependent on the classification of the particular security.
3.0 Taxation treatment of distributions from the Spark Infrastructure Trust
The Spark Infrastructure Trust should be treated as a flow through entity for Australian tax purposes. As
such, Holders would generally be taxable on their share of the Spark Infrastructure Trust’s net income on
the basis that they are “presently entitled” to such income via ownership of units in the Spark
Infrastructure Trust. Holders would be taxable on their share of the net income of the Spark Infrastructure
Trust regardless of whether that income is actually distributed.
The Spark Infrastructure Trust is expected to derive predominantly interest income. However, the Spark
Infrastructure Trust is not expected to have any material net income in the forecast period due to its gross
interest income being offset by interest expense on the Loan Notes and administrative expenses.
Other payments from the Spark Infrastructure Trust will be comprised predominantly of:
(a) Interest and (ultimately) repayments of principal on the Loan Notes; and
(b) Capital returns on the units.
The taxation treatment of these types of payments and net income from the Spark Infrastructure Trust for
Australian tax resident Holders and non-Australian tax resident Holders are set out below.
3.1 Australian resident Holders
Interest paid on the Loan Notes should be taxable to Australian resident Holders. Repayments of
principal on the Loan Notes should not be subject to Australian tax (assuming Holders do not acquire
Loan Notes on market (as part of the Stapled Security) for less than their face value). If Holders acquire
Loan Notes for less than their face value, principal repayments in excess of the acquisition cost may be
taxable. It should be noted that gains with respect to the Loan Notes can be taxed under the ordinary
income provisions, and not the CGT provisions. In such circumstances, the CGT discount and capital
losses are not available for the Loan Notes.
Australian resident Holders should also be assessable on their respective share of net income (if any)
remaining in the Spark Infrastructure Trust after deduction of interest expense on the Loan Notes and
administrative expenses.
Capital distributions from the Spark Infrastructure Trust should not be subject to CGT in the hands of an
Australian resident Holder if the distributions do not exceed the cost base of the Holder’s units in the
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Spark Infrastructure Trust. As such, these are tax deferred distributions. Such tax deferred capital
distributions will arise as a result of the repayment of loan principal. If the cumulative capital
distributions are in excess of the cost base, the excess would be subject to CGT. Individual, trust and
superannuation fund Holders may be entitled to CGT discount treatment if they hold their interests for at
least 12 months before such capital distributions.
3.2 Non-resident Holders
Interest paid on the Loan Notes to non-resident Holders should be exempt from interest withholding tax
under s128FA(1) (“public offer test”). In the event that the exemption is not available, Holders will be
subject to 10% interest withholding tax. The Spark Infrastructure Trust will not have an obligation to
gross up the interest on the Loan Notes to account for this liability.
Depending on their circumstances, non-resident Holders would generally be taxable on principal
repayments in excess of their acquisition cost for the Loan Notes when those Loan Notes are ultimately
redeemed.
To the extent that any net income remains in the Spark Infrastructure Trust after deduction of interest
expense on the Loan Notes and administrative expenses, non-Australian resident Holders should be
subject to 10% interest withholding tax on their respective shares of that income. This is on the basis that
the income derived by the Spark Infrastructure Trust is interest income and retains its character as such in
the hands of the Holders.
Capital distributions from the Spark Infrastructure Trust should not be subject to CGT in the hands of
non-Australian resident Holders if the distributions do not exceed the cost base of the Holder’s units in
the Spark Infrastructure Trust. As such, these are tax deferred distributions. Such capital distributions
will arise as a result of the repayment of loan principal. Under current law, once the cumulative capital
distributions exceed the cost base in the units, the excess would be subject to CGT if the Holder (together
with its associates) owns 10% or more of the units in the Spark Infrastructure Trust at any time in the five
years before the distribution. However, under proposed reforms (discussed in 5.2 below), such
distributions may no longer be subject to CGT.
4.0 Taxation Treatment of distributions from the Stapled Companies
The holding of shares in Spark Infrastructure Company 1 and Spark Infrastructure Company 2 by Holders
should constitute equity interests for tax purposes. Accordingly, any dividends paid by these companies
should be capable of being franked. Spark Infrastructure Company 3 is not tax resident in Australia and,
as such, dividends paid by Spark Infrastructure Company 3 cannot be franked.
4.1 Australian resident Holders
Unfranked dividends (if any) paid by Spark Infrastructure Company 1 or Spark Infrastructure Company 2
to Australian resident Holders should be taxable. Franked dividends (if any) should also be taxable, but
should carry a franking credit that partly or fully offsets the relevant tax liability. Holders that are
individuals, trusts or superannuation funds may be entitled to a refund of any excess franking credits.
Generally, dividends paid by Spark Infrastructure Company 3 to Australian resident Holders should be
taxable, with a credit for any direct foreign tax. Dividends paid by Spark Infrastructure Company 3 to an
Australian resident corporate Holder that owns at least 10% of Spark Infrastructure Company 3 would
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generally be exempt from Australian tax (although this may not be the case if such dividends are paid
during the period for which the Instalment Receipts are on issue). We note, however, that the Offer
Document does not contemplate any such dividends during the forecast period.
Capital distributions from Spark Infrastructure Company 1, Spark Infrastructure Company 2 or Spark
Infrastructure Company 3 to Australian resident Holders should generally be treated in the same way as
capital distributions from the Spark Infrastructure Trust. However, in certain circumstances, a specific
anti-avoidance rule could recharacterise a return of capital from a company as an assessable unfranked
dividend. This rule could potentially only apply if the company has distributable profits at the time of the
return.
For the sake of completeness, it is noted that Australia’s controlled foreign company and foreign
investment fund rules could apply to Australian residents in respect of their shareholding in Spark
Infrastructure Company 3. In the forecast period there is no attributable income expected under these
rules.
4.2 Non-resident Holders
Unfranked dividends paid by Spark Infrastructure Company 1 or Spark Infrastructure Company 2 to non-
resident Holders would be subject to dividend withholding tax. The dividend withholding tax rate under
the Tax Act is 30%, however, Holders resident in countries with which Australia has a double tax
agreement may be eligible for a lower dividend withholding tax rate. Franked dividends should not be
subject to dividend withholding tax.
Capital distributions from Spark Infrastructure Company 1 or Spark Infrastructure Company 2 to non-
Australian resident Holders would generally be treated in the same way as capital distributions from the
Spark Infrastructure Trust to such Holders, except that the proposed CGT changes (refer 5.2 below) may
not eliminate CGT on capital distributions in excess of cost base if, broadly speaking, more than 50% of
the Stapled Companies’ assets consist of Australian land (including fixtures). Further, in certain
circumstances, a specific anti-avoidance rule could recharacterise a return of capital from a company as
an assessable unfranked dividend (see above) which would be subject to dividend withholding tax.
Distributions from Spark Infrastructure Company 3 to non-Australian residents should not be subject to
Australian tax provided that Spark Infrastructure Company 3 does not become tax resident in Australia
and does not make any investments in Australia.
5.0 Disposal of Stapled Securities
5.1 Australian resident Holders
Australian resident Holders should be subject to tax upon a disposal of the Stapled Securities. The cost
base used to calculate a Holder’s gain or loss on disposal should be reduced by previous non-assessable
capital distributions received by the Holder from the Stapled Entities. Holders that are individuals, trusts
or superannuation funds may be entitled to a CGT discount for gains on the units and shares if they have
held the Stapled Securities for at least 12 months before disposal.
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5.2 Non-resident Holders
Under current law, non-Australian resident Holders should not be subject to CGT upon disposal of
Stapled Securities unless the Holder (together with its associates) owns 10% or more of the Stapled
Entities at any time in the five years before the disposal.
Non-Australian resident Holders who hold 10% or more of the Stapled Entities would generally be
subject to CGT under current law in respect of the disposal of the units in the Spark Infrastructure Trust
or shares in Spark Infrastructure Company 1 or Spark Infrastructure Company 2. However, proposed
reforms have been announced that should exempt such non-Australian resident Holders from Australian
CGT provided that, in the case of shares in Spark Infrastructure Company 1 and Spark Infrastructure
Company 2, the value of the Stapled Company’s assets is not wholly or principally attributable to
Australian land (including fixtures). At the time of writing, these changes have not yet been enacted and
the scope of the exemption might ultimately be different.
Gains realised by non-residents on the disposal of the Loan Notes may be subject to Australian tax if the
gain is considered Australian sourced (unless the Holder is entitled to an exemption, such as under a
double tax treaty with Australia).
6.0 Taxation Treatment of Instalment Receipts
6.1 Distributions made by the Stapled Entities while the Instalment Receipts are on issue
We assume that the only payments that will be made to Holders by the Stapled Entities while the
Instalment Receipts are on issue are the payment of interest on the Loan Note and distributions of trust
capital by Spark Infrastructure Trust.
Australian-resident Holders who receive interest on the Loan Notes issued by the Trust should be taxable
on the interest. (Since the issue of the Instalment Receipts involves the creation of a security trust, the
interest will technically be taxed under the provisions dealing with trusts.) Non-resident Holders should
be exempt from tax on the interest under the public offer test.
The distributions of trust capital made by Spark Infrastructure Trust should be exempt from income tax
but may have CGT consequences (see below).
6.2 Instalment Interest
Instalment Interest should be deductible for income tax purposes, and the deduction should broadly arise
as the expense accrues. That is, Holders should be entitled to deductions for Instalment Interest related to
the period for which the Holders own the Instalment Receipt. However, there is a risk that the ATO may
take a different view. If the ATO takes the view that the whole or a portion of the Instalment Interest is
not deductible, it is possible that the purchase and selling price of an Instalment Receipt would both be
increased by the amount of the Instalment Interest that is not deductible (see 6.3.2 below).
However, we think it unlikely that the ATO would take the view that the consequences are significantly
different to those outlined below.
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Our comments assume that the Holder’s tax year ends on 30 June. If it ends on a different date, the
consequences may be different.
The Instalment Receipt arrangement is economically equivalent to a Holder receiving a loan that is equal
to the Final Instalment, with the interest being payable, and principal being repayable, 15 months after the
loan is made. On that basis, in our opinion Division 16E of Part III of the Income Tax Assessment Act
1936 should apply to the arrangement, and Australian-resident Holders should be entitled to deduct
Instalment Interest in accordance with the provisions of Division 16E.
In principle, under Division 16E it is necessary to determine the internal rate of return on the loan; that is,
the rate at which the present values of the amounts payable by the borrower equal the principal amount of
the loan. For these purposes, interest is assumed to compound on 31 December and on 30 June during
each tax year. The internal rate of return is then used to calculate the deductions to which the borrower
may be entitled during the period of the loan.
Accordingly, in the present case, if a Holder subscribes for an Instalment Receipt and holds it until the
Final Instalment is paid, interest should be assumed to compound on 31 December 2005, 30 June 2006
and 31 December 2006.
Where a Holder buys an Instalment Receipt or sells an Instalment Receipt, the consequences under
Division 16E are unclear. This is in essence because in our opinion the transfer of an Instalment Receipt
is not a transfer of a security for the purposes of Division 16E, and therefore there is no balancing
adjustment when a Holder sells a security.
In practice, we think it would be reasonable for Holders who buy or sell Instalment Receipts to calculate
their deductions under Division 16E as follows:
• Calculate the amount of Instalment Interest for which a notional Holder would have been entitled
to deductions under Division 16E for each of the following periods on the assumption that the
Holder subscribed for the Instalment Receipt at the time it was issued for the price at which it was
issued and held the Instalment Receipt until 15 March 2007 (when the Instalment Receipt
arrangement ends):
(a) the period 15 December (when the Instalment Receipt is issued) to 31 December 2005
(“Period A”);
(b) the six months ending 30 June 2006 (“Period B”);
(c) the six months ending 31 December 2006 (“Period C”); and
(d) 1 January 2007 to 15 March 2007 (“Period D”).
For convenience, we refer to the total amount of Instalment Interest calculated for each of these
periods for the notional Holder as Instalment Interest A, B, C and D respectively.
• If the Holder holds the Instalment Receipt during the whole of Period A, claim a deduction for
Instalment Interest A. Similarly, if the Holder holds the Instalment Receipt during the whole of
Period B, C or D, claim a deduction for Instalment Interest B, C or D respectively.
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• If the Holder holds the Instalment Receipt during only part of Period A, B, C or D, claim only a
portion of the Instalment Interest for that period and determine that portion on a pro rata basis.
For example, if a Holder holds the Instalment Interest during the five months ending 30 June
2006, claim five-sixths of Instalment Interest B.
Finally, each Holder will need to consider the Holder’s specific circumstances to decide whether the
general anti-avoidance rule contained in Part IVA of the Income Tax Assessment Act 1936 applies to the
Holder to prevent the Holder from obtaining deductions for the Instalment Interest or to defer the
deductions for the tax year ending 30 June 2006 until the following tax year. In the absence of special
circumstances, we would not expect the general anti-avoidance rule to apply.
6.3 Acquisition and disposal of Instalment Receipts
6.3.1 General comments
Holders should bear in mind that there is some uncertainty about the way in which the tax law applies to
security trusts. The tax consequences outlined below are based partly on discussions with the ATO,
partly on positions taken by the ATO in public rulings dealing with similar arrangements and partly on an
examination of the relevant law. Despite the uncertainty in the law, we think the risk of the ATO
disagreeing with the tax consequences outlined below is low.
For the purposes of determining the tax consequences on acquisition and disposal of an Instalment
Receipt, a Holder who acquires an Instalment Receipt should be deemed to have acquired the Stapled
Security itself.
6.3.2 Australian-resident Holders buying and selling Instalment Receipts
The Loan Note should constitute a traditional security for tax purposes. A profit made on the disposal of
a traditional security is generally taxed as ordinary income (not as capital gain), and a loss is generally
deductible. Accordingly, a profit made by a Holder on the disposal of a Loan Note should generally be
taxed as ordinary income, and a loss made on disposal should generally be deductible.
On the basis that the Holder holds the Stapled Security on capital account, the profit made by the Holder
on the disposal of the shares and unit included in a Stapled Security should be subject to CGT. If a
Holder holds the Instalment Receipt for at least 12 months, the capital gain or loss made on disposal of
those shares and that unit may be reduced by up to 50%. If a Holder sells a Stapled Security after the
Final Instalment has been paid, for the purpose of determining whether the capital gain or loss made on
the sale of the shares and unit included in the Stapled Security is reduced, the Holder should be deemed to
have acquired the Stapled Security when the Holder acquired the Instalment Receipt.
The distributions of capital made by Spark Infrastructure Trust should reduce the Holder’s cost base in the
units of Spark Infrastructure Trust. In the unlikely event that those distributions exceed the cost base of
the relevant unit, the excess should be subject to CGT. The return of capital by Spark Infrastructure Trust
should not reduce the Holder’s cost base in the shares included in the Stapled Security or in the Loan
Note.
Because the Loan Note is treated differently from the shares and unit included in the Stapled Security and
because returns of capital by Spark Infrastructure Trust will reduce only the cost base in the unit, it will be
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necessary for each Holder to apportion the purchase price and the selling price of each Stapled Security
between the Loan Note, the unit in Spark Infrastructure Trust and the shares included in the Stapled
Security. The Stapled Entities may be able to assist Holders with the apportionment.
Where a taxpayer acquires an asset subject to a liability, the liability is generally included in the cost price
of the asset. Similarly, where a taxpayer sells an asset subject to a liability, the liability is generally
included in the proceeds derived by the taxpayer. Accordingly, in our opinion, for the purposes of
calculating the amount of the gain or loss made on the disposal of an Instalment Receipt:
• the purchase price of the Instalment Receipt should be increased by the amount of the Instalment
Interest that has accrued until the time of purchase and the Final Instalment; and
• the selling price should be increased by the amount of the Instalment Interest that has accrued
until the time of sale and the Final Instalment.
Instalment Interest should accrue at the rate specified in the Offer Document.
If the ATO takes the view that the whole or a portion of the Instalment Interest is not deductible, it is
possible that the purchase and selling prices of an Instalment Receipt would both be increased by the
amount of the Instalment Interest that is not deductible.
6.3.3 Non-resident Holders buying and selling Instalment Receipts
Where a Holder sells an Instalment Receipt and there is a profit attributable to the Loan Note, the profit
may be subject to Australian income tax if the profit is considered to be derived from an Australian source
and the non-resident Holder is not entitled to protection from Australian tax on that profit under a double
tax agreement. Otherwise, that profit should be exempt from Australian tax.
Under current law, non-resident Holders should not be subject to CGT upon disposal of the Instalment
Receipt unless the Holder (together with the Holder’s associates) owns 10% or more of the Stapled
Entities at any time before the disposal of the Instalment Receipt.
Non-resident Holders who hold 10% or more of the Stapled Entities should generally be subject to CGT
under current law in respect of the disposal of the units in the Spark Infrastructure Trust or shares in
Spark Infrastructure Company 1 or Spark Infrastructure Company 2. However, proposed reforms have
been announced that should exempt such non-resident Holders from Australian CGT provided that, in the
case of shares in Spark Infrastructure Company 1 and Spark Infrastructure Company 2, the value of the
Stapled Company’s assets is not wholly or principally attributable to Australian land (including fixtures).
At the time of writing, these changes have not yet been enacted and the scope of the exemption might
ultimately be different.
6.3.4 Conclusion of Instalment Receipt arrangements
No gain or loss should arise for resident or non-resident Holders upon transfer of legal title of the Stapled
Security from the Security Trustee to the Holder.
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7.0 Other
7.1 GST
No GST is payable upon the provision, acquisition or disposal of Stapled Securities or on distributions to
Holders.
7.2 Stamp Duty
No stamp duty should be payable on the issue of the Stapled Securities.
7.3 PAYG Withholding – Australian residents
Pursuant to an indicative letter of advice received from the ATO, if Australian resident Holders do not
provide their Tax File Number or Australian Business Number no PAYG will be withheld from payments
made to Holders in respect of interest payments or returns of trust capital paid by the Stapled Entities
during the period that the Instalment Receipts are on issue.
However, once the Instalment Receipt arrangements end and the Holders directly hold the Stapled
Securities, they will be required to provide their Tax File Number or Australian Business Number as
applicable. If this requirement is not met, an amount (up to 48.5%) could be withheld from certain
income derived by the Spark Infrastructure Trust and unfranked dividends from Spark Infrastructure
Company 1 and Spark Infrastructure Company 2.
8.0 Disclaimer
This report is based solely on:
(a) the representations, information, documents, and facts that we have included or referred to in this
report;
(b) an assumption (without independent verification other than that as stated in the Investigating
Accountants Report) that all of the representations, information and facts set out in the Offer
Document are accurate and not misleading;
(c) an assumption (without independent verification) that there will be timely execution, delivery and
performance as required by the Offer Document;
(d) the law, regulations, cases, rulings, and other tax authorities in effect as of the date of this letter. If
there are any significant changes in or to these tax authorities (for which we shall have no
responsibility to advise you), such changes may result in our opinion being rendered incorrect or
necessitate (on your request) a reconsideration of the opinion. Except where expressly mentioned, we
have not considered proposed reforms or legislation that has not been enacted; and
(e) your understanding that this report is not binding on the ATO or the courts and should not be
considered a representation, warranty, or guarantee that the ATO or the courts will concur with our
conclusions.
This report is general in nature and is not intended to be an authoritative or complete statement of the
relevant law or taxation consequences that flow. This report is not intended to consider the specific
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objectives, situation or needs of each Holder, which can affect the taxation impact of ownership of their
Securities. Holders should not rely on this summary only and should seek appropriate independent
professional advice that considers the taxation implications in respect of their own specific circumstances.
The representatives of Deloitte Touche Tohmatsu Ltd involved in preparing this report are not licensed to
provide financial product advice as defined by the Corporations Act 2001. You may consider seeking
advice from an Australian financial services license holder before making any decision in relation to a
financial product. You should also note that taxation is only one of the matters that you need to consider
when making a decision on a financial product.
Yours sincerely,
Joe Niven
Director, Deloitte Touche Tohmatsu Ltd twel
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The DirectorsSpark Infrastructure RE Limited (in its capacity as trustee of Spark Infrastructure Trust) Spark Infrastructure Holdings No.1 Limited Spark Infrastructure Holdings No.2 Limited Spark Infrastructure Holdings International Limited Spark Infrastructure Instalment Limited
The purpose of this letter is to outline for you, key regulatory considerations under theSuperannuation Industry (Supervision) Act 1993 (Cth) and Regulations (“SIS”) for regulated superannuation funds, the trustees of which are considering investing under the terms of theOffer. We understand that this letter is to be included in the replacement prospectus and product disclosure statement (“Offer Document”) for Spark Infrastructure. This letter is based on theSecurities Administration Deed and the Offer Document, and the law as at the date of this letter. Terms used in this letter are as defined in the glossary in the Offer Document.
The trustee of any investing superannuation fund will need to consider SIS and other relevant laws in the circumstances of the particular fund and whether to obtain legal advice in relation to their circumstances. In this letter, we have outlined three of the more prominent regulatoryconsiderations which may affect a superannuation fund trustee’s ability to invest in theSecurities. The list is not intended to be exhaustive. For example, the trustee of an investingsuperannuation fund would need to be satisfied that an investment under the terms of the Offer complies with the superannuation fund’s investment strategy and that the superannuation fund’s investment strategy complies with regulatory requirements.
All references in this letter to superannuation funds are to superannuation funds which areregulated under SIS. They include funds regulated by the Australian Prudential Regulation Authority (“APRA”) and self managed superannuation funds (“SMSFs”) regulated by the Australian Taxation Office (“ATO”).
The superannuation legislation
Relevantly, SIS prohibits:
• a trustee of a regulated superannuation fund from borrowing money (section 67 of SIS);
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• a trustee from granting a charge over or in relation to an asset of a regulated superannuation fund (regulation 13.14 of SIS); and
• the investment of more than 5% of a regulated superannuation fund’s asset in “in-house” assets (Part 8 of SIS).
If any of these three prohibitions is breached, the concessional tax treatment of the superannuation fund might be jeopardised. Further, a person who allows a superannuation fund to breach these prohibitions may commit a criminal offence.
The prohibition on “borrowing”
There is a difference between a “borrowing” and an instalment purchase arrangement of the kind used in the Offer. A “borrowing” involves a loan. A loan has the essential features of anadvance of money to the borrower and an obligation for the borrower later to repay the advance.
The arrangement described in the Offer does not involve an advance of money to an Investor. Although there is a prospective obligation for an Investor to pay more money, there is no advance of money to the Investor and therefore no prohibited “borrowing”.
There is a risk that APRA or the ATO may take a different view. In published material APRAhas acknowledged the distinction between a loan and an instalment purchase arrangement whererecourse of the seller on default by the purchaser is limited to the proceeds of sale of the asset. Under the arrangement described in the Offer, the Instalment Creditor (or the Security Trustee acting for the benefit of the Instalment Creditor) is entitled, in given circumstances, to recoverunpaid money plus interest, fees, expenses and taxes if the Investor does not pay the FinalInstalment. To our knowledge, neither APRA nor the ATO has publicly commented on this concept and there is a risk that they may take a contrary view.
The prohibition on charges
It is intended that under the Securities Administration Deed the Security Trustee will have apower of sale over the Stapled Securities for an Investor and the Instalment Creditor, if theInvestor fails to pay the Final Instalment. Based on the terms of the Securities Administration Deed, it is unlikely that the structure involves the granting of a charge by any person, including the Security Trustee, in respect of the unpaid Final Instalment.
The prohibition on in-house assets
Generally, SIS prohibits the investment of more than 5% of a superannuation fund’s assets in in-house assets. An in-house asset includes an investment in a related trust of a regulatedsuperannuation fund. A related trust of a regulated superannuation fund does not include anexcluded instalment trust of the fund. Under the proposed investment, the Security Trustee is appointed as trustee to hold each Stapled Security on a separate trust for each Investor. If, as is
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proposed in the Offer Document, the Stapled Securities are listed on the Australian Stock Exchange, the trust in which the investing trustee of the superannuation fund obtains an interest will be an excluded instalment trust and not a related trust of the superannuation fund. It willnot be an in-house asset of the fund.
Important information
Nothing contained in this letter is intended to be financial product advice or a recommendation to invest under the terms of the Offer. We are not licensed to provide financial product advice. Investors should consider taking advice from professional advisers, including from the holder of an Australian financial services licence, before making a decision to invest.
Yours faithfully
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risk factors
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Investors should consider carefully the risksassociated with investing in Spark Infrastructure.These risks include risks relating to utility andinfrastructure funds generally, Spark Infrastructure inparticular, as well as the Asset Companies, otherpotential assets of Spark Infrastructure, theInstalment Receipts and underlying StapledSecurities. This Section outlines the risks that SparkInfrastructure considers the most pertinent. Some ofthese risks can be mitigated by appropriate action,safeguards and procedures. However, many areoutside Spark Infrastructure’s control and cannot bemitigated, and may affect the future performance ofSpark Infrastructure.
This list of risk factors may not be exhaustive andshould be considered in conjunction with otherinformation disclosed in this Offer Document.Investors with any doubt, having given dueconsideration to these risks and other informationcontained in this Offer Document, should consulttheir stockbroker or other professional advisor.
There can be no guarantee that the assumptions,forward looking statements and forecasts containedin this Offer Document will be met, or thatdistributions will be paid.
13.1 Economic and financial market environments
The Stapled Securities and the Instalment Receiptshave not yet been admitted to quotation on ASX andhave never previously been traded on ASX or anysecondary market. There is currently no publictrading market for the Stapled Securities orInstalment Receipts, and an active trading marketmay not develop upon completion of the Offer orcontinue to exist if it does develop.
The Instalment Receipts may trade on ASX belowthe amount of the First Instalment. In addition, whenthe Stapled Securities begin to trade on ASX (afterthe Final Instalment Payment Date) they may tradebelow the Final Price. The Instalment Receipts andthe underlying Stapled Securities have no tradinghistory and there can be no assurances on how theprice of the Stapled Securities or the InstalmentReceipts will move following commencement oftrading or the volume of trading. A number ofexternal factors could affect the price at which theStapled Securities and the Instalment Receipts tradeon ASX, their liquidity, and distributions which maybe paid. Amongst other things, these includemovements on international and domestic stockmarkets, changes in the long term bond rate,volatility in the Australian and international financialmarkets, interest rates, inflation and inflationaryexpectations, actual and expected economic growth,overall economic and financial market conditions andGovernment taxation, regulation and other policychanges.
13.2 Key risks specific to an investment in Spark
Infrastructure and the Asset Companies
RevenueGeneralWhile more than 70% of the current aggregatedrevenues of the Asset Companies are from regulatedactivities, the revenue forecasts for the AssetCompanies are, to a large extent, based on demandforecast assumptions which may not be met.A reduction in the revenue earned by the AssetCompanies may reduce the ability of the AssetCompanies to pay dividends or other distributions toSpark Infrastructure, which in turn could limit SparkInfrastructure’s ability to make distributions toHolders. Key risks to the Asset Companies’ revenueare variations in customer load, regulatory pricing andcompliance, inflation and network disruptions. Eachof these risks is summarised below.
Variations in customer loadThe volume of electricity distributed through thenetworks of each of the Asset Companies is subjectto a range of variables, including economicconditions, population growth, Government policy,weather, alternative energy sources (such as gas),and the availability of adequate supplies of electricity.While the regulated distribution areas of each of theAsset Companies have exhibited economic growthand increases in population over recent years, therecan be no assurance that further increases inelectricity volumes (based on those or other factors)will continue in the future. In addition, unusually mildsummers or warmer than normal winters cannegatively affect the volume of electricity used.
Regulatory pricing and complianceRegulated distribution revenue represents between73% and 83% of the revenues for each of the AssetCompanies. Accordingly, the financial performance ofSpark Infrastructure is significantly dependent on,and sensitive to, pricing reset decisions by aRegulator. Should a decision be made by a Regulatorto decrease tariffs below what can be recovered byimproved volume, operating efficiency or operatingexpenditure over the period for which the price isset, the earnings of Spark Infrastructure will benegatively affected. A price reset may also impactnegatively on the carrying value of the distributionnetwork assets of each of the Asset Companies,which would be reassessed at the time of the pricingreset. The next scheduled price reset for ETSA isfrom 1 July 2010 and Citipower and Powercor from1 January 2011.
The Asset Companies must adhere to electricitydistribution licence requirements, codes and guidelinesestablished by the relevant Regulator from time totime. Failure to comply with licence requirements,codes or guidelines may lead to penalties, or, inextreme circumstances, amendment, suspension orcancellation of relevant licenses by the relevantRegulator.
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Further, based on market and regulatory reforms currentlyunder consideration, it is expected that there will be a moveaway from State based regulation of the electricity sector to asingle national regulator. Although no enacting legislation iscurrently in place, the AER may take over regulation of allAustralian electricity distribution networks from 31 December2006. It is expected that the new regime would “grandfather”the existing decisions and that the AER would not reset pricesuntil the next scheduled review. However, as the relevantlegislation has not yet been enacted, there is a risk that existingprice determinations may be subject to change.
Network disruptionsThe distribution networks of the Asset Companies are exposedto supply interruptions. If a severe storm, fire, sabotage,terrorist attack or other unplanned event interrupts service, theloss of cash flow resulting from the interruption and the cost ofrecovery from network damage could be considerable andpotentially cause poor customer perception and lead to claimsand litigation. Moreover, some losses from such events wouldnot be recoverable under the Asset Companies’ insurancepolicies. Importantly, the poles and wires of the distributionnetworks of each of the Asset Companies are not insured andthe current insurance policies of the Asset Companies do notprovide coverage for damage to the network assets as a resultof a terrorist attack. While the Australian Federal Governmenthas established a fund that may provide some coverage to theAsset Companies’ in the event of terrorist attack, there can beno assurance that such funds would be available to cover any orall of the losses caused by a terrorist attack.
Lastly, increases in the number or duration of supplyinterruptions could result in material increases in the costsassociated with the operation of the distribution networks,which could have a material adverse effect on the business,the financial condition and results of operations of the AssetCompanies, and in turn on the financial condition and theresults of operations of Spark Infrastructure.
InflationImplied inflation as measured by CPI is a factor in the tariffadjustment regime applicable to each of the Asset Companiesand is locked into nominal price term contracts. Accordingly,revenues earned by each of the Asset Companies may beadversely affected by increases in the rate of inflation, whichcould limit the amount of distributions payable to SparkInfrastructure.
FinancingInterest rates on Senior DebtThe Asset Companies and Spark Infrastructure are exposed tomovements in interest rates where funds are borrowed at afloating interest rate and where fixed rate debt is beingrefinanced. The Asset Companies are significant users of debt,which increases earnings’ sensitivity to interest ratemovements. While a prudent level of Senior Debt is intended tobe hedged against interest rate movements, not all borrowingsare hedged and future borrowings may not be hedged. Further,such hedges only provide certainty for a limited period, typicallycoinciding with regulatory reset periods, and there is noguarantee that future hedging activities will achieve the desired
outcome. For a discussion of floating interest rate exposure ofeach of the Asset Companies and Spark Infrastructure, seeSection 11.13.
High debt levelsEach of the Asset Companies has raised substantial levels ofdebt to fund operations. The terms of the debt for each of theAsset Companies generally require the Asset Companies tocomply with certain operating and financial covenants.Operating and financial covenants are described in Section 14.The ability of each of the Asset Companies to meet theirrespective debt service obligations and repay their outstandingdebt will depend primarily on the cash produced by the networkdistribution businesses of each of the Asset Companies. Giventhe relatively high levels of debt, there is a risk that the AssetCompanies will not generate sufficient cash to cover theoutstanding debt service obligations, which may force theAsset Companies to default on their debt obligations, refinancea portion or all of their debt or obtain additional financing onterms that are not as favourable.
Senior Debt Lock-upThe terms of the Senior Debt of the Asset Companies andSpark Infrastructure provide that in certain situations (i.e. wheredue payments of interest or principal have not been paid,specified interest cover ratios have not been met or wherethere is otherwise an event of default (or a potential event ofdefault subsisting)), the Asset Companies may not paysubordinated debt interest or dividends to Spark Infrastructure.This will in turn significantly limit Spark Infrastructure’s ability topay distributions to Holders, despite funds being otherwiseavailable (Senior Debt Lock-up). If Senior Debt Lock-up occurs,the ability of the Asset Companies to make distributions toSpark Infrastructure, and the ability of Spark Infrastructure tomake distributions to Holders, may be diminished or evenremoved until the Senior Debt Lock-up is remedied. See thefinancing agreement summaries in Sections 14.14, 14.15 and14.16 for further details.
Capital expenditure draw downsThere is a risk that due to unforeseen events, possible debtdraw downs planned by the Asset Companies and intended tobe used to fund capital expenditure items may not eventuate.If this occurs, future growth initiatives of the Asset Companiescould be restricted, which could limit future revenues and cashflows and potentially limit cash flow available for distribution toSpark Infrastructure and the Holders. See the sensitivityanalysis in Section 11.11.5 for further information.
RefinancingSenior Debt held by Spark Infrastructure and the AssetCompanies will need to be refinanced at varying maturity dates.In the short term, these include the Senior Debt $600 millionMTNs for CitiPower and $550 million MTNs for ETSA whichmature in 2007 and the Senior Debt $632 million US144a bondsfor Powercor, which mature in 2008. The terms under whichthe Senior Debt is refinanced may affect the financialperformance of the Asset Companies and Spark Infrastructureand the ability to pay distributions. If acceptable terms cannotbe agreed before or at maturity, dividends, distributions andinterest payments by the Asset Companies to Spark
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Infrastructure may be diminished, delayed or ceasedwhich could reduce the amount of cash available fordistribution to Holders. A summary of the debtmaturity dates is found in Section 11.9.1 and thematerial contract summary in Section 14.13.
Credit ratingsHolders face the risk that the credit rating of SparkInfrastructure may be downgraded as a result of achange in operating performance or capital structure,or a downgrade in the credit rating of any of theAsset Companies, which may result from a numberof matters. Any deterioration in the credit rating ofCKI or HKE, or entities holding interests in CKI orHKE, could also negatively affect the credit rating ofthe Asset Companies and Spark Infrastructure. Adowngrade of the credit rating of Spark Infrastructurewould increase the cost of debt, thereby adverselyaffecting the financial performance and value ofSpark Infrastructure. A summary of the AssetCompanies’ credit rating for their unsecured seniordebt obligations is found in Section 6.1.
TaxationThe financial forecasts contained within this OfferDocument are in part dependent upon the currentapplicable Australian tax laws and SparkInfrastructure Group’s interpretation of these laws.If there is a change in tax regime or if the ATO hasa different interpretation of the current laws thanthat of the Spark Infrastructure Group, the financialperformance of the Spark Infrastructure Group maydiffer from that forecast.
The carried forward revenue losses for CHEDHA andthe relevant partner companies of ETSA are $593million and $403 million, respectively, as at 31December 2004. CHEDHA and the relevant partnercompanies of ETSA have estimated that a further $8million and $16 million of revenue tax losses,respectively, were incurred in the 6 month periodended 30 June 2005. The availability of theCHEDHA and ETSA group’s tax losses at 30 June2005 is subject to them satisfying the “continuity ofownership test” or “same business test” forrelevant periods under the existing and/or proposedtax loss recoupment rules. The quantum of taxlosses available at 30 June 2005 may be affected bythe current ATO tax audits (see below) or by the ATOadopting a different interpretation of the currentand/or proposed tax loss recoupment rules.
The ATO has initiated a Large Business Audit ofPowercor’s financing arrangements. The audit is stillin the information gathering stage and no views haveyet been expressed by the ATO. A response fromthe ATO is not expected until 2006. The ATO hasstated publicly that it is reviewing a range offinancing arrangements of companies in Australiaand the ATO’s position will continue to be monitored.
The ATO is also undertaking a strategic audit ofETSA. The issues that the ATO are focussing oninclude:
• the taxation treatment of the rent instalmentspayable under the land lease and the timing ofincome relation to the Convertible RentInstalment Security Payment; and
• the calculation of the opening tax cost base ofdepreciable assets acquired on privatisation ofETSA.
The ATO has issued a position paper and income taxadjustment sheets for the years ended 30 June 2000to 31 December 2002 inclusive. Although not legallyeffective, the ATO’s proposed adjustments wouldreduce the relevant partner companies’ tax losses byapproximately $129.7 million (as at 30 June 2005).ETSA has received favourable opinions of SeniorCounsel in respect of the Convertible RentInstalment Security Payments.
ControlFollowing completion of the Offer, CKI and HKE willcollectively hold a 51% interest in each of the AssetCompanies and will have the right to appoint five outof nine members of the boards of directors thatoversee the Asset Companies. There can be noassurance that they will use their majority position onthe boards of the Asset Companies for the benefit ofSpark Infrastructure or the Holders. The terms of theAsset Company Agreements, which govern therelationship of CKI, HKE and Spark Infrastructure inrelation to the ownership and operation of CHEDHAand ETSA, require that certain decisions relating tosignificant corporate matters, including changes inthe capital structure of ETSA or CHEDHA ordistributions to the shareholders of CHEDHA or theETSA partners, are subject to a special majoritydecision requiring the approval of holders of 75% ofthe shares of CHEDHA or requiring the approval ofholders of 75% of the partnership interest of ETSA.There can be no assurances that these specialmajority provisions will afford adequate protection inall respects. Refer to Sections 14.7.2 and 14.7.3 formore details on the Asset Company Agreements.
ContractsIf third parties do not meet their obligations undermaterial contracts, or there is a dispute concerning amaterial contract, and Spark Infrastructure or therelevant Asset Company is not financiallycompensated or cannot alleviate the effect bycontracting with alternative parties, this may have amaterial adverse affect on Spark Infrastructure or therelevant Asset Company.
Investment strategy and processThe growth strategy of Spark Infrastructure isdependent upon its ability to source and acquireinvestments, as well as successfully finance andintegrate those investments. There is a risk that
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Spark Infrastructure will not be able to secure relevantinvestments on appropriate terms, potentially limiting growth.
While both CKI and RREEF Infrastructure have committed touse best endeavours to refer appropriate infrastructureinvestment opportunities to Spark Infrastructure, neither CKInor RREEF Infrastructure is obligated to refer potentialinvestment opportunities to Spark Infrastructure, and they maypursue such investment opportunities outside of SparkInfrastructure. Thus, there can be no assurance that CKI andRREEF Infrastructure will help facilitate Spark Infrastructure’soverall growth strategy.
Spark Infrastructure’s opportunities for growth are also likelyto be impacted by rising competition for utility infrastructureassets in different parts of the world. Any future acquisitions ofinfrastructure assets located outside of Australia could exposeSpark Infrastructure to potential foreign exchange risks.
In addition, in order to complete future acquisitions or takeadvantage of potential investment opportunities, SparkInfrastructure will generally require funding from externalsources. There can be no assurance that Spark Infrastructurewill be able to complete any required external funding on termsthat are favourable to Spark Infrastructure, or at all.
LitigationSpark Infrastructure or an asset it invests in (including the AssetCompanies) may be exposed to litigation arising from, forexample, contractual or industrial disputes and environmentalor occupational health and safety claims. Liability could beimposed as a consequence of any litigation and protractedlitigation could affect Spark Infrastructure or an asset adversely.
Conflicts of interestThere are potential conflicts of interest within SparkInfrastructure’s management structure. While both CKI andRREEF Infrastructure have committed to use best endeavours torefer appropriate investment opportunities to Spark Infrastructure,that obligation is subject to the referral not being inconsistent withthe business objectives of CKI/RREEF Infrastructure or theirrelated bodies corporate and to duties and obligations owed toother clients of CKI and RREEF Infrastructure and their relatedbodies corporate and to funds associated with their businesses.Further, both CKI and RREEF Infrastructure may pursueinvestment opportunities outside of Spark Infrastructure. Thedetails of the referral obligations of CKI and RREEF Infrastructureare contained in Section 9.5. Accordingly, it is possible that newinvestment opportunities that meet Spark Infrastructure’sinvestment criteria which are presented to either CKI or RREEFInfrastructure may not be offered to or reviewed by the Manageron behalf of Spark Infrastructure.
Joint ventureSpark Infrastructure may enter into joint venture arrangementswith respect to future acquisitions of interests in infrastructureassets. Owning an interest in an asset with joint venturepartners imposes restrictions which do not exist where theasset is wholly owned, and therefore, there may be limitationson the ability of Spark Infrastructure to make independentdecisions with respect to the relevant asset or the ability ofSpark Infrastructure to sell an interest in the joint venture.Disagreements between joint venture partners with respect to
the ongoing operations of an asset or the disposition of anasset may have an adverse effect on the financial condition orresults of operation of Spark Infrastructure.
13.3 Operational risks applicable to the Asset Companies
GeneralManagement of the Asset Companies is not contracted to anyexternal parties. Accordingly, the results of operations of theAsset Companies and Spark Infrastructure remain exposed toany unforeseen increases in operating expenses of the AssetCompanies.
Capital expenditureDue to the nature of the distribution networks and theadvancing age of network assets, each of the Asset Companieshas significant capital expenditure requirements. While each ofthe Asset Companies has detailed asset management plansand has historically maintained capital expenditure budgetsbased upon targets established by the relevant state regulator,there is a risk that due to unforeseen events, capitalexpenditure required for the replacement of assets or proposedgrowth initiatives could exceed current or future capitalexpenditure budgets. Material increases in capital expenditurebeyond budgeted amounts could adversely affect available cashflows of the Asset Companies, and have a negative impact onthe level of distributions to Spark Infrastructure. For adiscussion regarding the historical levels of capital expenditurefor each the Asset Companies and a sensitivity analysisregarding capital expenditure and its effects on the directors’forecasts, see Sections 11.10 and 11.12.15, respectively.
BushfireParts of the distribution networks of Powercor and ETSA arelocated in high bushfire risk areas. There is a risk that systemfailures in the networks could ignite catastrophic bushfiresparticularly in extreme fire danger weather conditions. Althougheach of the Asset Companies has implemented bushfiremitigation programs designed to minimise the risk of bushfireignition, which includes pole and power line inspections, treeclearings, audits, preventative capital projects and contingencyplans, the Asset Companies cannot eliminate the possibility ofcausing a bushfire nor can they fully mitigate the consequencesof such an event. The consequences include property damageand business interruption to the distribution networks of theAsset Companies and as previously advised (refer BushfireMitigation – Section 6.4.7) liability to third parties which mayinclude personal injury/death, property damage and businessinterruption.
Insurance for property damage and business interruption to thedistribution networks of the Asset Companies is limited withany damage to the poles and wires or assets within theCitiPower and Powercor distribution networks not beingcovered by insurance.
In respect of liability to third parties, CitiPower, Powercor andETSA have a group based liability insurance coverage foramounts which they may be held liable for personal injury orproperty damage arising from fires that are caused or arise fromtheir respective distribution networks. The liability insuranceprovides a limit of liability up to $860 million for any one claim orseries of claims arising out of the one event, and $1.72 billion in
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aggregate during the 12 month period of insurance.These liability limits are shared between Powercor,ETSA and CitiPower, with CitiPower’s coveragelimited to $330 million for any one claim or series ofclaims arising out of the one event and $660 millionin the aggregate, reflecting the lower level of bushfirerisk due to CitiPower’s urban distribution network.
The cost of remediation from network damage orliabilities to third parties caused by bushfire could besignificant, which could have a material adverseeffect on the Asset Companies’ results of operations.There can be no assurance that network damage orliability to third party costs incurred will not exceedthe amount of the property and liability insuranceslimits available under the respective policies.
Electrical safety standardsLegislation and associated regulations in place inVictoria and South Australia prescribe standards forthe safe operation and maintenance of poles, wiresand related distribution assets. Any material increasein the operational or capital expenditure costs of theAsset Companies as a result of changes to theelectrical safety standards that are not factored intothe regulatory pricing determinations affecting theAsset Companies could significantly impact thefinancial condition and results of operations of theAsset Companies.
Native titleA declaration of native title in respect of land on whichthe Asset Companies, or any future investments inwhich Spark Infrastructure acquires an interest, arelocated may affect operational and financialperformance of such Asset Companies. The AssetCompanies (or Spark Infrastructure, as relevant) mayhave to comply with a series of potentially arduousprocedures as well as pay compensation to native titleholders in some circumstances.
Industrial actionIndustrial action or claims by employees or their unionsmay have a negative impact on the operations,customer services, business reputation and financialperformance of each of the Asset Companies. Theworkforce conditions of certain employees of theAsset Companies are governed by a series of EBAswhich are subject to renegotiation from time to time.Although each of the Asset Companies considers thatits relations with its employees are good at this time,disputes may arise in the course of future EBArenegotiations which could lead to strikes or otherforms of industrial action. For example, recent EBAnegotiations with ETSA’s unionised workforce involvedsome protracted disputes with the employee unions,which interfered with ETSA’s ability to contract externalwork from third parties.
CreditTransmission companies charge distributors for use ofsystem and connection charges which the distributorthen passes on to retailers. The distributors are liableto pay the transmission companies even if thosecharges are not collected from retailers. The AssetCompanies have a highly concentrated directcustomer base, being a small number of electricityretailers, and thus face a substantial credit risk inrelation to such electricity retailers.
In the case of ETSA, should there be an unplannedexit of a retailer (e.g. due to insolvency) such that a“retailer of last resort” regime is triggered, thenETSA may incur delays and additional costs whichmay not be fully recoverable.
EnvironmentalChanges to national or state Governmentenvironmental policies may expose electricitydistribution providers to the risk of additional orunplanned capital expenditure. There has been atrend of increasingly stringent environmentalregulations and policies which may add to capitalcost requirements of industry participants. Costs andexpenditures associated with non-compliance withenvironmental laws and regulations will increase theoverall cost of operation of the Asset Companies’distribution networks, which in turn could have amaterial adverse effect on the business, financialcondition and results of operations of the AssetCompanies.
In addition, the activities of the Asset Companiesmay, in certain circumstances, pose a risk to theenvironment. Non-compliance with environmentallaws and regulations may lead to costs and penaltiesin respect of environmental rehabilitation, damagecontrol, and other losses, despite programs tominimise the probability of such accidents orviolations occurring.
13.4 Risks specific to the Manager
Reliance on the ManagerAs Holders will not have control over the day to dayoperations, including the investment decisions, ofSpark Infrastructure, they must rely on thejudgement of the boards of directors of the StapledEntities and the Manager, and the success of SparkInfrastructure will depend in large part on theperformance of the Manager. Further, because theManager will utilise the experience of both CKI andRREEF Infrastructure to help fulfil its obligations toSpark Infrastructure, the loss of any key personnel byCKI or RREEF Infrastructure could materially affectthe Manager’s ability to effectively manage SparkInfrastructure.
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In addition, the Manager has the ability to terminate theManagement Agreement in certain circumstances, andaccordingly there can be no assurance that the Manager willremain the manager of Spark Infrastructure. Further, neitherSpark Infrastructure nor the Holders would be able to removethe Manager in the event the Manager underperforms or failsto perform requisite duties under the Management Agreementunless the Manager is in serious breach of a material provisionof the Management Agreement. See Section 14.6.1 for asummary of this agreement. To the extent the Managerunderperforms and is not removed, Spark Infrastructure’sfinancial performance may be negatively affected. In the eventthe Manager’s relationship with Spark Infrastructure isterminated, there can be no assurance that a suitablereplacement manager may be found.
13.5 Risks related to the Offer, the Stapled Securities and
the Instalment Receipts
Distributions and interest payments on SecuritiesDistributions on the Securities, and in particular interestpayments relating to the Loan Notes, are not guaranteed.Factors such as an increase in interest rates, inflation andinflationary expectations, the issue of further Stapled Securitiesor diminished financial results of the Asset Companies mayhave an adverse impact on the financial performance of SparkInfrastructure, which may reduce or prevent distributions andinterest payments being made.
Future issuesSpark Infrastructure cannot predict what effect, if any, futureissues of Securities, or the availability of Securities for futuresale, will have on the market price of the Securities. Sales ofsubstantial amounts of Securities in the public market followingthe initial public offering, or the perception that such sales couldoccur, could adversely affect the market price of the Securitiesand may make it more difficult to sell Securities at a time andprice deemed appropriate by the relevant Holder. Any futureissuances of Securities will also dilute the interests of theHolders.
Ability for superannuation funds to investSection 12 contains a report prepared by Mallesons StephenJaques which concludes that trustees of superannuation fundsare not prohibited from investing in the Stapled Entities throughthe Instalment Receipts. There is a risk, however, that APRA orthe ATO may take a different view and that superannuationfunds may be precluded from acquiring Instalment Receipts. Ifthis were to happen, it may have adverse consequences for thesuperannuation funds which have invested and their trusteesand members. It may also affect other Holders by the effect onthe trading price of Instalment Receipts on ASX.
Deductibility of Instalment InterestSection 12 contains a report prepared by Deloitte ToucheTohmatsu Ltd which concludes that the Instalment Interestshould be deductible for income tax purposes and thededuction should broadly arise as the expense accrues. That is,investors should be entitled to deductions for InstalmentInterest related to the period for which the investors own theInstalment Receipt. However, there is a risk that the ATO maytake a different view.
Instalment Interest rateInstalment Interest will be charged at a fixed rate of interest forthe term of the Instalment Purchase Arrangements, which isexpected to be 15 months. The interest rate will be fixed oncompletion of the Bookbuild by reference to the Market Rate atthat time. Accordingly, Holders will be exposed to the risk thatthis fixed rate on the Instalment Interest becomes anunattractive interest rate due to market rates falling below thislevel. Holders will not be able to refinance the Final Instalment.Applicants are also exposed to movements in interest ratesbetween the date of this Offer Document and the date ofannouncement of pricing and allocations.
Liability of Holders for defaultIf a Holder does not pay the Final Instalment and InstalmentInterest when due, then Spark Instalment will issue a finalreminder to the Holder and interest will accrue on a daily basison the unpaid amount at an interest rate equal to the fixedInstalment Interest rate plus 2%. If the Holder does not pay theFinal Instalment and Instalment Interest by the time set out inthe reminder notice, then the Instalment Creditor may directthe Security Trustee to sell the Stapled Securities in which theHolder has a beneficial interest by virtue of the InstalmentReceipts. If the proceeds from the sale of the StapledSecurities (less any interest costs, expenses of sale and dutiesand taxes owed) are insufficient to pay the Holders’ obligations,then the Holder will remain liable for the outstanding balance.
Early payment of Final InstalmentUnder the terms of the Securities Administration Deed, thereare a number of events that may lead to Holders being requiredto pay the Final Instalment early. Early payment of the FinalInstalment and Instalment Interest may be required by theInstalment Creditor in the following circumstances:• a change of control occurs (being a situation where any
person and its associates, other than the InstalmentCreditor, control 20% or more of the Stapled Securities orthe Instalment Receipts);
• the Security Trustee or Spark Instalment breaches or fails toperform a material obligation under the SecuritiesAdministration Deed;
• quotation of the Stapled Securities on ASX ceases; or• certain transaction documents are terminated or become
void, illegal or unenforceable.
If any of these events take place, Spark Instalment may requirethe early payment of the Final Instalment, Instalment Interest andany costs incurred by Spark Instalment as a consequence of theacceleration of the payment of the Final Instalment, includingbreak costs in respect of the fixed rate funding of the FinalInstalment. In these circumstances, the break costs payable areunlikely to be material and are not quantifiable in advance.
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material contracts
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Title Page
14.1 Availability of documents 231
14.2 Summary of material contracts at Stapled Entity level 231
14.3 Agreements relating to the governance of the Stapled Entities 233
14.11.1 Deemed Electricity Distribution Contract 268
14.11.2 Default Use of System Agreement –Victorian Electricity Industry 268
Title Page
14.12 Summary of Senior Debt facilities at Asset Company level 269
14.13 Summary of Senior Debt facilities – ETSA 270
14.13.1 2000 MTN Program 270
14.13.2 Reimbursement Agreement for 2000 MTN Program 270
14.13.3 2000 (EUR) MTN Program 270
14.13.4 2004 MTN Program 270
14.13.5 Reimbursement and IndemnityAgreement for 2004 MTN Program 271
14.13.6 US Private Placement – US$387 million Note and Guarantee Agreement 271
14.13.7 $60 million HSBC Cash Advance Facility 271
14.13.8 $75 million Westpac Cash Advance Facility 272
14.13.9 Westpac Master Lease Agreement 272
14.14 Summary of Senior Debt facilities – CitiPower 272
14.14.1 CitiPower A$1,000 million MTN Program (2003 MTN) 272
14.14.2 Reimbursement Agreement for the 2003 MTN 272
14.14.3 A$400 million MTN Program (2000 MTN) 273
14.14.4 Reimbursement Agreement for the 2000 MTN 273
14.14.5 Revolving Bank Loan Facility – Westpac 273
14.14.6 Working Capital Facility – CBA 274
14.14.7 Working Capital Facility – Citibank 274
14.15 Summary of Senior Debt facilities – Powercor 274
14.15.1 A$600 million MTN Program (2001 MTN) 274
14.15.2 Reimbursement Agreement for the A$600 million MTN 274
14.15.3 Rule 144A Notes 275
14.15.4 A$500 million Commercial Paper Program (A$500 million Paper) 275
14.15.5 Revolving Bank Loan Facility – Westpac 275
14.15.6 Working Capital Facility – Westpac 275
14.15.7 Facilities Agreement – CBA 275
14.16 Summary of Senior Debt Facilities –Spark Infrastructure 276
14.17 Offer Management 277
14.17.1 Offer Management Agreement 277
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14.1 Availability of documents
The following documents do not form part of this OfferDocument but during the Offer Period they are available forinspection at the offices of Spark Infrastructure between9:00am and 5:00pm on Business Days or a copy may berequested to be provided free of charge by contacting the SparkInfrastructure Offer Infoline in Australia:• Spark Infrastructure Trust Constitution;• Spark Infrastructure Company 1 Constitution;• Spark Infrastructure Company 2 Constitution;• Spark Infrastructure Company 3 Constitution;• Rules of the DRP;• Securities Administration Deed;• Co-operation Deed;
14.2 Summary of material contracts at Stapled Entity level
This Section contains a summary of the material contractsentered into by the Stapled Entities. The main contracts,including a brief description of the contract and the parties tothe contract, are outlined in the following table. All of thesecontracts (other than the Spark Infrastructure Trust Constitution)were executed on or about the date of the Original Document,unless otherwise stated.
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Table 14.1 Material Contract Index
14.3.5Sets out agreement betweenthe Stapled Entities to consultand co-operate on staplingmatters, to co-ordinateadministrative arrangements,and to facilitate SparkInfrastructure transactions
Stapled EntitiesCo-operation Deed
14.3.1 and14.3.4
Sets out rights ofshareholders, boardgovernance procedures andvarious other matters relatingto the operation andgovernance of the StapledCompanies
Shareholders in SparkInfrastructure Company 1,Spark Infrastructure Company2 and Spark InfrastructureCompany 3
Stapled CompanyConstitutions
14.3.1 and14.3.2
Sets out rights of unitholders, rights andresponsibilities of theResponsible Entity andvarious other matters relatingto the operation andgovernance of the SparkInfrastructure Trust
Unit holders in the SparkInfrastructure Trust
Spark Infrastructure TrustConstitution
14.3.1 to14.3.4 and
14.3.7
Constituent Documents
The rights of Holders are set out in the Constituent Documents.The Stapling Provisions
The Constituent Documents governing the Stapled Securities contain identical StaplingProvisions, which apply while the instruments comprising the Stapled Securities areOfficially Quoted and stapled.The Stapling Provisions provide that a Stapled Security is comprised of one unit in SparkInfrastructure Trust, one share in Spark Infrastructure Company 1, one share in SparkInfrastructure Company 2, one CDI over one share in Spark Infrastructure Company 3 andone Loan Note. Accordingly, a Stapled Security Holder will always hold the same number ofunits in the Spark Infrastructure Trust, shares in Spark Infrastructure Company 1, shares inSpark Infrastructure Company 2, CDIs over shares in Spark Infrastructure Company 3, andLoan Notes in the Spark Infrastructure Trust. Essentially, the component securities aretreated as one security such that a Stapled Security Holder may only deal in a StapledSecurity and not individually in the instruments that comprise the Stapled Security.Each Stapled Entity must use every reasonable endeavour to procure that while the Securitiesare Officially Quoted they are dealt with in a manner consistent with the Stapling Provisions.The Stapling Provisions also set out the core rules governing dealings in the StapledSecurities, the stapling of additional instruments to the Stapled Securities and unstaplingof the Stapled Securities. Please refer to Section 14.3.1 for further details.
Agreements relating to the governance of the Stapled Entities
Section/
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14.7.3Sets out the relationshipbetween the partners ofETSA in relation to theownership and operationof ETSA
The partners comprising theETSA partnership
Partnership Agreement
14.7.2Sets out the relationshipbetween the shareholders ofthe holding company ofCitiPower and Powercor inrelation to the ownership andoperation of CitiPower andPowercor
Shareholders of CHEDHA –initially wholly-ownedsubsidiaries of SparkInfrastructure Company 1,CKI and HKE
Asset CompanyShareholders Agreement
14.7.1Sets out the steps comprisingthe restructure of ownershipof, and intra-group debtrelating to, the AssetCompanies
CKI, HKE, Deutsche AustraliaLimited, Stapled Companies,CitiPower, Powercor, thepartners comprising theETSA partnership, the C&PIntermediaries and certainof their subsidiaries
Implementation Deed andImplementation Deed Poll
Arrangements in respect of Asset Companies
14.6.3Sets out relationship betweenthe Stapled Entities andDeutsche Bank in relation tothe provision of investmentbanking services
Stapled Entities andDeutsche Bank
Financial ServicesAgreement
14.6.2.2Sets out relationship betweenthe Manager and DAML inrelation to the provision oftechnical services
The Manager and DAMLTechnical ServicesAgreement
14.6.2.1Sets out relationship betweenthe Manager, CKI and Chistarin relation to the provision oftechnical services
The Manager, CKI and ChistarTechnical ServicesAgreement
14.6.1Sets out responsibilities andrights of the Manager inrelation to the operation ofSpark Infrastructure
Stapled Entities and theManager
Management Agreement
14.4Sets out rights of participantsin the DRP and the rights andobligations of the StapledEntities in respect of the DRP
Stapled EntitiesDRP Rules
Agreements relating to operation of Stapled Companies
14.3.7Sets out rights ofNoteholders and rightsand responsibilities of NoteTrustee in relation to the LoanNotes issued by the SparkInfrastructure Trust
The Responsible Entity andthe Note Trustee
Note Trust Deed
14.3.6Sets out rights of access ofdirectors to company booksand indemnifies the directorssubject to Corporations Actrestrictions
The Responsible Entity, eachStapled Company and each oftheir directors
Deeds of AccessInsurance and Indemnity
The Stapling Provisions continued
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14.3 Agreements relating to the governance
of the Stapled Entities
14.3.1 Stapling Provisions
(a) IntentionThe intention of the Stapling Provisions is to ensure that, to theextent permitted by law, each Stapled Security is treated as onesecurity.
(b) Stapling arrangementsUnder the Stapling Provisions:• (Stapling) each component of a Stapled Security must be
Stapled to each other component of the Stapled Security onand from a stapling commencement date agreed by SparkInfrastructure;
• (No issue) a Stapled Entity must not offer or issue acomponent of a Stapled Security, or any option or rights tosuch a component without a corresponding andsimultaneous offer or issue being made in respect of eachother component of the Stapled Security;
• (No transfer) a Stapled Entity must not register any transferof a component of a Stapled Security without acorresponding and simultaneous transfer of each othercomponent of the Stapled Security;
• (Corporate action) a Stapled Entity must not consolidate,divide, dispose, cancel, buy-back or redeem (except in thecase of a redemption in full of a Loan Note) a component ofa Stapled Security without a corresponding andsimultaneous corporate action being made in respect ofeach other component of the Stapled Security;
• (New Attached Securities) Spark Infrastructure may causeNew Attached Securities to be stapled provided certainconditions are satisfied including:
– the New Attached Security is (or will be) OfficiallyQuoted;
– the ASX has indicated that it will approve the stapling ofthe New Attached Security to the Stapled Securities;
– each Stapled Entity (excluding the issuer of the NewAttached Security) has agreed to the stapling of the NewAttached Security to the Stapled Security and that thestapling of the New Attached Security is in the bestinterest of Holders as a whole and is consistent with thethen investment objectives of Spark Infrastructure;
– the Constituent Documents for the New AttachedSecurity have provisions giving effect to the stapling;
– the issuer of the New Attached Security has agreed toenter into the Accession Deed;
– where the New Attached Security is partly-paid, orapproval from Holders is required to the transaction,approval of the Holders has been obtained; and
– the number of New Attached Securities issued isidentical to the number of Stapled Securities on issue;
• (Unstapling of a component) a component of the StapledSecurities may be unstapled if:– the ASX has indicated that it will approve such unstapling
and the remaining components remain Officially Quotedas a Stapled Security;
– each Stapled Entity has agreed to the unstapling andsuch unstapling is not contrary to the interests of Holdersas a whole and is consistent with the then investmentobjectives of Spark Infrastructure; and
– after the unstapling, the Stapling Provisions will terminatein respect of the component of the Stapled Security thathas been unstapled;
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14.8.2 and14.16
See summary inSection 14.16
See summary inSection 14.16
Stapled Entity relatedSenior Debt
14.8.1See summary inSection 14.8.1
See summary inSection 14.8.1
On-lending arrangements
Financing documents
14.7.4 (d)Sets out the relationshipbetween the shareholders ofthe ETSA partners
14.7.4Sets out a mechanismto equalise returns fromsubordinated debt providedto ETSA and returns anpreferred partnership capitalheld in ETSA
Cheung Kong InfrastructureFinance (Australia) Pty Ltd,Hong Kong ElectricInternational Finance(Australia) Pty Ltd, SparkInfrastructure RE Limited,Spark Infrastructure (SA) PtyLtd, and each of the ETSApartners which is indirectlyowned by the StapledCompanies
Adjustment Deed
Arrangements in respect of Asset Companies continued
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• (Restapling) if a component of the StapledSecurity becomes unstapled, the Stapled Entity ofthe unstapled component may subsequentlydetermine that the Stapling Provisions shouldrecommence in respect of that unstapledcomponent;
• (Unstapling of Securities) the Stapled Securitieswill be unstapled on the occurrence of anUnstapling Event provided:– the ASX has indicated that it will approve the
unstapling; – each Stapled Entity has agreed to the
unstapling and the unstapling is not contrary tothe interests of Holders as a whole; and
– after the unstapling, the Stapling Provisionswill terminate;
• (Meetings) meetings of each Stapled Entity maybe held in conjunction with the meetings of eachother Stapled Entity; and
• (Interests of Holders) each Stapled Entity may,subject to the Corporations Act and the terms ofthe relief granted by ASIC (see Section 15.1),have regard to the interests of Holders as a wholeand not only to the interests of Holders of eachcomponent of the Stapled Security.
(c) Stapling mattersThe Stapling Provisions also provide that bysubscribing for, taking a transfer of, or otherwiseacquiring a Stapled Security each Holder will betaken to have consented to each provision in theConstituent Documents, including without limitation:• the stapling of the Stapled Securities;• any reorganisation or corporate action involving
the Stapled Securities;• the disposal of any partly paid Stapled Security on
which a call has been validly made but remainsunpaid by the due date for payment;
• the disposal of any small holding of StapledSecurities that is less than a marketable parcel;
• the restrictions on Stapled Securities that arerestricted securities, as that term is defined in theASX Listing Rules;
• the stapling of New Attached Securities to theStapled Securities;
• the Holder becoming a member of any newStapled Entity and being bound by theConstituent Documents for any New AttachedSecurity;
• the unstapling of one or more Stapled Securities;• the restapling of an unstapled Stapled Security;• the disposal of the Stapled Securities of a
Designated Foreign Holder;• the disposal of the Stapled Securities of an
Excluded US Person; and• the unstapling of the Stapled Securities,(each a “Stapling Matter”).
(d) Powers of attorneyIn respect of each Stapling Matter (including theStapling of a New Attached Security, and the disposalof the Stapled Securities of a Designated ForeignHolder or Excluded US Person) each Holderirrevocably appoints the Stapled Entity as the Holder’s:• agent and attorney in the Holder’s name and on
the Holder’s behalf to:– do all acts and things and execute all
documents which Spark Infrastructureconsider necessary, desirable or reasonablyincidental to effect any Stapling Matter;
– agree to obtain any New Attached Security;– apply any distributions, redemption proceeds
or other payments to obtain a New AttachedSecurity;
– where a New Attached Security comprisesshares or an interest in shares or interests in acompany or managed investment scheme, toagree to become a member of that companyor managed investment scheme;
– to do all acts and things and execute allapplications, transfers, withdrawals and anyother documents which Spark Infrastructureconsider necessary, desirable or reasonablyincidental to effect the transfer of:(i) the New Attached Security to the Holder;(ii) the Stapled Securities of a Designated
Foreign Holder to a nominee appointed bySpark Infrastructure and the subsequentsale of those Stapled Securities; and
(iii) the Stapled Securities of a US Person to anominee appointed by Spark Infrastructureand the subsequent sale of those StapledSecurities; and
• proxy to vote at any meeting in favour of anyresolution to effect a Stapling Matter.
(e) New Attached SecuritySpark Infrastructure has the power to do all thingsconsidered necessary, desirable or reasonablyincidental to give effect to the Stapling of NewAttached Securities to the Stapled Security and maytransfer a New Attached Security to a Holder by anymeans and in any manner, including but not limitedto any combination of issue, sale, reduction ofcapital, distribution in kind or transfer.
(f) Designated Foreign HoldersIt is possible that the issue/transfer of a NewAttached Security to a foreign Holder would requirecompliance with legal and regulatory requirements inthe foreign jurisdiction. Subject to applicable ASICrelief, the Stapling Provisions provide that SparkInfrastructure will have the ability to determine that aHolder (whose address in the register is in a placeother than Australia) is a Designated Foreign Holderand divest that Designated Foreign Holder of theirStapled Securities where Spark Infrastructuredetermines that it is unreasonable to issue or
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transfer New Attached Securities to such Holders, havingregard to the following criteria:• the number of Designated Foreign Holders in the foreign
place;• the number and the value of New Attached Securities that
may be transferred to the Designated Foreign Holders in theforeign place; and
• the cost of complying with legal requirements and therequirements of any relevant regulatory authority applicableto the transfer of the New Attached Securities in the foreignplace.
Where Designated Foreign Holders are divested of their StapledSecurities they will receive the proceeds of sale of thoseStapled Securities (net of transaction costs including withoutlimitation any applicable brokerage, stamp duty and other taxesor charges) as soon as practicable after the sale.
Stapled Securities are issued on terms under which eachInvestor who is or becomes a Designated Foreign Holderagrees to the above terms and irrevocably appoints eachStapled Entity as that Holder’s agent and attorney to do all actsand things and execute all documents which SparkInfrastructure considers necessary, desirable or reasonablyincidental to effect the above actions.
(g) Excluded US PersonsThe Important Information Section of this Offer Document setsout selling restrictions that apply in respect of the Securities(including the Stapled Securities). In summary, the Securitieshave not been, and will not be, registered under the USSecurities Act and none of the Stapled Entities have been, orwill be, registered under the US Investment Company Act.
Accordingly, the Securities may not be offered, sold or resoldin, the United States or to, or for the account or benefit ofUS Persons except in accordance with an available exemptionfrom, or a transaction not subject to, the registrationrequirements of the US Securities Act, the US InvestmentCompany Act and applicable United States state securitieslaws. Exemptions to the above prohibitions apply to US Personswho are both QIBs and QPs.
In order to at all times qualify for the exemptions, theStapling Provisions provide that where a Holder is an ExcludedUS Person:• the Stapled Entities may refuse to register a transfer
of Stapled Securities to that Excluded US Person; and• the Excluded US Person may be requested to sell
their Stapled Securities and if they fail to do so within30 Business Days, to be divested of their Stapled Securitiesand to receive the proceeds of sale (net of transaction costsincluding without limitation any applicable brokerage, stampduty and other taxes or charges) as soon as practicable afterthe sale.
In addition, the Stapling Provisions provide that a Holder may berequired to complete a statutory declaration in relation towhether it (or any person on whose account or benefit it holdsStapled Securities) is an Excluded US Person. Any Holder whodoes not comply with such a request as an ExcludedUS Person.
Stapled Securities are issued on terms under which each Holderwho is or becomes an Excluded US Person agrees to the aboveterms and irrevocably appoints each Stapled Entity as thatHolder’s agent and attorney to do all acts and things and executeall documents which Spark Infrastructure considers necessary,desirable or reasonably incidental to effect the above actions.
(h) Partly paid New Attached SecuritiesA New Attached Security may be offered on terms that theapplication price is payable by one or more instalments. If a callhas been validly made on such a New Attached Security but isunpaid by the due date for payment, the whole Stapled Security(of which the unpaid New Attached Security is merely onecomponent) may be sold (“Defaulted Stapled Security”). This isbecause the Stapled Security is treated as one security and adefault on one component is taken to be a default on the wholeStapled Security. Interest accrues on the unpaid amount of thecall and subject to the ASX Listing Rules, the Corporations Actand the Constituent Documents all voting rights, entitlementsto distributions and any other rights in respect of the DefaultedStapled Security are suspended.
(i) Application priceThe Stapling Provisions provide that the consideration to bepaid to acquire an interest in Spark Infrastructure for furtherissues of Stapled Securities is the market price of a StapledSecurity. However, the Responsible Entity may determine adifferent application price of the Stapled Securities consistentlywith the Corporations Act, as modified by any applicable ASICrelief, and the ASX Listing Rules in certain circumstances,including in the case of a rights issue, a distributionreinvestment, a security purchase plan, a placement, the issueof Securities on the exercise of an option or any othercircumstances set out in the Corporations Act, as modified byany applicable ASIC relief. For further information on theapplication price applicable under the DRP, please refer toSection 14.4.
Unless otherwise agreed between the Responsible Entity andthe other Stapled Entities, the application price for a StapledSecurity will be allocated between the application price of theunit and the application price of the other components of theStapled Security as follows:• first, to the application price of the Loan Note (or any other
component that is a debenture) being the lesser of theapplication price and the principal amount outstanding forthat security (adjusted for any interest coupon for the FirstInstalment period after its issue);
• second, to the application price for the unit (or any othercomponent that is an interest in a trust), being the lesser ofthe balance remaining and the amount reflecting the NTA ofthe relevant trust; and
• third, to the application price for any other component, beingthe lesser of the balance (if any) and the NTA of thoseStapled Entities (which will be allocated between them inthe ratio of their respective net assets (adjusted for the netmarket value of their investments).
(j) TransfersThe Securities will be transferred through CHESS. Electronictransfers must be made in accordance with the ASTCSettlement Rules.
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14.3.2 Spark Infrastructure Trust Constitution
(a) GeneralThe constitution of the Spark Infrastructure Trustsets out the rights of the Holders of the units andthe obligations of the Responsible Entity as theresponsible entity of the Spark Infrastructure Trust.The Spark Infrastructure Trust is a registeredmanaged investment scheme.
A general summary of the rights attaching to theunits and other key provisions of the SparkInfrastructure Trust Constitution is set out below.This summary is not intended to be exhaustive andis qualified by the Spark Infrastructure TrustConstitution, the Corporations Act, the ASX ListingRules, the ASTC Settlement Rules and the generallaw.
(b) AssetsThe Responsible Entity must hold the assets of theSpark Infrastructure Trust on trust for the Holders.The beneficial interest in the Spark InfrastructureTrust is divided into units. A unit confers an interestin the assets of the Spark Infrastructure Trust as awhole and not in a particular asset.
(c) Principal rights of HoldersUnder the Spark Infrastructure Trust Constitution,Holders are principally entitled to:• receive distributions of income and/or capital
attributable to their units, as determined by theResponsible Entity;
• transfer their units, subject to the operating rulesof the relevant CS facility1;
• speak, attend and vote at meetings of Holders;and
• participate in the winding up of the SparkInfrastructure Trust.
While the Spark Infrastructure Trust is listed, Holdershave no right to withdraw from the SparkInfrastructure Trust or request redemption of theirunits.
(d) Issue of additional units or optionsThe Responsible Entity may issue additional unitsor options on such terms and conditions as theResponsible Entity determines.
(e) Distributions of incomeThe distributable income under the SparkInfrastructure Trust will be determined by theResponsible Entity. If no determination is made, thenthe distributable income for a particular distributionperiod will be the income of the Spark InfrastructureTrust applicable according to accounting standardsapplicable as at 31 December 2004, but not less thanthe amount which, if distributed, would prevent theResponsible Entity from being liable to tax on theincome of the Spark Infrastructure Trust for thefinancial year.
A person registered as a Holder on the record datefor a distribution is entitled to the distributableincome in the Spark Infrastructure Trust for thatdistribution period, in the proportion that the incomedistributions made to that Holder bear to theaggregate income distributions made to all personswho are or have been Holders at any time duringthat distribution period. A Holder’s entitlement to adistribution will be satisfied by the payment of thedistribution to the Holder.
Distributions must be made to Holders within threemonths after the relevant distribution calculationdate. It is intended that distributions will be made forperiods ending 30 June and 31 December. TheResponsible Entity may deduct from distributionsand other amounts payable to Holders anyinstalments due on Securities, taxes and amountsowed by Holders to other persons, where theResponsible Entity is authorised by law or by theSpark Infrastructure Trust Constitution to make suchdeductions or where the Responsible Entityconsiders those taxes and other amounts should bededucted. Distributions may be in cash or by way ofadditional units. The Responsible Entity may alsorequire or permit holders of units to reinvest some orall of any Distribution to acquire Securities.
(f) Withdrawals and RedemptionsWhile the Spark Infrastructure Trust is listed, Holdersdo not have a right to withdraw from the SparkInfrastructure Trust or have their units redeemed.Instead, the Holder may sell their Stapled Securitieson ASX.
Subject to the ASX Listing Rules, the ResponsibleEntity may redeem the units:• if a Holder holds less than a minimum holding
amount as determined by the Responsible Entity,(see paragraph (u) “Small holdings” below); or
• where the Responsible Entity has not beenindemnified by a Holder for any tax or user paidfees incurred by the Responsible Entity for or onbehalf of the Holder (see paragraph (o) “Holderliability” below).
(g) TransfersWhile the Spark Infrastructure Trust is listed, theunits will be transferred through CHESS. Electronictransfers must be made in accordance with theASTC Settlement Rules.
The Spark Infrastructure Trust Constitution hasprovisions dealing with transfers which aresubstantially the same as those in the StapledCompanies’ Constitutions.
Units, which are restricted securities under the ASXListing Rules may not be transferred during theapplicable escrow period.
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(h) VotingSubject to any special rights or restrictions attached to anyspecial classes of units in the Spark Infrastructure Trust, at ageneral meeting, every Holder who is present in person (or byproxy, attorney or representative) has one vote. On a poll, eachHolder present in person (or by proxy, attorney orrepresentative) has one vote for each dollar value of the unitsheld by that Holder.
A poll may be demanded by a member with at least 5% of thevotes entitled to be cast on a poll, by at least five membersentitled to vote on the resolution, or by the chairman of thegeneral meeting. Otherwise, the chairman may on show ofhands, declare whether a resolution has been carried or carriedunanimously, or by a particular majority, or lost. The chairman ofthe meeting is not entitled to a casting vote.
The quorum required for a meeting of Holders is two Holderspresent in person (or by attorney, representative or proxy).
A resolution passed at a meeting binds all Holders of unitswhether or not they are present.
(i) General meetingEach Holder will receive notices of general meetings and isentitled to attend, speak and vote at any general meetings inaccordance with the Corporations Act. Currently under theCorporations Act, a notice of a general meeting must beprovided to Holders at least 21 days before the meeting.
(j) Duration of the Spark Infrastructure TrustThe Spark Infrastructure Trust terminates on the earliest of:• a date specified by the Responsible Entity as the date of the
termination of the Spark Infrastructure Trust in a notice givento Holders; and
• the date on which the Spark Infrastructure Trust terminatesin accordance with another provision of the SparkInfrastructure Trust Constitution or by law.
On winding up, the proceeds of sale (after deducting anyliabilities or expenses of the Spark Infrastructure Trust) will bedistributed to the Holder pro rata in accordance with thenumber of units that they hold.
(k) Price for the unitsThe Spark Infrastructure Trust Constitution makes provision forthe consideration to paid to acquire an interest in the scheme,as required in Part 5C of the Corporations Act. While the unitsare not Officially Quoted, the application price of a unit isdetermined by reference to a formula based on the net assetvalue of the Spark Infrastructure Trust. While the units areOfficially Quoted, the application price will be the market price.
However, the Responsible Entity may determine a differentapplication price of the units consistently with the ASX ListingRules, the Corporations Act, as modified by any applicable ASICrelief, in certain circumstances, including in the case of a rightsissue, a distribution reinvestment, a security purchase plan, aplacement, the issue of units on the exercise of an option orany other circumstances set out in the Corporations Act, asmodified by any applicable ASIC relief.
(l) Partly paid unitsThe Responsible Entity may determine that any unit to beoffered for sale or subscription is to be offered on terms thatthe application price is payable by one or more instalments. If acall has been validly made but is unpaid by the due date forpayment, the Responsible Entity may sell or otherwise disposeof that Holder’s units. The Responsible Entity may also, subjectto the ASX Listing Rules, the Corporations Act and the SparkInfrastructure Trust Constitution, suspend all voting rights,entitlements to distributions and any other rights in respect ofthe units. Interest accrues on any unpaid amounts.
(m) Accounts and ReportingThe Spark Infrastructure Trust will comply with the accounting,audit and reporting requirements of the Corporations Act andthe ASX Listing Rules.
(n) ValuationThe Responsible Entity may cause the assets of the SparkInfrastructure Trust to be valued at any time, and must do sowhen required by the Corporations Act.
(o) Holder liabilityThe Spark Infrastructure Trust Constitution contains provisionsdesigned to limit the liability of the Holders to the assets of theSpark Infrastructure Trust. While it is generally considered thatsuch provisions will be effective, this has not been definitelydetermined by the courts. In certain circumstances, theResponsible Entity is entitled to be indemnified by a Holder (orformer Holder), to the extent the Responsible Entity incurs anyliability for tax or user pays fees as a result of the Holder’saction or inaction, or as a result of an act or omission requestedby the Holder (or a former Holder). In this circumstance, theResponsible Entity may redeem some or all of the units held bya Holder to satisfy any amount of money due to it by thatHolder.
Joint Holders are jointly and severally liable in respect of allpayments.
(p) Responsible Entity liabilityThe Responsible Entity is not liable in contract, tort orotherwise to Holders for any loss suffered in any way relatingto the Spark Infrastructure Trust, except if the Corporations Actimposes such liability. Subject to the Corporations Act, theliability of the Responsible Entity to any person other than aHolder in respect of the Spark Infrastructure Trust is limited tothe Responsible Entity’s ability to be indemnified out of theassets of the Spark Infrastructure Trust.
In addition to any other indemnities allowed by law, theResponsible Entity is entitled to be indemnified out of theassets of the Spark Infrastructure Trust for any liability incurredby it in properly performing or exercising any of its powers orduties in relation to the Spark Infrastructure Trust. Thisindemnity is in an addition to any indemnity allowed by law andcontinues to apply after the Responsible Entity retires or isremoved from office. The indemnity is unaffected by theexistence of an unrelated breach of trust.
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(q) Powers of the Responsible EntitySubject to the Spark Infrastructure Trust Constitution,the Responsible Entity has all the powers in respectof the Spark Infrastructure Trust that is possible toconfer on a trustee under the law, as though it wasthe absolute owner of the assets of the SparkInfrastructure Trust, acting in its personal capacity.
In particular, the Responsible Entity may:• enter into contracts and incur obligations and
liabilities (including guarantees and indemnities);• borrow and raise money on behalf of the Spark
Infrastructure Trust; and• authorise any person to act as its agent or
delegate to hold title to any asset of the SparkInfrastructure Trust, perform any act or exerciseany discretion within the Responsible Entity’spowers, including the power to appointsub-agents or sub-delegates.
The Responsible Entity also has broad investmentpowers. It may invest in, dispose of and otherwisedeal with property and rights in its absolutediscretion.
(r) Rights of the Responsible EntityThe Responsible Entity and its associates may holdunits in the Spark Infrastructure Trust in any capacity.Subject to the Corporations Act, the ResponsibleEntity may:• deal with itself (as trustee of the Spark
Infrastructure Trust or in any other capacity) andan associate or with any Holder;
• enter into or be interested in any contract ortransaction with itself (as trustee of the SparkInfrastructure Trust or in any other capacity) andan associate or with any Holder or, when acting ina capacity other than as trustee of the SparkInfrastructure Trust), retain for its own benefit anyprofits or benefits derived from any such contractor transaction; and
• act in the same or a similar capacity in relation toany other managed investment scheme.
(s) Fees and expensesFees payable to and expenses recoverable by theResponsible Entity are described in Section 10.3.
(t) Retirement of the Responsible EntityThe Responsible Entity may voluntarily retire astrustee of the Spark Infrastructure Trust, and mustretire when required by law. The Responsible Entityis released from all obligations in relation to theSpark Infrastructure Trust arising after the time itretires or is removed.
The Responsible Entity is entitled to agree with theincoming Responsible Entity to be remunerated by,or to receive a benefit from, the incomingResponsible Entity in relation to its retirement asresponsible entity, and is not required to account toHolders for such remuneration or benefit.
(u) Small holdingsWhile the units are Officially Quoted, theResponsible Entity may in its discretion sell any unitsheld by a Holder which comprise less than amarketable parcel (as that term is defined in the ASXListing Rules) without request by the Holder.
(v) Proportional TakeoversThe Spark Infrastructure Trust Constitution hasproportional takeover provisions substantially thesame as the Stapled Company Constitutions.
(w) AmendmentSubject to the Corporations Act, the SparkInfrastructure Trust Constitution may be amended bya 75% resolution of the Holders or by deed executedby the Responsible Entity (where the ResponsibleEntity reasonably considers that the change will notadversely affect Holders’ rights).
14.3.3 Compliance Plan of Spark Infrastructure
Trust
The Compliance Plan for the Spark InfrastructureTrust describes the procedures that the ResponsibleEntity will apply in operating the Spark InfrastructureTrust to ensure compliance with the Corporations Actand the Spark Infrastructure Trust Constitution (inaccordance with Part 5C of the Corporations Act).
The board of the Responsible Entity has appointed acompliance committee for the Spark InfrastructureTrust (comprised of a majority of external members)which will oversee that Responsible Entity’sprocedures for complying with the Compliance Plan.
14.3.4 Stapled Company Constitutions
(a) GeneralThe Stapled Company Constitutions are essentiallyidentical (save for minor differences in relation toSpark Infrastructure Company 3 noted below) and setout the rights of the shareholders in those entities.
Spark Infrastructure Company 3 is incorporated inThe Bahamas and is governed by the laws of thethat country. The Spark Infrastructure Company 3Constitution contains references to the laws of TheBahamas but is also governed by the CorporationsAct and the ASX Listing Rules.
(b) Special Voting ShareAs soon as practicable after the ManagementAgreement becomes effective, each of the StapledCompanies must issue the Special Voting Share tothe Manager or reclassify an existing Share held bythe Manager as the Special Voting Share.
The Special Voting Share entitles its holder to appointpersons to fill up to 50% of the maximum number ofdirectors permitted under the relevant constitution. Ifa director appointed by the holder of the SpecialVoting Share resigns, retires or is removed by therelevant company, the holder of the Special VotingShare is entitled to appoint a replacement.
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The holder of the Special Voting Share will be entitled to receivenotice of, and attend any meeting of the Company, but is notentitled to vote except in relation to:• a proposal to appoint or remove a director pursuant to the
relevant Constitution;• any variation of rights attaching to the Special Voting Share;
and• any other matter in respect of which the Corporations Act
prevents the right to vote being excluded or restricted.
On a distribution of capital on winding up, the holder of theSpecial Voting Share is entitled to repayment of the capital paidup in priority to any repayment to any other shareholder (otherthan the holder of preference shares, if any, that are on issue).The Special Voting Share confers no other right to participate inthe capital or profits of the relevant company.
If:• the person acting as the responsible entity of the Trust is
removed as responsible entity of the Trust by resolution ofunitholders of the Trust in accordance with the CorporationsAct; or
• the Management Agreement (or any managementagreement between the relevant company and anotherperson who has become the holder of the Special VotingShare) is terminated pursuant to its terms,
(“Relevant Event”)
then the holder of the Special Voting Share may, within 28 daysof the Relevant Event occurring, transfer the Special VotingShare to any other person appointed to act as a manager inrelation to the assets of the relevant company. If the holder ofthe Special Voting Share does not do so within 28 days, or atany time all the Stapled Securities on issue become unstapled,all of the rights attaching to the Special Voting Share will cease,except:• the right to participate in the repayment of capital on a
winding up of the relevant company; and• the right to vote on any other matter in respect of which the
Corporations Act prevents the right to vote being excludedor restricted.
Prior to the occurrence of the Relevant Event, the SpecialVoting Share may only be transferred to:• a related entity of a shareholder in the Manager;• a joint venture entity established by the shareholders of
the Manager,acting or proposing to act as a manager in relation to the assetsof the relevant company under the Management Agreement oran agreement that replaces the Management Agreement.
(c) VotingSubject to any special rights or restrictions attached to anyspecial classes of shares (such as the Special Voting Share) ineach Stapled Company Constitution (including the rights of theholder of the Special Voting Share to appoint or remove adirector), at a general meeting, each Holder who is present inperson (or by proxy, attorney or representative) has one vote.On a poll, each Holder present in person (or by proxy, attorneyor representative) has one vote for each fully paid share held bythat Holder.
A poll may be demanded by a Holder with at least 5% of thevotes entitled to be cast on a poll, by at least five Holders
entitled to vote on the resolution, or by the chairman of thegeneral meeting. Otherwise, the chairman may on show ofhands, declare whether a resolution has been carried or carriedunanimously, or by a particular majority, or lost. The chairman ofthe meeting is not entitled to a casting vote.
The quorum required for a meeting of Holders is two Holderspresent (or by attorney, representative or proxy).
(d) General meetingEach Holder will receive notices of general meetings and beentitled to attend, speak and vote at any general meetings inaccordance with the Corporations Act (except the appointmentor removal of a director in respect of whom the right is vestedin the holder of the Special Voting Share). Currently under theCorporations Act, a notice of a general meeting must beprovided to Holders at least 28 days before the meeting.
(e) Additional issue of shares and optionsSubject to the Corporations Act, ASX Listing Rules (the IBC Actin the case of Spark Infrastructure Company 3) and any specialor preferential rights conferred on the holders of any shares orclass of shares, (such as the Special Voting Share), the StapledCompanies may:• issue or dispose of shares at any time and on any terms and
conditions, and having attached to them any preferred,deferred or other special rights or restrictions; or
• grant options over shares or pre-emptive rights at any timeand for any consideration as the directors see fit.
(f) Variation of class rightsSubject to the Corporations Act and the ASX Listing Rules (andthe IBC Act in the case of Spark Infrastructure Company 3),special rights attaching to a class of shares may be varied insuch manner as may be provided by those rights, or in theabsence of such a provision, with the consent in writing ofholders of 75% in nominal value of the issued shares in theclass, or with the sanction of a special resolution passed at aseparate meeting of the shareholders of that class.
(g) Winding upIf a Stapled Company is wound up, the liquidator may, with thesanction of a special resolution, divide among the Holders, thewhole or part of the property of the relevant company and forthis purpose, may set such value as the liquidator deems fair onany property and determine how the division should be carriedout as between Holders or classes of Holders.
(h) Proportional takeover provisionsThe Stapled Company Constitutions contain provisions thatprohibit the registration of any transfer of voting shares that giveeffect to an offer made pursuant to a proportional takeover bid(that is, an offer for some but not all of the holder’s shares in theStapled Companies) until the persons holding shares in a classfor which the takeover bid was made have passed an ordinaryresolution approving the bid. The bidder and any associates ofthe bidder are excluded from voting on that resolution. Toremain effective, the proportional takeover provisions must berenewed at a general meeting every three years.
The treatment of shares in Spark Infrastructure Company 3 andthe rights and obligations of its shareholders and of that companyin respect of any takeover or compulsory acquisition of shareswill be governed by the laws of Australia.
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(i) Minimum and small holdingsWhile the shares are Officially Quoted, the boards ofthe Stapled Companies may in their discretion sellany shares held by a Holder which comprise lessthan a marketable parcel (as that terms is defined inthe ASX Listing Rules) without request by theHolders. This right is subject to the IBC Act in thecase of Spark Infrastructure Company 3.
(j) Transfer of sharesSubject to the ASX Listing Rules and to the StapledCompany Constitutions, the shares are transferablein any manner permitted by the operating rules ofthe relevant CS facility2, by written instrument, or byany other method of transfer which is recognised bythe Corporations Act, the operator of the relevant CSfacility (ASTC), ASX and is approved by the relevantboard.
If permitted to do so by the ASX Listing Rules, theboards of the Stapled Companies may request theoperator of the relevant CS facility to apply a holdinglock to prevent a transfer of shares, or refuse toregister a transfer or other shares. The boards mustrefuse to register a transfer or request the relevantCS facility operator to apply a holding lock if the ASXListing Rules require the relevant company to do so,the transfer is in breach of the ASX Listing Rules or arestriction agreement or the registration of thetransfer is prohibited under the Stapled CompanyConstitution.
(k) DirectorsThe boards are responsible for the overall corporategovernance of the Stapled Companies.
The minimum number of directors is three (asrequired by the Corporations Act) and the maximumis 10, unless otherwise determined by the directorsfrom time to time (provided the number of directorsnot reduced to less than the number of directors onthe board at the time). Holders may also by specialresolution increase or reduce the number of directors– provided the maximum number of directors is at alltimes an even number.
At each annual general meeting, one third of thedirectors (or if the number of directors is not threeor a multiple of three, then the number nearest toone-third) and any other director who has held officefor three years or more, must retire from office. Indetermining the number of directors that must retire,no account is to be taken of a director who onlyholds office until the conclusion of the meeting orthe Managing Director who is exempted fromretirement by rotation. A retiring director is eligiblefor re-election.
A director appointed by the Special Voting Shareholder must also retire by rotation, however thatdirector is eligible for re-election or the Special Voting
Share holder may nominate another person forelection as a director and that person may beappointed by a resolution at a general meeting onwhich only the Special Voting Share holder may vote.A director appointed by the Special Voting Shareholder may only be removed by the Special VotingShare holder.
The directors of Stapled Companies are entitled tobe remunerated for their services as directors. Thetotal amount of the remuneration per company mustnot exceed the sum of $2 million, less any amountthe directors receive as fees from another StapledEntity or any other amount per annum determinedby the relevant company in general meeting. Theremuneration is to be divided among the directors ofthe relevant company in the proportion and manneragreed between them or, in default of agreement,equally.
The directors may appoint and remove the ManagingDirector and may fix his/her remuneration, whichmay be paid by way of salary or commission orparticipation in profits or by all or any of thosemodes, but may not be by a commission on orpercentage of operating revenue. The directors willnot appoint a Managing Director unless theManagement Agreement (or another managementagreement with a person who is the holder of aSpecial Voting Share) is terminated.
Questions arising at a meeting of directors will bedecided by a majority vote. The chairman of themeeting does not have a casting vote.
(l) Directors’ indemnitiesThe Stapled Company Constitutions provide for theindemnification of any current or former director,secretary or executive officer of Stapled Companiesagainst all liability (except legal costs) incurred bythat person in that capacity and all legal costsincurred in defending or resisting any proceedings inwhich the person becomes involved because of thatcapacity, unless the Stapled Companies areforbidden by statute to indemnify such person or anindemnity in this manner would be made void bystatute. The indemnity is to be funded from theproperty of the relevant company.
(m) Amendment of ConstitutionThe Stapled Company Constitutions do notspecifically deal with amendments of theconstitutions. However, under the Corporations Act,the constitution of a company may only be amendedby special resolution passed by at least 75% of thevotes cast by members present and entitled to voteat a general meeting. The Constitution of SparkInfrastructure Company 3 adopts the same processfor amendment.
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(n) DividendsSubject to the Corporations Act (and the IBC Act in the case ofSpark Infrastructure Company 3), the Australian StapledCompanies’ Constitutions and the rights of persons entitled toshares with special or preferential rights, the boards maydetermine to distribute out of the profits of the StapledCompanies a dividend to the Holders in proportion to the sharesheld by them, paid in proportion to the amounts paid, orcredited as having been paid, on those shares.
(o) Partly paid sharesEach board may determine that any shares to be offered for saleor subscription are to be offered on terms that the applicationprice is payable by one or more instalments. If a call has beenvalidly made but is unpaid by the due date for payment, therelevant board may sell or otherwise dispose of that Holder’sshares, such sale to include all dividends and distributionsdeclared or to be made in respect of those shares and notactually paid or distributed before the disposal. Subject to theCorporations Act (the IBC Act in the case of Spark InfrastructureCompany 3), a share on which a valid call has not been paid maybe sold, re-issued or otherwise disposed of as the relevantboard thinks fit.
14.3.5 Co-operation Deed
(a) Co-operationEach Stapled Entity is a party to the Co-operation Deed. TheCo-operation Deed provides for the sharing of informationbetween the Stapled Entities and obliges the SparkInfrastructure to adopt consistent accounting policies andvaluation policies and to co-ordinate the provision of all reports,circulars and other information which are required by law or theASX Listing Rules or which may be reasonably desirable toprovide to Holders.
Under the Co-operation Deed, Spark Infrastructure agrees to:• co-operate and consult with each other in relation to all
stapling arrangements, including:– the agreement not to issue, transfer, consolidate, divide,
redeem, (except in relation to a redemption in full of allthe Loan Notes on issue), buy-back or cancel anycomponent of a Stapled Security without asimultaneously and corresponding action in respect ofeach other component of the Stapled Security;
– the maintenance of a single Stapled Security register;– the co-ordination of meetings of Holder;– the making of calls and disposal of Defaulted Securities;– the disposal of small holdings of Securities that are less
than a “marketable parcel” (as that term is defined in theASX Listing Rules);
– the disposal of the Securities of a Designated ForeignHolder or of an Excluded US Person;
– the payment of distributions on the Stapled Securities;– the offer of a DRP;– the allocation of the application, redemption or disposal
price of a Stapled Security in various circumstances;– the stapling of a New Attached Security;– the unstapling or restapling of a component of a Stapled
Security;– the unstapling of the Securities; and– the winding up of a Stapled Entity;– facilitate transactions contemplated by Spark Infrastructure;
• consult with each other before making an acquisition ordisposal, or allowing any of the respective subsidiaries tomake an acquisition or disposal of an asset of that exceedsa certain value;
• consult with each other before borrowing or raising anymoney;
• if requested by any other Stapled Entity, to enter into anyagreement or arrangement or take any other action to lendmoney or provide financial accommodation or guarantee orprovide various other financial benefits to that Stapled Entity;and
• indemnify each other Stapled Entity for any loss incurred asa consequence of any act or omission by that other StapledEntity in complying with any provisions of the Co-operationDeed.
(b) Reimbursement of costsIf a Stapled Entity incurs costs for or on behalf or for the benefitof Spark Infrastructure, that Stapled Entity may seekreimbursement for those costs from the other Stapled Entities.Unless otherwise agreed, these reimbursement costs will beapportioned between the Stapled Entities in accordance withthe proportion that the gross consolidated revenue of thatStapled Entity bears to the gross revenue of SparkInfrastructure for the quarter most recently ended, as shownin the management accounts.
(c) Paramountcy of Constituent DocumentsIf there is any inconsistency between the obligations of aStapled Entity under the Co-operation Deed and the relevantConstituent Document, the provisions of the ConstituentDocuments applies to the extent of the inconsistency.
(d) AmendmentThe Co-operation Deed may be amended by agreement of theStapled Entities.
(e) DisputesNotice of any dispute arising under the Co-operation Deedmust be given to each Stapled Entity and each party to thedispute must use its best endeavours to resolve the disputewithin 10 Business Days of receiving the notice or such longerperiod as agreed. If the parties to the dispute do not resolve thedispute in that time the chief executive officer or other senioremployee of the Relevant Stapled Entities must negotiate ingood faith to resolve the dispute for a period of up to 10Business Days. No court proceedings must be commencedunless the above steps have been followed except whereurgent injunctive relief is sought or where the dispute relates tocompliance with these steps.
(f) Appointment of IntermediaryThe Co-operation Deed also provides that Spark InfrastructureCompany 3 will appoint the Responsible Entity as its intermediaryto make offers to arrange for the issue of Spark InfrastructureCompany 3 shares (which will trade as CDIs) in Australia.
(g) Limitation of liabilityAny liability of the Responsible Entity arising under or inconnection with the Co-operation Deed is limited to and can beenforced against the Responsible Entity only to the extent towhich it can be satisfied out of the property of the SparkInfrastructure Trust and for which the Responsible Entity isactually indemnified for the liability.
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14.3.6 Deeds of Access, insurance and indemnity
The Responsible Entity and each Stapled Companyhas executed a deed of access, indemnity andinsurance in favour of each of its directors. Theindemnity is subject to the restrictions prescribed inthe Corporations Act and the Spark InfrastructureConstitutions. The deed gives each director a right ofaccess to the Stapled Company books includingboard papers and requires the Stapled Companies tomaintain insurance cover for the directors. TheStapled Companies have arranged this insurance.
14.3.7 Note Trust Deed
The Note Trust Deed is a deed dated on or about thedate of the Original Document between theResponsible Entity in its capacity only as responsibleentity of Spark Infrastructure Trust and AustralianExecutor Trustees Limited (“Note Trustee”). TheNote Trust Deed contains the terms of the LoanNotes and establishes the Note Trust. EachNoteholder is bound by the Note Trust Deed. TheStapling Provisions summarised in Section 14.3.1also apply to the Loan Notes if so determined by theResponsible Entity. A general summary of the keyprovisions of the Note Trust Deed is set out below.The summary is not intended to be exhaustive and further information is available by obtaining acopy of the Note Trust Deed in accordance withSection 14.1.
(a) Role of the Note TrusteeThe Note Trustee agrees, on the terms andconditions contained in the Note Trust Deed, to actas trustee for the benefit of Noteholders, holding ontrust:• any amounts it receives for Noteholders; and• the right to enforce the Responsible Entity’s
obligations in respect of the Loan Notes, includingits obligations to make payments to Noteholders.
The Note Trust Deed also provides for other powersand duties of the Note Trustee and payment of theNote Trustee’s fees and costs (see Section 10.3 fora summary of those fees and costs).
The Note Trustee can retire or be removed, subjectto the Corporations Act and the terms of the NoteTrust Deed (including requirements as to theappointment of a successor and notice periods).Removal of the Note Trustee requires a specialresolution of Noteholders.
(b) DurationThe duration of the Note Trust, unless ended earlierin accordance with the terms of the Note Trust Deedor by law, is 100 years after the date of the NoteTrust Deed.
(c) Loan NotesThe Loan Notes are unsecured obligations of SparkInfrastructure Trust for the purposes of section283BH of the Corporations Act. The Loan Notesare subordinated to all secured and an unsecuredcreditors of Spark Infrastructure Trust for all amountsand rank equally among themselves.
The Note Trust Deed enables the Responsible Entityto issue Loan Notes on the terms of the Note TrustDeed by registering a person as a Noteholder.
(d) RegisterThe Responsible Entity must, or must procure thatthe registrar, establishes and maintains a register inaccordance with the Note Trust Deed. Entry in theregister as the holder of a Loan Note is conclusiveevidence of title (subject to fraud or error).
(e) Repayment of principal amountThe Loan Notes are repayable on redemption or onthe winding up of the Responsible Entity. TheResponsible Entity has the right to repay in partsome of the principal amount of all (but not some)of the Loan Notes. If a Loan Note is repaid in part,the face value (initially $1.25 per Loan Note will bereduced by an amount equal to the amount ofprincipal repaid.
(f) Interest paymentsInterest will accrue daily on each Loan Note, for theperiod from (and including) the Issue Date to (butexcluding) the first reset date (see (i) below), at therate of 10.85% per annum.
Interest is calculated on the face value of the LoanNotes. The face value is initially $1.25, and may bereduced if the Loan Notes are repaid in part inaccordance with the Note Trust Deed.From the first reset date, interest may be reset(see (i) below).
Interest is generally payable semi-annually, in arrears,on 15 March in respect of the 6 month period endingon 31 December in the previous calendar year, and15 September in respect of the 6 month periodending on 30 June earlier that calendar year. Interestpayments may be reset (see i) below). TheResponsible Entity may defer interest payments, bynotice to the Note Trustee and Noteholders. Alloutstanding interest must be paid on the next resetdate, except to the extent that monies are owing bya Stapled Entity to any bank, financial institution orother entity providing financial accommodation(secured or unsecured) for over $5,000,000 (orequivalent). Deferral of interest payments, and non-payment on a reset date in the circumstancesdescribed above, does not constitute a default.
(g) Payment and deductionsThe Responsible Entity may deduct from any amountpayable to a Noteholder the amount of anywithholding or other tax, duty or levy required by lawto be deducted in respect of such amount and the
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Responsible Entity shall pay the full amount required to bededucted to the relevant revenue authority within the timeallowed for such payment.
Unless the Responsible Entity and a Noteholder otherwiseagree, amounts will be paid by direct credit to a nominatedaccount at an Australian financial institution or by cheque drawnin favour of the Noteholder and sent by prepaid post to theaddress of the Noteholder in the register, or otherwise inaccordance with the Note Trust Deed.
(h) RedemptionThe Responsible Entity can redeem the Loan Notes:• by not less than 40 business days’ notice prior to a reset
date;• within 20 business days of giving notice of a specified tax or
regulatory event (as defined in the Note Trust Deed)occurring (which notice must be given by the ResponsibleEntity as soon as reasonably practicable after it has becomeaware of such occurrence); or
• if the Noteholder holds less than a minimum holding of LoanNotes set by the Responsible Entity from time to timesubject to the Listing Rules and the Corporations Act or aholding of Loan Notes which is less than a marketable parcelas provided under the Listing Rules.
The Responsible Entity must redeem the Loan Notes when theNote Trust expires.
Upon redemption of the Loan Notes in full the Noteholders areentitled to be repaid the then face value of the Loan Notes(subject to the following sentence) plus any outstandinginterest. The face value payable at that time can be applied bythe Responsible Entity as consideration for the issue of a NewAttached Security to the Noteholders, if the Loan Notes havebeen redeemed as a result of a tax or regulatory event asdescribed above.
(i) ResetThe Responsible Entity may use the reset process provided forin the Note Trust Deed to change, from the relevant reset date:• the interest rate, provided it may not be set lower than the
application base rate (see below);• the method of calculating interest payments;• the timing of interest payment dates; and• the timing of the next reset date.
The first reset date is 30 November 2010 or, if that day is not aBusiness Day, the next Business Day.
The base rate is determined by the Responsible Entity in goodfaith in accordance with the terms of the Note Trust Deed asthe lower of:
• a rate based on average swap reference rates at the relevanttime as quoted on Reuters; and
• a rate based on the average bid rate for Australian bank billsof exchange at the relevant time as quoted on Reuters,
plus in each case 4% per annum.
If for any reason those rates are not capable of beingdetermined by the Responsible Entity, the Responsible Entitywill determine the rate in good faith having regard tocomparable rates. The rate so determined will be rounded up to4 decimal places.
(j) Issue of further Loan Notes
The Responsible Entity may issue other Loan Notes inaccordance with the Note Trust Deed without the consent ofany Noteholder or the Note Trustee. Those Loan Notes mustbe issued on the same terms and conditions as any outstandingLoan Notes, except that the RE may elect:• that the holders of the further issue of Loan Notes are
entitled to participate fully for payment of interest in respectof the interest period in which the further Loan Notes areissued, as if the holders of the further issue of Loan Noteshad held those Loan Notes from the first day of that interestperiod; or
• in respect of the interest period in which the further issueof Loan Notes is issued, that no interest shall be paid inrespect of that interest period to either then existingNoteholders or holders of the further issue of Loan Notes,or both.
(k) Limitation of liability and indemnitySubject to the Corporations Act, the Note Trustee will not beliable except for liability attaching due to fraud, gross negligenceor wilful default by it, or for failure to appoint any agent,attorney or delegate in accordance with the Note Trust Deed.The Note Trustee undertakes its obligations under the NoteTrust Deed only in its capacity as Note Trustee, and its liability islimited to the property of the Note Trust under the Note TrustDeed, subject to the same exception for fraud, grossnegligence or wilful default or failure to appoint any agent,attorney or delegate in accordance with the Note Trust Deed.
Subject to the Corporations Act, the Responsible Entityindemnifies the Note Trustee in respect of any liability or lossarising from, and any reasonable costs incurred in connectionwith, the Note Trustee performing or exercising its powers orduties under the Note Trust Deed, other than:• taxes on the Note Trustee’s remuneration; and• to the extent such amounts are incurred due to gross
negligence, fraud or wilful default by the Note Trustee, itsofficers, agents, employees, contractors, attorneys or otherdelegates.
The liability of the Responsible Entity is limited to amountswhich can be satisfied out of the property of SparkInfrastructure Trust and for which it is actually indemnified.Subject to the Corporations Act, the Responsible Entity is notliable in contract, tort or otherwise to Noteholders for any losssuffered in any way relating to Spark Infrastructure Trust.However, these limitations do not apply where there is areduction of indemnification out of the assets of SparkInfrastructure Trust as a result of the Responsible Entity’s fraud,negligence or breach of trust.
(l) CalculationsCalculations in respect of the Loan Notes by the registrar or theNote Trustee, are (in the absence of wilful default, bad faith ormanifest error) binding on Responsible Entity, the registrar, theNote Trustee and all Noteholders.
(m) Meetings of NoteholdersWhile the Stapling Provisions are in effect, and unless themeeting is a meeting of Noteholders only and not combinedwith any other meetings of Holders, meetings of Noteholders
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are to be conducted in accordance with the meetingprovisions in Spark Infrastructure Trust Constitution,summarised in Section 14.3.2. The Note Trust Deedcontains provisions which otherwise apply to theholding of a meeting of Noteholders in that capacity only.
The Corporations Act imposes additionalrequirements and restrictions in relation to mattersdealt with in the Note Trust Deed.
(n) Alteration of Note Trust Deed and terms of theLoan NotesThe Note Trust Deed sets out the circumstances inwhich the Responsible Entity or the Note Trusteemay amend or supplement the Note Trust Deed andthe terms of the Loan Notes, without the consent ofNoteholders.
14.4 Distribution Reinvestment Plan (DRP)
14.4.1 Overview
Spark Infrastructure may permit or require Holders toreinvest some or all of any distribution in additionalStapled Securities. The DRP is not currentlyoperative. Holders will be notified once the board ofdirectors of the Stapled Companies and of theResponsible Entity deem it to be in the interest ofHolders that the DRP becomes operative.
If a Holder chooses to participate in the DRP,distributions otherwise payable on their StapledSecurities (which participate in the DRP) will beapplied as consideration to acquire additional StapledSecurities (by Spark Infrastructure either issuing newStapled Securities or transferring Stapled Securitiesacquired on market on the Holder’s behalf).
If a Holder chooses not to participate in the DRP,the issue of new Stapled Securities under the DRP(including any DRP underwriters) will dilute thatHolder’s holding of Stapled Securities relative toother Holders.
The administration of the DRP will be carried out bythe Administrators. The Administrators are currentlythe Stapled Entities, but the administration of the DRPmay be delegated to such persons as deemed fit.
In addition, any distribution may be partially or fullyunderwritten with one or more underwriters.
14.4.2 Purpose of DRP
The purpose of the DRP is to provide Holders withthe choice to reinvest all or part of their distributionsin additional Stapled Securities.
14.4.3 Eligibility
All Holders are eligible to participate in the DRP(“Eligible Member”) unless, subject to anyapplicable ASIC relief, the Administrators determinethat a Foreign Member is to be excluded.
14.4.4 Participation
Participation in the DRP is optional and nottransferable. Eligible Members may elect to
participate in the DRP (“Participants”) in respect ofall or part of their holding and, subject to the termsof the DRP, may withdraw their participation at anytime. Participants will at all times be bound by theDRP Rules as modified from time to time.
Stapled Securities allocated under the DRP and anybonus Stapled Securities will be added to theHolder’s Stapled Securities. The Administrators mayat any time:• suspend or terminate the DRP by notice in
accordance with the DRP rules;• limit the amount of a distribution which may be
reinvested under the DRP;• subject to the Corporations Act, in its absolute
discretion, determine that a Holder may notparticipate in the DRP, without being bound togive any reason for doing so.
14.4.5 DRP Rules
Shortly after commencement of the DRP, Holderswill be mailed information which will contain theSpark Infrastructure Distribution Reinvestment PlanRules (DRP Rules).
These DRP Rules set out the detailed terms of theDRP and Holders are encouraged to read them andnot to rely on this summary. In the event of anyinconsistency between the DRP Rules and thissummary, the DRP Rules will prevail. The DRP Ruleswill also contain information on how to vary orterminate a Holder’s participation in the DRP(see below).
14.4.6 Applications to participate
To participate in the DRP, Holders must complete theNotice of Distribution Election and return it to theRegistry. A separate notice must be lodged for eachsecurity holding account. Participation in the DRP willcommence with the first distribution payment afterreceipt by the Registry of the Notice of DistributionElection, provided it is received before the recorddate for that distribution. The Notice of DistributionElection will also operate for all future distributions inrespect of which the DRP operates, unlesssuperseded by a Notice of Variation or if participationin the DRP has been suspended or terminated.
By applying to participate in the DRP, the Holderwarrants that they are not US persons who are notboth QIBs and QPs and agree to and acknowledgecertain conditions as set out in the DRP Rules.
14.4.7 Variation of level of participation or
withdrawal from the DRP
Participants in the DRP may vary their level ofparticipation or withdraw from the DRP at any timeby completing a Notice of Variation and returning it tothe Registry. The variation or withdrawal will beeffective for the next distribution, provided theNotice of Variation is received on or prior to the DRPrecord date for that distribution.
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14.4.8 Entitlement
On each distribution payment date, Participants will be entitledto be allocated the nearest whole number of Stapled Securities(rounding down) which can be acquired at the allocation priceusing the cash distribution on the Stapled Securities in therelevant account. If there is a cash amount remaining afterStapled Securities have been allocated under the DRP, thatamount will be carried forward to the next distribution and willbe added to that distribution in determining the number ofStapled Securities to be allocated under the DRP on that nextdistribution date.
Stapled Securities will not be allocated under the DRP if theallocation would breach any provision of any applicable law or ifSpark Infrastructure determines not to make a distribution. Anydistributions on Stapled Securities which Spark Infrastructure isentitled to retain under the Constituent Documents orotherwise will not be available for acquiring Stapled Securitiesunder the DRP. If withholding tax is payable in respect of adistribution, that tax will be deducted and only the balance willbe applied in acquiring Stapled Securities.
14.4.9 Allocation price of DRP Stapled Securities
Stapled Securities allocated under the DRP may be allocated ata discount (not exceeding 10%) to the DRP VWAP. The DRPVWAP is the average of the VWAP for Stapled Securities foreach of the 10 Trading Days from and including the third TradingDay after the record date for the relevant Distribution Period. Incertain circumstances, the DRP Stapled Securities may beallocated at a discount of zero to the DRP VWAP. Accordingly,the discount (if any) may be different from one distribution tothe next.
14.4.10 Costs
The allocation of Stapled Securities under the DRP will not besubject to brokerage, commissions, stamp duty or othertransaction costs. All administrative costs will be paid by theSpark Infrastructure.
14.4.11 Ranking of DRP Stapled Securities
Subject to the terms of issue, Stapled Securities allocatedunder the DRP will rank equally in every respect with the SparkInfrastructure’s existing Stapled Securities and will participate inall distributions subsequently declared or paid.
If a New Attached Security is allocated partly paid, StapledSecurities allocated under the DRP:• while that New Attached Security is partly paid will comprise
a partly paid New Attached Security and fully paid otherAttached Securities; and
• when the New Attached Security is fully paid will comprisefully paid Attached Securities.
14.4.12 DRP records
Participants in the DRP will be mailed a statement at the timeof each distribution payment showing, for each account, fulldetails of the amount of distribution entitlement, the allocationprice, the number of Stapled Securities allocated and anyresidual distribution carried forward.
14.4.13 Sale of Stapled Securities
Participants in the DRP may sell any of their Stapled Securities,including Stapled Securities participating in the DRP or allocatedunder the DRP, at any time. Stapled Securities participating inthe DRP which are transferred are automatically withdrawnfrom the DRP on registration of a valid transfer document.
14.4.14 Listing
Application will be made for all Stapled Securities allotted underthe DRP to be quoted on ASX.
14.4.15 Taxation
Participants in the DRP will be liable to include distributionsunder the DRP in their taxable income on the same basis asif those distributions had been received in cash. SparkInfrastructure does not take responsibility for the taxationliability of Holders.
14.4.16 Modification and termination of the DRP
The DRP may be varied, suspended or terminated by theAdministrators at any time by giving Participants notice asprovided in the DRP Rules. If the DRP rules are modified,Participants continue to participate unless they terminate theirparticipation in accordance with the DRP Rules. If the DRP issuspended, Participants’ elections cease to be effective. AllStapled Securities are taken not to be DRP Stapled Securitiesfor the purpose of any distribution declared while the DRP issuspended.
Notice may be given to Participants in any manner (includingbut not limited to, by public announcement, advertisement inany newspapers circulating generally in Australia, notice on theAdministrators’ website, announcements to ASX or mailedwritten notices) which the Administrators consider appropriateto bring the termination, variation or suspension to the notice ofparticipants, having regard to the nature of the event. Anexercise of a discretion or power by the Administrators is not avariation of the DRP Rules.
Any variation, suspension, recommencement or termination ofthe DRP will not give rise to any liability on the part of, or rightof action against, Spark Infrastructure, the Administrators ortheir officers, employees, representatives or agents.
14.4.17 Administration of the DRP
The DRP will be administered by the Administrators who havethe power to determine administration procedures that areconsistent with the DRP Rules and settle disputes that arise inconnection with the DRP.
14.5 Securities Administration Deed
The term and conditions of the Instalment Receipts are set outin the Securities Administration Deed. The following informationis a summary of the material terms of the SecuritiesAdministration Deed. The Securities Administration Deed isavailable for inspection as described in Section 14.1.
14.5.1 Subscription for Stapled Securities
Under the Securities Administration Deed, Spark Instalmentagrees to subscribe for the Stapled Securities which are thesubject of the Offer and deliver a promissory note for anamount equal to the aggregate of the Final Price for thoseStapled Securities to the Stapled Entities. Spark Instalment
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directs the Stapled Entities to issue the StapledSecurities to the Security Trustee and the StapledEntities agree to so issue.
Spark Instalment will redeem the promissory noteusing the proceeds of the Offer plus theconsideration payable for the assignment of its rightsas Instalment Creditor (for further details see Section4.5.11).
14.5.2 Nature of Instalment Receipts
By participating in the Offer, Holders will acquire abeneficial interest in Stapled Securities. Each Holderwill receive Instalment Receipts as evidence of thatbeneficial interest in Stapled Securities. Holders willhold the Instalment Receipts until the FinalInstalment and Instalment Interest is paid. Holderscan transfer or sell the Instalment Receipts (andhence their beneficial interest in the underlyingStapled Securities) prior to the Final Instalment beingpaid. On payment of the Final Instalment andInstalment Interest by Holders, Instalment Receiptswill be cancelled and legal title to the Securities willbe transferred to Holders.
Each Instalment Receipt represents evidence ofa beneficial interest in one Stapled Security.
By applying for Securities, Holders agree to anumber of terms and conditions set out in theApplication Form. These terms and conditionsinclude:• an acknowledgement that the payments
accompanying the Application Form representpayment of the First Instalment only;
• an agreement to take any number of Securitiesthat may be allocated to the Applicant pursuantto this Offer Document;
• a direction that all Stapled Securities applied forare to be held by the Security Trustee inaccordance with the Securities AdministrationDeed;
• an acknowledgement that the Holder will beissued with Instalment Receipts in respect ofeach Stapled Security held by the Security Trusteeon the Holder’s behalf;
• an acknowledgment that in certain circumstancesSecurities may be disposed of at the directionof˛the Stapled Entities or Spark Instalment inaccordance with their Constitutions and theSecurities Administration Deed respectively;
• an agreement to be bound by all the terms andconditions of the Offer as set out in this OfferDocument and the terms and conditions of theSecurities Administration Deed, including withoutlimitation:– the obligation to pay the Final Instalment and
Instalment Interest on the Final InstalmentPayment Date;
– the obligation to pay any additional interest on,and costs associated with the recovery of,
the Final Instalment and Instalment Interest ifthose amounts are not paid when due;
– the requirement that no encumbrance (such asa mortgage) may be created or arise over aStapled Security and no person may acquireany right before a court that could adverselyaffect, or make conditional, the InstalmentCreditor’s Reserved Interest without priorwritten consent of the Instalment Creditor untilthe Reserved Interest, has been fully satisfied;
– the requirement that any transfer of InstalmentReceipts is to be effected in the mannerprescribed in the Securities AdministrationDeed; and
– an agreement to become a member of eachStapled Entity and be bound by the SecuritiesAdministration Deed and the Constitutions ofeach Stapled Entity.
The Security Trustee will hold the Stapled Securitieson trust for Holders subject to the InstalmentCreditor’s Reserved Interest while the FinalInstalment and Instalment Interest remains unpaid.There will be a separate trust for each Security.
It is important to note that the Instalment Creditorhas full recourse to a Holder for payment of allamounts owed to it including the Final Instalmentand Instalment Interest.
14.5.3 Instalment Interest
Holders are obliged to pay interest at the InstalmentInterest Rate on the amount of the Final Instalment.Instalment Interest will be calculated daily andcompounded quarterly. Instalment Interest is onlypayable on the Final Instalment Payment Date.
14.5.4 Payment of Final Instalment and
Instalment Interest
Each Holder is obliged to pay the Final Instalmentand Instalment Interest on the Final InstalmentPayment Date (expected to be 15 March 2007).
Holders shown in the Register on the FinalInstalment Record Date will be required to paythe Final Instalment and Instalment Interest to SparkInstalment (at the direction of the InstalmentCreditor). Spark Instalment will send Holders apayment notice 30 Business Days before thescheduled Final Instalment Payment Date.
Early payment of the Final Instalment and InstalmentInterest may be required by the Instalment Creditorin certain limited circumstances described furtherbelow.
When a sale or transfer of an Instalment Receiptoccurs, the obligation to pay the Final Instalment andInstalment Interest is also transferred from theformer Holder to the new Holder.
If the Final Instalment and Instalment Interest is paid,the Security Trustee will transfer the underlyingSecurities to Holders within five Business Days after
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the Final Instalment Payment Date. Upon such transfer theInstalment Creditor’s Reserved Interest in the Security isextinguished and the relevant Instalment Receipt cancelled.
Joint Holders of Instalment Receipts owe the obligationsimposed on them under the Securities Administration Deed,including the obligation to make the payment of FinalInstalment and Instalment Interest, jointly and severally.
14.5.5 Failure to pay the Final Instalment and Instalment
Interest
If a Holder does not pay the Final Instalment and InstalmentInterest by the Final Instalment Payment Date, default interestwill accrue on a daily basis on the unpaid amount at an interestrate equal to the Instalment Interest Rate plus 2% per annum.
Spark Instalment will issue a final reminder notice to Holderswho have not paid, which will set a date by which payment ofthe Final Instalment, Instalment Interest, default interest andany other costs associated with the recovery of those amountsis required.
If payment is not received by the date set in the final remindernotice, then the Instalment Creditor may direct the SecurityTrustee to sell the Stapled Securities to which the InstalmentReceipts relate by way of enforcement of its Reserved Interestand apply the proceeds of sale to pay all outstanding amountsto the Instalment Creditor (including any default interest,expenses of sale, and duties and taxes owed). If there is anybalance from the sale, that balance will be paid to the Holder.If the net proceeds from the sale are insufficient to fully paythe Holder’s obligations, the Holder remains liable to pay theoutstanding amount and any associated interest and costs.
If the Holder fails to pay the Final Instalment and InstalmentInterest in full, then any amount received may be apportionedacross all of the Stapled Securities that relate to the Holder’sInstalment Receipts, with the result being that the FinalInstalment on all of the Stapled Securities will not be fully paid.In these circumstances, the Instalment Creditor may direct theSecurity Trustee to sell all of the Stapled Securities and applythe proceeds of sale to pay outstanding amounts.
14.5.6 Early prepayment of Final Instalment and Instalment
Interest
Holders do not have any right to a transfer of Stapled Securitiesif the Final Instalment is paid before the Final InstalmentPayment Date. Any payment of the Final Instalment before theFinal Instalment Payment Date will not affect the Holder’sobligation to pay Instalment Interest on the total amount of theFinal Instalment.
14.5.7 Early payment of the Final Instalment and Instalment
Interest
Early payment of the Final Instalment and Instalment Interestmay be required by the Instalment Creditor in the event thatany of the following circumstances arise:• a change of control occurs (being a situation where any
person and its associates, other than the InstalmentCreditor, control 20% or more of the Stapled Securities orthe Instalment Receipts);
• the Security Trustee or Instalment Co breaches or fails toperform a material obligation under the SecuritiesAdministration Deed;
• quotation of the Stapled Securities or the InstalmentReceipts on ASX ceases;
• certain transaction documents are terminated or becomevoid, illegal or unenforceable.
If this happens, Spark Instalment must provide each Holderwith a Final Instalment Payment notice. This notice will requirethe early payment of the Final Instalment, Instalment Interestand any costs incurred by the Instalment Creditor as aconsequence of the acceleration of the Final InstalmentPayment Date, including break costs in respect of the fixed ratefunding of the Final Instalment. In these circumstances thebreak costs payable are unlikely to be material and are notquantifiable in advance.
14.5.8 No encumbrances
Until the Final Instalment Payment Date, Stapled Securities towhich Instalment Receipts relate will be registered in the nameof the Security Trustee. Holders may not create or permit toarise or continue to exist any mortgage, pledge, lien, charge,assignment, or other security interest over a Stapled Security.Holders may grant security interests over their InstalmentReceipts, but such security interests cannot extend to theunderlying Stapled Security and the Security Trustee and theRegistrar need not recognise or give effect to any securityinterest or encumbrance in respect of the Instalment Receipt.
14.5.9 Holders’ rights in respect of Stapled Securities
Holders of Instalment Receipts have a beneficial interest in thecorresponding underlying Stapled Securities as evidenced bythe issue to Holders of Instalment Receipts (on the basis of oneInstalment Receipt for each Stapled Security). Legal title to theStapled Securities is held by the Security Trustee until the FinalInstalment and Instalment Interest is paid.
The Securities Administration Deed operates to pass through toHolders their rights as owners of the Stapled Securities to thesame extent (other than noted above) as if they were directlyrecorded as the registered Security Holder. These rights includethe Holders’:• right to receive all distributions from the Stapled Entities;• ability to receive notices and attend meetings of the Stapled
Entities and exercise voting rights on resolutions put toStapled Security Holders by directing the Security Trusteehow to vote in respect of the Stapled Securities which relateto their Instalment Receipts;
• right to receive annual reports and other Security Holdernotices directly from the Stapled Entities as though theywere Stapled Security Holders;
• ability to transfer or sell their beneficial interest in theStapled Securities. It is expected that the InstalmentReceipts will be listed on ASX and the sale on ASX (oroff-market transfer) of the Instalment Receipts will have theeffect of selling (or transferring) the underlying beneficialinterest in Stapled Securities; and
• right to receive the benefit of certain corporate actions(including rights issues, bonus issues, entitlements offers)on the terms set out in the Securities Administration Deed.The benefits of such corporate actions either flow directly to
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Holders or will be held by the Security Trustee onthe same trust as the Stapled Securities.
14.5.10 Transfer or sale of Instalment Receipts is
subject to the terms of the Securities
Administration Deed
A Holder may transfer their Instalment Receipts.The rights and obligations evidenced by anInstalment Receipt may be transferred incombination but not separately.
Spark Instalment will apply to have the InstalmentReceipts participate in CHESS. Participation willprovide for the establishment of electronicissuer-sponsored and CHESS subregisters.Application will be made for Instalment Receipts tobe quoted for trading on ASX.
The Securities Administration Deed provides that theInstalment Receipts may be transferred by:• a transfer under the ASTC Settlement Rules;• a sufficient transfer (as defined in the
Corporations Act);• a Deed of Acknowledgment and Transfer as set
out in the Securities Administration Deed; or• any other method of transfer of marketable
securities which is introduced by ASX or ASTC, oroperated in accordance with the ASX ListingRules or ASTC Settlement Rules and recognisedunder the Corporations Act and approved by theInstalment Creditor.
Spark Instalment may direct the Registrar to refuseto register a transfer of Instalment Receipts wherethe ASX Listing Rules or ASTC Settlement Rulespermit Spark Instalment to do so. The Registrar isnot permitted to register a transfer of InstalmentReceipts that are held by a Holder that has defaultedon its obligation to pay the Final Instalment andInstalment Interest.
Upon registration of a transfer of an InstalmentReceipt the former Holder is discharged from anyliability to pay the Final Instalment and InstalmentInterest. The Securities Administration Deed providesthat, by a new Holder becoming a registered Holderof an Instalment Receipt, the new Holderautomatically agrees to be bound by all of the termsof the Securities Administration Deed, including theobligation to pay the Final Instalment and theInstalment Interest.
The Registrar will provide persons who becomeHolders with a notice that sets out the number ofInstalment Receipts held by each such Holder.
The Important Information Section of this OfferDocument sets out selling restrictions that apply inrespect of the Securities. In summary, theInstalment Receipts have not been, and will not be,registered under the US Securities Act and none ofthe Stapled Entities have been, or will be, registeredunder the US Investment Company Act.
Accordingly, the Instalment Receipts may not beoffered, sold or resold in, the United States or to, orfor the account or benefit of US Persons except inaccordance with an available exemption from, or atransaction not subject to, the registrationrequirements of the US Securities Act, the USInvestment Company Act and applicable UnitedStates state securities laws. Exemptions to theabove prohibitions apply to US Persons who are bothQIBs and QPs.
In order to at all times qualify for the exemptions, theSecurities Administration Deed provides that where aHolder is determined to be an Excluded US Person:• Spark Instalment may refuse to register a transfer
of Instalment Receipts to that Excluded USPerson; and
• the Excluded US Person may be requested to selltheir Instalment Receipts and if they fail to do sowithin the specified time, to be divested of theirInstalment Receipts and to receive the proceedsof sale (net of transaction costs including withoutlimitation any applicable brokerage, stamp dutyand other taxes or charges) as soon as practicableafter the sale.
In addition, the Securities Administration Deedprovides that a Holder may be required to completea statutory declaration in relation to whether it (orany person on whose account or benefit it holdsInstalment Receipts) is an Excluded US Person andany Holder who does not comply with such arequest as an Excluded US Person.
Instalment Receipts are issued on terms underwhich each Holder who is or becomes an ExcludedUS Person agrees to the above terms and irrevocablyappoints Spark Instalment as that Holder’s agent andattorney to do all acts and things and execute alldocuments which Spark Instalment considersnecessary, desirable or reasonably incidental toeffect the above actions.
14.5.11 Instalment Creditor
The Instalment Creditor from time to time is entitledto be paid the Final Instalment and InstalmentInterest when due. Spark Instalment is the InstalmentCreditor as at the date of this Offer Document. SparkInstalment has agreed to assign its rights asInstalment Creditor under the SecuritiesAdministration Deed to SELECT ACCESSInvestments (No. 1) Limited under the InstalmentDebt Sale Deed dated on or about the date of theOriginal Document between Spark Instalment,SELECT ACCESS Investments (No. 1) Limited andDeutsche Bank AG. Under that Deed SELECTACCESS Investments (No. 1) Limited has agreed topay an amount equal to the aggregate FinalInstalment payable by Successful Applicants(“Instalment Debt Purchase Price”). Subject to thesatisfaction of certain conditions (including the issueof the Instalment Receipts), SELECT ACCESS
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Investments (No. 1) Limited is obliged to pay the InstalmentDebt Purchase Price to the Stapled Entities (at the direction ofSpark Instalment) on the Issue Date. The obligation of SELECTACCESS Investments (No. 1) Limited to pay the Instalment DebtPurchase Price is guaranteed by Deutsche Bank AG.Assignment of Spark Instalment rights as Spark InstalmentCreditor under the Securities Administration Deed will occur onthe date of payment.
The Instalment Creditor may assign or novate its rights andobligations under the Securities Administration Deed to anotherperson. The consent of Spark Instalment is required to any suchassignment or novation unless the assignee or novatee is aRelated Body Corporate of Deutsche Bank AG or theassignment is of the Instalment Creditor’s rights againstdefaulting Holders.
14.5.12 Security Trustee
Australian Executor Trustees Limited has been appointed asSecurity Trustee. The Security Trustee’s role is to hold theStapled Securities on the trust for the Instalment Creditor inrespect of its Reserved Interest and otherwise for the Holderof the Instalment Receipt to which that Stapled Security relates.
Fees and expenses in relation to the services provided by theSecurity Trustee will be funded by the Stapled Entities.
Except in some limited circumstances where a court may doso, Spark Instalment (with the consent of the InstalmentCreditor) and Instalment Creditor (after consultation with theSpark Instalment) are both entitled to remove the SecurityTrustee and simultaneously appoint a new trustee. The SecurityTrustee may also retire by giving 30 days notice to SparkInstalment and the Instalment Creditor. The Stapled Entities willindemnify the Security Trustee in respect of all liabilities arisingfrom the performance of its responsibilities under the SecuritiesAdministration Deed.
14.5.13 Limitations of Security Trustee’s discretion and
liabilities
The Security Trustee has limited powers, rights and discretionsin respect of the Securities.
The Security Trustee is not liable to any Holder to any greaterextent than the value of the interest of the Holder under thetrusts of the Stapled Securities to which its Instalment Receiptrelates, except for any liability which the Security Trustee mayhave as a result of its fraud, wilful misconduct, negligence orbreach of trust. The Security Trustee is not liable for any failureto do anything if it is hindered, prevented or forbidden fromdoing that act or thing by any law. The Security Trustee maydelegate various tasks and rely on various persons and things.The Securities Administration Deed sets out in detail thelimitations on the Security Trustee’s liability to Holders andother persons.
The Stapled Entities have provided the Security Trustee withcertain indemnities and the Security Trustee has no right ofrecourse against any Holder for any disbursements, expensesand outgoings incurred by the Security Trustee for performingits duties under the Securities Administration Deed except inrelation to the sale of Stapled Securities following a Holder’sdefault or any duties and taxes payable in respect of anInstalment Receipt or Stapled Security.
14.5.14 Payment of any Duties and Taxes on Instalment
Receipts or Stapled Securities
If the Security Trustee receives a demand or an assessmentrelating to a Holder or any Stapled Securities from a revenue,or other Governmental or regulatory authority, for any dutiesand taxes or becomes aware that it may be liable to pay suchduties and taxes, then if the Security Trustee is advised that itmust pay the amount, the Holder must pay that amount to theSecurity Trustee on demand.
If the Holder does not pay the amount demanded by theSecurity Trustee in the manner and within the period set out inthe notice provided by the Security Trustee, the SecurityTrustee may take action to recover that amount as a debt duefrom the Holder. It may choose to sell all or any of the Holder’sInstalment Receipts or the Stapled Securities underlying theInstalment Receipts. If the Instalment Receipts or StapledSecurities are sold, the proceeds of any sale will be applied inaccordance with a priority order set out in the SecuritiesAdministration Deed.
14.5.15 Amendments
The Securities Administration Deed may be amended byagreement between Instalment Co, the Instalment Creditor andthe Security Trustee. However, amendments are restricted toprevent any changes from:• impacting on the rights of any Holder, on payment of the
Final Instalment and Instalment Interest, to receive atransfer or the Securities and, pending such transfer, toenjoy the beneficial interest in respect of such Securities; or
• accelerating the Final Instalment Payment Date other thanas already contemplated by the terms of the SecuritiesAdministration Deed and described in this Offer Document.
14.6 Agreements relating to operation of Stapled
Companies
14.6.1 Management Agreement
(a) PartiesThe Management Agreement is an agreement entered into bythe Manager with each of the Stapled Companies and theResponsible Entity in its capacity as responsible entity of theSpark Infrastructure Trust.
Under the Management Agreement, the Manager is appointedas the manager of each of the Stapled Entities.
The Manager has been formed to assume this role under theManagement Agreement and to engage in the business ofidentifying investment opportunities, and making, managing andrealising investments of the kind that each Stapled Entityproposes to make.
The appointment of the Manager is exclusive and the Managermust devote all of its time and attention to the provision of themanagement services to the Stapled Entities. Any investmentproposal submitted to the Stapled Entities by a third party mustbe referred to the Manager for assessment.
The Manager holds AFSL number 290441.
More information about the investment policy of SparkInfrastructure is set out in Section 9 and more informationabout the Manager is set out in Section 7.5.
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(b) TermThe Manager is appointed for 25 years, subject tocertain termination events.
(c) Termination by the Stapled EntitiesThe Stapled Entities may terminate the ManagementAgreement if:• the Manager is in serious breach of a material
obligation and such breach cannot be remedied,or if it can it has not been remedied within 90days of the Stapled Entities giving notice of thebreach. However, the agreement may notbe terminated by the Stapled Entities based onnon-performance of individual investments, unlesssuch non-performance is the result of a seriousbreach of a material obligation under theagreement;
• the Manager suffers an insolvency event,including going into liquidation, being wound up,entering into an arrangement for the benefit of itscreditors, having a controller appointed and beingplaced in administration; or
• any licence, permit or authorisation held by theManager which is necessary for it to be able tosupply the management services is suspended orrevoked or otherwise made subject to conditionswhich prevent it from providing the managementservices and this is not remedied within 90 days.
(d) Termination by the ManagerThe Manager may terminate the ManagementAgreement if:• the Stapled Entities are not admitted to the
official list of ASX by 31 January 2006;• having been listed, the Stapled Entities cease to
be listed;• a Stapled Entity suffers an insolvency event,
including going into liquidation, being wound up,entering into an arrangement for the benefit of itscreditors, having a controller appointed and beingplaced in administration;
• the Stapled Entities are in breach of a materialobligation under the agreement and such breachcannot be remedied, or if it can it has not beenremedied within 90 days of notice of the breach;
• a person, other than the Manager or a RelatedBody Corporate of the Manager, acquires arelevant interest in 30% or more of the StapledSecurities (as constituted from time to time); or
• a person, other than the Manager or a RelatedBody Corporate of the Manager, makes a bonafide takeover offer in relation to the StapledSecurities (as constituted from time to time)which becomes unconditional, or a Stapled Entityenters into a scheme of arrangement which is notapproved by the Manager.
(e) Services provided under the ManagementAgreementThe management services to be provided by theManager comprise:• working together with the boards of each of the
Stapled Entities to develop, implement, manageand review the long term investment and financialstrategy for the Stapled Entities consistent withthe investment policy of Spark Infrastructure andassisting in reviewing these strategies from timeto time;
• develop investment proposals with respect toacquisitions and disposals for consideration by theboards of the Stapled Entities;
• develop proposals for both debt and equity capitalraisings by the Stapled Entities and assistimplementation where these proposals are to bepursued;
• prepare board papers pertaining to suchproposals;
• manage the investments of the Stapled Entitiesincluding making all decisions in relation to suchinvestments (other than decisions as toacquisitions or disposals which are required to bethe subject of investment proposals);
• sourcing and administering investment bankingservices in respect of investment proposals andcapital raising of the Stapled Entities;
• prepare drafts of and consult with the StapledEntities in relation to all Holder related publicannouncements and Investor relations generally;
• assist each Stapled Entity to comply with itsobligations with respect to keeping of accountingrecords, preparation of financial statements,complying with its obligations with respect toeach Stapled Entity’s Constitution, ASIC and ASXregulatory requirements, company secretarialfunctions such as arranging meetings ofshareholders and liaison with share registry etc;
• provide information in its possession to assisteach Stapled Entity secretary in his/her role;
• provide all necessary information technologysupport if requested to do so by the board on thebasis that the costs of providing any specialist ITsupport will be recoverable from each StapledEntity (day to day IT support being provided at thecost of the Manager);
• assist in group corporate governance in relation toinvestments of the Stapled Entities; and
• manage the day to day operations of the StapledEntities including procuring services of thirdparties.
The Manager must also make available to theStapled Entities from time to time appropriatelyqualified and experienced individuals to performfunctions equivalent to those that would ordinarily beperformed by a Chief Executive Officer, ChiefFinancial Officer, Chief Investment Officer andCompany Secretary of Spark Infrastructure.
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In providing the management services the Manager mustcomply with all relevant statutory requirements and the termsof the constitutions of the Stapled Entities and discharge itsduties in good faith, honestly and with a degree of professionalcare, diligence and skill a reasonable person in the Manager’sposition would exercise.
The management services may be varied from time to time byagreement between the parties.
(f) Obligations of the Manager with respect to investmentsThe Manager is obliged to make available to the StapledEntities any investment opportunity it sources which is withinthe investment policy of Spark Infrastructure on a first right ofrefusal basis and otherwise in accordance with the proceduresset out in the agreement. Any investments must be kept underreview by the manager and recommendations must be made asto how each Stapled Entity should deal with the investments.
The Manager has entered into arrangements with each of CKIand RREEF Infrastructure to establish a referral protocolwhereby each will from time to time refer investment proposalswithin the investment policy to the Stapled Entities subject tothe terms of the protocol. Further details of the referral protocolare contained in Section 9.5.
If Spark Infrastructure acquires assets as a result of aninvestment opportunity introduced by a person other than theManager, CKI or RREEF Infrastructure then in relation to thoseassets Spark Infrastructure may, where it is a condition of theacquisition that any existing management arrangementsaffecting those assets continue, allow those arrangements tocontinue in accordance with those requirements or, at the timeof the acquisition, make alternative arrangements in relation tomanagement of those assets. Otherwise, assets so acquiredwill be managed by the Manager.
The Manager is required to provide quarterly reporting duringthe term of the agreement in a form agreed between theManager and each Stapled Entity (or more regularly if theStapled Entities require more regular reporting to coincide withboard schedules). There is also provision for additional reportingat the request of the Stapled Entities.
(g) Investment decision making processThe Manager will submit investment proposals relating toacquisitions and disposals to the boards of the Stapled Entities.The board of each Stapled Entities has absolute discretion withrespect to all investment decisions submitted to it.
Spark Infrastructure may only change its investment policy withthe prior approval of the Manager.
(h) No guarantee by the ManagerThe Manager does not guarantee the performance of anyinvestment made by any of the Stapled Entities.
(i) Indemnity provided to ManagerEach Stapled Entity indemnifies the Manager and its associates(as defined) against all losses and claims (as defined) sufferedor incurred by the Manager as a result of the appointment ofthe Manager under the agreement, or the provision of themanagement services, including as a result of:• a claim by a third party against the Manager and its
associates, or any enquiry by any Government or regulatory
authority in respect of the role or conduct of the Managerand its associates under the agreement (except where theManager is obliged to indemnify each Stapled Entity or theloss or claim arises as a result of fraud, wilful misconduct orgross negligence of the Manager or its associate); or
• the Manager and its associates acting under direction inaccordance with the governance arrangements of eachStapled Entity.
(j) Management Fees and costs• Management Fees
The Stapled Entities will pay the Manager the following feeseach of which is described in more detail, including workedexamples, in Section 10:– Base Fee: From the listing of Spark Infrastructure on
ASX the Manager is entitled to the Base Fee eachquarter. The Base Fee is calculated as a percentage perannum of Enterprise Value being 0.5% per annum up to$2.443 billion plus 1.0% per annum of any amount bywhich the Enterprise Value exceeds $2.443 billion.
– Performance Fee: From the listing of Spark Infrastructureon ASX the Manager is entitled to be paid a PerformanceFee in respect of each half financial year. ThePerformance Fee is equal to 20% of the amount (if any)by which the Return exceeds the Benchmark Return forthat half financial year.
The Manager must bear all costs, charges and expensesincurred by it in providing the management services,including its own ordinary overhead and administrative costsincluding costs of staff.
Fees payable under the Management Agreement will besubject to GST. The Stapled Entities will not be entitled toa full input tax credit for the acquisition of managementservices but may be entitled to a reduced input tax credit(being 75% of the GST payable by the Manager to the ATO)for certain acquisitions prescribed in the GST Regulationspursuant to “A New Tax System (Goods and Services Tax)Regulations 1999 (Cth)”.
• Liability for fees
The Stapled Entities are jointly and severally liable for thefees due to the Manager. However, the Stapled Entities mayfrom time to time agree with the Manager the basis onwhich such fees are to be borne as between the StapledEntities.
• Reorganisations affecting Stapled Entities
If there is a change (actual, proposed or anticipated) afterthe date of the agreement to the number or identity of theentities that comprise Spark Infrastructure, the parties mustnegotiate in good faith with a view to:– any entity to be added to Spark Infrastructure becoming
a party to the agreement; and– agreeing such variations to the agreement as are
necessary to ensure that the Manager remains entitled toa Base Fee and a Performance Fee calculated in the samemanner as when the agreement is first entered into.
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• Costs and expenses
In addition to the fees payable to the Manager,Spark Infrastructure will bear all expensesnormally associated with a listed entity with adiverse range of investors and investments.These include but are not limited to costsresulting from ASX and ASIC listings, applicationand compliance, due diligence costs, legal fees,accounting, audit, financial and taxation advice,investor communications, insurance and IT costsetc. The agreement provides for an annual budgetof all such expenses to be submitted by theManager for approval by the Stapled Entityboards.
14.6.2 Technical Services Agreements
14.6.2.1 Technical Services Agreement with CKIThe Technical Services Agreement is between CKI,the Manager and Chistar (the Provider).
Under the Agreement, the Manager has appointedthe Provider to provide services to it and the Providerhas agreed to provide those services. The servicesare intended to assist the Manager in performing itsobligations under the Management Agreement.
CKI guarantees the performance of the Providerunder the Agreement.
TermThe Agreement is in force from the commencementdate until 25 years after the date of the ManagementAgreement, unless otherwise terminated inaccordance with the Technical Services Agreement.
ServicesThe Provider agrees to provide the followinginvestment management services:• facilitating deal origination for the investment
portfolio of Spark Infrastructure;• assisting the Manager with detailed investment
evaluation of assets considered for SparkInfrastructure;
• assisting the Manager (on request) in itsmanagement and review of the investmentstrategy of Spark Infrastructure;
• assisting the Manager to manage the pipelineof˛investment opportunities that may grow orenhance the quality or performance of SparkInfrastructure and prioritising focus and resourcesto those most suited to Spark Infrastructure’sstrategy and investment policy;
• assisting the Manager to conduct ongoing reviewof assets to which Spark Infrastructure has anexposure, with the view to maximisinginvestment returns;
• appointing key senior management of theManager;
• providing two directors to the relevant boardsof˛Spark Infrastructure;
• assisting (on request) the recruitment ofindependent directors for the relevant boards ofSpark Infrastructure and the staff of the Manager;
• assisting the Manager to undertake within thefirst 90 days of 2006 (as well as periodic updating)a full scoping study (including a full technical andeconomic analysis) of available opportunities intarget industries and markets in accordance withSpark Infrastructure’s investment strategy andinvestment policy; and
• assisting with and participating in all workundertaken in connection with bringing the initialpublic offering of Spark Infrastructure to fruition.
Payment for ServicesThe Manager must pay the Provider an agreedservice charge for the services provided to it.
If the Manager fails to pay any amount payable by itunder the Technical Services Agreement by the duedate, the interest on the unpaid amount may accruedaily in accordance with the terms of the Agreement.
Standard of ServicesThe Provider shall provide the services with all theskill, care and diligence to be expected from aqualified, competent and experienced provider ofservices of a similar scope.
Mutual Representations and WarrantiesEach party represents and warrants to the otherthat it has full power and authority to perform andobserve all the terms and provisions of the TechnicalServices Agreement.
IndemnityThe Provider indemnifies the Manager against alllosses or claims suffered or incurred by the Manageras a result of the provision, or purported provision,by the Provider of the services, but only to theextent they arise out of any fraud, wilful misconductor gross negligence by the Provider or its officers,employees or agents.
TerminationThe Technical Services Agreement will automaticallyterminate if the Management Agreement isterminated.
The Technical Services Agreement may also beterminated at any time if a party becomes insolvent,or, if any party commits a breach under the TechnicalServices Agreement which is material and notcapable of being cured, or if the breach is not curedwithin 90 days of being notified of the breach.
AssignmentNeither party may assign any of its rights orobligations under the Technical Services Agreementwithout the prior written consent of the other party,except that the Provider must do so where it or itsrelated entity transfers its shares in CKI RREEF JVHoldings Pty Limited.
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Dispute ResolutionThe parties undertake to use all reasonable efforts in good faithto resolve any dispute which may arise between them. A partymay not commence legal proceedings (except proceedingsseeking interlocutory relief) in respect of a dispute unless thedispute has first been referred for resolution and the partieshave failed to resolve the dispute after completing the disputeresolution procedure.
14.6.2.2 Technical Services Agreement with Deutsche AssetManagement (Australia) Limited (ABN 11 026 098 896)(DAML)The Technical Services Agreement is between the Manager andDAML (the Provider).
Under the Agreement, the Manager has appointed the Providerto provide services to it and the Provider has agreed to providethose services. The services are intended to assist the Managerin performing its obligations under the ManagementAgreement.
TermThe Agreement is in force from the commencement date until25 years after the date of the Management Agreement, unlessotherwise terminated in accordance with the Technical ServicesAgreement.
ServicesThe Provider agrees to provide the following investmentmanagement services:• facilitating deal origination for the investment portfolio of
Spark Infrastructure;• assisting the Manager with detailed investment evaluation
of assets considered for Spark Infrastructure;• assisting the Manager (on request) in its management and
review of the investment strategy of Spark Infrastructure;• assisting the Manager to manage the pipeline of investment
opportunities that may grow or enhance the quality orperformance of Spark Infrastructure and prioritising focusand resources to those most suited to Spark Infrastructure’sstrategy and investment policy;
• assisting the Manager to conduct ongoing review of assetsto which Spark Infrastructure has an exposure, with theview to maximising investment returns;
• appointing key senior management of the Manager.• providing two directors to the relevant boards of Spark
Infrastructure;• assisting (on request) the recruitment of independent
directors for the relevant boards of Spark Infrastructure andthe staff of the Manager;
• assisting the Manager to undertake within the first 90 daysof 2006 (as well as periodic updating) a full scoping study(including a full technical and economic analysis) of availableopportunities in target industries and markets in accordancewith Spark Infrastructure’s investment strategy andinvestment policy; and
• assisting with and participating in all work undertaken inconnection with bringing the initial public offering of SparkInfrastructure to fruition.
Payment for ServicesThe Manager must pay the Provider an agreed service chargefor the services provided to it.
If the Manager fails to pay any amount payable by it under theTechnical Services Agreement by the due date, the interest onthe unpaid amount may accrue daily in accordance with theterms of the agreement.
Standard of ServicesThe Provider shall provide the services with all the skill, careand diligence to be expected from a qualified, competent andexperienced provider of services of a similar scope.
Mutual Representations and WarrantiesEach party represents and warrants to the other that it has fullpower and authority to perform and observe all the terms andprovisions of the Technical Services Agreement.
IndemnityThe Provider indemnifies the Manager against all losses orclaims suffered or incurred by the Manager as a result of theprovision, or purported provision, by the Provider of theservices, but only to the extent they arise out of any fraud,wilful misconduct or gross negligence by the Provider or itsofficers, employees or agents.
TerminationThe Technical Services Agreement will automatically terminateif the Management Agreement is terminated.
The Technical Services Agreement may also be terminated atany time if a party becomes insolvent, or, if any party commitsa breach under the Technical Services Agreement which ismaterial and not capable of being cured, or if the breach isnot cured within 90 days of being notified of the breach.
AssignmentNeither party may assign any of its rights or obligations underthe Technical Services Agreement without the prior writtenconsent of the other party, except that the Provider must doso where it or its related entity transfers its shares in CKIRREEF JV Holdings Pty Limited.
Dispute ResolutionThe parties undertake to use all reasonable efforts in good faithto resolve any dispute which may arise between them. A partymay not commence legal proceedings (except proceedingsseeking interlocutory relief) in respect of a dispute unless thedispute has first been referred for resolution and the partieshave failed to resolve the dispute after completing the disputeresolution procedure.
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14.6.3 Financial Services Agreement
The Financial Services Agreement is an agreementbetween Deutsche Bank and each of the StapledEntities.
Under the Financial Services Agreement, the StapledEntities have appointed Deutsche Bank to provideinvestment banking services (the Services) to theStapled Entities. Except in certain circumstancesdescribed below, the Stapled Entities must offer toDeutsche Bank on an exclusive basis allengagements which constitute:
(a) advisory assignments, including all acquisition,divestment, merger, capital and debt advisorywork (Advisory Assignments); and
(b) the raising of capital, including debt, equity orequity related instruments or raisings, hybrids,quasi-equity, convertible bonds, swaps,derivatives, foreign exchange or any otherstructured product, or any other financingrequirements that may be warranted to enablethe Stapled Entities to achieve their statedobjectives and strategy (Fundraising
Assignments).
(i) Independent AdviceThe Stapled Entities retain the right to engage thirdparties for the provision of independent expertadvice in respect of any engagement whereDeutsche Bank has been appointed to provideServices or where Deutsche Bank or CKI or a relatedcorporation of either is involved in a transaction andwhere the Stapled Entities consider that anindependent valuation or review is in the bestinterests of holders of Stapled Securities.
(ii) Opportunity from a third party Where a third party service provider has exclusiveaccess to or a proprietary interest in an opportunityand it proposes to provide Services to one or moreStapled Entities in respect of that opportunity, thenthe Stapled Entities may appoint such third partyservice provider to provide the Services.
Approval of the BoardAll engagements and the appointment of DeutscheBank by the Stapled Entities in respect of anengagement are subject to the approval by the Boardof Directors of each Stapled Entity in accordancewith the Related Party Protocol. The Board of aStapled Entity shall approve the appointment ofDeutsche Bank where the Services will be providedby Deutsche Bank to the Stapled Entity on a marketcompetitive basis.
Fees The fees paid to Deutsche Bank in considerationof the Services provided by Deutsche Bank to theStapled Entities are to be agreed on a case by casebasis and must be at market rates and oncommercial arm's length terms.
TerminationThe term of the Financial Services Agreement is10 years (Initial Term). Deutsche Bank may terminatethe Agreement by giving 180 days' written noticeto the other parties. The Agreement shall beautomatically renewed for a period of 10 years atthe end of the Initial Term (Further Term) providedthe Stapled Entities are satisfied that the Serviceswill continue to be provided by Deutsche Bank in asatisfactory manner and on a market competitivebasis. The Stapled Entities may terminate theAgreement at any time after the expiry of the FurtherTerm by giving 90 days written notice. TheAgreement may also be terminated at any time byDeutsche Bank or the Stapled Entities if the otherbecomes insolvent, or, if the other commits a breachunder the Agreement which is material and notcapable of being cured, or if the breach is not curedwithin 30 business days of notification of the breach.
14.6.4 Joint Venture Shareholders’ AgreementThe Joint Venture Shareholders' Agreement isbetween CKI, CKI Spark Holdings No. Three Limited(CKI Sub), Deutsche Australia Limited (DAL) and CKIRREEF JV Holdings Pty Limited (JVCo).
CKI guarantees the performance of CKI Sub underthe Agreement.
Background• CKI Sub and DAL (together, the Shareholders)
have established JVCo as a joint venture companyto act as the holding company of the Manager,the Responsible Entity and Spark Instalment.
• The Manager and the Responsible Entity willprovide services to Spark Infrastructure. SparkInstalment will issue Instalment Receipts to assistSpark Infrastructure raise capital.
• JVCo, the Manager, the Responsible Entity andSpark Instalment together comprise the Group(the Group).
• The Joint Venture Shareholders’ Agreementregulates the Shareholders’ rights and obligationsas members of JVCo and in respect of the Group.
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Shareholders’ ObjectiveThe Shareholders agree that they will: • facilitate the provision of resources and expertise to enable
the successful initial public offering of Spark Infrastructure,its listing on the ASX, the performance by the Manager of itsobligations under the Management Agreement and thecontinued growth of Spark Infrastructure through theprovision of services under the Technical ServicesAgreements; and
• assist with the future growth of Spark Infrastructure byendeavouring to provide access to deal flow.
Structure and Establishment of JVCoIn establishing JVCo, the Shareholders will appoint directors ofJVCo and the Group and JVCo must purchase and maintaininsurance for each director of JVCo against any liability incurredby the director. The Shareholders must contribute funds andworking capital to JVCo.
Control of JVCo
The BoardThe Board of directors of JVCo will be responsible for theoverall direction and control of the management of JVCo.
Unanimous DecisionsJVCo will not and will ensure each Group company does nottake any action in respect of certain matters in relation to JVCoor a Group company, except with the unanimous consent of theBoard of directors of JVCo. These matters include altering theequity structure of a Group Company or diluting a Shareholder'sownership interest in JVCo.
Appointment of directors in JVCo and the Group• JVCo will have a maximum of 4 directors and each
Shareholder may appoint two directors. • The Manager will have a maximum of 4 directors and each
Shareholder may nominate two directors. • The Responsible Entity will have a maximum of 8 directors
and each Shareholder may nominate two directors whilefour of the directors will be independent directors.
• Spark Instalment will have a maximum of 8 directors andeach Shareholder may appoint two directors while four ofthe directors will be independent directors.
Meetings of directorsThe Joint Venture Shareholders’ Agreement contains provisionsregulating the meetings of directors.
Business of the Group Each Shareholder will exercise its powers in relation to JVCo toensure that each Group Company carries on and conducts itsbusiness in a proper and efficient manner in accordance withsound business practice and so that JVCo complies with all itsobligations under the Joint Venture Shareholders’ Agreement.
Deal flow principlesEach of CKI and RREEF Infrastructure will use best endeavoursto refer global investment and co-investment opportunitieswithin the investment policy to Spark Infrastructure, subject tothe following principles:
(a) a referral within the investment policy will occur where CKIor RREEF Infrastructure, as the case may be, considers that
such referral would not be inconsistent with the businessobjectives of that party or with the duties of that party or anyof its related corporations to its clients or funds associatedwith its business;
(b) recognition by the parties of other potential competingengagements for the relevant party or any of its relatedcorporations as underwriter, principal, adviser and/or arrangerin connection with the types of investment opportunitiesreferred to in paragraph (a); and
(c) recognition by the parties that Spark Infrastructure has noobligation to accept investment opportunities from CKI orRREEF Infrastructure.
The deal flow principles only apply to each of CKI or RREEFInfrastructure while it has (directly or indirectly) at least a 50%interest in the Manager.
Company dealingsJVCo will transact all of its business on arm's length termsunless all the parties concerned are Group Companies.
Financing of CompanyJV Co will meet any capital requirements for licensing purposesin respect of a Group company.
Disposal of Shares in JVCoA Shareholder may not dispose of any of its JVCo shares or loansexcept by a transfer of the entire legal and beneficial interest inthose shares or loans provided that the Shareholder has compliedwith all conditions set out in the Joint Venture Shareholders’Agreement in connection with the transfer and the shares arefree from all liens, charges and other encumbrances.
Pre Emptive Rights on DisposalWithin 7 days of receipt of the transfer notice the transfershares will be offered by the secretary or director for purchaseat the transfer price as follows:
• first to the other Shareholder and to Spark Infrastructure(which may only accept the offer subject to the otherShareholder rejecting the offer); and
• second, to a third party purchaser if the other Shareholderor Spark Infrastructure reject the offer.
Technical Services AgreementThe transferor of JVCo shares, in respect of the TechnicalServices Agreement to which it, or a related body corporate ofit, is a party, must, prior to registration of the transfer, procurethat the transferee: • enters into a Deed of Assignment and takes an assignment
of all of the transferor's rights and obligations under theTechnical Services Agreement to which the transferor is aparty; or
• enters into a new relevant agreement in respect of servicesrequired by the Group following the transfer,
and enters into transitional arrangements with the transferor toensure the smooth transition of the provision of the servicesrequired by the Group from provision by the transferor toprovision by the transferee.
Registration RequirementsThe parties will procure that before any person is registered byJVCo as a holder of any Joint Venture Shareholders’ share that
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Material Breach Each of the following is a material breach under theAgreement: • failure to provide capital to or in respect of JVCo
or a Group Company;• failure to comply with the share disposal
restrictions;• the Shareholder becomes insolvent;• the Shareholder stops or suspends or threatens
to stop or suspend payment of all or a class of itsdebts;
• an administrator is appointed over theShareholder's shares in JVCo;
• a controller within the meaning of section 9 of theCorporations Act or similar officer is appointed tothe Shareholder's shares in JVCo; or
• an order is made or a resolution is passed orproposed in a notice of meeting for the windingup of the Shareholder.
Consequences of Material Breach If a material breach occurs the aggrieved Shareholdermay serve a notice on the defaulting Shareholderidentifying the material breach within 60 days ofbecoming aware of the material breach. If thematerial breach is either incapable of being remediedor is capable of being remedied and is not remediedwithin the required time then the material breachbecomes enforceable. If the material breachbecomes enforceable, the defaulting Shareholderimmediately loses the right to appoint directors, voteand to receive distributions and is deemed to haveserved a transfer notice in respect of the JVCoshares it holds. In addition, any director appointed byit must be removed.
Term The Joint Venture Shareholders’ Agreementcontinues in full force and effect until it is terminatedor where there is only one Shareholder or whereJVCo is wound up.
TerminationEither Shareholder may terminate the Joint VentureShareholders’ Agreement by written notice to theother parties if the initial public offering of SparkInfrastructure is not effected and Spark Infrastructureis not included in the official list of the ASX by31 January 2006 or an ancilliary agreement relating tothe establishment of Spark Infrastructure is notexecuted by the time Spark Infrastructure is includedin the official list of the ASX.
If termination occurs, the Shareholders agree tounwind the arrangements in respect of SparkInfrastructure. This includes causing any relevant
entity to be wound up or transferred to a third partyand any relevant contract to be terminated, and theShareholders agree to restore each other as nearlyas possible to the economic position of theShareholder as if the Joint Venture Shareholders’Agreement had not been entered into.
14.7 Arrangements in respect of Asset
Companies
14.7.1 Implementation Deed and Implementation
Deed Poll
The purpose of the Implementation Deed and theImplementation Deed Poll is to restructure theownership of, and certain intra-group debt relating to,the Asset Companies (“Restructure”).
Under these Deeds Spark Infrastructure will acquirethe 49% interest in CHEDHA and ETSA, 100% ofPreferred Partnership Capital in ETSA and makesubordinated loans to CHEDHA and ETSA(“Acquisition”).
The Restructure and Acquisition will not occur until:• the Responsible Entity has applied for and is
granted an Australian Financial Services Licence;• Spark Infrastructure is established as a stapled
group;• the Commonwealth Treasurer has indicated he
has no objection to the share transactionscontained in deeds, or ceases to be empoweredto make any orders under the Foreign Acquisitionand Takeovers Act 1975 (Cth) because of lapse oftime;
• execution of the Constituent Documents and funddocuments, which are required to establish theownership and management structures of SparkInfrastructure;
• execution of the Asset Company Agreements,which are required to establish the newownership and management structures of theAsset Companies;
• CKI has received the requisite shareholderapprovals necessary for the sale of 49% of itsinterest in the Asset Companies, as contemplatedby the Implementation Deed and theImplementation Deed Poll; and
• approval of the Final Price by CKI in accordancewith the Offer Management Agreement.
On satisfaction of the conditions set out above, theparties to the Implementation Deed and theImplementation Deed Poll must procure that the IPOcompletion occurs. The IPO completion must occurby a back-stop date (31 December 2005).
The various steps required to effect the Restructureand Acquisition occur immediately after completionof the IPO. Each party to the Implementation Deedmust do all things reasonably necessary to procurethe completion of those steps.
Furthermore, various companies in the CHEDHAcorporate group and three of the ETSA partners will
migrate to Australia following completion of the Restructureand Acquisition. CHEDHA Holdings and its Australiansubsidiaries will then elect to form a tax consolidated group.Spark Infrastructure Company 2 and its Australian subsidiarieswill also elect to form a tax consolidated group.
CKI and HKE each give certain warranties in respect of theinformation that they have provided during the due diligenceprocess, the ownership of the assets (including shares) used inthe business of the Asset Companies, that no third party hasany interest in the shares being transferred and that there is noinsolvency in relation to the Asset Companies or theirsubsidiaries.
In addition each seller of shares as part of the Restructure andAcquisition warrants that (except to the extent they are relyingon the preceding transfer of shares as part of the Restructureand Acquisition):• they are the registered and beneficial owner of those
shares;• there are no encumbrances over those shares; and• there are no restrictions on the transfer of those shares.
Each party to the Implementation Deed and the ImplementationDeed Poll also provides limited warranties as to power, capacityand authority to enter into these deeds.
Following the Restructure and Acquisition, the AssetCompanies will be indirectly owned in the followingproportions:• CKI 1%;• HKE 50%; and• Spark Infrastructure 49%.
14.7.2 Asset Company Shareholders Agreement
The relationship of CKI, HKE and Spark Infrastructure (throughSpark Infrastructure Company 1), in relation to the ownershipand operation of CitiPower and Powercor, is governed by theAsset Company Shareholders Agreement.
CKI, HKE and Spark Infrastructure Company 1 will hold sharesin CHEDHA, via other investment vehicles. CHEDHA indirectlyowns CitiPower and Powercor. CKI, HKE and SparkInfrastructure Company 1 will, through their investment inCHEDHA, own and control CitiPower and Powercor in thefollowing proportions:
Shareholder Interest
CKI and HKE 51%*(in aggregate)
Spark Infrastructure Company 1 49%
* It is contemplated that, immediately following the IPO this 51%interest will be indirectly held 1% by CKI and 50% by HKE.
CKI, HKE and Spark Infrastructure Company 1, together withtheir wholly owned subsidiaries which will own shares inCHEDHA, will be all parties to the Asset Company ShareholdersAgreement. CKI, HKE and Spark Infrastructure Company 1 arerequired to remain parties to the Asset Company ShareholdersAgreement for so long as they each remain “ultimateshareholders” of the shareholders of CHEDHA.
Spark Infrastructure Company 1 will continue to be a party:• for so long as a shareholder of CHEDHA is a member of its
“shareholder group”; or• if it became a shareholder of CHEDHA.
Also, CKI and HKE will continue to be parties:• for so long as a shareholder of CHEDHA is a member of
their “shareholder group”; or• if either became a shareholder of CHEDHA.
Broadly, a “shareholder group” comprises a CHEDHAshareholder and their Related Bodies Corporate. In addition, theconcept of “shareholder group” is extended:• in the case of CKI and HKE, to include any entity in which
they between them hold (or either one of them holds) adirect or indirect 50% interest, or are otherwise able to“control” (within the meaning of the Corporations Act)(control) (but ignoring any interest which CKI and HKE havein the other); and
• in the case of Spark Infrastructure Company 1, to includeany entity in which a Stapled Entity (either alone or withanother Stapled Entity) holds a direct or indirect 50%interest, or is otherwise able to control.
Each of CKI, HKE and Spark Infrastructure Company 1guarantee the obligations of any shareholder of CHEDHA intheir “shareholder group”. For this reason, references below toCKI, HKE and Spark Infrastructure Company 1 are intended toinclude reference to the shareholders of CHEDHA which aremembers of their respective “shareholder groups”.
(a) Conditions precedent and termThe Asset Company Shareholders Agreement is conditional oncompletion of certain of the transactions contemplated underthe Implementation Deed.
The Asset Company Shareholders Agreement ceases to applyto a shareholder if they cease to be a shareholder of CHEDHA.The Asset Company Shareholders Agreement terminates if allof the shareholders agree to its termination or if CHEDHA iswound up by a resolution of shareholders (or by order of acourt).
(b) Shareholder control of CHEDHAThe day-to-day management of CHEDHA is vested in its board.Subject to rights granted to shareholders at law, theshareholders’ rights are limited to the following matters:• any corporate action which could dilute a shareholder’s
interest in CHEDHA or any subsidiary of CHEDHA (exceptfor a sale of shares or other securities in CHEDHA pursuantto the terms of the Asset Company ShareholdersAgreement) and the issue price of any new shares or othersecurities of CHEDHA;
• the entry into, or raising of additional debt under loans fromshareholders (or their wholly owned subsidiaries or entitieswhich wholly own the shareholder) for CHEDHA or any of itssubsidiaries;
• the adoption by CHEDHA or any of its subsidiaries of ascheme pursuant to which securities or instrumentsconvertible into shares of CHEDHA or any of its subsidiariesare issued to employees, directors or consultants ofCHEDHA or any of its subsidiaries;
• any amendment to the Asset Company ShareholdersAgreement or to the constitution of CHEDHA or any of itssubsidiaries and to any loan to CHEDHA or any of itssubsidiaries from shareholders (or their wholly ownedsubsidiaries or entities which wholly own the shareholder orany associated subordination deed poll);
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• any alteration to the rights attached to any shares orequity capital in CHEDHA or any of its subsidiaries;
• any change in the distribution policy applying toCHEDHA and its subsidiaries;
• any return or buy-back of equity capital ofCHEDHA or any of its subsidiaries;
• any proposal by CHEDHA or any of its subsidiariesto cease to carry on, or vary in a material respect(including by engaging in new activities), the “corebusiness” (which is, broadly, the electricitydistribution businesses of CitiPower andPowercor);
• the appointment of a liquidator or administrator orany proposal to unwind CHEDHA or anysubsidiary of CHEDHA;
• the sale of all or substantially all of the assets ofCHEDHA or any subsidiary of CHEDHA;
• any proposal in relation to a merger, disposal oramalgamation of or any subsidiary of CHEDHAwith at least a net asset value in excess of$5,000,000;
• a decision to undertake an initial public offering ofany of the securities of CHEDHA or any subsidiaryof CHEDHA;
• any proposed action or decision to implement anymaterial change to debt/equity ratios oramortisation profile of, or increases in capital of,CHEDHA or any subsidiary of CHEDHA wheresuch action or implementation affects or is likelyto affect:– the cash distribution payable or projected to be
payable to the shareholders; or– the maintenance of a Standard and Poor’s
“A–” credit rating in the Powercor and theCitiPower guarantee group or where they holda different credit rating, the maintenance ofthat credit rating (where “guarantee group”means those subsidiaries of CHEDHA whichparticipate in the CitiPower or Powercorbusiness);
• any agreement or decision to enter into, amend,waive, vary, exercise rights in relation to, or notcomply with, an agreement between CHEDHA(or a subsidiary of CHEDHA) and a shareholder(or a Related Body Corporate of a shareholder)with a contract value in excess of $1,000,000;
• any increase in the number of directors ofCHEDHA (except in accordance with the AssetCompany Shareholders Agreement); and
• any proposal for CHEDHA to deal with ashareholder who has breached the AssetCompany Shareholders Agreement (other thanin accordance with the procedure set out in theAsset Company Shareholders Agreement) inrespect of which resolution the breachingshareholder is not entitled to vote.
Each of the above matters must be determined bya special majority resolution of shareholders (i.e. itmust be approved by shareholders holding at least75% of CHEDHA shares).
(c) Board compositionThe maximum number of directors permitted on theboard of CHEDHA is 12.
Each CHEDHA shareholder may appoint a directorto the board of CHEDHA in respect of each 10%shareholding it has in CHEDHA. Accordingly, CKI andHKE may, together, appoint five directors to theboard of CHEDHA and Spark Infrastructure Company1 may appoint four directors. In addition, SparkInfrastructure Company 1 has the right to appoint anadditional director in respect of its 9% residualholding. Further, any subsequent assignee of SparkInfrastructure Company 1’s 9% residual shareholdingassumes this right to appoint a director.
However, for so long as the only shareholders ofCHEDHA are CKI, HKE and Spark InfrastructureCompany 1 then CKI and HKE on the one hand andSpark Infrastructure Company 1 on the other hand,agree to only appoint four out of their possible fivedirectors.
Furthermore, pursuant to the Joint VentureShareholders’ Agreement, one of the directorsnominated by Spark Infrastructure Company 1 will bedetermined by CKI. If, for whatever reason, CKIceases to be able to determine a director nominatedby Spark Infrastructure Company 1, then for so longas CKI and HKE’s aggregate interest in CHEDHA is atleast 51% (but less than 60%), CKI will have theadditional right to appoint a director to the board ofCHEDHA in respect of any shareholding held by CKIthat is less than 10%.
The current chief executive officer of CitiPower andPowercor, Shane Breheny, will be appointed theinitial chief executive officer of CHEDHA (and willalso be a director).
The initial chairman of the board will be Peter Tulloch.The chairman will not have a casting vote.
(d) Board decisionsThe board of CHEDHA must meet at least six timesper calendar year.
The quorum for a meeting of the board is at leastfour directors of whom:• two must be appointed by CKI/HKE; and• two must be appointed by Spark Infrastructure
Company 1 (not counting the CKI nominee if s/heis present at the board meeting).
All decisions of the board are by simple majority,except if CKI/HKE holds, in aggregate, an interest inCHEDHA which is less than 50% and SparkInfrastructure Company 1 does not hold, in aggregate,at least 80%, in which case all board decisions mustbe determined by a super majority (70%).
The board of CHEDHA may delegate its powers(other than powers required by law to be dealt withby the board and the power to consider and approveCHEDHA’s s budget and business plan) to acommittee.
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Each committee of the CHEDHA board must comprise at leastone representative appointed by CKI/HKE on the one hand andSpark Infrastructure Company 1 on the other (not counting theCKI nominee if s/he is appointed to the committee).
All decisions of a committee must be determined by aunanimous vote, failing which the matter must be referred tothe board for determination.
(e) Distribution policy of CHEDHAThe Asset Company Shareholders Agreement sets out theinitial distribution policy of CHEDHA and its subsidiaries whichis, broadly, to distribute all surplus cash available to theshareholders in whatever form is deemed appropriate by theboard.
The distribution policy may be amended by a special resolutionof the shareholders.
(f) Dealing with sharesA shareholder may transfer its shares:• to a “100% Related Party” of that shareholder (which,
broadly, is all wholly owned entities within the shareholder’scorporate group and in the case of Spark InfrastructureCompany 1 includes 100% of Related Parties of anotherStapled Entity); and
• in the case of CKI and HKE, to each other (or to a whollyowned subsidiary of the other or any entity which whollyowns the other or any entity jointly wholly owned (in anyproportion) by CKI and HKE); and
• in the case of Spark Infrastructure Company 1, to a nomineeof the Manager.
Otherwise, a shareholder who wishes to transfer any or all oftheir shares must first offer those shares for sale to existingshareholders, in proportion to their current shareholding(respective proportion). This is done by the issue of a transfernotice.
If a shareholder does not take up all of its respective proportionof offered shares, the outstanding entitlement will be offered tothose shareholders who wish to take up more than theirrespective proportion of offered shares.
If, after this process, there are unaccepted shares, then noshares will be transferred to existing shareholders and all of theoffered shares may be offered to third parties, (provided thosethird parties were identified in the transfer notice) on terms nomore favourable than those offered to existing shareholders.
A shareholder who transfers shares must also transfer theirrespective proportion of shareholder loans to that transferee(or to the transferee’s 100% Related Parties).
(g) Further issues of shares and offer of shareholder loansA further issue of CHEDHA shares or shareholder loans mustfirst be offered to existing shareholders in their respectiveproportions, at a price agreed between the shareholders.
If a shareholder does not take up all of its respective proportionof new shares and new shareholder loans, the outstandingentitlement will be offered (further offer) to those shareholderswho wish to take up more than their respective proportion ofnew shares or new shareholder loans. The further offerscontinue until all new shares and new shareholder loans areaccepted or the expiry of 10 business days after the first furtheroffer is made, whichever is earlier.
If, after this process, there are still unaccepted new shares,they may be offered to third parties, determined by thedirectors, on terms no more favourable than those offered toshareholders.
This procedure does not apply to certain share issues approvedby a special majority shareholders’ resolution and to debt theboard determines to source from a third party financier.
(h) New shareholders bound by shareholders agreementPrior to registering any person as a new shareholder, theperson must agree to be bound by the Asset CompanyShareholders Agreement. Furthermore, the remainingshareholders may require that the new shareholder’s ultimatecontrolling shareholder also guarantee the obligations of thatnew shareholder under the Asset Company ShareholdersAgreement.
(i) Shareholder defaultIf a shareholder:• suffers an insolvency event;• breaches the provisions of the Asset Company Shareholders
Agreement relating to share and shareholder loan dealingand new issues or offers of shares and shareholder loans orwarranties (including those given at the time of accession tothe agreement);
• undergoes a change of control (excluding certain changes ofcontrol, as set out below); or
• acquired shares as a permitted nominee because it was the100% Related Party of another shareholder (or formershareholder), and it ceases to have that relationship,
then the other shareholders may trigger a sale process for all ofits shares and shareholder loans. Except where the defaultrelates to an insolvency of the shareholder, 30 days after thesale process is triggered and until it concludes the rightsattaching to the defaulting shareholder’s shares will besuspended and the directors appointed by that shareholder willbe removed. The sale price for the defaulting shareholder’sshares and shareholder loans is the price agreed between theparties, or failing agreement, the fair market value of the sharesand shareholder loans (independently determined). If SparkInfrastructure Company 1 is the insolvent party, failingagreement on the sale price, its shares and shareholder loansmay be sold for the greater of fair market value and theoutstanding debt raised from third party financiers by theStapled Companies or their wholly owned subsidiaries inrelation to the acquisition by them of an interest in or thefunding of CHEDHA or any of its subsidiaries (or any refinancingof such debt) plus all amounts payable in relation to that debtsuch as interest, costs, fees and expenses and payments dueunder relevant interest rate hedging arrangements whichremains outstanding.
Shareholders may, by notice, accept all, some or more than theirrespective proportion of offered shares and shareholder loans.
If a shareholder does not take up all of its respective proportionof offered shares and shareholder loans, the outstandingentitlement will be offered to those shareholders who wish totake up more than their respective proportion of offered sharesand shareholder loans.
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If, after this process, there are still unacceptedshares and shareholder loans, they may be offered tothird parties, determined by the directors, on termsno more favourable than those offered to existingshareholders.
In the event of an insolvency of CKI or HKE, theother of them has the prior right to acquire theinsolvent party’s shares and shareholder loans, forfair market value.
(j) Change of controlIf a shareholder undergoes a change of control thenthis may trigger a sale process for all of its sharesand shareholder loans as outlined above. Broadly, achange of control of a shareholder is defined tooccur if the persons who, at a particular time, havecontrol of that shareholder lose that control, or oneor more persons acquire control of that shareholder.Change of control of a shareholder also occurswhere a shareholder’s ultimate shareholder ceasesto wholly own the shareholder. Change of control ofa shareholder does not include:• in relation to a shareholder who is wholly owned
(directly or indirectly) by any Stapled Entity, achange in control resulting from:– a person acquiring or disposing of a direct or
indirect interest in Spark Infrastructure stapledsecurities; or
– the termination of the ManagementAgreement or a change of control of theManager; and
• in relation to a shareholder who is a 100%Related Party of CKI or HKE, a change in control:– where the shareholder continues to be a
100% Related Party of CKI or HKE (or both ofthem); or
– where there is a change of control of CKI orHKE resulting from the trading of publiclylisted securities; and
• a change arising from a third party debt financier’sexercise of security over the shares held by theshareholder in CHEDHA, as a result of aninsolvency event.
14.7.3 Partnership Agreement
ETSA is a partnership comprised of five partnerswhose relationship is governed by a PartnershipAgreement. ETSA is managed by ETSA Manager, theshares in which will be held by the partnership.
The relationship of CKI, HKE and Spark Infrastructure(through Spark Infrastructure Company 2), in relationto the ownership and operation of ETSA, will beeffected by amendments to the PartnershipAgreement.
CKI, HKE and Spark Infrastructure Company 2 will,via other investment vehicles, own interests in theETSA partners, resulting in the following ownershipproportions:
Holder Interest
CKI and HKE 51%*Spark Infrastructure Company 2 49%
* It is proposed that, immediately following the IPO this51% interest will be held 1% by CKI and 50% by HKE.
Broadly speaking, the governance of ETSA mirrorsthat of CHEDHA (see above) except that:• matters which relate to the shareholders of
CHEDHA under the Asset Company ShareholdersAgreement are matters which relate to the ETSApartners under the Partnership Agreement;
• matters which related to the board of CHEDHAunder the Asset Company ShareholdersAgreement are matters delegated to a partnershipboard under the Partnership Agreement; and
• under the Partnership Agreement a partnercannot sell any of its interest in the Partnershipand there are restrictions on the shareholders ofthe partners’ ability to deal with their shares inthe partners under the ETSA Partner ShareDealing Agreement (see further below).
(a) Partner control of ETSAThe partners have established a partnership boardand the day-to-day management of ETSA is vested inthe partnership board. Subject to rights granted topartners at law, the partners’ rights are limited to thesame matters (to the extent that they apply to apartnership) as those reserved for shareholdersunder the Asset Company Shareholders Agreement.
(b) Partnership board compositionThe Partnership board composition and appointmentrights are the same as those described for CHEDHA.
The current chief executive officer of ETSA, LewOwens, will remain as the chief executive officer ofETSA (and will also be on the partnership board).
The initial chairman of the board will be PeterTulloch. The chairman will not have a casting vote.
(c) Distribution policy of ETSAThe Partnership Agreement sets out the distributionpolicy of ETSA and its subsidiaries which is, broadly,to distribute all surplus cash available to the partnersin whatever form is deemed appropriate by thepartnership board.
The distribution policy may be amended by a specialresolution of the partners.
(d) Dealing with partnership interest – ETSAPartner Share Dealing AgreementA partner may not dispose of any of its partnershipinterest without the consent of all of the otherpartners.
Each of the shareholders of the partners are party tothe ETSA Partner Share Dealing Agreement (ETSA
PSDA). Under the ETSA PSDA a shareholder of apartner may only dispose of its shares in the partner
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in the same way as shareholders are permitted to dispose ofshares in CHEDHA.
Further, a shareholder of a partner who transfers its shares in apartner to a non-100% Related Party must also transfer itsrespective proportion of partner loans to that transferee.
(e) Further funding (ordinary and Preferred Capitalcontributions or partner loans)The partnership board may seek funding and/or partner loansfrom partners in the same way as the CHEDHA board may offernew shares for issue or seek new shareholder loans. However,if a partner refuses to provide additional capital funding, thepartnership cannot seek that capital funding from a third partyunless all of the partners agree.
Funding that may be sought from partners may be provided inthe form of:• “ordinary capital” – such funding confers an additional
interest in the assets of the partnership;• “partnership loans” – in the form of debt owed by the
partnership to the partners; and• “partnership preferred capital” – such funding does not
confer an additional interest in the assets of the partnership.The partnership may (but is not obliged to) pay a preferreddistribution of profit on partnership preferred capital at aspecified rate. The partnership will not pay any distributionto a partner while a distribution referable to partnershippreferred capital is outstanding. Partnership preferred capitalranks in priority to ordinary capital in a winding up of thepartnership.
(f) New partnersNew partners may only be admitted to the partnership if all ofthe partners agree.
(g) Partner defaultUnder the ETSA PSDA, if a partner defaults in a correspondingway to that described in the Asset Company ShareholdersAgreement, the shareholders of the other partners have a rightto require the sale of the shares in the defaulting partner(s) tothe owners of the non-defaulting partners.
(h) Change of controlBroadly, a partner undergoes a change of control in the samecircumstances as those described in the Asset CompanyShareholders Agreement.
14.7.4 Adjustment Deed
(a) Purpose of documentThe Adjustment Deed governs the relationship between:• the CKI subsidiary and the HKE subsidiary who lend
subordinated debt to ETSA (“CKIFA” and “HEIFA”respectively);
• the ETSA partners who are owned by Spark Infrastructureand who hold preferred partnership capital in ETSA (“Fund
Partners”); and• Spark Infrastructure (SA) Pty Ltd, which is the holding
company of the Fund Partners (“SISAPL”),in relation to their respective returns on subordinated debt andpreferred partnership capital. The main circumstance where theAdjustment Deed is expected to apply is if the ETSA SOC Testprevents ETSA from making distributions on those subordinated
loans and that preferred partnership capital in full, but then onlyif the interest or principal on the subordinated loans is paid toCKIFA and HEIFA at a rate which is greater than the rate ofdistribution on the preferred partnership capital.
(b) Turn-over arrangementsCKIFA and HEIFA agree to turn-over to SISAPL anydisproportionate returns of interest or principal which theyreceive on the subordinated debt (when compared to thedistributions and redemptions which the Fund Partners receiveon the preferred partnership capital).
Similarly, the Fund Partners and SISAPL agree to turn-over toCKIFA and HEIFA any disproportionate returns which the FundPartners receive on the preferred partnership capital.
The respective proportions are the same as those which eachETSA partner’s ordinary capital in ETSA bears to the totalordinary capital in ETSA.
Pending turn-over, the disproportionate returns are held on trustfor the payee.
(c) Resulting loanTurn-over payments by CKIFA or HEIFA to SISAPL are treatedas a loan by CKIFA or HEIFA to SISAPL.
The loan is interest bearing at the same rate as applicable underthe subordinated loans by CKIFA and HEIFA to ETSA.
However, effectively interest is only payable by SISAPL if theFund Partners receive distributions on the preferred partnershipcapital which exceed the rate of interest payments and principalrepayment on the subordinated loans provided to ETSA byCKIFA and HEIFA – that is, “catch-up” distributions on thepreferred partnership capital. If SISAPL does not pay thatinterest in full because the Fund Partners have not receivedsuch catch-up distributions, then the shortfall will accumulateand bear interest at the interest rate mentioned above.
Similarly, except in limited circumstances, the principal amountof the loans from CKIFA and HEIFA to SISAPL is only repayablefrom such catch-up distributions after interest and accumulatedinterest are paid.
14.8 Financing documents at Stapled Entity level
14.8.1 On-lending Arrangements
(a) Rate resetThe interest rates for the interest bearing loans may beperiodically reset by agreement between the borrower and thelender.
(b) EnforcementExcept for the interest free loans from the Spark InfrastructureTrust to Spark Infrastructure (Victoria) Pty Limited, from SparkInfrastructure (Victoria) Pty Limited to Spark Infrastructure (SA)Pty Limited and from Spark Infrastructure (SA) Pty Limited toCheung Kong Infrastructure Finance (Australia) Pty Ltd the loansare not prepayable prior to their stated maturity other than atthe option of the relevant borrower.
The three interest free loans are repayable on demand ifspecified enforcement events occur.
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Table 14.2
Note: Some of the amounts set out in the column “Amount” assume an issue price for the Stapled securitiesof $2.00 and are subject to adjustment if the issue price differs from that amount and if HKE accepts CKI’s offerreferred to in Section 6.7.
To fund equity subscriptionby CHEDHA in the CitiPowerGuarantors and the PowercorGuarantors
Interestbearing
100 yearsA$1,312million
CHEDHA Holdingsto CHEDHA
To fund in part the loans madeby CHEDHA Holdings toCHEDHA and the acquisitionof shares
Interestbearing
100 yearsA$405million
HEI TransmissionFinance (Australia)Pty Ltd to CHEDHAHoldings
To fund in part the loans madeby CHEDHA Holdings toCHEDHA and the acquisition ofshares in CHEDHA
Interestbearing
100 yearsA$8 millionCKI TransmissionFinance (Australia)Pty Ltd to CHEDHAHoldings
To fund in part the loans madeby CHEDHA Holdings toCHEDHA and the acquisitionof shares in CHEDHA
To fund in part the loans madeby Spark InfrastructureCompany 1 to CHEDHAHoldings and SparkInfrastructure Company 2
Interestbearing
100 yearsA$1,263million
Spark InfrastructureTrust to SparkInfrastructure (Victoria)Pty Limited
PurposeInterest
Maturity
dateAmountLender to borrower
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In place of purchasing theaccrued interest from CheungKong Infrastructure Finance(Australia) Pty Ltd as part ofthe acquisition of CKI’s interestin ETSA
To fund in part the loans madeby Spark InfrastructureCompany 1 to CHEDHAHoldings and SparkInfrastructure Company 2
Interest freeOn demand,not later than10 years,subject tosubordinationprovisions
A$230million
Spark InfrastructureTrust to SparkInfrastructure (Victoria)Pty Limited
To acquire the existingshareholding of the CheungKong Group and the HongkongElectric Group in three ofthe partners in ETSA and tofund further ordinary equitysubscription in three of thepartners in ETSA
Interest freeOn demand,not later than10 years,subject tosubordinationprovisions
To fund further equitysubscription by CHEDHA inthe CitiPower Guarantors andthe Powercor Guarantors
Interestbearing
100 yearsA$50 millionCHEDHA Holdings toCHEDHA
PurposeInterest
Maturity
dateAmountLender to borrower
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ts on terms which, in some cases, contain the ETSASOC Test.
Except for the loan from Spark Infrastructure (SA) PtyLimited to Cheung Kong Infrastructure Finance(Australia) Pty Limited, all other loans described inthe above table are subordinated on terms betweenthe relevant lender and borrower.
14.8.2 Stapled Entity Senior Debt
In conjunction with the Offer, the Stapled Entitieswill raise approximately A$475 million in Senior Debt.The initial Senior Debt of the Stapled Entities is setout in Table 14.3.
14.9 Summary of material contracts at Asset
Company level
This Section contains a summary of the materialcontracts entered into by the Asset Companies. Themain contracts, including a brief description of thecontract and the parties to the contract, are outlinedin Table 14.4.
14.10 ETSA operational contracts
14.10.1 Leases
(a) BackgroundAt the time of privatisation in 2000, the SouthAustralian Government was prevented by legislationfrom selling certain electricity assets. Accordingly, itleased those assets to ETSA under the two leasesdescribed below and sold the remaining distributionassets under a Distribution Business Sale Agreement.
(b) PartiesThe parties to these two leases are DLC and ETSA.
(c) PurposeDLC (as lessor) leases to ETSA (as lessee) thoseelectricity assets which the State was preventedfrom privatising by way of the:• Network Lease which leases the distribution
network (i.e. poles and wires, substations andcertain public lighting infrastructure); and
• Land Lease which leases the distribution networkland (i.e. the land on which the distributionnetwork is located including private easements).
Table 14.3
Working capital of theStapled Companiesand their subsidiaries
2006A$50 millionWorking capital facility
Acquisition of interestsin and loans to theholding companies ofthe Asset Companiesand to pay transactioncosts
$200 million due in 2008$225 million due in 2010
A$425 millionSyndicated bank debtfacility, structured as aloan note facility
Use of proceedsMaturity dateLimitFacility
Table 14.4
Gives the DLC rights overany assets involved in thedistribution business that arenot leased from the DLC andthe end of the 200 year leaseperiod. Otherwise, DLCwould not be in a position tore-privatise the distributionbusiness as a completepackage at the end of theLeases
DLC and each partner inETSA and UMPL
Deeds of charge
Agreement to lease thedistribution network and landon which the distributionnetwork is located for200 years, commencing28 January 2000
DLC, a subsidiary of theTreasurer of the State ofSouth Australia (“SATreasurer”), and ETSA
Distribution NetworkLand Lease andDistribution NetworkLease (the “Leases”)
ETSA operational contracts
Section/
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See Summary in Section 14.7See Summary in Section 14.7Senior Debt Facilities
Sets out the terms of thesubordinated loans betweenCheung Kong InfrastructureFinance (Australia) PtyLimited and Hong KongElectric International Finance(Australia) Pty Limited toETSA Utilities
ETSA Utilities and CheungKong Infrastructure Finance(Australia) Pty Limited andHong Kong ElectricInternational Finance(Australia) Pty Limited
Loans to ETSA Utilitiesfrom entities related toHKE and CKI
Financing documents
Under the terms of theirdistribution licences,CitiPower and Powercor mustoffer to enter into the DefaultUse of System Agreement –Victorian Electricity Industrywith retailers on request, theterms of which have beenapproved by the ESC. Thedistributors and retailers arefree to negotiate changes
CitiPower/Powercor andretailers who do nototherwise have a negotiatedagreement
Default Use of SystemAgreement – VictorianElectricity Industry
Under the Electricity Act2000 (Vic), Powercor andCitiPower, as distributors, aredeemed to have a standardform contract (in a formapproved by the ESC) withend use customers to theextent that they do not havea written agreement withthat customer
CitiPower/Powercor and endcustomers who do nototherwise have a negotiatedagreement
Deemed ElectricityDistribution Contract
Powercor/CitiPower operational contracts
Customers who do not havea negotiated connectioncontract with ETSA aredeemed to be on theStandard Connection andSupply Contract with ETSA,as prescribed by theElectricity Distribution Code
ETSA and end use customerswho do not have a negotiatedcontract with ETSA
Standard connection andsupply contract
Provides a framework fora co-ordinated approach byETSA and the retailers tothe delivery of distributionservices to the end usecustomers, including billing,information provision andliability arrangements, withthe aim of avoidingduplication
ETSA and South Australianelectricity retailers
Co-ordination agreement
ETSA operational contracts continued
Section/
Page ref.Subject matterPartiesTitle
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(d) TermThe Leases commenced on 28 January 2000 and runfor 200 years with no options to renew.
(e) RentRent was prepaid in advance for the entire term.
(f) ObligationsETSA must ensure that the distribution network andland is used for the purpose of conducting anelectricity distribution business in South Australia.The Leases deal with issues ordinarily found inleases such as obligations on the lessee to maintainand insure the property and pay outgoings.
ETSA provides broad indemnities to DLC in regard todamage to or liabilities arising in regard to the leasedland or network.
(g) Replacement and transfer of ownershipThe distribution network and related land will changesignificantly during the 200 year lease term.Accordingly, replacements and upgrades of thenetwork (including the land on which they aresituated) will roll in to the leases (apart from newassets and geographical extensions and related landwhich are discussed below).
Any parts of the distribution network which areremoved during maintenance may be owned or soldby ETSA. Similarly, surplus distribution network landmay also be sold by ETSA.
(h) New assets and geographical extensionsThe following do not form part of the leased propertyor land:• any future alteration or modification of the
distribution network, which is not in the ordinarycourse of replacement and the regulatory value ofwhich exceeds $2 million (adjusted), and relatedland which ETSA elects to own rather than lease;and
• any future network extensions and related landbeyond the outer extremities of the distributionnetwork at the time the Leases were entered into.
At Leases end, the new assets and, at DLC’selection, geographical extensions and related landmust be transferred to DLC. Where the Leasesexpire (or in certain cases of early termination notinvolving fault on the part of ETSA), ETSA will receivecompensation for such assets. Otherwise, suchtransfer is to be at no cost to DLC.
(i) Return of the distribution networkAt Lease end, it is intended that the entiredistribution network as a going concern be returnedto DLC. Therefore, at the end of the Leases, ETSAmust return the distribution network (includingreplacements and extensions), related land,easements, new land and geographical extensions toDLC in a good condition. ETSA is also obliged totransfer other distribution assets and contracts underits original agreement to acquire the distributionbusiness.
ETSA’s obligation to return the distribution businessis also secured under the Deeds of Charge(summarised below).
(j) Termination rights and consequencesETSA will be in default under the Leases if it fails topay monies due; enters into external administration;sells or charges its interests in the Leases; a licencerequired to operate the distribution network issuspended or cancelled; there is a substantialcessation of the use of the distribution network forits intended purpose; it fails to undertake appropriatemaintenance; or the Deeds of Charge (summarisedbelow) are alleged to be unenforceable. ETSA isrequired to remedy any of its defaults under theLeases within agreed cure periods.
ETSA also has limited rights of termination.
If a Lease is terminated for certain events which arenot the fault of ETSA (e.g. uninsurable casualty),then ETSA is entitled to compensation including thatpart of the pre-payment referable to the unexpiredportion of the Lease which was prepaid atcompletion.
If a Lease is terminated by DLC because of a breachby ETSA of its obligations, then the Treasurer has noobligation to reimburse any part of the pre-paymentbut may have an obligation to pay compensation insome circumstances.
(k) Force MajeureETSA is excused from performing its obligationsunder the Lease, other than the obligation to payrent or other money or maintain insurance, to theextent that an event beyond the reasonable controlof ETSA prevents ETSA from complying with itsobligations.
14.10.2 Deeds of Charge
(a) PartiesThere are six Deeds of Charge between DLC(as chargee) on the one hand and each partner inETSA and UMPL (as chargors) on the other hand.
(b) PurposeThe purpose of the charges is to reinforce DLC’soption rights at the end of the Leases over assets ofthe distribution business which are not leased fromDLC. They effectively put DLC in the same positionin respect of un-leased assets as it is in respect ofthe leased assets. Otherwise, DLC would not be in aposition to take over the distribution business as acomplete package at the end of the Leases.
(c) Operative provisionsThe charges operate as a floating charge whichcrystallises into a fixed charge on the securedproperty at the end of the Leases. The chargesgrant DLC a security interest in the assets of thedistribution business which are not leased from DLCincluding the new assets and geographicalextensions and related land (see discussion of these
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concepts in the summaries of the Leases) to the extent ETSAdoes not roll such assets into the Leases.
They also secure amounts which become owing in respect ofthe performance or breach of ETSA’s obligations under theLeases to transfer the new assets and geographical extensionsand related land and other distribution assets (in accordancewith the Distribution Business Sale Agreement) to DLC whenthe Leases end.
As UMPL is not a party to the Leases, its charge is confined toassets it owns or enjoys in connection with the distributionbusiness.
The charges take priority over all other security interests.
14.10.3 Co-ordination Agreement
(a) SummaryETSA and South Australian retailers are obliged under theirlicences to enter into a Co-ordination Agreement approved byESCOSA.
ETSA’s standard form Co-ordination Agreement provides aframework for a co-ordinated approach by it and the retailer tothe delivery of distribution services to the retailer’s customersin South Australia. It deals with billing, information provision andliability arrangements between ETSA and the retailer with theaim of avoiding duplication in their respective relationships withthe customer.
(b) ResponsibilitiesThe retailer is required to pay ETSA for the provision ofdistribution services (and other associated services) to itscustomers. ETSA appoints the retailer as its agent for thepurposes of billing and collection of distributor charges from thecustomers. However, the retailer’s obligation to pay ETSA is notaffected by a retailer’s failure to recover those charges from itscustomers.
The retailer is also obliged to provide a bank guarantee to ETSAequal to three months estimated distribution charges if theretailer does not meet certain creditworthiness tests.
(c) TermThe agreement operates until such a time as one of the partiesterminates the agreement.
(d) LiabilityThe agreement contains mutual indemnities. In particular, ETSAindemnifies the retailer against customer claims relating toquality of, or interruptions to, supply but the parties’ liability isgenerally subject to caps and, except where specificallyprovided for, neither party is liable for loss of profits orconsequential losses.
14.10.4 Standard Connection and Supply Contract (deemed
contract with customers)
(a) SummaryUnder the Electricity Act 1996 (SA), customers who do nothave a negotiated connection contract with ETSA are deemedto be on the Standard Connection & Supply Contract withETSA.
The Standard Connection & Supply Contract is prescribed bythe Electricity Distribution Code made by ESCOSA. It sets outthe terms on which ETSA connects a customer’s supply
address to its electricity distribution network, maintains thatconnection and supplies the customer’s address with electricity.It also requires the customer to comply with a number of safetyand technical obligations and to provide access to the supplyaddress.
(b) TermThe agreement operates from the time the customer’s supplyaddress is connected to ETSA’s network and ends when ETSAdisconnects the customer or where the customer pays allaccounts and does not continue to buy electricity from a retailerfor that supply address.
(c) Tariffs and chargesThe customer must pay the tariffs and charges set out inETSA’s price list from time to time. ETSA may vary the tariffsand charges in accordance with the applicable pricedetermination and pass through taxes and other chargespermitted by ESCOSA.
ETSA will arrange for the retailer to bill the customer fordistribution services. Payment to the retailer is deemed to be adischarge of the customer’s obligations to pay ETSA.
(d) LiabilityThe customer is made aware that the quality and reliability ofelectricity supply may be affected by interruptions from time totime. ETSA has the right to interrupt or limit supply for anumber of purposes.
Under the contract, ETSA seeks to limit its liability to themaximum extent permissible at law for quality and reliability ofsupply claims which do not arise from negligence or bad faith.
Where the claim relates to negligence or bad faith, ETSA limitsits liability to $500,000 per event for very small customers andto $1,000,000 per event for other customers.
14.11 Powercor/CitiPower operational contracts
14.11.1 Deemed Electricity Distribution Contract
(a) SummaryUnder the Electricity Act 2000 (Vic), Powercor and CitiPower, asdistributors, are deemed to have a standard form contract (in aform approved by the ESC) with end use customers to theextent that they do not have a written agreement with thatcustomer. This Deemed Electricity Distribution Contract outlinesthe rights and obligations of the parties regarding the waynetwork services (and certain other services) are provided bythe distributor to the customer’s retailer (who then suppliesthose services to the customer).
(b) ResponsibilitiesThe distributor is generally required to bill the customer’sretailer for network services and excluded services providedunder the relevant Use of System Agreement (see summarybelow). The distribution company may also bill the customerdirectly for the provision of other excluded services.
The parties must ensure that they comply with their respectiveobligations under other regulatory instruments and the contractimposes a number of technical compliance obligations on thecustomer that are aimed at protecting the distributor’s networkand equipment.
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(c) LiabilityThe customer acknowledges under the contract thatmatters beyond the distributor’s control may affectthe quality and reliability of electricity supply andsupply may be interrupted.
However, certain statutes may imply terms into thecontract that the law does not allow to be excluded.Any liability of the distributor under such terms islimited, where the law allows, to the cost ofsupplying equivalent goods or services (or the cost ofacquiring equivalent goods or services) as the casemay be. In addition, a business customer must takereasonable precautions to minimise loss resultingfrom poor quality or reliability of electricity supply.
14.11.2 Default Use of System Agreement –
Victorian Electricity Industry
(a) SummaryUnder their Victorian distribution licences, CitiPowerand Powercor must offer to enter into the DefaultUse of System Agreement – Victorian ElectricityIndustry (“UoS Agreement”) with retailers onrequest. The default terms have been approved bythe ESC. However, distributors and retailers are freeto negotiate changes.
The UoS Agreement sets out the terms on whichdistributors provide distribution services to retailersfor their customers. As distributors, Powercor andCitiPower have entered into UoS Agreements with anumber of Victorian retailers. A substantial proportionof Powercor and CitiPower’s revenue is collectedunder these agreements.
(b) ResponsibilitiesThe distributor is required to provide the retailer (inrelation to the retailer’s customers) with distributionservices. The retailer is obliged to pay the distributorthe distribution service charges for those services.However, the retailer’s obligation to pay thedistribution service charges is not affected by aretailer’s failure to recover those charges from itscustomers.
To the extent the distributor receives retail servicesfrom the retailer (e.g. the provision of informationand documentation to customers), the distributormust pay the retailer for those services.
Under the default agreement, the retailer may beobliged to provide a bank guarantee to the distributorof not more than three months’ estimateddistribution service charges if the retailer does notmeet certain creditworthiness tests. However,retailers and distributors can negotiate alternativecredit support arrangements and CitiPower andPowercor have agreed to alternative arrangements insome cases.
(c) TermThe UoS Agreement operates until such a time asone of the parties validly terminates the agreement.
(d) LiabilityThe parties exclude, to the maximum extentpermissible by law, all implied warranties, terms andconditions in relation to the supply of electricity (orother product or service). The distributor indemnifiesthe retailer against customer claims relating to qualityof, or interruption to, supply; for breach of certainstatutory warranties and conditions; and for claimsarising as a consequence of action taken by theretailer to enforce the distributor’s right to disconnecta customer. In each case, the indemnity may notapply in certain situations.
Each party is required to obtain adequate insuranceto cover any liability incurred in relation to certainindemnities.
(e) DefaultThe retailer is required to remedy certain defaultswithin the agreed cure periods. If such a default hasnot been cured, the distributor may terminate theUoS Agreement. The retailer does not have a similarright to terminate. However, the retailer may, bynotice to the distributor, terminate the agreementwhere it has no customers that require distributionservices.
(f) Force MajeureIf either party is prevented, by an event beyond itsreasonable control, from performing its obligations, itmust use its best endeavours to remove the effectsof that event as quickly as possible. The affectedobligation is suspended, without liability, for as longas the event exists.
14.12 Summary of Senior Debt Facilities at Asset
Company level
14.13 Summary of Senior Debt Facilities – ETSA
14.13.1 2000 MTN Program
EUF has issued the following series of AustralianMTNs guaranteed by ETSA:• A$750 million Floating Rate Notes due
12 April 2010; and• A$350 million Floating Rate Notes due
12 April 2007.
Scheduled principal and interest due under theA$750 million and A$350 million Notes areguaranteed by Ambac under a financial guarantee. Asa result, Ambac is entitled to exercise all rights of thenote holders and if ETSA were to default on paymentof interest or principal on the notes, Ambac wouldcontinue to make payments of interest and principalon ETSA’s behalf as and when such payments wouldotherwise become due.
(a) Security position and subordinationrequirementsAll notes are supported directly by a guarantee fromETSA. In addition, noteholders indirectly hold thebenefit of a security over all ETSA’s assets andundertaking. This is achieved by ETSA granting acharge in favour of EUF to secure all moneys
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Table 14.5
Short-termworking capital
2006A$15 millionFacilities Agreement
Short-termworking capital
2006A$25 millionWorking Capital Facility
Stand by tocommercialpaper program
2007A$100 millionRevolving Bank LoanFacility – Westpac
A$300 million – 2015A$300 millionSourced Credit WrappedMedium Term Notes
Core debtA$750 million – 2010A$350 million – 2007A$200 million – 2007
A$1.3 billion2000 Floating RateMedium Term NoteProgram
ETSA
Use of ProceedsMaturity DateLimitFacility
Amounts of existing facilities are current as at the date of the Original Document.
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advanced pursuant to an intercompany loan made byEUF to ETSA. EUF in turn grants a security in favourof a Note Trustee, who holds the benefit of thesecurity on behalf of secured creditors, includingnoteholders.
All senior creditors also have the benefit ofsubordination deeds entered into in 2000 wherebydistributions can only be made on subordinated debtif there is no senior event of default, no payment ofSenior Debt is due and payable but unpaid andsubject to solvency tests. In addition, payments canonly be made from surplus operating cash flow (the“ETSA SOC test”). The effect of this test is thatborrowings for the purposes of “core business”reduce the availability of permitted distributions whileborrowings for “ancillary business” increasepermitted distributions. The test also effectivelyimposes a requirement to maintain cash for the next30 days of operational expenditure, capitalexpenditure, tax, senior interest. Indebtedness for“ancillary business” cannot exceed A$60 million inany financial year or A$400 million for, approximately,each 10 year period.
As discussed further below, the current intention isthat the ETSA SOC test will cease to apply on thelater of the repayment of the notes under the 2000MTN Program and the 2000 (EUR) MTN Program(discussed below), and all associated swaps areterminated (the “ETSA Security Release Date”).
(b) Covenants and Events of DefaultA change in persons beneficially owning any of theETSA partners gives rise to an event of defaultunless ETSA remains at all times at least 51% inaggregate beneficially owned by CKI (and itssubsidiaries) and/or HKE (and its subsidiaries). SparkInfrastructure does not consider that its acquisition ofan interest in the Asset Companies will result in adefault under this change of control provision.
There are various other events of default under theterms of the notes including:• payment defaults and cross defaults;• breaches of undertakings;• insolvency events or judgments or enforcement in
excess of a threshold amount;• capital reductions or buy backs;• amendments to certain key project and finance
documents relating to ETSA’s business, such asETSA’s distribution licence, or if any specifiedtransaction document becomes void orunenforceable; and
• for the wrapped notes, if an event of defaultarises under the applicable ReimbursementAgreement (discussed below).
The notes contain various covenants includinglimitations on granting additional security interestsand related party dealings for ETSA’s otherinstallations, as well as requirements as to the
disposal of assets and the nature of permittedbusiness activities.
Noteholder consent is required for waivers andamendments.
14.13.2 Reimbursement Agreement for 2000 MTN
Program
The Reimbursement Agreement between EUF, ETSAand Ambac governs the relationship between theparties in relation to the A$750 million andA$350 million Notes.
The position for this agreement is similar to thatdiscussed under the heading of “Security positionand subordination requirements” and “Covenantsand Events of Default” under paragraph 14.3.1.However, the Reimbursement Agreement also givesAmbac, as financial guarantor, some other rightsincluding making distributions to Partners subject tothe ETSA SOC test.
14.13.3 2000 (EUR) MTN Program
EUF has issued a series of MTNs, namelyA$200 million floating rate notes guaranteed byETSA due 28 April 2007.
The position in relation to these notes is substantiallysimilar to that discussed under the heading of“Security position and subordination requirements”and “Covenants and Events of Default” underparagraph 14.3.1.
14.13.4 2004 MTN Program
EUF has issued a series of Australian MTNs in July2005 being A$300 million floating rate notesguaranteed by ETSA due July 2015.
Scheduled principal and interest due under the notesare guaranteed by Financial Security Assurance Inc.(“FSA”) under a financial guarantee.
(a) Security position and subordinationrequirementsThe position in relation to these notes is similar tothat discussed under the heading of “Securityposition and subordination requirements” underparagraph 14.3.1 for the 2000 MTN Program.However, noteholders and FSA agree to release thesecurity (other than the guarantee from ETSA) on theETSA Security Release Date.
Noteholders also have the benefit of subordinationdeeds entered into in 2000 whereby distributions onsubordinated debt can only be made if there is nosenior event of default, no payment of Senior Debt isdue and payable but unpaid and subject to solvencytests. However, noteholders and FSA have waivedtheir rights in relation to the ETSA SOC test. On theETSA Security Release Date, noteholders will havethe benefit of new subordination deeds onsubstantially the same terms (that do not contain theETSA SOC Test).
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(b) Covenants and Events of DefaultThere are various events of default under the terms of thenotes including:• payment defaults and cross defaults;• breaches of undertakings;• insolvency events and enforcement against assets;• amendments to certain key project and finance documents,
or if any specified transaction document becomes void orunenforceable;
• if the distribution licence is revoked or cancelled and notreplaced; and
• if an event of default arises under the applicableReimbursement and Indemnity Agreement (discussedbelow).
The notes contain various covenants including limitations ongranting additional security interests.
14.13.5 Reimbursement and Indemnity Agreement for 2004
MTN Program
The Reimbursement and Indemnity Agreement between EUF,ETSA and FSA governs the relationship between the parties inrelation to the A$300 million Floating Rate Notes.
The position in relation to this agreement is similar to thatdiscussed under the heading of “Security position andsubordination requirements” and “Covenants and Events ofDefault” under paragraph 14.13.1 relating to the 2000 MTNProgram.
However, in accordance with standard practice, theReimbursement Agreement contains some other obligationsincluding:• limitations on indebtedness, namely that the percentage of
net total senior indebtedness at a time to total capitalisationat the calendar month-end most recently ended, cannotexceed 75%;
• distributions are restricted on events of default or certainpotential events of default;
• restrictions on ETSA’s ability to enter into transactions withrelated parties;
• certain limitations on subsidiary indebtedness; and• various standard covenants (including regarding limitations
on granting security interests, insurance, payment of taxesand asset disposals).
Additional events of default also include:• an event which gives rise to a right for DLC to terminate the
distribution network lease or land lease; and• a judgment or enforcement in excess of a threshold amount.
14.13.6 US Private Placement – US$387 million Note and
Guarantee Agreement
EUF has issued the following series of notes guaranteed byETSA:• US$192 million Series A 5.33% Guaranteed and Senior
Secured Notes due 15 October 2016; and• US$195 million 5.58% Series B Guaranteed and Senior
Secured Notes due 15 October 2019.
The position in relation to this agreement is similar to thatdiscussed under the heading of “Security position andsubordination requirements” and “Covenants and Events of
Default” under paragraph 14.3.1 regarding the Reimbursementand Indemnity Agreement for the 2000 MTN Program.
In addition, there are prepayment obligations if there is achange of control, namely if any person (other than CKI (and itssubsidiaries) and/or HKE (and its subsidiaries)) acting in concert,together with affiliates, acquires the ability to control thedecision-making process of ETSA. Spark Infrastructure does notbelieve that its acquisition of an interest in the AssetCompanies will result in a default under this change of controlprovision.
14.13.7 $60 million HSBC Cash Advance Facility
EUF has entered into a secured cash advance facility withHSBC Bank Australia Limited repayable on 25 November 2005(or such other date as agreed to by HSBC) with a commitmentof A$60 million. HSBC has the benefit of the security trust deedand therefore is a secured creditor. This facility will be replacedsoon by a A$75 million facility from CBA on similar terms with amonthly date in November 2006.
(a) Covenants and Events of DefaultThe facility contains various standard covenants (includingregarding limitations on granting security interests, arm’s-lengthdealing requirements, and asset disposals).
There are various events of default including:• payment defaults and cross defaults;• breaches of undertakings;• reduction of share capital or buy-back of shares;• material adverse change; and• if the distribution licence is revoked or cancelled and not
replaced.
In addition, CKI (and its subsidiaries) and/or HKE (and itssubsidiaries) cease to hold in aggregate at least 51% of ETSA,there is an event of default. Spark Infrastructure does notbelieve that its acquisition of an interest in the AssetCompanies will result in a default under this change of controlprovision.
EUF is currently considering refinancing this facility andincreasing the facility limit to $75 million.
14.13.8 $75 million Westpac Cash Advance Facility
EUF has entered into a secured cash advance facility withWestpac Banking Corporation repayable on 29 September 2006(or another date as agreed to by Westpac) with a commitmentof A$75 million. Westpac has the benefit of the security trustdeed and therefore is a secured creditor.
The covenant position in relation to this agreement is similar tothat discussed under the heading of “Covenants and Events ofDefault” under paragraph 14.13.7 for the $60 million HSBC CashAdvance Facility.
14.13.9 Westpac Master Lease Agreement
EUF has entered into a master lease agreement with WestpacBanking Corporation regulating rights in relation to leasedgoods, which permits leasing of up to A$26 million.
The standard terms entitle Westpac to terminate leases upon:• an event of default (being events similar to those discussed
under the heading of “Covenants and Events of Default”
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under paragraph 14.13.7 for the $60 million HSBCCash Advance Facility);
• a breach of any essential term;• distress, attachment or execution against relevant
goods; and• cancellation or disclaimer of relevant insurance
policies by insurer.
The standard terms require rent, casualty andtermination value to be adjusted in the event thatcertain tax assumptions are no longer correct(including in relation to the tax treatment of the leaseor changes in tax rates). The terms also contain otherprovision customary to these arrangements.
14.14 Summary of Senior Debt Facilities –
CitiPower
14.14.1 CitiPower A$1,000 million MTN Program
(2003 MTN)
CitiPower I has issued four series of AustralianMTNs, including:• A$100 million 5.50% domestic fixed rate notes
due 2007;• A$100 million floating rate notes due 2007;• A$175 million 5.75% domestic fixed rate notes
due 2010; and• A$300 million floating rate notes due 2013.
The principal and interest due under the 2003 MTNsare guaranteed by the CitiPower Guarantors. Theprincipal and interest due under those series of 2003MTNs which mature in 2010 and 2013 respectively isalso guaranteed by Ambac under a ReimbursementAgreement (“Wrapped 2003 MTN”).
Under the terms of the 2003 MTN program,CitiPower I and the CitiPower Guarantors haveagreed to various covenants, including:• restrictions on the ability of members of the
CitiPower group to grant any lien or other securityinterest with respect to other indebtedness;
• restrictions on the ability of members of theCitiPower group to dispose of CitiPower’s corebusiness (generally electricity distribution); and
• restrictions on the ability of members of theCitiPower group to borrow money.
The following will constitute an event of defaultunder the terms of the 2003 MTN:• payment default under the 2003 MTN;• breach of any covenant or agreement by
CitiPower or the CitiPower Guarantors under theterms of the 2003 MTN or any specifiedtransaction document;
• a monetary obligation of CitiPower I in excess ofa threshold amount remains unsatisfied orundischarged;
• CitiPower I or the CitiPower Guarantors cease orthreaten to cease to carry on a substantial part oftheir respective core businesses;
• a judgment or enforcement in excess of athreshold amount is made against CitiPower I orthe CitiPower Guarantors;
• an insolvency event occurs in respect ofCitiPower I;
• CitiPower I or the CitiPower Guarantors engagesin a capital reduction or buy back of any of itsordinary shares;
• any specified transaction document becomes voidor unenforceable;
• specified Governmental action is taken in respectof CitiPower I or the CitiPower Guarantors;
• any distribution licence is terminated and asubstitute licence not obtained which results in amaterial adverse affect; and
• an event of default under the ReimbursementAgreement.
14.14.2 Reimbursement Agreement for the
2003 MTN
The Reimbursement Agreement between CitiPowerI, the CitiPower Guarantors and Ambac governs therelationship between the parties in relation to theWrapped 2003 MTN.
CitiPower I and the CitiPower Guarantors give certainfinancial undertakings, including:• CitiPower I and the CitiPower Guarantors are
prohibited from making distributions to anyshareholder or loans or bonuses to an entitywhich is a related party unless:– the ratio of defined net earnings before
income tax, depreciation and amortisation,adjusted for capitalised operating expensesand less cash capital expenditure divided bySenior Debt interest expenses is greater than1.2 times; and
– the wrapped 2003 MTN are given an S&Prating of not less than “A–”
• the ratio of total Senior Debt to total capitalisationmust not exceed 75% of total capitalisation.
CitiPower and the CitiPower Guarantors may onlyincur indebtedness without the approval of Ambacfor capital expenditure or working capital purposes,defined ancillary business other than core business(up to a maximum of A$235 million and not morethan A$37 million per annum) or for refinancingindebtedness existing or available under facilitiesexisting on 4 February 2003. They may not borrow topay a distribution.
CitiPower must ensure that it and the CitiPowerGuarantors remain at least 51% in aggregatebeneficially owned by CKI and/or HKE. SparkInfrastructure does not believe that its acquisition ofan interest in the Asset Companies will result in adefault under this change of control provision.
The events of default under the ReimbursementAgreement are no more onerous than those underthe 2003 MTN, except that it will also be an event ofdefault if both:• the ratio of defined net earnings before income
tax, depreciation and amortisation, adjusted forcapitalised operating expenses and less cash
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capital expenditure divided by Senior Debt interest expenseis less than one times; and
• the Wrapped 2003 MTNs (disregarding the affect ofAmbac’s financial guarantee) are given an S&P rating of lessthan “A–”.
14.14.3 A$400 million MTN Program (2000 MTN)
CitiPower I has issued two series of Australian MTNs:• A$200 million 8.00% domestic fixed rate notes due 2007;
and• A$200 million floating rate notes due 2007.
The principal and interest due under the 2000 MTN isguaranteed by Ambac under a financial guarantee.
The issuer has made a representation and covenant to holdersof the 2000 MTN that it will remain wholly owned by AEPResources Inc. Under the terms of the 2000 MTN, only Ambac(and not the noteholders) may direct acceleration of the notesfor an event of default which occurs while the credit wrapremains in place. Upon the divestment by AEP Resources Incof its interest in the CitiPower group on or about August 2002,CitiPower I obtained an irrevocable “no action” statement fromAmbac that it will not take any action against CitiPower I solelybecause CitiPower I Pty Ltd ceases to be wholly owned by AEPResources Inc.
The events of default for the 2000 MTN are no more onerousthan those attached to the 2003 MTN.
14.14.4 Reimbursement Agreement for the 2000 MTN
The Reimbursement Agreement between CitiPower I, theCitiPower Guarantors and Ambac governs the relationshipbetween the parties in relation to the 2000 MTN.
CitiPower I and the CitiPower Guarantors are prohibited frommaking distributions to other CitiPower group members orservicing subordinated indebtedness unless it complies withcertain financial undertakings, including:• the ratio of defined net earnings before income tax,
depreciation and amortisation to Senior Debt interestexpenses must be greater than or equal to 1.5 times; and
• the ratio of total Senior Debt to total capitalisation must notexceed 80% of total capitalisation.
However, it will not be an event of default if CitiPower I fails tocomply with the financial undertakings described above.
CitiPower I must ensure that it and the CitiPower Guarantorsremain at least 51% in aggregate beneficially owned by CKIand/or HKE. Spark Infrastructure does not believe that itsacquisition of an interest in the Asset Companies will result in adefault under this change of control provision.
The events of default under the Reimbursement Agreement areno more materially onerous than those under the 2003 MTN.
14.14.5 Revolving Bank Loan Facility – Westpac
The Revolving Bank Loan Facility Agreement betweenCitiPower I, the CitiPower Guarantors and Westpac governs therelationship between the parties in relation to the granting offinancial accommodation by Westpac to CitiPower I.
The facility provided by Westpac under the Revolving BankLoan Facility Agreement:• is an unsecured revolving loan facility;
• has a facility limit of A$50 million;• has a maturity of five years commencing on 10 June 2009;• has an interest rate of the bank bill swap yield rate plus a
margin; and• is available for general funding requirements of CitiPower I.
The CitiPower Guarantors guarantee the obligations ofCitiPower I under the Revolving Bank Loan Facility Agreement.
CitiPower I and the CitiPower Guarantors must comply withcertain financial undertakings, including that the ratio of totalSenior Debt to total capitalisation must not exceed 75% of totalcapitalisation.
It is a review event if CitiPower I ceases to be at least 51% inaggregate beneficially owned by CKI and/or HKE. SparkInfrastructure does not believe that its acquisition of an interestin the Asset Companies will result in a review event under thischange of control provision.
The events of default under the Revolving Bank Loan FacilityAgreement are no more onerous than those under the 2003MTN.
14.14.6 Working Capital Facility – CBA
The Working Capital Facility Agreement between CitiPower I,the CitiPower Guarantors and CBA governs the relationshipbetween the parties in relation to the granting of financialaccommodation by CBA to CitiPower I.
The facility provided by CBA under the Working Capital FacilityAgreement:• is an unsecured cash advance facility;• has a facility limit of A$15 million;• has a maturity extending to 31 August 2006;• has an interest rate of a cash rate plus a margin; and• is available for short-term working capital requirements of
the CitiPower group.
The CitiPower Guarantors guarantee the obligations ofCitiPower I under the Working Capital Facility Agreement.
Under the Working Capital Facility Agreement, there is a reviewevent if CitiPower ceases to be at least 51% in aggregatebeneficially owned by CKI and/or HKE as a result of such achange in ownership there is a material adverse change toCitiPower’s credit profile including a removal or reduction in theS&P credit rating of below A– as a result of change inownership. Spark Infrastructure does not believe that itsacquisition of an interest in the Asset Companies will result in areview event under this change of control provision. Thecovenants and events of default under the Working CapitalFacility Agreement are substantially the same as those underCitiPower’s Revolving Bank Loan Facility.
14.14.7 Working Capital Facility – Citibank
The Working Capital Facility Agreement between CitiPower I,the CitiPower Guarantors and Citibank governs the relationshipbetween the parties in relation to the granting of financialaccommodation by Citibank to CitiPower I.
The facility provided by Citibank under the Working CapitalFacility Agreement has the following characteristics:• is an unsecured cash advance facility;• has a facility limit of A$15 million;• has a maturity of one year extending to 28 August 2006;
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• has an interest rate of the cash rate plus amargin; and
• is available for short-term working capitalrequirements of the CitiPower group.
The CitiPower Guarantors guarantee the obligationsof CitiPower I under the Working Capital FacilityAgreement.
Under the Working Capital Facility Agreement, thereis a review event if CitiPower ceases to be at least51% in aggregate beneficially owned by CKI and/orHKE as a result of such a change in ownership thereis a material adverse change to CitiPower’s creditprofile including a removal or reduction in the S&Pcredit rating of below A– as a result of change inownership. Spark Infrastructure does not believe thatits acquisition of an interest in the Asset Companieswill result in a review event under this change ofcontrol provision. The covenants and events ofdefault under the Working Capital Facility Agreementare substantially the same as those under theCitiPower’s Revolving Bank Loan Facility.
14.15 Summary of Senior Debt Facilities –
Powercor
14.15.1 A$600 million MTN Program (2001 MTN)
Powercor Australia, LLC has issued two series ofAustralian MTNs, including:• A$150 million floating rate notes due 2006; and• A$350 million floating rate notes due 2011
The principal and interest due under the 2001 MTNis guaranteed by the Powercor Guarantors andAmbac under a financial guarantee.
The covenants and events of default under the 2001MTN are substantially the same as those forCitiPower’s 2003 MTN.
14.15.2 Reimbursement Agreement for the A$600
million MTN
The Reimbursement Agreement between PowercorAustralia, LLC, the Powercor Guarantors and Ambacgoverns the relationship between the parties inrelation to the A$600 Notes.
Powercor Australia, LLC and the PowercorGuarantors must comply with certain financialundertakings, including:• Powercor Australia, LLC and the Powercor
Guarantors are prohibited from incurringindebtedness for the purpose of makingdistributions to any shareholder or loans orbonuses to an entity which is a related party; and
• total Senior Debt must not exceed 75% of totalcapitalisation.
Powercor Australia, LLC and the PowercorGuarantors may only incur indebtedness without theapproval of Ambac for:• capital expenditure or working capital purposes;• refinancing indebtedness existing or available
under facilities existing on 4 May 2001; and
• permitted business other than core business upto a maximum of A$350 million and not morethan A$55 million per annum.
The events of default under the ReimbursementAgreement are no more onerous than those underCitiPower’s 2003 MTN, except that it is also an eventof default if Powercor ceases to be:• 80% owned by Powercor Pty Ltd and 20%
owned by CKI/HEI Electricity Distribution Pty Ltd;or
• wholly owned by CKI/HEI Electricity DistributionPty Ltd,
unless Ambac receives an acceptable United Statestax opinion.
Also, under the Reimbursement Agreement, there isan event of default if Powercor ceases to be at least51% in aggregate beneficially owned by CKI and/orHKE. Spark Infrastructure does not believe that itsacquisition of an interest in Powercor will result in adefault under this change of control provision.
14.15.3 Rule 144A Notes
Powercor Australia, LLC has issued US$400 million6.15% fixed rate notes due in 2008 in a privateplacement pursuant to Rule 144A under the USSecurities Act.
The principal and interest due under the Rule 144ANotes is guaranteed by the Powercor Guarantors andAmbac under a financial guarantee. The financialguarantee is by Ambac in favour of the noteholdersand does not impose any obligations or restrictionson the Powercor Guarantors.
The events of default attached to the Rule 144ANotes are no more onerous than those underPowercor’s 2001 MTN.
14.15.4 A$500 million Commercial Paper Program
(A$500 million Paper)
Powercor Australia, LLC has a commercial paperprogram arranged by CBA under which it may issuecommercial paper from time to time up to anaggregate face value of A$500 million.
The terms of this arrangement are principallygoverned by a Commercial Paper DealershipAgreement between Powercor Australia, LLC, thePowercor Guarantors, CBA and certain dealers. Inaddition, the issuance of and payments due underthe A$500 million Paper is governed by an Issuingand Paying Agency Agreement between PowercorAustralia, LLC and CBA.
The principal and interest due under the A$500million Paper is guaranteed by the PowercorGuarantors under a Deed of Guarantee andIndemnity.
Under the Commercial Paper Program, there is anevent of default if Powercor ceases to be at least51% in aggregate beneficially owned by CKI and/orHKE. Spark Infrastructure does not believe that itsacquisition of an interest in Powercor will result in a
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default under this change of control provision. The terms andconditions of the agreements referred to above do not containany materially onerous covenants or events of default.
14.15.5 Revolving Bank Loan Facility – Westpac
The Revolving Bank Loan Facility Agreement betweenPowercor, Powercor Australia, LLC and Powercor AustraliaHoldings Pty Ltd and Westpac governs the relationshipbetween the parties in relation to the granting of financialaccommodation by Westpac to Powercor.
The facility provided by Westpac under the Revolving BankLoan Facility:• is an unsecured revolving loan facility;• has a facility limit of A$100 million;• has a maturity of 10 June 2007;• has an interest rate of the bank bill swap yield rate plus a
margin; and• is available for general funding requirements of Powercor.
Powercor Australia, LLC and Powercor Australia Holdings PtyLtd guarantee the obligations of Powercor under the RevolvingBank Loan Facility.
Under the Revolving Bank Loan Facility Agreement, there is areview event if Powercor ceases to be at least 51% inaggregate beneficially owned by CKI and/or HKE and as a resultof such a change in ownership there is a material adversechange to Powercor’s credit profile including a removal or areduction in the S&P credit rating of below A– as a result of achange in ownership. Spark Infrastructure does not believe thatthis offering will result in a review event under this change ofcontrol provision. The covenants and events of default under theRevolving Bank Loan Facility Agreement are substantially thesame as those under CitiPower’s Revolving Bank Loan Facility.
14.15.6 Working Capital Facility – Westpac
The Working Capital Facility Agreement between Powercor,Powercor Australia, LLC and Powercor Australia Holdings PtyLtd and Westpac governs the relationship between the partiesin relation to the granting of financial accommodation byWestpac to Powercor.
The facility provided by Westpac under the Working CapitalFacility Agreement:• is an unsecured cash advance facility;• has a facility limit of A$25 million;• has a maturity of 8 June 2006;• has an interest rate of a cash rate plus a margin; and• is available for short-term working capital requirements of
Powercor.
Powercor Australia, LLC and Powercor Australia Holdings PtyLtd guarantee the obligations of Powercor under the WorkingCapital Facility Agreement.
Under the Working Capital Facility Agreement, there is a reviewevent if Powercor ceases to be at least 51% in aggregatebeneficially owned by CKI and/or HKE and as a result of such achange in ownership there is a material adverse change toPowercor’s credit profile including a removal or a reduction inthe S&P credit rating of below A– as a result of a change inownership. Spark Infrastructure does not believe that thisoffering will result in a review event under this change ofcontrol provision. The covenants and events of default under
the Working Capital Facility Agreement are substantially thesame as those under Powercor’s Revolving Bank Loan Facility.
14.15.7 Facilities Agreement – CBA
The Facilities Agreement between Powercor, PowercorAustralia LLC and Powercor Australia Holdings Pty Ltd andCBA governs the relationship between the parties in relation tothe granting of financial accommodation by CBA to Powercor.
The facilities provided by CBA under the Facilities Agreement:• in respect of the working capital facility:
– is an unsecured cash advance facility– is available for short-term working capital requirements of
the Powercor– has an interest rate of a cash rate plus a margin
• in respect of the guarantee facility:– is an on-demand bank guarantee facility– is available for the issue of bank guarantees to support
Powercor’s obligations– has a fee calculated by reference to a margin on the
drawn commitment under the facility– have a total facility limit of A$15 million– have a maturity of 29 August 2006.
Powercor Australia, LLC and Powercor Australia Holdings PtyLtd guarantee the obligations of Powercor under the FacilitiesAgreement in favour of CBA.
The covenants and events of default under the FacilitiesAgreement are substantially the same as those underPowercor’s Revolving Bank Loan Facility.
14.16 Summary of Senior Debt Facilities –
Spark Infrastructure
Outline
Spark Infrastructure (Victoria) Pty Limited (“Borrower”) will putin place the following Senior Debt Facilities:• A$425 million Syndicated Facility, to finance the acquisition
of interests in and loans to the holding companies of theAsset Companies and to pay transaction costs; and
• A$50 million Working Capital Facility.
The Syndicated Facility has been underwritten by DeutscheBank AG and Commonwealth Bank of Australia (“CBA”), asmandated lead arrangers and underwriters. CBA will act as theAgent under the Syndicated Facility and will provide theWorking Capital Facility.
The Senior Debt Facilities will be guaranteed on a joint andseveral basis by Spark Infrastructure Holdings 1, SparkInfrastructure Holdings 2, Spark Infrastructure Holdings 3, SparkInfrastructure (SA) Pty Limited and the Responsible entity onbehalf of the Spark Infrastructure Trust (“Guarantors”). TheBorrower’s and the Guarantors’ (“Obligors”) obligations will beunsecured and unsubordinated.
Interest and fees
The Senior Debt Facilities are interest bearing. Interest iscalculated by reference to market rates and the credit rating ofthe Borrower. A commitment fee is payable on the undrawnportion of each facility, calculated daily from signing of thefacilities. In addition, underwriting fees will be payable toDeutsche Bank AG and CBA on the completion date.
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Conditions precedent
First drawdown on the Senior Debt Facilities issubject to a number of conditions precedentcustomary for facilities of this nature, including:• no change in the financial condition of the
Obligors, the Asset Companies or the holdingcompanies of the Asset Companies that couldhave a material adverse effect;
• material adverse change in the domestic orinternational capital markets which would directlyor indirectly affect the syndicated credit market;
• completion of the IPO;• confirmation by S&P that the Asset Companies’
credit ratings are no less than A- and by Moody’sInvestor Services that the Borrower is rated noless than Baa2;
• payment of all fees, costs and expenses then dueand payable to the lenders.
Representations and warranties
The Obligors will give representations and warrantieson matters customary for facilities of this nature.Representations and warranties will be repeated ondrawdown dates and rollover dates subject to agreedexceptions.
Undertakings
The Obligors will make undertakings customary forfacilities of this nature, including:• limitations on raising further indebtedness, giving
guarantee in relation to the obligations of third
parties, granting security interests, capitalreductions and disposal of assets;
• Spark Infrastructure will not declare a distributionif interest on the facilities is not paid when due orif an event of default or potential event of defaultis subsisting; and
• restrictions on the type of business or activitywhich the Obligors may carry on or invest in andpre-conditions to the Obligors acquiring newbusinesses.
Financial undertakings
The Obligors will undertake to comply with specifiedfinancial undertakings in relation to interest coverage,gearing of the Obligors and consolidated gearing ofthe Obligors and the Asset Companies. Non-compliance with the financial undertakings willconstitute an event of default.
Events of default
The lenders will be entitled to require repayment ofthe senior debt facilities if an event of default occurs.These events will be customary for facilities of thisnature and will include:
• payment default;• breach of undertakings under a finance document;• breach of financial covenants;• insolvency events;• reductions in capital other than certain permitted
capital reductions; • cross default by Obligors;• occurrence of a material adverse effect;
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Table 14.6
General working capital of theStapled Companies and theirsubsidiaries
December 2006$50 millionWorking Capital Facility
Acquisition of interests in and loansto the holding companies of theAsset Companies and to paytransaction costs
December 2008December 2010
Tranche A -$200 millionTranche B -$225 million
Syndicated Facility
PurposeMaturity DateFacility AmountFacility Name
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• misrepresentations;• change in the control of the Manager without consent of the
lenders, subject to limited exceptions;• delisting or suspension of trading of the Securities for more
than five business days for non compliance with the listingrules;
• new financial indebtedness of the holding companies of theAsset Companies, subject to limited exceptions;
• changes to the ownership structure of the holding of theObligors in the Asset Companies and holding companies ofthe Asset Companies;
• default by an Obligor under the Shareholders Agreement orthe Shareholders Agreement not being in full force andeffect;
• vitiation of material agreements;• material amendments to a constitution;• revocation of material authorisations; and• events of default relating to trust matters.Materiality thresholds and cure periods will apply to someevents of default.
Review event
A review event potentially entitling the lenders to requirerepayment of the senior debt favilities will occur if there is achange in control of the Obligors or the Responsible Entity.
Indemnity
The Obligors will indemnify the lenders against all loss, costliability and expense in connection with a default, breach ormisrepresentation by an Obligor, any break costs, any failure totake a loan requested, any action or proceedings taken by anindemnified party to enforce any right power or remedy or anystatement, conduct or omission taken in reliance on theinformation memorandum or other information provided.
14.17 Offer Management
14.17.1 Offer Management Agreement
Under the Offer Management Agreement, the Joint LeadManagers are appointed as the joint bookrunners and joint leadmanagers in relation to the Offer. Deutsche Bank is also theGlobal Coordinator in relation to the Offer. Along with the JointLead Managers, the Stapled Entities and Spark Instalment, CKIis also a party to the Offer Management Agreement.
Nothing in the Offer Management Agreement obliges any JointLead Manager or the Global Coordinator to act as anunderwriter of any Offer Securities, except to the extentrequired in settlement by the Joint Lead Managers of theInstitutional Offer allocation and any shortfall in the settlementof the Broker Firm Offer allocation.
Fees and ExpensesPursuant to the Offer Management Agreement, the StapledEntities and Spark Instalment must pay a management fee of0.2125% of the Offer proceeds to Deutsche Bank and a sellingfee equal to 2.2875% of the Offer proceeds to the Joint LeadManagers to be shared in equal proportions. The StapledEntities and Spark Instalment must also reimburse the JointLead Managers for certain out of pocket expenses and legalcosts of the Offer.
Bookbuild, pricing and allocationThe Joint Lead Managers agree to conduct the Bookbuildin accordance with the Offer timetable in the mannercontemplated in the Offer Document to determine theFinal Price.
Conditional obligationsThe obligations of the Joint Lead Managers under the OfferManagement Agreement are conditional and if any of theconditions precedent are not satisfied, one or more Joint LeadManagers may terminate its obligations. The conditions includethe following:• certain transaction documents in relation to the Offer not
being terminated or terminable or incapable of enforcement;and
• the delivery of certain documents to the Joint LeadManagers.
Listing and quotationWithin seven days after lodgement of the Australian OfferDocument, the Stapled Entities must apply for admission to theofficial list of ASX. The Stapled Entities and Spark Instalmentmust also use their reasonable endeavours to obtain officialquotation of the Instalment Receipts and the Stapled Securitieson ASX as soon as practicable after their issue.
SettlementThe Offer Management Agreement sets out the process for thesettlement of the Retail Offer and the Institutional and BrokerFirm Offers. The Stapled Entities and Spark Instalment mustensure that all the Instalment Receipts are issued in accordancewith the Offer timetable, the Offer Documents, theCorporations Act and the ASX Listing Rules. The Joint LeadManagers will support the settlement of the Institutional Offerallocation and any shortfall in settlement of the Broker FirmOffer allocation.
Representations, warranties and undertakingsThe Stapled Entities and CKI acknowledge that the Joint LeadManagers are entering the Offer Management Agreement inreliance on the representations and warranties contained in theOffer Management Agreement. The representations andwarranties of the Stapled Entities, Spark Instalment and CKI tothe Joint Lead Managers include that certain information is trueand accurate in all material respects and not misleading ordeceptive. The representations and warranties of the Joint LeadManagers to the Stapled Entities and CKI include that the JointLead Managers each hold an AFSL. Under the OfferManagement Agreement, CKI and the Stapled Entities alsomake certain undertakings to the Joint Lead Managers.
Termination EventsSummaries of the termination events under the OfferManagement Agreement are set out below:
• (Australian Offer Document): if the Australian OfferDocument fails to comply with the ASX Listing Rules orother applicable law;
• (International Offer Document) the International OfferDocument includes an untrue statement of a material fact oromits to state a material fact;
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• (unable to issue Securities): the Stapled Entitiesare prevented from allotting and issuing theSecurities within the time required by the ASXListing Rules, by ASX or ASIC;
• (ASIC Stop Order): ASIC issues or applies for astop order under or an interim order in relation tothe Australian Offer Document and the applicationis not dismissed or withdrawn within twoBusiness Days;
• (responsible entity): Spark Infrastructure RELimited seeks to retire or is removed as theresponsible entity of Spark Infrastructure Trust;
• (CKI Meeting): the necessary shareholderapprovals to permit the Offer are not received atthe CKI shareholder meeting;
• (ASX approval): approval, other than subject tocustomary conditions, by ASX for the admissionof the Stapled Entities to its official list or theofficial quotation of the Securities is refused, or isnot granted by the date of Allotment, or iswithdrawn, qualified or withheld;
• (Supplementary Offer Document): aSupplementary Offer Document is required butthe Stapled Entities fail to lodge a SupplementaryOffer Document with ASIC, or the StapledEntities issue a supplement to an OfferDocument that is not required without theconsent of the Joint Lead Managers;
• (consent): any person whose consent to theissue of an Offer Document is required withdrawssuch consent;
• (withdrawal): CKI or the Stapled Entitieswithdraw the Offer;
• (director): a director of a Stapled Entity, or anAsset Company, is charged with an indictableoffence relating to any financial or corporatematter or any regulatory body commences anypublic action against the director in his or hercapacity as a director of a Stapled Entity or thatAsset Company or is disqualified from managing acorporation;
• (market fall): the ASX200 Index:(i) during the period from completion of the
Bookbuild to the Settlement Date, closes onany two consecutive Business Days or onthe Business Day immediately prior to theSettlement Date at a level that is 10% or morebelow the level of the ASX200 Index as at theclose of trading on the Institutional OfferClosing Date (Starting Level); or
(ii) at any time to the Settlement Date, falls to alevel that is 12.5% or more below the StartingLevel;
• (information supplied): information CKI or theStapled Entities supply to the Joint LeadManagers in respect of the Offer is, or is found tobe, false or misleading or deceptive or likely tomislead or deceive each in a material respect.
Termination Events subject to materialityThe following are termination events but are subjectto a materiality test to the effect that the Joint LeadManagers may terminate if in the reasonable opinionof the Joint Lead Manager, the event:(i) has, or is likely to have a material reduction in the
level or likely level of application for InstalmentReceipts, the level or likely level of settlement ofthose applications or, if the event occurs, or theJoint Lead Managers become aware of theoccurrence of the event, after completion of theBookbuild but before the commencement ofnormal unconditional trading of the InstalmentReceipts, the price at which Instalment Receiptsare sold on ASX;
(ii) has, or is likely to have, a material adverse effectin relation to Spark Infrastructure; or
(iii) leads, or is likely to lead, to a contravention by orliability of one or more Joint Lead Manager of theCorporations Act or any other applicable law.
• (due diligence): the results of the investigationperformed under the due diligence investigationsor from the verification material or the results ofthe investigation or the verification material arefalse or misleading or deceptive or contain anomission;
• (revocation of Authorisation): any authorisationwhich is material to anything referred to in theOffer Documents or necessary to conduct thebusiness of Spark Infrastructure or SparkInstalment is repealed, revoked, terminated orexpires or is modified or amended in a mannerunacceptable to the Joint Lead Managers;
• (unauthorised alterations): a Stapled Entityalters its share capital (other than in a mannerexpressly contemplated in the Offer Documents)or its constitution or, in the case of theResponsible Entity, the Trust Constitution or NoteTrust Deed;
• (change in laws): a law is introduced into theParliament of the Commonwealth of Australia orany State or Territory of Australia;
• (compliance with regulatory requirements): acontravention by any of the Stapled Entities of itsconstitution or applicable law;
• (adverse change): there is an adverse change inthe financial position of Spark Infrastructure, orthe composition of the directors or seniormanagement of the Stapled Entities or SparkInstalment or Spark Infrastructure from thatrepresented in the Offer Documents, including:(i) any change in the earnings, future prospects
or forecasts of any of the Stapled Entities orSpark Instalment from those disclosed in theOffer Document;
(ii) any change in the nature of the businessconducted by any of the Stapled Entities orSpark Instalment; or
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(iii) the insolvency or voluntary winding up of any of theStapled Entities or any Asset Company or theappointment of any receiver, receiver and manager,liquidator or other external administrator;
• (director): a CKI director is charged with an indictableoffence relating to any financial or corporate matter;
• (failure to comply): a Stapled Entity or Spark Instalmentfails to comply with a provision of its constitution or law oran order made by or on behalf of ASIC, ASX or anygovernmental agency;
• (hostilities): there is an outbreak or escalation of hostilitiesinvolving any one or more countries including Australia, NewZealand, the United States and the United Kingdom or thedeclaration by any of these countries of a nationalemergency or war, or a major terrorist attack is perpetratedon any of those countries;
• (Credit rating downgrade): the credit rating assigned to aStapled Entity, ETSA Utilities Finance Pty Limited, PowercorAustralia LLC or CitiPower 1 Pty Limited at the date of theOMA by Standard & Poor’s or Moody’s is downgraded orwithdrawn;
• (default): the Stapled Entities or Spark Instalment or CKI arein default of any of the terms and conditions of the OMA orfail to perform or observe any other requirement binding onthem in connection with the Offer;
• (moratorium): a declaration of a general moratorium oncommercial banking activities in Australia, the UnitedKingdom, the United States or the Peoples Republic ofChina;
• (suspension): trading in all securities quoted or listed onASX, New York Stock Exchange, HKSE, the London StockExchange or Shanghai Stock Exchange is suspended orlimited in a material respect for more than one day; or
• (misrepresentation): any representation or statement by aStapled Entity or CKI in relation to the Offer is, or is found tobe, false or misleading or deceptive in a material respect.
IndemnitiesThe Stapled Entities undertake to keep indemnified and holdharmless the Joint Lead Managers against all losses incurreddirectly or indirectly in connection with the Offer or the OfferManagement Agreement. The Stapled Entities agree that noclaim may be made by them against the Joint Lead Managersprovided that the loss does not arise from any fraud, wilfulmisconduct or negligence of the Joint Lead Managers. CKIprovides a separate indemnity in respect of matters relating to,and information provided by, it and the Asset Companies.
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15.1 ASIC declarations and exemptions
ASIC has granted certain modifications of, andexemptions from, the application of certainprovisions of the Corporations Act, subject to thesatisfaction of certain conditions, in relation to thefollowing matters:
(a) AFSL reliefa modification of Part 7.6 of the Corporations Actsuch that a person who deals in or provides financialproduct advice in relation to the component of theInstalment Receipts that represents a unit in SparkInfrastructure Trust is exempted from therequirement to hold an Australian Financial ServicesLicence (AFSL) as long as the person holds an AFSLthat authorises that person to deal in, or providefinancial products or advice in relation to an interestin a managed investment scheme;
(b) Division 3 Securities and Division 4 financial products
declarations to the effect that the InstalmentReceipts are securities to which Division 3 ofPart 7.11 of the Corporations Act apply and financialproducts falling within Division 4 of Part 7.11 of theCorporations Act;
(c) “Offeror” and “issuer” reliefa modification of Chapter 6D and Part 7.9 of theCorporations Act so as to deem:• the Stapled Entities as the persons making an
offer of the Instalment Receipts (insofar as theOffer relates to an offer of an equitable interest inthe share and debenture components of theStapled Securities); and
• the Responsible Entity as the product issuer ofthe Instalment Receipts (insofar as the Offerrelates to an offer of an equitable interest in theunit component of the Stapled Securities);
(d) Financial Services Guide reliefa modification of Part 7.7 of the Corporations Act toallow the Security Trustee to combine its FinancialServices Guide with the Offer Document;
(e) Relevant interest reliefa modification of Chapter 6 and Chapter 6C of theCorporations Act such that none of the followingpersons will hold a relevant interest in the Securitiesthrough their involvement in the Instalment Receiptsstructure:• Spark Instalment;• the Security Trustee;• the Instalment Creditor (and any person who
assumes the rights and liabilities of theInstalment Creditor under the SecuritiesAdministration Deed); and
• each entity that would be deemed to have arelevant interest in the Securities through their(direct or indirect) holding in Spark Instalmentunder section 608(3) of the Corporations Act.
(f) “Standard” Stapling reliefcertain standard relief required by registeredschemes whose units are stapled, namely:• a modification of section 601GAA(a) as notionally
inserted by ASIC Class Order CO 05/26 tofacilitate the issue of Stapled Securities at marketprice and to allow the Responsible Entity toallocate a proportion of the Final Price of theStapled Securities to units in Spark InfrastructureTrust;
• a modification of section 601FC(1)(c) and601FD(1)(c) to allow the Responsible Entity tohave regard to the interests of Holders of StapledSecurities as a whole and not just their interestsas members of Spark Infrastructure Trust; and
• a modification of Part 5C.7 of the CorporationsAct to allow the Responsible Entity to givefinancial benefits out of the assets of SparkInfrastructure Trust to the other Stapled Entitiesand certain subsidiaries without Holder approvalfor as long as the Stapled Securities are stapled;
(g) Single bank account reliefa modification of section 1017E to allow SparkInfrastructure to use a single bank account for theApplication Monies to be deposited into a singlebank account and for any Application Moneys inrespect of an issue of Stapled Securitiescontemplated under this Offer Document to bedeposited in a single bank account;
(h) DRP reliefa modification of Part 6D.2 of the Corporations Act toallow distributions from the Stapled Securities to bepooled together to be reinvested under the DRP;
(i) Transfer of price of Stapled Securitiesunder DRP
a modification of section 601GA(1)(a) to allow theResponsible Entity to determine the issue or transferprice of Stapled Securities issued or transferredunder the DRP provided certain conditions are met;and
(j) Divestment of Excluded US Persons a modification of section 601FC(1)(d) to enable theResponsible Entity not to treat all Holders equally bypermitting Excluded US Persons to be divested oftheir Securities in accordance with The SparkInfrastructure Trust Constitution.
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15.2 ASX waivers and approvals
ASX has indicated that on application by the Stapled Entitiesand Spark Instalment, subject to satisfying certain prescribedconditions, it is likely to grant the following waivers from theASX Listing Rules and provide the following confirmations:
(a) Appropriateness for Listingconfirmation under ASX Listing Rule 1.1 that the structure andoperations of the Stapled Entities are appropriate for listing onthe ASX subject to certain conditions relating to theManagement Agreement and the disclosure of pre-emptiverights that exist between Spark Infrastructure, CKI andHongkong Electric Group;
(b) Quotation of Securitiesconfirmation that both Instalment Receipts and StapledSecurities can be Officially Quoted;
(c) Spread requirementsa waiver of condition 6 of ASX Listing Rule 2.5 to the extentnecessary to permit the Stapled Securities underlying theInstalment Receipts to be quoted without the required spreaduntil the Final Instalment Payment Date;
(d) Certificated sub-registersa waiver of ASX Listing Rule 8.2 to the extent necessary topermit the Stapled Securities to be held on a certificated sub-register until the Final Instalment Payment Date on thecondition that the Stapled Entities undertake to transfer theStapled Securities to an uncertificated sub-register immediatelyon payment of the Final Instalment and Instalment Interest;
(e) Listing feesa waiver of ASX Listing Rule 16.4 to the extent necessary sothat initial listing fees are payable only on the Stapled Securitiesfor which quotation is sought;
(f) Main class of securitiesconfirmation that the Instalment Receipts will be treated as themain class of securities of Spark Infrastructure, but only untilthe Final Instalment Payment Date, when the Stapled Securitieswill become the main class of securities of Spark Infrastructure;
(g) Voting and dividend arrangements for InstalmentReceiptsconfirmation that the ASX accepts the voting and dividendarrangements for the Instalment Receipts set out in theSecurities Administration Deed having regard to condition 1 ofASX Listing Rule 2.1 and ASX Listing Rules 6.1, 6.8, 6.9, 6.10.3,6.11 and 14.2;
(h) Instalment Creditor’s Reserved Interestconfirmation that the Instalment Creditor’s Reserved Interestover the Stapled Securities does not breach ASX Listing Rule6.13;
(i) Spark Instalment not to be listedconfirmation that Spark Instalment is not required to be Listedand must enter into a Quotation and Application Agreementwith the ASX;
(j) “Standard” stapling waiverscertain “standard” waivers applying to stapled transactions,namely:
• a waiver of condition 7 of ASX Listing Rule 1.1 to the extentnecessary to ensure compliance, given that while the valueof a parcel of Stapled Securities is greater than or equal to$2,000, the component parcels of shares, units, CDIs orLoan Notes may individually have a value of less than$2,000;
• a waiver of condition 8 of ASX Listing Rule 1.1 in respect ofcompliance with ASX Listing Rule 1.3 on the basis thatSpark Infrastructure as a whole will comply with the assetstest even though the Stapled Entities may not individuallysatisfy the test;
• a waiver of condition 2 of ASX Listing Rule 2.1 on the basisthat the Final Price of a Security exceeds $0.20 in cash,even if the Final Price attributable to each component share,unit, CDI or Loan Note does not exceed this amount;
• a waiver of ASX Listing Rule 8.10 to the extent necessary topermit each Stapled Entity to refuse to register a transfer ofa particular component of the Stapled Securities (whetherit’s a share, unit, CDI or Loan Note, as applicable) if notaccompanied by a corresponding transfer of all the othercomponents of the relevant Stapled Securities;
• a waiver of ASX Listing Rule 10.1 to the extent necessary toallow the transfer of substantial assets between StapledEntities and between entities wholly-owned by members ofSpark Infrastructure without shareholder approval while theStapled Securities remain stapled.
(k) Requirement to provide 3 years of financial accountsconfirmation that ASX considers the reviewed financialstatements as set out in Section 11 are sufficient for thepurposes of ASX Listing Rule 1.3.5;
(l) Announcement of estimated distribution rate on record date
a waiver or ASX Listing Rule 6.24 (clause 1 of Appendix 6A) toallow the Stapled Entities to advise the ASX of an estimateddistribution rate on the same day the record date is announcedand the actual rate as soon as it becomes known;
(m) Voting arrangements under Special Voting Sharea waiver of ASX Listing Rule 6.8 and 6.9 to the extentnecessary to facilitate the voting rights contemplated on theSpecial Voting Shares issued to the Manager, subject to certainconditions;
(n) Exercise of pre-emption rights and disposal of telecommunications assets
a waiver of ASX Listing Rules 10.1 and 11.2 to the extentnecessary to permit Spark Infrastructure to:
• dispose of or acquire assets upon the exercise of pre-emptive rights by Spark Infrastructure or CKI/HKE as set outin Section 14.7.2 and 14.7.3; and
• dispose of the Asset Companies’ telecommunicationbusinesses;
without the approval of Holders on the condition that the pre-emptive rights and the details of any such sale are disclosed;
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(o) Issue of Securities to certain partiesa waiver of ASX Listing Rules 7.1 and 10.11 to theextent necessary to permit the issue of StapledSecurities to the Manager or its nominee, in lieu ofthe payment in cash of the Base Fee and/orPerformance Fee payable under the ManagementAgreement without the approval of Holders, subjectto compliance with certain conditions;
(p) Consistency with ASX Listing Rulesconfirmation that the constitutions of each of theStapled Entities are consistent with the ASX ListingRules;
(q) Terms of Securities are appropriateconfirmation that the terms of the Securities areappropriate and equitable for the purposes ofcondition 1 of ASX Listing Rule 6.1;
(r) Stapled Securities are equity securitiesconfirmation that the Stapled Securities andInstalment Receipts are equity securities and theLoan Note component of the Stapled Securities donot constitute debt securities for the purposes of theASX Market Rules and the ASX Listing Rules;
(s) Divestment of Holders if fail to pay callconfirmation for the purpose of ASX Listing Rule6.12.3 that the ability to divest Holders of allcomponents of a Stapled Security, where a partlypaid security is stapled to an existing StapledSecurity and where such Holders fail to pay a call onthat partly paid security when due and payable, isappropriate and equitable;
(t) Divestment of Designated Foreign Holders and Excluded US Persons
confirmation for the purpose of ASX Listing Rule6.12.3 that the proposed divestment of DesignatedForeign Holders and Excluded US Persons areappropriate and equitable, subject to certainconditions;
(u) Refusal to register transfer of Stapled Securities
a waiver of ASX Listing Rules 8.10 and 8.11 to theextent necessary to allow each Stapled Entity andInstalment Co to:
- refuse to register a transfer of Securities wheresuch transfer is made to an Excluded US Person; and
- require Holders to provide a statutory declaration inconnection with the ownership restrictions ofSecurities at the time;
(v) Appendix 4D and Appendix 4Ea waiver of ASX Listing Rule 4.3A to the extentnecessary such that Spark Infrastructure will not berequired to provide the information set out inAppendix 4E in respect of the financial year ending31 December 2005 on the basis that the financialinformation set out in Section 11 is sufficient.
Spark Infrastructure will also apply to ASX for thefollowing waivers from the ASX Listing Rules andconfirmations:
(w) Waiver of Listing Rules in respect ofInstalment Receiptsa waiver of all ASX Listing Rules, other than ASXListing Rules 3.1, 3.1A and 3.1B, to the extentnecessary to allow Spark Instalments not to complywith those ASX Listing Rules in relation to mattersrelating to the Instalment Receipts which are withinthe control of Spark Instalment and which SparkInstalment will undertake to the ASX to comply withpursuant to a Quotation and Application Agreement,but only until the Final Instalment Payment Date; and
(x) Issue of Securities to certain partiesconfirmation that ASX Listing Rules 7.1 and 10.1 donot apply to the issue of Securities to the followingpersons either under, or as contemplated by, thisOffer Document:
• directors of the Stapled Entities or SparkInstalment (including their spouses, parents,children or other entities that the directorscontrol); and
• CKI and/or its related entities in relation to theissue of 9.9% of the Stapled Securities to it.
15.3 Disclosure of interests
Except as set out below and in Sections 15.4 and 10or otherwise disclosed in this Offer Document, nodirector or person providing professional or advisoryservices in connection with this Offer Document hasany interest in Spark Infrastructure, the acquisition ofany property or interests by Spark Infrastructure, orreceived any consideration for agreeing to act as adirector or in relation to the Offer.
• The Responsible Entity and each of the StapledCompanies has entered into a deed of access,insurance and indemnity with their respectivedirectors – see Section 14.3.6;
• Collectively, the independent directors will be paidnot more than $400,000 in respect of theirinvolvement in the IPO process prior to theirappointment as directors. The directors and/ortheir respective associates may apply forSecurities under the Offer.
15.4 Interests of advisors, experts and other persons
involved in the Offer
The following disclosures of interests and fees are made inrelation to the roles of advisors, experts and others involved inconnection with Spark Infrastructure and the Offer.
Deloitte Touche Tohmatsu has acted as the InvestigatingAccountant in connection with the Offer. In that capacity,Deloitte Touche Tohmatsu has produced the InvestigatingAccountants’ report, as set out in Section 12. SparkInfrastructure estimates that it will pay approximately$1,014,000 (excluding disbursements and GST) to DeloitteTouche Tohmatsu for that work.
Deloitte Touche Tohmatsu Ltd has also acted as tax advisor toSpark Infrastructure in relation to the Offer, the transactionscontemplated by this Offer Document and certain other taxissues. In that capacity, Deloitte Touche Tohmatsu Ltd hasproduced the independent taxation report included in Section12. Spark Infrastructure estimates that it will pay approximately$1,269,000 (excluding disbursements and GST) to DeloitteTouche Tohmatsu Ltd for this work.
Deloitte Corporate Finance Pty Ltd has also acted as regulatoryadvisor to Spark Infrastructure in relation to evaluating thereasonableness of the regulatory projections used in theForecasts. In that capacity, Deloitte Corporate Finance Pty Ltdhas produced the regulatory report, as set out in Section 12.Spark Infrastructure estimates that it will pay approximately$80,000 (excluding disbursements and GST) to DeloitteCorporate Finance Pty Ltd for that work.
Deloitte Touche Tohmatsu has also reviewed the directors’forecast as set out in Section 12. Spark Infrastructureestimates that it will pay $584,000 to Deloitte Touche Tohmatsufor that work.
Deloitte Touche Tohmatsu has also undertaken certainagreed-upon procedures in respect of the financial models usedto produce the Forecasts. Spark Infrastructure estimates that itwill pay approximately $303,000 to Deloitte Touche Tohmatsufor that work.
Mallesons Stephen Jaques has acted as Australian legal adviserto Spark Infrastructure in relation to the arrangements for itsacquisition of an interest in the Asset Companies, thepreparation of various material contracts, the conduct of duediligence enquiries and other arrangements for the IPO.Mallesons Stephen Jaques has also prepared the legal reportfor superannuation investors included in Section 12. SparkInfrastructure estimates that it will pay approximately$3.25 million (excluding disbursements and GST) to MallesonsStephen Jaques for that work. Further amounts may be paid toMallesons Stephen Jaques in relation to other matters relatingto this Offer in accordance with its normal time based charges.
Deutsche Bank has been appointed as the Global Co-ordinator,Joint Bookrunner and Joint Lead Manager to the Offer by SparkInfrastructure. Deutsche Bank has acted as financial adviser toCKI in relation to the sale of an interest in the Asset Companiesby CKI to Spark Infrastructure. Deutsche Bank has beenappointed as Joint Lead Arranger and Underwriter in relation tothe Senior Debt to be provided to Spark Infrastructure inconnection with the acquisition of an interest in the AssetCompanies. Deutsche Bank has been appointed to provide 50%of hedging products provided in connection with the Senior
Debt. Deutsche Bank also guarantees the payment of thepurchase price by Select Access Investments (No. 1) Limited toacquire the rights of Instalment Creditor in relation to theInstalment Purchase Arrangements. See Section 10 for detailsof amounts to be paid to Deutsche Bank.
Deutsche Bank, Citigroup Global Markets Australia Pty Limitedand Merrill Lynch International (Australia) Limited have agreedto act as Joint Bookrunners and Joint Lead Managers,managing the Offer pursuant to the Offer ManagementAgreement (see Section 14 for a summary). SparkInfrastructure estimates that it will pay the Joint Lead Managersfor these services the fees described in Sections 10.1 and14.17.11. The Joint Lead Managers will pay any commissionsand fees payable to any Co-Managers or Brokers appointed bythem. Spark Infrastructure will reimburse the Joint LeadManagers for the reasonable costs, charges and expenses ofand incidental to the Offer.
15.5 Expenses of the Offer
The total estimated costs of the Offer, including advisory, legal,accounting, tax, listing and administrative fees, printing,advertising and other expenses relating to the Offer, arecurrently estimated to be approximately $23.3 million. SparkInfrastructure is bearing all expenses of the Offer and the Offerrelated transactions.
15.6 Consents and disclaimers
Deloitte Touche Tohmatsu has given, and has not, before thelodgement of this Offer Document with ASIC, withdrawn itswritten consent to the inclusion of the InvestigatingAccountant’s report in the form and context in which it appears.
Deloitte Touche Tohmatsu Ltd has given, and has not, beforethe lodgement of this Offer Document with ASIC, withdrawn itswritten consent to the inclusion of the independent taxationreport in the form and context in which it appears.
Deloitte Corporate Finance Pty Limited has given, and has not,before the lodgement of this Offer Document with ASIC,withdrawn its written consent to the inclusion of the regulatoryreport in the form and context in which it appears.
Deloitte Touche Tomatsu has given, and has not, beforelodgement of this Offer Document with ASIC, withdrawn itswritten consent to the inclusion of its review reports in theform and context in which they appear in the appendix.
Mallesons Stephen Jaques has given, and has not, before thelodgement of this Offer Document with ASIC, withdrawn itswritten consent to the inclusion of its legal report forsuperannuation investors in the form and context in which itappears in this Offer Document and to being named asAustralian legal adviser to Spark Infrastructure.
Deutsche Bank AG, Citigroup Global Markets Australia PtyLimited and Merrill Lynch International (Australia) Limited haveeach given, and have not, before the lodgement of this OfferDocument with ASIC, withdrawn their written consent to theinclusion of their names in the form and context in which theyappear in this Offer Document.
S&P has given, and has not, before the lodgement of this OfferDocument with ASIC, withdrawn its written consent to theinclusion of the credit ratings in the form and context in whichthey appear in this Offer Document.
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CitiPower and Powercor have given, and have not,before the lodgement of this Offer Document withASIC, withdrawn their written consent to theinclusion of statements and information attributed tothem in the form and context in which they appear inthe Offer Document.
ETSA has given, and has not, before the lodgementof this Offer Document with ASIC, withdrawn itswritten consent to the inclusion of statements andinformation attributed to them in the form andcontext in which they appear in the Offer Document.
Australian Executor Trustees has given, and has notbefore the lodgement of this Offer Document withASIC, withdrawn its written consent to the inclusionof its Financial Services Guide in the form andcontext in which it appears and to being named asSecurity Trustee and Note Trustee in this OfferDocument.
None of these parties referred to above haveauthorised or caused the issue of this OfferDocument or made any statement that is included inthe Offer Document or any statement on which astatement in the Offer Document is based, except asstated above. Other than where they are specificallyreferred to, each of these parties expressly disclaimsand takes no responsibility for any statements in, oromissions from, this Offer Document. This applies tothe maximum extent permitted by law and does notapply to any matter and to the extent to whichconsent is given above.
15.7 Complaints
The Responsible Entity has procedures in place toproperly consider and deal with any complaintsreceived in accordance with the Spark InfrastructureTrust Constitution.
The Responsible Entity will acknowledge acomplaint, investigate it and decide what actionneeds to be taken. The Responsible Entity will notifya complainant of its decision, together with anyremedies that are available or other avenues ofappeal.
If you have a complaint in relation to SparkInfrastructure Trust, then please contact theCompany Secretary of the Responsible Entity atLevel 19, 83 Clarence Street, Sydney, NSW 2000 orwrite to the Responsible Entity at the contact detailsshown in the Corporate Directory. The ResponsibleEntity will use reasonable endeavours to deal withand resolve any complaint within a reasonable time.
If your complaint is not resolved within 45 days, youmay have the right to complain to the FinancialIndustry Complaints Service Limited (FICS) at POBox 579, Collins Street, West Melbourne, Victoria,3007, Australia or by calling 1300 78 0808. ASIC alsohas a toll-free infoline – 1300 300 630 to obtaininformation about your rights.
15.8 Reporting and disclosure obligations
On listing, the Stapled Securities will be quoted ED(“Enhanced Disclosure”) securities and the StapledEntities will be disclosing entities for the purposes ofthe Corporations Act. As such, the Stapled Entitieswill be subject to regular reporting and disclosureobligations under the Corporations Act and afteradmission to the official list of the ASX, the ASXListing Rules. In addition, Spark Instalment will enterinto a Quotation and Application Agreement with theASX in which Spark Instalment will agree to complywith certain ASX Listing Rules as if it were a listedentity while the Instalment Receipts are on issue.These obligations require the Stapled Entities and/orSpark Instalment to notify ASX of information andspecified events and matters as they arise, for thepurposes of ASX making that information available tothe stock market conducted by ASX. In particular, theStapled Entities and/or Spark Instalment have anobligation under the ASX Listing Rules (subject tocertain limited exceptions), to notify ASXimmediately of any information of which the StapledEntities and/or Spark Instalment are or becomeaware concerning the Stapled Entities and/or SparkInstalment which a reasonable person would expectto have a material effect on the price or value ofSecurities. The Stapled Entities will also be requiredto prepare and lodge with ASIC both yearly and half-yearly financial statements accompanied by adirectors’ statement and report, and an audit reviewreport. Copies of documents lodged with ASIC maybe obtained from, or inspected at, an office of ASIC.
15.9 Bahamas law issues
Spark Infrastructure Company 3 is incorporated inThe Bahamas and is therefore subject to the law ofThe Bahamas. This Section outlines some aspectsof Bahamian law relevant to the operation of SparkInfrastructure Company 3.
15.9.1 “Winding up rules” and bankruptcy
Pursuant to the IBC Act, Spark InfrastructureCompany 3 may voluntarily commence winding upand dissolution procedures by a resolution ofmembers or by a resolution of directors incircumstances where it has previously issued shares.
Sections 155 and 156 of the IBC Act set out thepriorities for the payment of debts and the approvalof liquidation schemes on the winding up of acompany. For example, all rates, taxes, assessmentsand wages rank equally in relation to each other andare to be paid in priority to all other debts. If theassets of the company available for payment ofgeneral creditors are insufficient to satisfy the debtsof the company, the debts will be paid in priority toany claims made by debenture holders in thecompany under any floating charge created by thecompany and will be paid out of any property subjectto that charge. The liquidators may, with approval ofthe court, make arrangements and compromiseswith creditors.
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The Bahamian Bankruptcy Act is by virtue of Section 154 of theIBC Act also relevant to any winding up of Spark InfrastructureCompany 3 with regard to the respective rights of secured andunsecured creditors and to debts that may prove in a windingup. Demands in the nature of unliquidated damages, arisingotherwise than by reason of a contract or promise, shall not beprovable in the winding up of Spark Infrastructure Company 3and no person who has notice of commencement of windingup of Spark Infrastructure Company 3 shall prove for any debtor liability contracted by Spark Infrastructure Company 3subsequently to the date of his so having notice. Except for theabove, all debts and liabilities, present or future, certain orcontingent, to which Spark Infrastructure Company 3 is subjectat the date of the the commencement of winding up shall bedeemed to be debts provable in the winding up. Further, wherethere have been mutual credits, mutual debts or other mutualdealings between Spark Infrastructure Company 3 and anyother person proving or claiming to prove a debt in the windingup, an account shall be taken of what is due from one party tothe other, in respect of such mutual dealings, and the sum duefrom one party shall be set off against any sum due from theother party, and the balance of such account, and no more, shallbe claimed or paid on either side respectively.
Stapling and redemptionBahamian law does not directly regulate Stapled Securities.Accordingly, provided the stapling of the Securities is done inaccordance with the Spark Infrastructure Company 3Constitution, the IBC Act and Bahamian taxation laws, thestapling of the securities will be permissible under Bahamian law.
Accordingly, the issue of shares by Spark InfrastructureCompany 3 will be pursuant to the power, and at the discretionof, the directors of Spark Infrastructure Company 3.
Redemptions are governed by sections 13(k), 32, and Part VII ofthe IBC Act. A company may (subject to its Memorandum orArticles) purchase, redeem or otherwise acquire and hold itsown shares.
The directors must determine that immediately after thepurchase, redemption or acquisition of its own shares thecompany will be able to satisfy its liabilities as they becomedue, and the realisable value of the assets of the companymust not be less than the sum of its total liabilities, other thandeferred taxes. (In the absence of fraud, the decision of thedirectors as to the value of the assets is conclusive unless aquestion of law is involved).
The directors are not required to make a determination as setout above where shares are purchased, redeemed or acquired:• pursuant to a right of a member to have their shares
redeemed or exchanged for money or other property of thecompany;
• in exchange for newly issued shares in the company;• by virtue of the provisions dealing with redemption of
minority shares (section 80 of the Act); and• pursuant to a court order.
Spark Infrastructure Company 3 is not by virtue of its governinglaw subject to the sections in Chapter 6 of the Corporations Actdealing with the acquisition of shares (including substantialholdings and takeovers). There is no takeover bid legislation inThe Bahamas.
However, in respect of any redemption of minority holdings:• subject to the terms of the Memorandum and Articles of
Association of Spark Infrastructure Company 3 redemption ofminority shares is permitted in certain prescribedcircumstances. Pursuant to section 81 of the IBC Act where,in the case of merger or consolidation under the IBC Act, themembers holding at least 90% of votes of outstandingshares entitled to vote (or 90% of votes of shares of eachclass/series entitled to vote as class/series) may give thecompany written instruction to redeem remaining shares; and
• the company must then redeem shares regardless ofwhether they are by their terms redeemable. The companymust give written notice to members whose shares are tobe redeemed.
The Spark Infrastructure Company 3 Constitution expresslyprovides that takeovers and compulsory acquisition of shares betreated in a manner consistent with Australian law.
15.9.2 Bahamian Taxation
Under Bahamian law neither Spark Infrastructure Company 3nor its members who are non-residents for exchange controlpurposes shall be subject to any business licence fee, incometax, corporation tax, capital gains tax or any other tax on incomeor distributions and shall not be subject to any estateinheritance succession or gift tax rate duty levy or other chargepayable in The Bahamas with respect to any share debtobligation or other security of the company. This position shallexist for a period of twenty years from the date ofincorporation. Spark Infrastructure Company 3 is also exemptfrom the provisions of the Exchange Control Regulations Act ofthe Commonwealth of The Bahamas.
15.9.3 Meetings
The IBC Act provides that the directors of Spark InfrastructureCompany 3 will give not less than 7 days notice of meetings ofmembers. The inadvertent failure of the directors to give noticeof a meeting to a member or the fact that a member has notreceived the notice does not invalidate the meeting. Membersparticipating in a meeting by electronic means must be able torecognise each other.
15.9.4 Appointment of Alternate Director
An alternate director must be appointed by a director by awritten instrument.
15.9.5 Payment of dividends
Dividends shall only be declared and paid if the directorsdetermine that immediately after the payment of the dividend:(a) the company will be able to satisfy its liabilities as they
become due in the ordinary course of its business; and(b) the realisable value of the assets of the company will not be
less than the sum of its total liabilities, other than deferredtaxes, as shown in the books of account, and its issued andoutstanding share capital;
and in the absence of fraud, the decision of the directors as tothe realisable value of the assets of the company is conclusiveunless a question of law is involved.
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15.9.6 Transfer of shares
Under the IBC Act, Spark Infrastructure Company 3will not be required to treat a transferee of aregistered share in the company as a member untilthe transferee’s name has been entered in the shareregister.
15.10 CDIs
15.10.1 Introduction
CDIs are units of beneficial ownership in foreignsecurities. Legal title to those securities is held bythe Depositary Nominee.
All Securities Holders will initially hold the SparkInfrastructure Company 3 component of their StapledSecurities in the form of CDIs. With the exceptionof voting arrangements, CDI holders have the samerights as holders whose securities are legallyregistered in their own name.
A summary of the rights and entitlements of CDIholders is set out below. Further information aboutCDIs is available from the Registry, CHESS or anystockbroker.
15.10.2 Ratio of CDIs to Spark Infrastructure
Company 3 shares
Each CDI will represent one underlying SparkInfrastructure Company 3 share.
15.10.3 Voting
CDI holders cannot vote personally at a meeting ofSpark Infrastructure Company 3 security holders.However, CDI holders will receive notice of securityholder meetings and can vote by way of proxy. TheASTC Settlement Rules require Spark InfrastructureCompany 3 to include in a notice of any meeting ofshareholders a proxy form permitting a CDI holder todirect the Depositary Nominee, as legal owner of theSpark Infrastructure Company 3 shares, to cast proxyvotes in a particular manner. The instruction formmust be completed and returned to the Registryprior to a record date fixed for the purpose andnotified to CDI holders in the voting instructionsincluded in a notice of meeting. Spark InfrastructureCompany 3 is obliged to collect and process thesedirections. The Depositary Nominee is required tovote in accordance with the instructions receivedfrom CDI holders and will appoint two proxies tovote the net position representing all instructionsreceived from CDI holders (one indicating thenumber in favour of the resolution described in theproxy, and the other indicating the number against).If the constitution of Spark Infrastructure Company 3only allows one proxy to be appointed, the proxymust vote the net position representing allinstructions received from CDI holders.
15.10.4 Conversion of CDIs to Spark
Infrastructure Company 3 shares
Holders of Securities can choose to have the CDIcomponent of their Stapled Securities converted to adirect holding of Spark Infrastructure Company 3shares. However, if they do so, they will no longerbe able to trade their Securities on ASX.
Generally, if a holder of CDIs wishes to convert toholding certificated shares they could do so at anytime by, in the case of issuer sponsored CDIs,notifying the Registry, or in the case of CHESSsponsored CDIs, notifying the CHESS sponsoringparticipant (in most cases, a stockbroker).
15.10.5 Dividends and other shareholder
entitlements
Spark Infrastructure Company 3 is required to treatholders of CDIs in respect of dividends and otherentitlements as if they were the holders of theunderlying Spark Infrastructure Company 3 shares.
CDIs have all the direct economic benefits of legalownership (such as the right to receive dividends,rights issues and bonus issues) to which holders ofSpark Infrastructure Company 3 shares are entitled.
15.10.6 Takeovers
If a takeover bid is made in respect of any of theSpark Infrastructure Company 3 shares of whichthe Depositary Nominee is the registered holder,the Depositary Nominee is prohibited from acceptingthe offer made under the takeover bid except to theextent that acceptance is authorised by the CDIholders in accordance with the ASTC SettlementRules. The Depositary Nominee must accept atakeover offer if a CDI holder instructs it to do so.
15.10.7 Other rights
As CDI holders will not appear on the Register aslegal holders of Spark Infrastructure Company 3shares, any other right conferred on CDI holders mayonly be exercised by means of them instructing theDepositary Nominee.
15.10.8 Fees
It is expected that a CDI holder will not incur anyadditional fees or charges as a result of holding CDIsrather than Spark Infrastructure Company 3 shares.
15.10.9 Trading
Holders of Securities comprising a CDI componentwill be transferring beneficial title to SparkInfrastructure Company 3 shares rather than legaltitle. The transfer will be settled electronically bydelivery of the relevant CDI holding through CHESS,thereby avoiding the need to effect settlement bythe physical delivery of certificates.
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15.11 Spark Infrastructure Trademark
Spark Infrastructure Company 1 has applied to register the“Spark Infrastructure” trademark which, if granted, will belicensed to the other Stapled Entities and other users ofthat name.
15.12 Directors’ statement
Each director of the Responsible Entity, the Stapled Companiesand Spark Instalment has given, and not withdrawn, theirconsent to the lodgement of this Offer Document with ASIC.
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glossary
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Unless the contrary intention appears, a reference in this Offer Document to the singular includes the plural andvice versa.
Term Definition
ACCC Australian Competition and Consumer Commission
Accession Deed The deed of that name between each Stapled Entity and:• any new responsible entity; or• any issuer of a New Attached Security,by which that person accedes to the Co-operation Deed
AEMC Australian Energy Market Commission
AER Australian Energy Regulator, a Federal regulatory body with responsibility formonitoring and regulating the wholesale electricity market (including enforcing theNE Rules and economic regulation of electricity transmission networks)
AFSL Australian Financial Services Licence
AGAAP Australian Generally Accepted Accounting Principles
A-IFRS Australian equivalents to International Financial Reporting Standards
Allotment Allotment of Securities pursuant to this Offer
Appeal Panel An appeal panel appointed under the Essential Services Commission Act 2001 (Vic)to hear appeals from ESC determinations
Applicant A person who submits a valid Application Form under this Offer Document
Application An application to purchase Securities under this Offer Document
Application Form An application form (including a paper copy of an electronic form) attached to oraccompanying this Offer Document (including the electronic form of this OfferDocument) pursuant to which Investors may apply for Securities
Application Monies Monies received from Investors in respect of their Applications for Securities
ASIC Australian Securities and Investments Commission or any replacement orsuccessor authority
Asset Companies Means CitiPower, Powercor and ETSA
Asset Company The agreements entitled:Agreements • “CHEDHA Holdings Shareholders Agreement” between CKI, Spark
Infrastructure Company 1, HKE, Chistar, Sigerson, CHEDHA and SparkInfrastructure (Victoria) Limited;
• “ETSA Partner Share Dealing Agreement” between Spark Infrastructure (SA)Limited, Chistar and Sigerson;
• “ETSA Partnership Amendment Agreement” between the ETSA Partners andthe ETSA Manager; and
• “OpCo Shareholders Amendment Agreement” between the ETSA Partners,all dated prior to the date of this Offer Document
Asset Group The 49% interest in CHEDHA and the 49% interest in ETSA to be acquired bySpark Infrastructure
ASTC ASX Settlement and Transfer Corporation Pty Limited (ABN 49 008 504 532) as theoperator of the settlement facility under the ASTC Settlement Rules
ASTC Settlement Rules The operating rules of the settlement facility provided by ASTC
ASX Australian Stock Exchange Limited (ABN 98 008 624 691) or the market operatedby it, as the context requires
ASX Listing Rules The ASX Listing Rules and any other rules of ASX which are applicable while theStapled Entities are admitted to the official list of ASX, each as amended orreplaced from time to time, except to the extent of any express written waiverby ASX
ATO Australian Taxation Office
Audit and Risk A committee reporting to the board of the Responsible Entity and the Stapled Management Committee Companies in relation to the matters described in Section 8.5.4.
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Australian Institutional A person who is a sophisticated or professional investor within the meaning of sections 708(8) orInvestor 708(11) of the Corporations Act and a wholesale client within the meaning of section 761G of the
Corporations Act
Base Fee Quarterly fee paid to the Manager pursuant to the Management Agreement
Benchmark Index S&P/ASX 200 Industrial Accumulation Index
Benchmark Return The relative movement in the Benchmark Index over a given period
Bookbuild The process to be conducted by the Joint Lead Managers to determine the Final Price where AustralianInstitutional Investors and certain International Institutional Investors will be invited to lodge bids forStapled Securities at a price within or outside the Bookbuild Range
Bookbuild Range $1.80 to $2.00 per Stapled Security
Broker Firm Offer The Offer of Stapled Securities to Australian resident Investors who have received a firm allocation ofStapled Securities from a Joint Lead Manager or Co-Manager
Business Day Has the meaning given to it in the ASX Listing Rules
C&P Intermediaries CKI Power Development Limited, CKI Power Distribution Limited, CKI/HEI Power Holdings Limited, HEIPower Development Limited and HEI Power Distribution Limited
CBA Commonwealth Bank of Australia (ABN 48 123 123 124)
CBD Central business district
CDI CHESS Depositary Interest as that term is defined in the ASTC Settlement Rules, where the principalfinancial product (within the meaning of those rules) is a share in Spark Infrastructure Company III
CitiPower Guarantors CitiPower I Pty Limited (ABN 23 085 166 589) and CitiPower II Pty Limited (ABN 85 085 166 409)trading as Australia’s Energy Partnership, CitiPower II Pty Limited (ABN 85085 166409), Marregon (No.2) Pty Limited (ABN 19 083 953 575), Marregon Pty Limited (ABN 97 085 210 117) and CitiPower in both its personal capacity and as trustee of the CitiPower Trust
CKI Cheung Kong Infrastructure Holdings Limited (incorporated in Bermuda with limited liability), the sharesof which are listed on the Main Board of the Stock Exchange of Hong Kong Limited (Hong Kong StockCode: 1038)
Compliance Committee A committee reporting to the board of the Responsible Entity in relation to the matters described inSection 8.5.4
Compliance Plan The compliance plan of Spark Infrastructure Trust, as required under the Corporations Act
Constituent Documents The constituent documents of a Stapled Entity (at the date of this Offer Document includes the SparkInfrastructure Trust Constitution, the Stapled Company Constitutions and the Note Trust Deed in respectof the Loan Note)
Co-operation Deed The deed of that name between each Stapled Entity dated prior to the date of this Offer Document as amended from time to time
Corporations Act The Corporations Act 2001 (Cth) as amended from time to time
CPI The annual percentage change in the Consumer Price Index (eight capital cities all groups), catalogue no.6401.0, published by the Australian Bureau of Statistics form March in the previous year to March inthe current year
CPI-X CPI-X means the method of determining adjustments by using CPI adjusted by a factor determinedby the ESC or ESCOSA
DAL Deutsche Australia Limited (ABN 37 006 385 593)
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DAML Deutsche Asset Management (Australia) Limited (ABN 026 098 896)
Designated Foreign Holder A Holder whose address in the register is a place outside Australia and isdesignated as a Designated Foreign Holder by Spark Infrastructure
Deutsche Bank Deutsche Bank AG (ABN 13 064 165 162)
Deutsche Bank Group Deutsche Bank and its Related Bodies Corporate
DLC Distribution Lessor Corporation – a subsidiary of the Treasurer of South Australiaestablished under the Public Corporations (Distribution Lessor Corporation)Regulations 1999 (SA) which has an agreement to lease the distribution networkand land for 200 years to ETSA
DRP Distribution Reinvestment Plan
DUoS Distribution use of system
EBA Enterprise Bargaining Agreement
EBITDA Earnings before interest, tax, depreciation and amortisation
Enterprise Value The market capitalisation of Spark Infrastructure, together with the aggregate netoutstanding amount of any external borrowings of Spark Infrastructure and thevalue of any equity, debt or hybrid instrument issued by Spark Infrastructure. SeeSection 10.3 for further details
EPO Electricity Pricing Order
ESC Victorian Essential Services Commission
ESCOSA Essential Services Commission of South Australia
ETSA Partners CKI Utilities Development Limited, CKI Utilities Holdings Limited, CKI/HEIUtilities Distribution Limited, HEI Utilities Development Limited and HEI UtilitiesHoldings Limited
Excluded US Person An Investor whom Spark Infrastructure has determined is a US Person, who is notboth a QIB and a QP
Final Instalment Equal to 30% of the Final Price and payable on the Final Instalment Payment Date
Final Price The price paid for a Stapled Security comprising either, in respect of RetailInvestors, the Retail First Instalment (as adjusted in accordance with Section 3.2)and the Retail Final Instalment or, in respect of Institutional Investors, theInstitutional First Instalment and the Institutional Final Instalment
Final Instalment The date on which the Instalment Interest and Final Instalment is to be paid,Payment Date expected to be 15 March 2007, but which may be earlier in the limited
circumstances described in Section 13.5
Final Instalment Record Date The date for determining the Holders of Instalment Receipts who have anobligation to pay the Final Instalment and Instalment Interest. The Final InstalmentRecord Date is expected to be 1 March 2007 but may be earlier in certain limitedcircumstances, if the Final Instalment Payment Date is accelerated
Financial Information The pro forma historical and forecast financial information in relation to SparkInfrastructure and the Asset Group
Financial Services Agreement between Spark Infrastructure and Deutsche Bank in relation to the Agreement provision of investment banking services to Spark Infrastructure
Financial Industry Financial Industry Complaints Service Limited, www.fics.asn.au or call 1300 780 808Complaint Services
First Instalment The Retail First Instalment or the Institutional First Instalment, as applicable
Forecast Information Has the meaning given in Section 11
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Forecast Period Period from Issue Date until 31 December 2006
Foreign Member Persons registered as Holders of Stapled Securities whose address on the Register is in a place otherthan Australia, and such other jurisdictions (if any) as the Stapled Entities may determine
FY2006 Financial year ended 31 December 2006
FY2007 Financial year ended 31 December 2007
General Public Offer The Offer of Securities to Retail Investors other than those applying under the Broker Firm Offer
GST The Goods and Services Tax defined in the A New Tax System (Goods and Services Tax) Act 1999 (Cth)
HIN A Holder Identification Number allocated by a stockbroking firm when the purchaser of financialproducts nominates them as a sponsor in CHESS
HKE Hongkong Electric Holdings Limited a company incorporated in Hong Kong with limited liability, theshares of which are listed on the Main Board of the Stock Exchange of Hong Kong Limited (Hong KongStock Code: 006)
Holder A holder of Stapled Securities or where Instalment Receipts have been issued in respect of any StapledSecurities, the holder of those Instalment Receipts
Hongkong Electric Group Hongkong Electric Holdings Limited and its Related Bodies Corporate
IBC Act The International Business Companies Act 2000 of the Commonwealth of The Bahamas
ICAA Institute of Chartered Accountants in Australia
Implementation Deed Between CKI, Chistar, CKI/HEI Electricity Assignment Limited, Deutsche Australia Limited, UtilitiesManagement Pty Limited, Cheung Kong Infrastructure Finance (Australia) Pty Limited, CKI TransmissionFinance (Australia) Pty Limited, CKI Distribution Finance (Australia) Pty Limited, the Responsible Entity,the Manager, Spark Infrastructure Company 1, Spark Infrastructure Company 2, Spark InfrastructureCompany 3, CKI Utilities Development Limited, CKI Utilities Holdings Limited, HEI Utilities HoldingsLimited, CKI/HEI Utilities Distribution Limited, CKI Power Development Limited, CKI Power DistributionLimited, CKI/HEI Power Holdings Limited, HEI Power Distribution Limited, CHEDHA Holdings PtyLimited, CKI Spark Holdings No. One Limited, CKI Spark Holdings No. Two Limited, Spark Infrastructure(Victoria) Pty Limited, Spark Infrastructure (SA) Pty Limited, CKI/HEI Electricity Distribution Pty Limited,CKI/HEI Electricity Distribution (No 2) Pty Limited, CKI/HEI Electricity Distribution Holdings (Australia) PtyLimited, Powercor Australia LLC, Powercor Pty Limited, Powercor Australia Limited, Powercor AustraliaHoldings Pty Limited, CitiPower I Pty Limited, Marregon (No. 2) Pty Limited, CitiPower Pty (as trustee ofthe CitiPower Trust) and Australia’s Energy Partnership
Instalment Creditor Spark Instalment initially and, following the assignment of Spark Instalment’s rights as InstalmentCreditor to SELECT ACCESS Investments (No. 1) Limited (as described in Section 14.15.11), theInstalment Credit will be SELECT ACCESS Investments (No1) Limited
Instalment Interest Interest which is payable on the amount of the Final Instalment at the Instalment Interest Rate asdescribed in Section 1.4.4
Instalment Interest Rate The rate to be determined after completion of the Bookbuild by reference to the Market Rate at thattime plus the Margin
Instalment Purchase The arrangements to allow Investors to obtain a beneficial interest in Stapled Securities by paying the Arrangements Final Price in two instalments and on other terms and conditions
Instalment Receipt Receipts issued by Spark Instalment to Holders recognising their beneficial interest in Stapled Securitiesand their obligation to pay the Final Instalment and Instalment Interest on the Final InstalmentPayment Date
Institutional Final The lower of $0.60 per Security and 30% of the Final Price determined under the BookbuildInstalment
Institutional First 70% of the lower of $2.00 and the Final Price determined under the Bookbuild plus, if the Final Price isInstalment higher than $2.00, the difference between $2.00 and the Final Price
Institutional Investor An Australian Institutional Investor or an International Institutional Investor
Institutional Offer That part of the Offer which is not the Retail Offer
International Institutional An investor invited to participate in the Institutional Offer by the Joint Lead Managers and who is notInvestor an Australian Institutional Investor
International Offer The offer document pursuant to which the Offer is made to International Institutional InvestorsDocument
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Investor A potential purchaser of Securities under this Offer or someone who purchasesSecurities under this Offer as the context requires
IPO Initial public offering of the Securities to Investors
Issue Date The date of issue of the Securities
Joint Lead Managers Deutsche Bank, Citigroup Global Markets Australia Pty Limited and Merrill LynchInternational (Australia) Limited
Joint Venture Shareholders Agreement between CKI, CKI Spark Holdings, No. Three Limited, DeutscheAgreement Australia Limited and CKI RREEF JV in relation to CKI RREEF, JV’s ownership of
the Manager, the Responsible Entity and Spark Instalment
Land Lease Distribution network land lease dated 28 January 2000 between DLC and ETSA
Lease Either of the Land Lease and Network Lease
Loan Notes The loan notes forming part of the Stapled Securities and which are issued by theResponsible Entity in its capacity as responsible entity of Spark Infrastructure Trustpursuant to the Offer, unsecured for the purposes of section 283BH of theCorporations Act and subordinated to all secured and unsecured creditors of theSpark Infrastructure Trust for all amounts
Management Agreement Agreement between the Manager and the Stapled Entities dated on or about thedate of the Original Document
Management Fees The fees payable to the Manager pursuant to the Management Agreement
Market Rate The rate (expressed as a yield per cent per annum to 3 decimal places),determined by Deutsche Bank AG, Sydney Branch on the basis of the arithmeticlinear interpolation to 15 months, between the 1 year and 2 year mid ratesdisplayed on Reuters page IRSW10AM at or about 10.00am (Sydney time) on thedate following completion of the Bookbuild or if for any reason either one of thoserates is not displayed for the relevant term or Deutsche Bank AG, Sydney Branchdetermines that there is manifest error in a published rate, then Market Rate willbe the rate determined by Deutsche Bank, AG, Sydney Branch in good faith onthe basis of arithmetic linear interpolation to 15 months, between the 1 year and2 year market swap mid rates at or about that time on that date.
OECD Organisation for Economic Co-operation and Development
Offer The offer under the Offer document to purchase Stapled Securities payable intwo equal instalments, via the Instalment Receipt mechanism
Offer Document This replacement prospectus and new product disclosure statement dated18 November 2005
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Offer Management Agreement between the Joint Lead Managers, the Stapled Entities and CKIAgreement in relation to the management of the Offer
Offer Period From 21 November 2005 to 7 December 2005 under the General Public Offer, from 21 November 2005to 12 December 2005 under the Broker Firm Offer and from 13 December 2005 to 14 December 2005for the Bookbuild
Offer Proceeds The proceeds of the Offer after expenses incurred as a result of the Offer, sometimes expressed as theOffer Proceeds attributable to the First Instalment or the Final Instalment plus Instalment Interest
Official List Has the meaning given to the term in the ASX Listing Rules
Offically Quoted Quotation on the Official List
Original Document The original prospectus and product disclosure statement that was lodged with ASIC on 9 November2005
Participating Broker Brokers who are invited by Spark Infrastructure and the Joint Lead Managers to participate in the Offer
Partnership Agreement Agreement between the partners of ETSA
Performance Fee A fee payable to the Manager pursuant to the Management Agreement
Powercor Powercor Australia Limited (ABN 89 064 651 109)
Powercor Australia LLC A company incorporated in the USA and registered as a foreign company in Australia
Powercor Guarantors Powercor and Powercor Australia Holdings Pty Limited (ABN 32 058 231 005)
Preferred Capital Distributions from Preferred Partnership CapitalDistributions
Preferred Partnership Preferred equity capital issued by ETSACapital
Prescribed Service Services provided by the Asset Companies which are subject to price control mechanics determined bythe Regulators
QIBs Qualified Institutional Buyers within the meaning of Rule 144A of the US Securities Act
QPs Qualified Purchasers within the meaning of in Section 2(a)(51) of the US Investment Company Act of1940, as amended under the rules and regulations and the Securities and Exchange Commissionpromulgated thereunder
Regulator ESCOSA or ESC, or both of them as appropriate
Related Body Corporate Has the meaning given to that term in the Corporations Act
Related Party Protocols Related party protocols adopted by Spark Infrastructure, see Section 8.6.2 for further information
Reserved Interest The interest in a Stapled Security that the Instalment Creditor has to secure the payment of the FinalInstalment and Instalment Interest if those amounts are not paid when due, which includes the right tohave the Stapled Security sold and to be paid all or part of the proceeds of that sale
Responsible Entity Spark Infrastructure RE Limited (ACN 114 940 984) – The Responsible Entity is responsible foroperating Spark Infrastructure Trust in accordance with the Spark Infrastructure Trust Deed and theCorporations Act
Retail Application Price $2.00
Retail Final Instalment The lower of $0.60 and 70% of the Final Price
Retail First Instalment $1.40
Retail Investor An Australian resident Investor who is not an Institutional Investor
Retail Offer As described in Sections 3.3 and 3.4 of this Offer Document, the General Public Offer and the BrokerFirm Offer
Return The return derived from holding Stapled Securities, including any distributions and price appreciation,over a given period
RREEF Infrastructure The infrastructure investment business of Deutsche Asset Management (Australia) Limited (ABN 11 076 098 596) which in turn is the asset management business of Deutsche Bank. RREEFInfrastructure’s ownership interest in the joint venture vehicle is held through DAL. It will provideservices under the Technical Services Agreement through DAML
SA South Australia
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SAIDI System Average Interruption Duration Index – measures the average number ofminutes each customer is without supply due to a distribution network outage
SAIFI System Average Interruption Frequency Index
Securities Stapled Securities and Instalment Receipts, or either of them
Securities Administration The deed governing the rights and obligations attaching to the Instalment Receipts Deed dated on or about the date of the Original Document between the Security
Trustee, Instalment Co and the Stapled Entities which is described in Section 14.5
Securities Index Accumulation index for the Securities
Senior Debt In relation to Spark Infrastructure, refer to Section 14.16. In relation to the AssetCompanies, refer to Section 14.12
Senior Debt Lock-up • In relation to ETSA, means ETSA SOC Test described in 14.13.1• In relation to CitiPower, means financing covenants described in 14.14.2
and 14.14.4• In relation to Spark Infrastructure’s senior financing, the occurrence of an event
of default or potential event of default.
Sigerson Sigerson Business Corp
S&P Standard & Poor’s, a division of the McGraw Hill Companies
Spark Infrastructure The Stapled Entities and any subsidiary of a Stapled Entity
Spark Infrastructure The Constitutions and Articles of Association of the Stapled Entities and the Note Constitutions Trust Deed in respect of the Loan Notes
Spark Infrastructure Trust The constitution establishing Spark Infrastructure Trust dated 25 October 2005, Constitution including any amendment or replacement of it
Special Voting Share A share with special voting rights in the capital of the Stapled Companies asdescribed in Section 14.3.4(b)
SP AusNet The owner of the electrical transmission network in Victoria
SRN Security holder reference number, which is allocated by an issuer to identify aholder on an issuer sponsored or certificated subregister
Standard Connection and A standard form agreement which is deemed to exist between ETSA and end useSupply Agreement customers who do not have negotiated contracts for the provision of distribution
services
Stapled The linking together of securities so that one security may not be issued,transferred or otherwise dealt with without a corresponding and simultaneousissue, transfer or dealing of the other securities and which securities are quoted onASX jointly as a “Stapled Security” or such other term as ASX permits. “Stapling”is to be construed accordingly
Stapled Companies Spark Infrastructure Company 1, Spark Infrastructure Company 2 and SparkInfrastructure Company 3
Stapled Company The constitutions of Spark Infrastructure Company 1 and Spark Infrastructure Constitutions Company 2 and the Memorandum of Association and Articles of Association of
Spark Infrastructure Company 3, as amended from time to time
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Stapled Entity At any time any Australian or overseas established company, trust, corporation or managed investmentscheme whose securities are then Stapled and which has executed the Accession Deed and at the dateof this Offer Document means Spark Infrastructure Trust (through the Responsible Entity), SparkInfrastructure Company 1, Spark Infrastructure Company 2 and Spark Infrastructure Company 3
Stapled Securities One unit in the Spark Infrastructure Trust, one ordinary share in each of Spark Infrastructure Company 1and Spark Infrastructure Company 2 a CDI issued over a share in Spark Infrastructure Company 3 and aLoan Note issued by the Responsible Entity as trustee of Spark Infrastructure Trust
Stapling Matter See Section 14.3.1(c)
Stapling Provisions The provisions relating to Stapling contained in the schedule to each Constituent Document, as thesame may be amended or added to from time to time in accordance with that schedule
Technical Services An agreement relating to the provision of technical services by CKI to the ManagerAgreement or the provision of technical services by RREEF to the Manager
Unstapling Event Means one or more of the following events:• a Special Resolution of the members of each Stapled Entity has been passed to unstaple the
Securities;• Stapling becomes unlawful or prohibited under the ASX Listing Rules; or• a winding-up is commenced in respect of a Stapled Entity
US Investment US Investment Company Act of 1940, as amendedCompany Act
UoS Agreement Use of System Agreement – sets out the terms on which distributors provide distribution services toretailers for their customers
US Person The meaning given in Rule 902 of Regulation S of the US Securities Act of 1933, as amended
US Securities Act US Securities Act of 1933, as amended
VENCorp Victorian Energy Networks Corporation, a statutory body responsible for planning and directing theaugmentation of the Victorian transmission network
VWAP Volume weighted average price
WACC Weighted average cost of capital
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appendix:financial statements
for the period ending 30 June 2005– CHEDHA
– ETSA301
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Notes to the financial statements are included on pages 5 to 37.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the 6 Months Ended 30 June 2005
Consolidated6 Months
Ended 30 June2005
Consolidated6 Months
Ended 30 June2004
Notes $000 $000
Cash flow hedgesGain / (loss) taken to equity (24) 9,281 -
Actuarial gain / (loss) on defined benefit plans (37) (4,633) 13,483
Income tax on items taken directly to or transferred from equity (4) (1,395) (4,045)
Net income recognised directly in equity 3,253 9,438
Profit for the period 123,092 40,351
Total recognised income and expense for the period 126,345 49,790
Notes to the financial statements are included on pages 5 to 37.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
STATEMENT OF CASH FLOWSfor the 6 Months Ended 30 June 2005
Consolidated6 Months
Ended 30 June2005
Consolidated6 Months
Ended 30 June2004
Notes $000 $000
Cash flows from operating activities
Receipts from customers 456,729 409,610Payments to suppliers and employees (197,403) (135,128)Interest received 328 1,173Net receipt of trust monies 1,662 5,473Borrowing costs (150,223) (153,594)
Net cash inflow provided by operating activities (34) 111,092 127,534
Cash flows from investing activitiesPayments for property, plant and equipment (123,291) (99,829)Payments for intangible assets (12) (119)Receipts from customers for capital works 17,959 17,980Proceeds from the sale of property, plant and equipment 898 811Proceeds from the sale of investments - 24
Net cash used in investing activities (104,446) (81,133)
Cash flows from financing activitiesProceeds from borrowings - external 12,635 -Repayment of borrowings - external - (39,586)
Net cash provided by /(used in) financing activities 12,635 (39,586)
Net increase/(decrease) in cash held 19,282 6,815
Cash at the beginning of the financial period 11,578 66,979
Cash at the end of the financial period (5) 30,860 73,794
Notes to the financial statements are included on pages 5 to 37.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Note 1. Summary of accounting policies
Statement of compliance
The financial report is a general purpose financial report for inclusion in a Product Disclosure Statementthat has been prepared in accordance with Accounting Standards and Urgent Issues Group Interpretations.Accounting Standards include Australian equivalents to International Financial reporting Standards (“A-IFRS”). Compliance with the A-IFRS ensures that the consolidated financial statements and notes of theconsolidated entity comply with the International Financial Reporting Standards (“IFRS”).
The financial statements were authorised for issue by the directors on 4 November 2005.
Basis of preparation
The financial report has been prepared on the basis of historical cost, except for the revaluation of certainnon-current assets and financial instruments. Cost is based on the fair values of the consideration given inexchange for the assets.
In the application of A-IFRS management is required to make judgments, estimates and assumptions aboutcarrying values of assets and liabilities that are not readily apparent from other sources. The estimates andassociated assumptions are based on historical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis of making the judgments. Actualresults may differ from these estimates. The estimates and underlying assumptions are reviewed on anongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate isrevised if the revision affects only that period or in the period of the revision and future periods if the revisionaffects both current and future periods.
Judgments made by management in the application of A-IFRS that have significant effects on the financialstatements and estimates with a significant risk of material adjustments in the next year are disclosed,where applicable, in the relevant notes to the financial statements.
Accounting policies are selected and applied in a manner which ensures that the resulting financialinformation satisfies the concepts of relevance and reliability, thereby ensuring that the substance of theunderlying transactions and other events is reported.
The consolidated entity changed its accounting policies on 1 January 2005 to comply with A-IFRS. Thetransition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 ‘First-time Adoption ofAustralian Equivalents to International Financial Reporting Standards ‘, with 1 January 2004 as the date oftransition. An explanation of how the transition from superseded policies to A-IFRS has affected theconsolidated entity’s financial position, financial performance and cash flows is discussed in note 40.
The directors have also elected under s.334(5) of the Corporations Act 2001 to apply Accounting StandardAASB 119 ‘Employee Benefits’ (December 2004), even though the Standard is not required to be applied untilannual reporting periods beginning on or after 1 January 2006.
The accounting policies set out below have been applied in preparing the financial statements for the periodended 30 June 2005, the comparative information presented in these financial statements for the periodended 30 June 2004, and in the preparation of the opening A-IFRS balance sheet at 1 January 2004 (asdisclosed in note 40), the consolidated entity’s date of transition, except for the accounting policies in respectof financial instruments. The consolidated entity has not restated comparative financial information forfinancial instruments, including derivatives, as permitted under the first-time adoption transitionalprovisions. The accounting policies for financial instruments applicable for the comparative information andthe impact of changes in these accounting policies on 1 January 2005, the date of transition for financialinstruments, is discussed further in note 1(ab).
All amounts have been rounded off to the nearest thousand dollars, except where indicated.
The following significant accounting policies have been adopted in the preparation and presentation of thefinancial report:
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Significant accounting policies
(a) Acquisition of assets
Cost methodThe purchase method of accounting is used for all acquisitions of assets. Cost is determined as thefair value of the assets given up, shares issued or liabilities undertaken at the date of acquisitionplus incidental costs directly attributable to the acquisition.
Construction work in progressConstruction work in progress is stated at cost plus attributable overheads. Cost includes all costsdirectly related to specific projects and an allocation of overhead expenses.
Capitalisation of overheadsServices provided by the corporate units of the consolidated entity are charged to the operatingunits. That portion of those costs that is attributable to the function of preparing an asset ready foruse is included in the cost base of the asset.
(b) Borrowing costs
Borrowing costs are recognised as expenses in the year in which they are incurred. Borrowingsinclude interest on short-term and long-term borrowings and the increase to reflect the changingmoney values over time of certain provisions recognised at the net present value of future cash flows.
(c) Cash assets
Cash assets include cash on hand, cash at bank and deposits at call with financial institutions, netof outstanding bank overdrafts.
(d) Construction contracts
Construction contract revenue and expenses are recognised by applying the stage of completionmethod where the outcome can be estimated reliably. Contract costs that relate to future activity ofa contract are recognised as an asset where it is probable that the contract costs will be recovered.
(e) Contributions for capital works
It is commercial practice to secure contributions from customers towards the cost of constructingaugmentation assets. These contributions may be in the form of cash or non-current assets. Cashcontributions are accounted for as revenue in the profit and loss statement. Non current assets,which have been contributed as part of a customer contribution scheme, are recognised at fair valuewith a corresponding increase in revenue.
The 'Network Connections' policy also incorporates Regulatory requirements in relation to developersof sub-divisions and large customers (based on demand). Contributions must be refunded if specifiedcontract requirements are met. Monies received are placed in a trust fund. This trust fund is splitbetween current and non-current depending on when the contributions are anticipated to berefunded and reviewed on a regular basis. Deposits are brought to account as revenue when thecustomer is no longer eligible to the refund of the deposit.
(f) Creditors and accruals
Trade creditors and accruals are recognised when there is an obligation to make future paymentsresulting from the purchase of goods and services.
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Notes to the Financial Statements
30 June 2005
(g) Derivative financial instruments
The consolidated entity enters into a variety of derivative financial instruments to manage itsexposure to interest rate and foreign exchange risk, including forward foreign exchange contracts,interest rate swaps and cross currency swaps. Further details of derivative financial instruments aredisclosed in note 38 to the financial statements.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into andare subsequently measured to their fair value at each reporting date. The resulting gain or loss isrecognised in profit or loss immediately unless the derivative is designated and effective as a hedginginstrument, in which case, the timing of the recognition in profit or loss depends on the nature of thehedge relationship. The consolidated entity designates certain derivatives as either hedges of the fairvalue of recognised assets or liabilities or firm commitments (fair value hedges) or hedges of highlyprobable forecast transactions (cash flow hedges).
Fair value hedgeChanges in the fair value of derivatives that are designated and qualify as fair value hedges arerecorded in profit or loss immediately, together with any changes in the fair vale of the hedged assetor liability that is attributable to the hedged risk.
Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated,exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of thehedged item arising from the hedged risk is amortised to the profit and loss from that date.
Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualified ascash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion isrecognised immediately in profit or loss.
Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item isrecognised in profit or loss. However, when the forecast transaction that is hedged results in therecognition of a non-financial asset or a non-financial liability, the gain or loss previously deferred inequity are transferred from equity and included in the initial measurement of the cost of the asset orliability.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated,exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or lossdeferred in equity at that time remains in equity and is recognised when the forecast transaction isultimately recognised in profit and loss. When a forecast transaction is no longer expected to occur,the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss.
Derivatives that do not qualify for hedge accountingCertain derivative instruments do not qualify for hedge accounting. Changes in the fair value of anyderivative instruments that do not qualify for hedge accounting are recognised immediately in profitor loss
Embedded derivativesDerivatives embedded in other financial instruments or other host contracts are treated as separatederivatives when their risks and characteristics are not closely related to those of host contracts andthe host contracts are not measured at fair value with changes in fair value recognised in profit orloss.
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Notes to the Financial Statements
30 June 2005
(h) Employee benefits
Provision is made for benefits accruing to employees in respect of wages and salaries, annual leaveand long service leave when it is probable that settlement will be required and they are capable ofbeing measured reliably.
Provisions made in respect of employee benefits expected to be settled within 12 months aremeasured at their nominal values using the remuneration rate expected to apply at the time ofsettlement.
Provisions made in respect of employee benefits which are not expected to be settled within 12months are measured as the present value of the estimated future cash outflows to be made by theconsolidated entity in respect of the services provided by the employees up to the reporting date.
Defined contribution plansContributions made to defined contribution superannuation plans are expensed when incurred.
Defined benefit plansFor defined benefit superannuation plans, the cost of providing benefits is determined using theProjected Unit Credit Method, with actuarial valuations being carried out at each reporting date.Actuarial gains and losses are recognised in full, directly in retained earnings, in the period in whichthey occur, and are presented in the statement of recognised income and expense.
Past service cost is recognised immediately to the extent that the benefits are already vested, andotherwise is amortised on a straight-line basis over the average period until the benefits becomevested.
The defined benefit obligation recognised in the balance sheet represents the present value of thedefined benefit obligation adjusted for unrecognised past service cost, net of the fair value of planassets. Any asset resulting from this calculation is limited to the past service cost, plus the presentvalue of available refunds and reductions in future contributions to the plan.
(i) Financial instruments
Debt and equity instrumentsDebt and equity instruments are classified as either liabilities or as equity in accordance with thesubstance of the contractual arrangement.
Interest and dividendsInterest and dividends are classified as expenses or as distributions of profit consistent with thebalance sheet classification of the related debt or equity instruments.
(j) Foreign currency transactions
All foreign currency transactions during the financial year are brought to account using theexchange rate in effect at the date of the transaction. Foreign currency monetary items at reportingdate are translated at the exchange rate at that date.
Exchange rate differences are brought to account in the Income Statement in the period in whichthey arise except that:
1. exchange differences which related to assets under construction for future productive useare included in the cost of those assets where they are regarded as an adjustment to interestcosts on foreign currency borrowings; and
2. exchange differences on transactions entered into in order to hedge certain foreign currencyrisks (refer note 1 (g)).
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
(k) Goods and Services Tax
Revenues, expenses, and assets are recognised net of the amount of Goods and Services Tax ("GST"),except:i. where the amount of GST incurred is not recoverable from the taxation authority, it is
recognised as part of the cost of acquisition of an asset or as part of an item of expense; orii. for receivables and payables which are recognised inclusive of GST.
The net amount of GST recoverable from, or payable to, the taxation authority is included as part ofreceivables or payables.
Cash flows are included in the Statement of Cash Flows on a gross basis. The GST component ofcash flows arising from investing and financing activities which is recoverable from, or payable to,the taxation authority is classified as operating cash flows.
(l) Impairment of assets
At each reporting date, the consolidated entity reviews the carrying amounts of its tangible andintangible assets to determine whether there is any indication that those assets have suffered animpairment loss. If any such indication exists, the recoverable amount of the asset is estimated inorder to determine the extent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the consolidated entity estimates the recoverableamount of the cash-generating unit to which the asset belongs.
The licences, which have indefinite useful lives, are tested for impairment at each reporting date andwhenever there is an indication that the assets may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing valuein use, the estimated future cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value of money and the risksspecific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than itscarrying amount, the carrying amount of the asset (cash-generating unit) is reduced to itsrecoverable amount. An impairment loss is recognised in the profit and loss immediately, unless theasset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.
(m) Income tax
Current taxCurrent tax is calculated by reference to the amount of income taxes payable or recoverable inrespect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax lawsthat have been enacted or substantively enacted by the reporting date. Current tax for current andprior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).
Deferred taxDeferred tax is accounted for using the comprehensive balance sheet liability method in respect oftemporary differences arising from differences between the carrying amount of assets and liabilitiesin the financial statements and the corresponding tax base of those items.
In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred taxassets are recognised to the extent that it is probable that sufficient taxable amounts will beavailable against which deductible temporary differences or unused tax losses and tax offsets can beutilised. However, deferred tax assets and liabilities are not recognised if the temporary differencesgiving rise to them arise from the initial recognition of assets and liabilities (other than as a result ofa business combination) which affects neither taxable income or accounting profit.
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Notes to the Financial Statements
30 June 2005
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to theperiod(s) when the asset and liability giving rise to them are realised or settled, based on the taxrates (and tax laws) that have been enacted or substantively enacted by reporting date. Themeasurement of deferred tax liabilities and assets reflects the tax consequences that would followfrom the manner in which the consolidated entity expects, at the reporting date, to recover or settlethe carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the sametaxation authority and the consolidated entity intends to settle its current tax assets and liabilitieson a net basis.
Current and deferred tax for the periodCurrent and deferred tax is recognised as an expense or income in the income statement, exceptwhen it relates to items credited or debited directly to equity, in which case the deferred tax is alsorecognised directly in equity, or where it arises from the initial accounting for a businesscombination, in which case it is taken into account in the determination of goodwill or excess.
Tax consolidation legislationCKI / HEI Electricity Distribution Holdings (Australia) Pty Ltd ("CHEDHA") and its wholly-ownedAustralian resident entities are part of a tax consolidated group under Australian taxation law.CHEDHA is the head entity in the tax consolidated group. Tax expense / income, deferred taxliabilities and deferred tax assets arising from temporary differences of members of the taxconsolidated group are recognised in the separate financial statement of the members of the taxconsolidated group using the ‘separate taxpayer within group’ approach. Current tax liabilities andassets and deferred tax assets arising from unused tax losses and tax credits of the members of thetax consolidated group are recognised by the company (as head entity in the tax consolidated group).
(n) Intangibles
Distribution LicenceDistribution Licence is recorded at cost of acquisition. The Licence is considered to have anindefinite life as it was issued in perpetuity and as such, there is no requirement for it to beamortised. Impairment is reviewed at each reporting date and whenever there is an indication thatthe Distribution Licence may be impaired.
Intellectual property and other intangible assetsIntellectual property is amortised on a straight-line basis over periods not exceeding 30 years, duringwhich the benefits are expected to arise. Impairment is reviewed at each reporting date andwhenever there is an indication that the asset may be impaired.
(o) Inventories
Inventories are valued at the lower of cost or net realisable value. Costs, including an appropriateportion of fixed and variable overhead expenses, are assigned to inventory on hand on the basis ofweighted average costs and where appropriate specific identification.
(p) Investments
Investments in controlled entities are recorded at cost. Dividend revenue is recognised on declarationby the controlled entity.
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Notes to the Financial Statements
30 June 2005
(q) Leased assets
Leased assets are classified as finance leases whenever the terms of the lease transfer all the risksand rewards of ownership to the lessee.
Amounts due under finance leases are recorded as receivable. Finance lease receivables are initiallyrecognised at amounts equal to the present value of the minimum lease payments receivable plusthe present value of any unguaranteed residual value expected to accrue at the end of the leaseterm. Finance lease payments are allocated between interest revenue and reduction of the leasereceivable over the term of the lease in order to reflect a constant periodic rate of return on the netinvestment outstanding in respect of the lease.
Rental income from operating leases is recognised on a straight line basis over the term of therelevant lease.
Operating lease payments are recognised as an expense on a straight line basis over the term of thelease, except where another systematic basis is more representative of the time pattern in which theeconomic benefits of the leased asset are consumed.
In the event that lease incentives are received to enter into operating leases, such incentives arerecognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rentalexpense on a straight line basis, except where another systematic basis is more representative of thetime pattern in which economic benefits from the leased asset are consumed.
(r) Maintenance and repairs
Maintenance and repair costs and minor renewals are charged as expenses as incurred, exceptwhere they relate to the replacement of a component of an asset, in which case the costs arecapitalised and depreciated.
(s) Principles of consolidation
The consolidated financial statements have been prepared by combining the financial statements ofall the entities that comprise the consolidated entity, being the company (CKI/HEI ElectricityDistribution Holdings (Australia) Pty Ltd) and its subsidiaries as defined in accounting standardAASB 127 ‘Consolidated and Separate Financial Statements’. A list of subsidiaries appears in note33 to the financial statements. Consistent accounting policies have been employed in thepreparation and presentation of the consolidated financial statements.
On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at theirfair values at the date of acquisition. Any excess of the cost of the acquisition over the fair values ofthe identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair valuesof the identifiable net assets acquired exceed the cost of acquisition, the deficiency is credited toprofit and loss in the period of the acquisition.
The consolidated financial statements include the information and results of each subsidiary fromthe date on which the company obtains control and until such time as the company ceases tocontrol such entity.
In preparing the consolidated financial statements, all intercompany balances and transactions, andunrealised profits arising within the consolidated entity are eliminated in full.
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Notes to the Financial Statements
30 June 2005
(t) Property, plant and equipment
Land and buildings are stated as cost less accumulated depreciation and impairment (if any). Costincludes expenditure that is directly attributable to the acquisition of the item.
Plant and equipment are stated as cost less accumulated depreciation and impairment (if any). Costincludes expenditure that is directly attributable to the acquisition of the item.
Depreciation is provided on property, plant and equipment, including freehold buildings butexcluding land. Depreciation is calculated on a straight line basis so as to write off the net cost orother revalued amount of each asset over its expected useful life to its estimated residual value. Theestimated useful lives, residual values and depreciation method are reviewed at the end of eachreporting period. The following estimated useful lives are used in the calculation of depreciation:
Category Useful lifeBuildings 40 yearsPlant and equipment 5 - 15 yearsDistribution System 35 - 50 years
(u) Provisions
Provisions are recognised when the consolidated entity has a present obligation, the future sacrificeof economic benefits is probable, and the amount of the provision can be measured reliably.
The amount recognised as a provision is the best estimate of the consideration required to settle thepresent obligation at reporting date, taking into account the risks and uncertainties surrounding theobligation. Where a provision is measured using the cash flows estimated to settle the presentobligation, its carrying amount is the present value of those cash flows.
RestructureProvisions for restructure are recognised when the consolidated entity has developed a detailedformal plan for the restructuring and has raised a valid expectation in those affected that it will carryout the restructure by:
� starting to implement the plan; or� announcing its main features to those affected by it.
(v) Receivables
Trade receivables, loans and other receivables are recorded at amortised cost less impairment.
(w) Refundable contributions and advances for capital works
Where customers are required to lodge security deposits for electricity connection works, thedeposits will be refunded with interest over the period specified in each individual contract. Allbalances held in this category are included in the balance sheet item 'Trust funds and deposits'.
(x) Reporting by segments
The consolidated entity operates predominantly in the one business segment and the one geographicarea. The majority of the consolidated entity's revenue is generated through the distribution ofelectricity within Victoria.
(y) Revenue recognition
Network revenue is recognised at the point of consumption. Network revenue comprises accountsrendered and a net accrual for unbilled and unread revenue. Revenue from a contract to provideservices is recognised by reference to the stage of completion of the contract.appe
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Notes to the Financial Statements
30 June 2005
(z) Safety regulation compliance
The consolidated entity provides for expenditure as required to comply with the Office of the ChiefElectrical Inspector ("OCEI") 'Electrical Regulations' where this is not provided for by the 2001-05Electricity Distribution Price Review.
(aa) Security arrangements on contracts
Cash retentions and security deposits from contractors are withheld to ensure some control overnon-performance. Retentions and deposits are recognised as liabilities until works have beencompleted to a satisfactory standard. Where retentions and deposits are not returned to thecontractor then the liability is recognised as revenue for the period.
(ab) Comparative information – Financial instruments
The consolidated entity has elected not to restate comparative information for financial instrumentswithin the scope of Accounting Standards AASB 132 ‘Financial Instruments: Disclosure andPresentation and AASB 139 ‘Financial Instruments: Recognition and Measurement’, as permitted onthe first-time adoption of A-IFRS.
The accounting policies applied to accounting for financial instruments in the current financialperiod are set out above. The following accounting policies were applied to accounting for financialinstruments in the comparative financial period:
(i)Creditors and accruals
Trade payables and other payables are recognised when there is an obligation to make futurepayments resulting form the purchase of goods and services.
(ii) Derivative financial instruments
The consolidated entity has credit risk exposure, but has adopted a policy of only dealing withcreditworthy counter parties as defined in the consolidated entity’s credit policy. Security isobtained where necessary.
Interest Rate SwapsThe net amount receivable or payable under interest rate swap agreements and cross currency swapagreements is progressively brought to account over the period to settlement. These derivatives arenot recognised in the financial statements on inception. The amount recognised is accounted for asinterest expense during the period.
Exchange Rate ContractsHedging is undertaken in order to avoid or minimise possible adverse financial effects of movementsin exchange rates. Gains or losses arising upon entry into a hedging transaction intended to hedgethe purchase or sale of goods or services, together with subsequent exchange gains or lossesresulting from those transactions are deferred in the Income Statement from the inception of thehedging transaction up to the date of the purchase or sale and included in the measurement of thepurchase or sale. The net amounts receivable or payable under the hedging transaction are alsorecorded in the Balance Sheet. Any gains or losses arising on the hedging transactions after therecognition of the hedged purchase or sale are included in the Income Statement.
In the case of hedges of monetary items, exchange gains or losses are brought to account in thefinancial period in which the exchange rates change. Gains or costs arising at the time of enteringinto such hedging transactions are brought to account in the Income Statement over the lives of thehedges.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
(iii) Financial instruments
Debt and equity instrumentsDebt and equity instruments are classified as either liabilities or as equity in accordance with thesubstance of the contractual arrangement.
Interest and dividendsInterest and dividends are classified as expenses or as distributions of profit consistent with thebalance sheet classification of the related debt or equity instruments or component parts ofcompound instruments.
(iv) Foreign currency transactions
All foreign currency transactions during the financial year are brought to account using theexchange rate in effect at the date of the transaction. Foreign currency monetary items at reportingdate are translated at the exchange rate at that date.
Exchange rate differences are brought to account in the Income Statement in the period in whichthey arise except that:i. exchange differences which relate to assets under construction for future productive use are
included in the cost of those assets; andii. exchange differences on transactions entered into to hedge the purchase or sale of specific
goods and services are deferred and included in the measurement of the purchase or sale.
(v) Borrowings
Bank loans and other loans are recorded at an amount equal to the net proceeds received. Interestexpense is recognised on an accrual basis. Ancillary costs incurred in connection with thearrangement of borrowings are deferred and amortised over the period of the borrowing. Borrowingcosts are recognised as expenses in the period in which they are incurred.
(vi) Finance lease
A finance lease receivable has been recorded for Stadium Operations Limited at amounts equal tothe present value of the minimum lease payments receivable plus the present value of theguaranteed residual value expected to accrue at the end of the lease term.
Finance lease payments are allocated between revenue and reduction of the lease receivable over theterm of the lease. A finance lease is one, which effectively transfers from the lessor to the lesseesubstantially all the risks and benefits incidental to ownership of the leased property.
(vii) Receivables
All trade and non-trade receivables are recognised at the amounts receivable less any provision fordoubtful debts.
Effect of changing the accounting policies for financial instruments
The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1January 2005 is set out as follows:
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Note 1 (ab) Comparative Information - Financial Instruments (Continued)
For the purposes of this reconciliation, deferred tax balances have been reflected on a gross basis.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Note 1 (ab) Comparative Information - Financial Instruments (Continued)
The main adjustments that were necessary in order to make the financial statements comply with AASB 132 and AASB 139
at 1 January 2005 to restate the opening financial position of the consolidated entity to a position consistent with the
accounting policies specified above were as follows:
BorrowingsAdjustments amounting to $104,515 thousands were made to record foreign currency borrowings at their fair value and other
borrowings at amortised cost.
Other financial liabilitiesAdjustments amounting to $111,804 thousands were made to record derivative financial instruments at fair value.
Other current and non-current assetsAmounts totalling $17,083 thousands representing deferred borrowing costs included in other current and non-current assets
were reclassified, of which $2,846 thousands was taken to opening retained earnings and the balance of $14,237 thousands
to the underlying borrowings.
Deferred taxThe recognition of a deferred tax asset of $6,458 thousands, being the tax effect of the adjustment to fair value of all
derivatives and certain borrowings, and the recognition of a deferred tax liability of $854 thousands being the tax effect
of deferred borrowing costs taken direct to retained earnings.
ReservesThe transfer of deferred hedging gains and losses arising from the fair value of cash flows hedges amounting to $8,671
thousands, after tax, to the hedging reserve.
Retained earningsThe recognition in retained earnings of the after tax impact for fair value hedges and ineffective derivatives and the fair
value of certain borrowings and derivatives.
It is not practicable for the consolidated entity to detail the amounts of the adjustments to profit or loss and to opening
retained earnings for the comparative period had the new accounting poicies been applied from the beginning of the
comparative period. In addition, it is not practicable for the consolidated entity to detail for the current period, the
amounts of the adjustments resulting to each financial statement line item as a consequence of applying the accounting
policies specified elsewhere in note 1.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated6 Months Ended30 June 2005
Consolidated6 Months Ended30 June 2004
$000 $000
2 PROFIT FROM OPERATIONS
REVENUE
Distribution Revenue 385,190 338,358
Other Operating RevenueCustomer contributions for capital works 24,246 21,460Interest revenue - other entities 328 1,173Property rentals 635 597Meter data / public lighting 13,189 13,243Customer transfers & connections 4,475 4,167Reserve capacity 527 640Service level agreement revenue 5,585 5,588Other revenue 21,601 36,133
70,586 83,001TOTAL REVENUE 455,776 421,359
OTHER INCOME
(Loss) on disposal of property, plant & equipment (145) (309)Gain on disposal of investments - 24Foreign exchange gains 450 -Hedging gains 4,714 -TOTAL OTHER INCOME 5,019 (285)
EXPENSES
Finance CostsOther related parties 73,946 74,358Other entities 80,616 81,738
154,563 156,096Bad and doubtful debts:
Bad debts written off - -Trade receivables - 78Other 235 279
Unrecognised deferred tax balancesThe following deferred tax assets have not been brought to account as assets:
Tax losses - revenue - 62,718
As a result of announced changes in tax legislation, the consolidated entity considers that it will have sufficient taxable profits and temporary differences,
which will result in taxable amounts against which the unused tax losses can now be utilised.
Tax consolidationRelevance of tax consolidation to the consolidated entity
CHEDHA and its wholly-owned Australian resident entities formed a tax-consolidated group with effect from 30 August 2002 and are therefore taxed
as a single tax entity from that date.
The head entity within the tax-consolidated group is CHEDHA. The members of the tax-consolidated group are identified in note 33.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
5 CASH ASSETS
Cash 2,110 1,794Deposits at call 28,750 72,000
30,860 73,794
6 TRADE AND OTHER RECEIVABLES
Trade receivables 7,413 13,134Less: Allowance for doubtful receivables (5,118) (6,053)
2,295 7,081
Non trade receivables 14,045 15,195Less: Allowance for doubtful receivables (1,391) (924)
12,654 14,271
Finance lease receivable (note 28) 2,094 2,094
17,043 23,446
7 OTHER CURRENT FINANCIAL ASSETS
Foreign currency forward contracts - 159
- 159
8 INVENTORIES
Raw materials: construction, general purpose and maintenance stocks - at cost 18,244 16,706
Balance at 1 January 2004 - at cost 773,122 140,405 913,527
Additions - - -
Disposals - - -
Balance at 30 June 2004 773,122 140,405 913,527
Balance at 1 January 2005 - at cost 773,122 140,597 913,719
Additions - 13 13
Disposals - - -
Balance at 30 June 2005 773,122 140,610 913,732
Accumulated Amortisation
Balance at 1 January 2004 - (23,610) (23,610)
Amortisation expense - (2,713) (2,713)
Disposals - - -
Balance at 30 June 2004 - (26,323) (26,323)
Balance at 1 January 2005 - (27,730) (27,730)
Amortisation expense - (2,814) (2,814)
Disposals - - -
Balance at 30 June 2005 - (30,544) (30,544)
Net Book ValueAs at 30 June 2004 773,122 114,082 887,204As at 30 June 2005 773,122 110,066 883,188
Aggregate amortisation allocated during the year is recognised as an expense and disclosed in note 2 to the financial statements.
Significant intangible assetsThe consolidated entity holds intellectual property referable to its network assets and systems. The carrying amount is $110,063 thousands and will be
fully amortised in 27 years.
The licences, which have been assessed as having an indefinite useful life, have a carrying amount of $773,122 thousands at 30 June 2005.
The factors that played a significant role in determining that the licences have an indefinite useful life are as follows:
- the licences are exclusive licences to distribute electricity within the defined service territories, or geographic regions;
- the licences are vested in perpetuity, subject to ongoing compliance with the licence conditions; and
- there is no presently available technology which is likely to replace the method of distribution of electricity.
During the financial period, the consolidated entity assessed the recoverable amount of the licences, and determined that the licences were not impaired.
The licences have been allocated for impairment testing purposes to two individual cash-generating units, being two distinct electricity distribution networks.
The carrying amount of the licences allocated to these cash-generating units is $773,122 thousands. The basis on which these cash-generating units’
recoverable amounts have been determined is their fair value less costs to sell. The key assumption on which management has based its assessment is
projected maintainable earnings before interest, tax, depreciation and amortisation (“EBITDA”) and a market multiple thereof. The maintainable EBITDA
is based on projections for the period covered by the 2006 budget and five-year forecasts, as approved by management. Management’s approach to
determining the appropriate market multiple is to compare to recent ‘like’ transactions in the market.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
13 OTHER NON-CURRENT ASSETS
Deferred expenses - 15,541
14 CURRENT PAYABLES
Creditors and accruals 73,284 54,588
Trust funds and deposits 29,541 26,789
Accrued interest - other 33,568 33,064
Accrued interest - other related parties 6,895 7,122
Goods and Services Tax (GST) Payable 6,006 4,369
149,294 125,932
15 CURRENT BORROWINGS
UnsecuredBank loans 27,135 59,354
16 OTHER CURRENT FINANCIAL LIABILITIES
At fair value (2004: cost)Foreign currency forward contracts 13 159Interest rate swaps 2,552 -
Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998.
Therefore, the company does not have a limited amount of authorised capital and issued shares do not have a par value.
Fully paid ordinary shares carry no special voting rights and carry the right to dividends.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated6 Months Ended30 June 2005
Consolidated6 Months Ended30 June 2004
$000 $000
24 RESERVES
Hedging reserves (2,174) -
(2,174) -
Balance at beginning of financial year - -Adoption of AASB 139 (12,387) -Deferred tax arising therefrom 3,716 -Restated balance at the beginning of the year (8,671) -
The hedging reserves represent hedging gains and losses recognised on the effective portion of the cash flow hedges. The cumulative deferred gain or loss
on the hedge is recognised in the profit and loss when the hedged transaction impacts the profit or loss, or is included as a basis adjustment to the
non-financial hedged item, consistent with the accounting policy.
25 RETAINED EARNINGS
Balance at the beginning of financial period 237,000 46,935
Adjustments on the adoption of accounting policies
specified by AASB 132 and AASB 139 (refer note
1(ab) (11,984) -
Deferred tax recognised directly in equity 3,595 -
Restated balance at the beginning of the financial period 228,611 46,935
Net profit (loss) attributable to members of CKI/HEI Electricity Distribution
Total basic earnings per share 20,515,333 6,725,167
The diluted earnings per share is the same as the basic earnings per share.
Basic earnings per share:The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:
Consolidated6 Months Ended30 June 2005
Consolidated6 Months Ended30 June 2004
$000 $000
Earnings (a) 123,092 40,351
Earnings from continuing operations (a) 123,092 40,351
Weighted average number of ordinary shares for the
purpose of basic earnings per share 600 600
(a) Earnings used in the calculation of total basic earnings per share and basic earnings
per share from continuing operations reconciles to the net profit in the income
statement as follows:
Net profit 123,092 40,351Other - -Earnings used in the calculation of basic earnings per share 123,092 40,351
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
27 COMMITMENTS FOR EXPENDITURE
Capital commitmentsPlant and equipment
Not later than 1 year 17,511 17,768Later than 1 year but not later than 5 years 560 -Later than 5 years - -
DEU109 SPARKS Prosp-Sect 17_D14 18/11/05 10:22 AM Page 328
27
CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated
30 June 2005
Consolidated
30 June 2004
$000 $000
29 CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Details and estimates of maximum contingent liabilities are as follows:
Unsecured bank guarantee facility 365 525
Consolidated
6 Months Ended
30 June 2005
Consolidated
6 Months Ended
30 June 2004
$ $
30 KEY MANAGEMENT PERSONNEL REMUNERATION
The directors of CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd during the period were:
W. Shurniak A.J. Hunter
E.B.S. Kwan D. Chan
C.T. Wan
The compensation of the directors and key management personnel of the consolidated entity is set out below:
Short term employee benefits 2,348,897 2,100,280
Post employment benefits 133,061 102,938
2,481,958 2,203,218
31 REMUNERATION OF AUDITORS
Auditor of the parent entity
Audit or review of the financial report 260,312 265,950
Taxation services 149,229 132,394
Accounting advice services 84,623 106,767
Other advisory services 38,500 27,011
532,664 532,122
The auditor of the parent entity (CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd) is Deloitte Touche Tohmatsu.
32 RELATED PARTIES
(a) Equity interests in related parties
Details of the percentage of ordinary shares held in controlled entities are disclosed in note 33 to the financial statements.
(b) Directors' remuneration
The names of persons who were directors of CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd and the aggregate of director
and key management personnel's remuneration are disclosed in note 30 to the financial statements.
(c) Directors' Loans
There were no loans in existence at balance date made, guaranteed or secured to directors of the company, director-related entities,
their spouses, relatives, or relatives of spouses.
(d) Directors' Equity Holdings
There were no director equity holdings in existence at balance date.
(e) Other transactions with directors
No director or director-related entity has declared an interest in a contract, or proposed contract, during the period ended 30 June 2005
with the company or any entities in the consolidated entity, except in instances where terms are no more favourable than those expected
under normal commercial arrangements, as is the case with the normal supply of electricity.
(f) Transactions with other related parties
During the year, the consolidated entity entered into the following transactions with other related parties on normal terms and conditions:
* Interest, arranger and agency fees were charged to the consolidated entity on subordinated loans
* IT systems and support services were provided by, and to, the consolidated entity
Amounts due and receivable from other related parties are disclosed in note 9 to the financial statements.
Amounts due and payable to other related parties are disclosed in notes 14, 18 and 19 to the financial statements.
(g) Controlling Entities
(i) The parent entity in the consolidated entity is CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd ("CHEDHA").
(ii) CHEDHA is owned by a joint consortium of Cheung Kong Infrastructure Holdings Limited (50%) and Hong Kong Electric Holdings Limited (50%).
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
33 DETAILS OF SUBSIDIARIES
Country offormation orincorporation Equity holding
2005 2004% %
PARENT ENTITYCKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd Australia - -
ULTIMATE PARENT ENTITYCKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd Australia - -
SUBSIDIARIES
CKI/HEI Electricity Distribution Two Pty Ltd Australia 100 100
CKI/HEI Electricity Distribution Pty Ltd Australia 100 100
Powercor Australia Limited Liability Company USA 100 100
Powercor Pty Ltd Australia 100 100
Powercor Australia Holdings Pty Ltd Australia 100 100
Powercor Australia Ltd Australia 100 100
Powercor Australia Telecommunications Pty Ltd Australia 100 100
CitiPower I Pty Ltd Australia 100 100
CitiPower II Pty Ltd Australia 100 100
Australia's Energy Partnership Australia 100 100
Marregon (No 2) Pty Ltd Australia 100 100
Marregon Pty Ltd Australia 100 100
CitiPower Pty Australia 100 100
The CitiPower Trust Australia 100 100
All the above entities are members of the tax consolidated group, of which CKI/HEI Electricity Distribution Holdings
(Australia) Pty Ltd is the head entity.
Consolidated6 Months Ended30 June 2005
Consolidated6 Months Ended30 June 2004
$000 $000
34 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Profit for the period 123,092 40,351
Loss on disposal of non-current assets 145 285
Depreciation and amortisation 74,656 71,787
Customer contributions received (24,246) (21,460)
Amortised finance charges 3,253 3,025
Adjustment in respect of prior period disposal (4,706) -
Change in operating assets and liabilities
Decrease (increase) in trade receivables (2,389) (1,908)
Decrease (increase) in deferred receivables (1,041) 120
Decrease (increase) in inventories (1,979) (540)
Decrease (increase) in prepayments 1,500 170
Decrease (increase) in accrued revenue (9,068) 2,307
Increase (decrease) in trade creditors and accruals (6,539) (3,029)
Increase (decrease) in other financial liabilities 5,161 -
Increase (decrease) in accrued interest (414) 1,002
Increase (decrease) in deferred revenue 284 5,123
Increase (decrease) in provision for tax balances (54,000) 28,229
Increase (decrease) in other provisions 4,142 (3,401)
Increase (decrease) in trust funds and deposits 3,241 5,473
Net cash inflow from operating activities 111,092 127,534
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
34 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES (Continued)
Notes to the Cash Flow Statement
Financing Arrangements
Unrestricted access was available at balance date to the following lines of credit:
Total facilities
Unsecured bank overdrafts 6,000 6,000
Unsecured market rate advance 70,000 70,000
Bank debt facility 150,000 150,000
Medium term note issue 1,575,000 1,575,000
Total 1,801,000 1,801,000
Used at balance date
Unsecured bank overdrafts - -
Unsecured market rate advance 7,250 -
Bank debt facility 20,000 -
Medium term note issue 1,575,000 1,575,000
Total 1,602,250 1,575,000
Unused at balance date
Unsecured bank overdrafts 6,000 6,000
Unsecured market rate advance 62,750 70,000
Bank debt facility 130,000 150,000
Medium term note issue - -
Total 198,750 226,000
Consolidated6 Months Ended
30 June 2005
Consolidated6 Months Ended
30 June 2004
$000 $000
35 NON-CASH INVESTING AND FINANCING ACTIVITIES
Receipt of gifted assets 6,287 3,480
36 EVENTS OCCURRING AFTER REPORTING DATE
There has not been any matter or circumstance that has arisen since the end of the financial period that has significantly
affected, or may significantly affect, the consolidated entity's operations, the results of those operations, or the
consolidated entity's state of affairs, in future financial years.
37 DEFINED BENEFIT SUPERANNUATION PLANS
% %
Key assumptions used (expressed as weighted averages)Discount rate(s) 5.1 5.9Expected return on plan assets 7.0 7.0Expected rate(s) of salary increase 4.0 4.0Expected rate(s) of pension increase 3.0 3.0
$000 $000
Amounts recognised in income in respect of thesedefined benefit plans are as follows:
Current service cost 2,274 2,696
Interest cost 4,608 4,483
Expected return on plan assets (6,350) (5,646)
Total, included in 'employee benefit expense' 532 1,533
Actuarial (gains) / losses 6,720 (18,464)
Net actuarial gains / (losses) not recognised (2,087) 4,981
Actuarial (gains) and losses incurred during the period
and recognised in the statement of recognised income
and expense 4,633 (13,483)
Cumulative actuarial (gains) and losses recognised in
the statement of recognised income and expense4,633 (13,483)
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
37 DEFINED BENEFIT SUPERANNUATION PLANS (Continued)
The amount in the balance sheet arising fromthe entity's obligations in respect of its definedbenefit plans is as follows:
Present value of funded defined benefit obligations 192,856 166,152Fair value of plan assets (193,364) (170,504)
(508) (4,352)Present value of unfunded defined benefit obligations - -(Surplus) / deficit (508) (4,352)Net actuarial gains and losses not recognised 2,087 4,981Net liability / (asset) arising from defined benefit obligations 1,579 629
Included in the balance sheet
Current provision for employee benefits (note 17)
Defined benefit obligations 1,579 629Non-current provision for employee benefits
Defined benefit obligations - -Net liability arising from defined benefit obligations 1,579 629
Consolidated6 Months Ended30 June 2005
Consolidated6 Months Ended30 June 2004
$000 $000
Movements in the present value of the definedbenefit obligations in the current period were asfollows:
Opening defined benefit obligation 181,126 169,433Current service cost 2,274 2,696Interest cost 4,608 4,483Contributions from plan participants 1,174 2,366Actuarial losses / (gains) 8,665 (11,058)Benefits paid (4,680) (1,768)Other (311) -Closing defined benefit obligation 192,856 166,152
Movements in the present value of the planassets in the current period were as follows:
Opening fair value of plan assetsdefined benefit obligation 185,134 153,253Expected return on plan assets 6,350 5,646Actuarial gains / (losses) 1,945 7,406Contributions from the employer 3,752 3,601Contributions from plan participants 1,174 2,366Benefits paid (4,680) (1,768)Other (311) -Closing fair value of plan assets 193,364 170,504
Consolidated30 June 2005
Consolidated30 June 2004
$000 $000
The analysis of the fair value of plan assets atthe balance sheet date is as follows:
5 years and more 6.19 6.01 0.63 0.63 631,912 631,912 (88,558) (11,536)
631,912 631,912 (88,558) (11,536)
Foreign Currency Contract Value
Contract Value Fair ValueRate
Average Exchange
Rate
Fair Value
Average Interest
333
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
38 FINANCIAL INSTRUMENTS (Continued)
(e) Interest Rate Risk Management
The consolidated entity is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates.
The risks is managed by maintaining an appropriate mix between fixed and floating rate borrowings, by the use of
interest rate swap contracts and forward interest rate contracts.
Interest Rate Swaps Contracts
Under interest rate swap contracts, the consolidated entity agrees to exchange (on a quarterly basis) the difference
between fixed and floating rate interest amounts calculated on agreed notional principal amounts.
Such contracts enable the consolidated entity to mitigate the risk of changing interest rates on debt held.
The fair value of interest rate swaps are based on market values of equivalent instruments at the reporting date and
are disclosed below. The average interest rate is based on the outstanding balances at the start of the financial period.
The following table details the notional principal amounts and remaining terms of interest rate swap contracts whereby
Powercor pays a fixed rate and receives a variable rate under the swap contracts outstanding as at the reporting date.
From 1 January 2005, interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated and effective
as cash flow hedges. Interest rate swaps outstanding at 31 December 2004 were recognised as financial assets on adoption of the accounting policies
1 to 2 years 6.68 6.38 150,000 2,475,000 (2,016) (28,717)
2 to 5 years 5.94 6.23 230,000 380,000 (2,254) (4,716)
5 years and more - - - - - -
2,855,000 2,855,000 (8,867) (33,433)
From 1 January 2005, interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated and effective as cash flow hedges.
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss. To manage its exposure to credit risk, a policy
has been adopted to deal only with creditworthy counterparties where appropriate obtaining sufficient collateral or other security as a means of mitigating the risk
of financial loss from defaults.
Except as detailed in the following table, the carrying amount of financial assets recorded in the financial statements, net of any provision for losses, represents the
consolidated entity's maximum exposure to credit risk in respect of financial instruments.
2005 2004
Financial Assets and Other Credit Exposures $000 $000
Not Readily Traded
Unfavourable interest rate swaps 288 -
Favourable foreign exchange options - 51
Favourable foreign exchange forwards - 2
288 53
(g) Fair Value of Financial Instruments
Except as detailed in the following table, the directors consider that the carrying amount of financial assets and financial liabilities
recorded in the financial statements approximates their fair values (2004: net fair value).
The fair values and net fair values of financial assets and financial liabilities are determined as follows:
- in respect options, with reference to generally accepted option pricing models;
- in respect of forward contracts, with reference to current market rates at the reporting date for contracts with similar volumes and terms to maturity;
- in respect of unfavourable interest rate swaps and options, the amounts that would be realised net of transaction costs if the contracts were extinguished
as at the reporting date.
- in respect of favourable cross currency swaps, the amounts that would be realised net of transaction costs if the contracts were extinguished as at the reporting date.
The following tables detail the fair value (2004: net fair value) of financial assets and financial liabilities:
CarryingAmount Fair Value
2005 $000 $000
Financial Assets
- -
- -
Financial Liabilities
Foreign currency options 13 13
Interest rate swaps 9,997 9,997
Cross currency swaps 88,588 88,558
98,598 98,568
CarryingAmount Fair Value
2004 $000 $000
Financial Assets
Foreign currency forward contracts - 2
Foreign currency options - 20
- 22
Financial Liabilities
Interest rate swaps - 34,478
Cross currency swaps - 11,536
- 46,014
Maximum Credit Risk
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
38 FINANCIAL INSTRUMENTS (Continued)
(h) Liquidity Risk ManagementThe consolidated entity manages liquidity risk by maintaining adequate reserves, banking and reserve borrowing facilities by continuously
monitoring forecast A1588and actual cash flows and matching the maturity profiles of financial assets and liabilities.
39 ADDITIONAL COMPANY INFORMATION
CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd is a proprietary company, incorporated and operating in Australia.
Registered Office and Principal Place of BusinessLevel 8
40 Market St
MELBOURNE VIC 3000
40 IMPACTS OF THE ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
The consolidated entity changed its accounting policies on 1 January 2005 to comply with Australian equivalents to International Financial
Reporting Standards ("A-IFRS"). The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 'First time
Adoption of Australian equivalents to International Financial Reporting Standards', with 1 january 2004 as the date of transition, except for
financial instruments, including derivatives, where the date of transition is 1 January 2005 (refer note 1 (ab)).
An explanation of how the transition from superseded policies to A-IFRS has effected the consolidated entity's position, financial performance
and cash flows is set out in the following tables and the notes that accompany the tables.
Effect of A-IFRS on the balance sheet as at 1 January 2004
Effect of A-IFRS on the cash flow statement for the period ended 30 June 2004There are no material differences between the cash flow statement presented under A-IFRS and the cash flow statement presented under the superseded policies.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
40 IMPACTS OF THE ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (Continued)
Effect of A-IFRS on the income statement for the financial year ended 31 December 2004
Supersededpolicies
Effect oftransition to A-
IFRS A-IFRS
Note $000 $000 $000
Revenue from ordinary activities (iv) 857,427 (8,230) 849,197Other income (iv) - 1,523 1,523Expenses from ordinary activities (iv) 440,138 (13,489) 426,649Finance costs 309,860 3,000 312,860
Profit/(Loss) from Ordinary Activities BeforeIncome Tax 107,429 3,782 111,211
Income tax expense relating to ordinary activities (71,310) 1,135 (70,175)
Profit for the period 178,739 2,647 181,386
Effect of A-IFRS on the balance sheet as at 31 December 2004
Effect of A-IFRS on the cash flow statement for the period ended 31 December 2004There are no material differences between the cash flow statement presented under A-IFRS and the cash flow statement presented under the superseded policies.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Notes to the Financial Statements
30 June 2005
40 IMPACTS OF THE ADOPTION OF AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (Continued)
Notes to the reconciliation of income and equity
(i) Defined Benefit Superannuation PlansA defined benefit obligation, included in the provision for employee benefits, was recognised on 1 January 2004 on transition to A-IFRS. Under superseded
policies, contributions to defined benefit superannuation plans were expensed when due and payable and no assets or liabilities were recognised in
relation to the plans. Adjustments were recognised on transition to A-IFRS direct to retained earnings of $11,326 thousands, after tax, and a provision of $16,180
thousands recorded.
For the six months ended 30 June 2004, the employee benefits provision reduced by $15,551 thousands to $629 thousands. Adjustments were made to
recognise actuarial gains of $9,438 thousands, after tax, directly in retained earnings and a reduction in employee expenses of $2,068 thousands.
For the financial year ended 31 December 2004, the employee benefits provision reduced to $nil. Adjustments were made to recognise actuarial gains of
$8,679 thousands, after tax, directly in retained earnings and a reduction in employee expenses of $3,782 thousands.
(ii) LicencesThe consolidated entity has elected not to restate business combinations that occurred prior to the date of transition to A-IFRS. The carrying amount of the
licences includes the impact of reversal of provisions. This has been adjusted on transition to A-IFRS.
(iii) ProvisionsProvisions that do not meet the recognition criteria of A-IFRS have been derecognised on transition to A-IFRS.
For the six months ended 30 June 2004, the provision and the licence had been reduced by $2,400 thousands. Adjustment was made to increase the
licence value by $2,400 thousands.
For the financial year ended 31 December 2004, the provision and the licence had been reduced by $3,529 thousands. Adjustment was made to increase
the licence value by $3,529 thousands.
(iv) RevenueUnder superseded policies, the consolidated entity recognised the gain or loss on disposal of non-current assets including property, plant and equipment and
investments on a gross basis by recognising the proceeds from sale as revenue, and the carrying amount of the property, plant and equipment disposed
of as an expense. Under A-IFRS, the gain or loss on disposal is recognised on a net basis and is classified as income, rather than revenue. Accordingly, the gross
amounts have been reclassified within the income statement for A-IFRS reporting purposes. The written down value of assets disposed has also been adjusted
by reducing expenses and reclassifying the amount in determining the net gain or loss on disposal.
(v) Finance costsUnder A-IFRS the impicit interest unwind on provisions has been reclassified as a finance cost. Under superseded policies the cost was included in expenses.
(vi) Income TaxThe consolidated entity elected to early adopt Accounting Standard AASB 1020 'Income Taxes' with effect from 1 January 2004. Accordingly, in the financial
statements deferred tax is determined using the balance sheet liability method in respect of temporary differences arising from differences between the carrying
amount of the assets and liabilities in the financial statements and their corresponding tax bases.
(vii) Retained EarningsThe effect of the adjustments on retained earnings on transition at 1 January 2004, the financial period ended 30 June 2004 and the financial year ended
31 December 2004 are set out below:
1 January 2004Six months
ended 30 June2004
Financialyear ended
31 December2004
Note $000 $000
Defined benefit pension plan after tax - transitional adjustment (decr (i) (11,326) - -Provision adjustment after tax - transitional adjustment (decrease) (iii) 2,822 - -Defined benefit pension plans adjustment after tax (decrease) (i) - 10,886 11,326
Other adjustmentsCurrent taxes have been reclassified to non-current where they are not recoverable or payable in the current period. This adjustment does not arise from the
application of A-IFRS.
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CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd
Directors’ declaration
30 June 2005
The directors declare that:
(a) In the directors' opinion, there are reasonable grounds to believe that the company will beable to pay its debts as and when they become due and payable; and
(b) In the directors' opinion, the attached financial statements and notes thereto are inaccordance with accounting standards and give a true and fair view of the financial positionand performance of the consolidated entity.
Signed in accordance with a resolution of the directors.
On behalf of the directors
Peter Peace Tulloch
Director
Melbourne, 4 November 2005
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Liability limited by a scheme approved under Professional Standards Legislation.
Independent review report to the members of CKI/HEI Electricity DistributionHoldings (Australia) Pty Ltd
ScopeThe financial report and directors’ responsibilityThe financial report comprises the balance sheet, income statement, cash flow statement, statement of recognisedincome and expenses, accompanying notes to the financial statements and the directors’ declaration for theconsolidated entity for the half-year ended 30 June 2005 as set out on pages 1 to 38. The consolidated entitycomprises both CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd (the company) and the entities itcontrolled at the end of the half-year or from time to time during the half-year.
The directors of the company are responsible for the preparation and true and fair presentation of the financialreport in accordance with Australian Equivalents to International Financial Reporting Standards and AASB1“First-time Adoption of Australian Equivalents to International Financial Reporting Standards” and othermandatory professional reporting requirements in Australia. This includes responsibility for the maintenance ofadequate accounting records and internal controls that are designed to prevent and detect fraud and error, and forthe accounting policies and accounting estimates inherent in the financial report.
Review ApproachWe have performed an independent review of the financial report in order to state whether, on the basis of theprocedures described, anything has come to our attention that would indicate that the financial report is notpresented fairly in accordance with Australian Equivalents to International Financial Reporting Standards andAASB1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” and othermandatory professional reporting requirements in Australia, so as to present a view which is consistent with ourunderstanding of the consolidated entity’s financial position, and performance as represented by the results of itsoperations and its cash flows.
Our review was conducted in accordance with Australian Auditing Standards applicable to review engagements.A review is limited primarily to inquiries of the entity’s personnel and analytical procedures applied to thefinancial data. These procedures do not provide all the evidence that would be required in an audit, thus the levelof assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do notexpress an audit opinion.
Statement
Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that thehalf-year financial report of CKI/HEI Electricity Distribution Holdings (Australia) Pty Ltd is not in accordancewith Australian Equivalents to International Financial Reporting Standards and AASB 1 “First-time Adoption ofAustralian Equivalents to International Financial Reporting Standards” and other mandatory professional reportingrequirements in Australia.
DELOITTE TOUCHE TOHMATSU
Clive MottersheadPartnerChartered AccountantsMelbourne, 4 November 2005
Deloitte Touche TohmatsuABN 74 490 121 060
180 Lonsdale StreetMelbourne VIC 3000GPO Box 78BMelbourne VIC 3001 Australia
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ETSA Utilities
Contents
Income statement 2Balance sheet 3Statement of recognised income and expense 4Cash flow statement 5
Notes to the financial statements
Summary of accounting policies 6 Non-current provisions 28Profit / (loss) from operations 21 Provisions 29Income taxes 22 Defined benefit superannuation plans 30Key management personnel remuneration 23 Partners capital accounts 34Remuneration of auditors 23 Partners current accounts 34Current trade and other receivables 24 Reserves 35Current inventories 24 Commitments for expenditure 35Other current assets 24 Contingent liabilities 36Non-current inventories 24 Leases 37Property, plant and equipment 25 Economic dependency 39Intangible assets 26 Subsidiaries 39Other non-current assets 26 Segment information 39Assets pledged as security 26 Related party disclosures 39Current trade and other payables 27 Subsequent events 40Current borrowings 27 Notes to the cash flow statement 41Other current financial liabilities 27 Financial instruments 42Current provisions 27 Impacts of the adoption of Australian equivalentsNon-current trade and other payables 28 to International Financial Reporting Standards 46Non-current borrowings 28 Additional information 52Other non-current financial liabilities 28
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ETSA Utilities
Consolidated income statementfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
ended
June June2005 2004
Note $'000 $'000
Revenue 2 371,632 356,833Other income 2 10,209 139
Transmission Use of System charges (70,202) (71,524)Employee benefits expense (36,586) (38,020)Raw materials and consumables used (6,964) (8,121)Services and other expenses (23,237) (32,808)Depreciation and amortisation expense (56,796) (66,177)Finance costs (166,830) (158,105)
Profit / (loss) before income tax expense 2 21,226 (17,783)
Income tax expense - -
Profit / (loss) for the period 21,226 (17,783)
Notes to the financial statements are included on pages 6 to 52.
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ETSA Utilities
Consolidated balance sheetas at 30 June 2005
ConsolidatedJune June2005 2004
Note $'000 $'000
Current assetsCash and cash equivalents 35 608,817 57,470Trade and other receivables 6 128,402 130,119Inventories 7 4,320 3,602Other 8 1,754 1,668
Current liabilitiesTrade and other payables 14 186,832 173,846Borrowings 15 638,892 50,012Other financial liabilities 16 56,942 -Provisions 17 25,049 38,578
Total current liabilities 907,715 262,436
Non-current liabilitiesTrade and other payables 18 64,527 126,170Borrowings 19 3,231,665 3,296,505Other financial liabilities 20 122,616 -Provisions 21 97,746 95,581
Total non-current liabilities 3,516,554 3,518,256
Total liabilities 4,424,269 3,780,692
Net assets 303,344 366,629
EquityPartners capital accounts 24 1,000 1,000Partners current accounts 25 355,910 365,629Reserves 26 (53,566) -
Total equity 303,344 366,629
Notes to the financial statements are included on pages 6 to 52.
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ETSA Utilities
Consolidated statement of recognised income and expensefor the half-year ended 30 June 2005
Consolidated
Half-year
ended
Half-year
ended
June June
2005 2004
Note $'000 $'000
Cash flow hedges:Gain / (loss) taken to equity 26 (2,620) -
Actuarial gain / (loss) on defined benefit plans 23, 25 - (3,397)
Income tax on items taken directly to or transferred from equity - -
Net income recognised directly in equity (2,620) (3,397)
Profit / (loss) for the period 21,226 (17,783)
Total recognised income and expense for the period 18,606 (21,180)
Notes to the financial statements are included on pages 6 to 52.
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ETSA Utilities
Consolidated cash flow statementfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
endedJune June2005 2004
Note $'000 $'000
Cash flows from operating activitiesReceipts from customers 377,827 381,112Payments to suppliers and employees (184,628) (190,663)Interest and other costs of finance paid (145,346) (131,444)
Net cash provided by operating activities 35(c) 47,853 59,005
Cash flows from investing activitiesProceeds on sale of investment securities 536,857 -Interest received 8,296 1,764Payments for property, plant and equipment (65,681) (79,022)Proceeds from sale of property, plant and equipment 617 1,658
Net cash provided by / (used in) investing activities 480,089 (75,600)
Cash flows from financing activitiesPayments for debt issue costs (3,036) (184)Proceeds from borrowings 2,900 1,400Repayment of borrowings (14,285) (33,140)
Net cash used in financing activities (14,421) (31,924)
Net increase / (decrease) in cash and cash equivalents 513,521 (48,519)
Cash and cash equivalents at the beginning of the half-year 95,296 105,989
Cash and cash equivalents at the end of the half-year 35(a) 608,817 57,470
Notes to the financial statements are included on pages 6 to 52.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies
Statement of compliance
The half-year financial report is a general purpose financial report for inclusion in a Product Disclosure Statementthat has been prepared in accordance with the Partnership Agreement, Accounting Standards and Urgent IssuesGroup Interpretations. Accounting Standards include Australian equivalents to International Reporting Standards(“A-IFRS”). Compliance with the A-IFRS ensures that the consolidated financial statements and notes of theconsolidated entity comply with International Financial Reporting Standard (“IFRS”). The half-year financialreport does not include parent entity financial statements and notes.
The financial statements were authorised for issue by the Board of Management on 8 November 2005.
Basis of preparation
The half-year financial report has been prepared on the basis of historical cost, except for the revaluation of certainnon-current assets and financial instruments. Cost is based on the fair values of the consideration given inexchange for assets.
In the application of A-IFRS management is required to make judgements, estimates and assumptions aboutcarrying values of assets and liabilities that are not readily apparent from other sources. The estimates andassociated assumptions are based on historical experience and various other factors that are believed to bereasonable under the circumstance, the results of which form the basis of making the judgements. Actual resultsmay differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimatesare recognised in the period in which the estimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of A-IFRS that have significant effects on the financialstatements and estimates with a significant risk of material adjustments in the next year are disclosed, whereapplicable, in the relevant notes to the financial statements.
Accounting policies are selected and applied in a manner which ensures that the resulting financial informationsatisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactionsor other events is reported.
The consolidated entity changed its accounting policies on 1 January 2005 to comply with A-IFRS. The transitionto A-IFRS is accounted for in accordance with Accounting Standard AASB 1 ‘First-time Adoption of AustralianEquivalents to International Financial Reporting Standards’, with 1 January 2004 as the date of transition. Anexplanation of how the transition from superseded policies to A-IFRS has affected the consolidated entity’sfinancial position, financial performance and cash flows is discussed in note 37.
The partners have also elected to apply Accounting Standard AASB 119 “Employee Benefits” (December 2004),even though the Standard is not required to be applied until annual reporting periods beginning on or after 1January 2006.
The accounting policies set out below have been applied in preparing the financial statements for the half-yearended 30 June 2005, the comparative information presented in these financial statements, and in the preparation ofthe opening A-IFRS balance sheet at 1 January 2004 (as disclosed in note 37), the consolidated entity’s date oftransition, except for the accounting policies in respect of financial instruments. The consolidated entity has notrestated comparative information for financial instruments, including derivatives, as permitted under the first-timeadoption transitional provisions. The accounting policies for financial instruments applicable to the comparativeinformation and the impact of changes in these accounting policies on 1 January 2005, the date of transition forfinancial instruments, is discussed further in note 1(v).ap
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
Going concern
The half-year financial report has been prepared on a going concern basis, which contemplates continuity ofnormal business activities and the realisation of assets and settlement of liabilities in the ordinary course ofbusiness.
At the balance date, the consolidated entity has a net working capital deficiency of $164 million. The partners,after reviewing the cash flow forecasts, the consolidated entity's existing financial facilities and the results ofoperations to the date of this report, have determined that the consolidated entity is able to pay its debts as andwhen they fall due and are satisfied that it is appropriate for this half-year financial report to be prepared on thegoing concern basis.
Significant accounting policies
The following significant accounting policies have been adopted in the preparation and presentation of the half-year financial report:
a) Borrowings
Borrowings are recorded initially at fair value, net of transaction costs.
Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between theinitial recognised amount and the redemption value being recognised in profit and loss over the period of theborrowing using the effective interest rate method.
b) Borrowing costs
Borrowing costs directly attributable to assets under construction are capitalised as part of the cost of thoseassets.
c) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, cash in banks and investments in money marketinstruments, net of outstanding bank overdrafts.
d) Derivative financial instruments
The consolidated entity enters into a variety of derivative financial instruments to manage its exposure to interestrate and foreign exchange rate risk, including forward foreign exchange contracts, interest rate swaps and crosscurrency swaps. Further details of derivative financial instruments are disclosed in note 36 to the financialstatements.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and aresubsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised inprofit or loss immediately unless the derivative is designated and effective as a hedging instrument, in whichevent, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Theconsolidated entity designates certain derivatives as either hedges of the fair value of recognised assets orliabilities or firm commitments (fair value hedges) or hedges of highly probable forecast transactions (cash flowhedges).
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Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
d) Derivative financial instruments (continued)
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profitor loss immediately, together with any changes in the fair value of the hedged asset or liability that is attributableto the hedged risk.
Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised, or nolonger qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from thehedged risk is amortised to profit or loss from that date.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flowhedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately inprofit or loss.
Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised inprofit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferredfrom equity and included in the initial measurement of the cost of the asset or liability.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, orno longer qualifies for hedge accounting. At that time, any cumulative gain or loss deferred in equity at thattime remains in equity and is recognised when the forecast transaction is ultimately recognised in profit orloss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferredin equity is recognised immediately in profit or loss.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivativeinstruments that do not qualify for hedge accounting are recognised immediately in profit or loss.
Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivativeswhen their risks and characteristics are not closely related to those of host contracts and the host contracts arenot measured at fair value with changes in fair value recognised in profit or loss.
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Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
e) Employee benefits
Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, long serviceleave, and sick leave when it is probable that settlement will be required and they are capable of being measuredreliably.
Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at theirnominal values using the remuneration rate expected to apply at the time of settlement.
Provisions made in respect of employee benefits which are not expected to be settled within 12 months aremeasured as the present value of the estimated future cash outflows to be made by the consolidated entity inrespect of services provided by employees up to reporting date.
Defined contribution plans
Contributions to defined contribution superannuation plans are expensed when incurred.
Defined benefit plans
For defined benefit superannuation plans, the cost of providing benefits is determined using the Projected UnitCredit Method, with actuarial valuations being carried out at each reporting date. Actuarial gains and losses arerecognised in full, directly in retained earnings, in the period in which they occur, and are presented in thestatement of recognised income and expense.
The defined benefit obligation recognised in the balance sheet represents the present value of the defined benefitobligation, adjusted for unrecognised past service cost, net of the fair value of the plan assets. Any assetresulting from this calculation is limited to past service cost, plus the present value of available refunds andreductions in future contributions to the plan.
f) Financial Assets
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profitor loss’, ‘held-to-maturity’ investments, ‘available-for-sale’ financial assets, and ‘loans and receivables’. Theclassification depends on the nature and purpose of the financial assets and is determined at the time of initialrecognition.
Loans and receivables
Trade receivables, loans, and other receivables are recorded at amortised cost less impairment.
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Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
g) Financial instruments issued by the consolidated entity
Debt and equity instruments
Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance ofthe contractual arrangement.
Interest and dividends
Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheetclassification of the related debt or equity instruments or component parts of compound instruments.
h) Foreign currency
Foreign currency transactions
All foreign currency transactions during the financial year are brought to account using the exchange rate ineffect at the date of the transaction. Foreign currency monetary items at reporting date are translated at theexchange rate existing at reporting date. Non-monetary assets and liabilities carried at fair value that aredenominated in foreign currencies are translated at the rates prevailing at the date when the fair value wasdetermined.
Exchange differences are recognised in profit or loss in the period in which they arise except that:
i) exchange differences which relate to assets under construction for future productive use are included inthe cost of those assets where they are regarded as an adjustment to interest costs on foreign currencyborrowings; and
ii) exchange differences on transactions entered into in order to hedge certain foreign currency risks (refernote 1(d)).
i) Goods and Services tax
Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except:
i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as partof the cost of acquisition of an asset or as part of an item of expense; or
ii) for receivables and payables which are recognised inclusive of GST.
The net amount of GST recoverable from, or payable to, the taxation authority is included as part ofreceivables or payables.
Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flowsarising from investing and financing activities which is recoverable from, or payable to, the taxation authorityis classified as operating cash flows.
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Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
j) Government grants
Government grants are assistance by the government in the form of transfers of resources to the consolidatedentity in return for past or future compliance with certain conditions relating to the operating activities of theentity. Government grants include government assistance where there are no conditions specifically relatingto the operating activities of the consolidated entity other than the requirement to operate in certain regions orindustry sectors.
Government grants relating to income are recognised as income over the periods necessary to match themwith the related costs. Government grants that are receivable as compensation for expenses or losses alreadyincurred or for the purpose of giving immediate financial support to the consolidated entity with no futurerelated costs are recognised as income of the period in which it becomes receivable.
Government grants relating to assets are treated as deferred income and recognised in profit and loss over theexpected useful lives of the assets concerned.
k) Impairment of assets
At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangibleassets to determine whether there is any indication that those assets have suffered an impairment loss. If anysuch indication exists, the recoverable amount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where the asset does not generate cash flows that are independent from otherassets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the assetbelongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, theestimated future cash flows are discounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific to the asset for which theestimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount,the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairmentloss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which casethe impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) isincreased to the revised estimate of its recoverable amount, but only to the extent that the increased carryingamount does not exceed the carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognisedin profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of theimpairment loss is treated as a revaluation increase.
l) Income tax
The partnership and consolidated entity is not subject to tax in its own right, as the partnership fullydistributes any taxable income or tax losses to the partners.
Tax consolidation
Certain companies in the consolidated entity are part of a tax-consolidated group under Australian taxationlaw. Tax consolidation is not applicable to the partnership and has no overall impact on the consolidatedentity.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
l) Income tax (continued)
The subsidiaries of the partnership are taxable entities and have adopted the following policies.
Current tax
Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of thetaxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted orsubstantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability(or asset) to the extent that it is unpaid (or refundable).
Deferred tax
Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporarydifferences arising from differences between the carrying amount of assets and liabilities in the financialstatements and the corresponding tax base of those items.
In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assetsare recognised to the extent that it is probable that sufficient taxable amounts will be available against whichdeductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred taxassets and liabilities are not recognised if the temporary differences giving rise to them arise from the initialrecognition of assets and liabilities (other than as a result of a business combination) which affects neithertaxable income nor accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments insubsidiaries, branches, associates and joint ventures except where the consolidated entity is able to control thereversal of the temporary differences and it is probable that the temporary differences will not reverse in theforeseeable future.
Deferred tax assets arising from deductible temporary differences associated with these investments andinterests are only recognised to the extent that it is probable that there will be sufficient taxable profits againstwhich to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeablefuture.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s)when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) thathave been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities andassets reflects the tax consequences that would follow from the manner in which the consolidated entityexpects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxationauthority and the partnership / consolidated entity intends to settle its current tax assets and liabilities on a netbasis.
Current and deferred tax for the period
Current and deferred tax is recognised as an expense or income in the income statement, except when itrelates to items credited or debited directly to equity, in which case the deferred tax is also recognised directlyin equity, or where it arises from the initial accounting for a business combination, in which case it is takeninto account in the determination of the lease premium.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
m) Intangible assets
Intangible assets acquired in a business combination
All potential intangible assets acquired in a business combination are identified and recognised separatelyfrom goodwill where they satisfy the definition of an intangible asset and their fair value can be measuredreliably.
n) Inventories
Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion offixed and variable overhead expenses, are assigned to inventory on hand by the method most appropriate toeach particular class of inventory, with the majority being valued on a weighted average cost basis. Netrealisable value represents the estimated selling price less all estimated costs of completion and costs to beincurred in marketing, selling and distribution.
o) Lease premium
The lease premium, representing the fair value at acquisition of the ETSA Utilities business is recognised asan asset and amortised on a straight line basis over the lease period of 200 years and tested for impairmentwhenever there is an indication that the lease premium may be impaired. Any impairment is recognisedimmediately in profit or loss. Refer also note 1(k).
p) Leased assets
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks andrewards of ownership to the lessee. All other leases are classified as operating leases.
Consolidated entity as lessee
Finance leases
Assets held under finance leases are initially recognised at their fair value or, if lower, at amounts equal to thepresent value of the minimum lease payments, each determined at the inception of the lease. Thecorresponding liability to the lessor is included in the balance sheet as a finance lease obligation.
Lease payments are apportioned between finance charges and reduction of the lease obligation so as toachieve a constant rate of interest on the remaining balance of the liability. Finance charges are chargeddirectly against income, unless they are directly attributable to qualifying assets, in which case they arecapitalised in accordance with the consolidated entity’s general policy on borrowing costs. Refer to note1(b).
Finance leased assets are amortised on a straight line basis over the estimated useful life of the asset.
The consolidated entity has leased distribution network assets from the Distribution Lessor Corporation (asubsidiary of the Treasurer of South Australia). The finance lease liability for the distribution network leasehas been prepaid.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
p) Leased assets (continued)
Operating leases
Operating lease payments are recognised as an expense on a straight-line basis over the lease term, exceptwhere another systematic basis is more representative of the time pattern in which economic benefits from theleased asset are consumed.
The consolidated entity has leased the distribution network land from the Distribution Lessor Corporation.Payments due under the distribution network land lease have been prepaid. This prepayment is amortised ona straight-line basis over the lease period of 200 years.
Lease incentives
In the event that lease incentives are received to enter into operating leases, such incentives are recognised asa liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economicbenefits from the leased asset are consumed.
q) Payables
Trade payables and other accounts payable are recognised when the consolidated entity becomes obliged to makefuture payments resulting from the purchase of goods and services.
r) Principles of consolidation
The consolidated financial statements are prepared by combining the financial statements of all the entities thatcomprise the consolidated entity, being the partnership (the parent entity) and its subsidiaries as defined inAccounting Standard AASB 127 ‘Consolidated and Separate Financial Statements’. Consistent accountingpolicies are employed in the preparation and presentation of the consolidated financial statements.
On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values atthe date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assetsacquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquiredexceeds the cost of acquisition, the deficiency is credited to profit and loss in the period of acquisition.
The consolidated financial statements include the information and results of each subsidiary from the date onwhich the company obtains control and until such time as the company ceases to control such entity.
In preparing the consolidated financial statements, all intercompany balances and transactions, and unrealisedprofits arising within the consolidated entity are eliminated in full.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
s) Property, plant and equipment
Land and buildings, plant and equipment, leasehold improvements and property, plant and equipment underfinance lease are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that isdirectly attributable to the acquisition of the item. In the event that settlement of all or part of the purchaseconsideration is deferred, cost is determined by discounting the amounts payable in the future to their presentvalue as at the date of acquisition.
Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land.Depreciation is calculated on a straight line basis so as to write off the net cost or other revalued amount of eachasset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated overthe period of the lease or estimated useful life, whichever is the shorter, using the straight line method. Theestimated useful lives, residual values and depreciation method is reviewed at the end of each annual reportingperiod.
The following estimated useful lives are used in the calculation of depreciation:
Sub-transmission and distribution system 20 - 71 yearsBuildings 10 - 40 yearsVehicles 3 - 15 yearsPlant, tools and office equipment 5 - 10 yearsTelecommunications 20 - 30 years
The consolidated entity has leased the distribution network and associated land from the Distribution LessorCorporation. In general, any maintenance, replacement or upgrading of the distribution network willautomatically become part of the distribution network, which is leased to the partnership.If, however, one of the exceptions (as defined under the terms of the lease) below are satisfied, then that additionto the distribution network (including land) may be owned by, or registered in favour of the partnership:
• Capital works which are considered to be qualifying projects; or
• Any extension beyond the outer extremities of the distribution network as it existed at 28 January 2000.
Depreciation rates for classes of assets are reviewed annually and, if necessary, adjusted so that they reflectthe most recent assessments of useful life. Where asset lives are revised the written down value of the asset isdepreciated over its revised remaining life.
As part of the annual review of useful lives in 2004, it was determined that the useful life of sub-transmissionand distribution lines should be extended from 55 to 71 years. The effect of the change in the useful lives ofsub-transmission and distribution system assets was to reduce depreciation expense for the year ended 31December 2004 by $21.9 million in the consolidated entity and partnership. The effect of this change wasfirst recorded in the financial statements for the year ended 31 December 2004.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
t) Provisions
Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice ofeconomic benefits is probable, and the amount of the provision can be measured reliably.
The amount recognised as a provision is the best estimate of the consideration required to settle the presentobligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Wherea provision is measured using the cash flows estimated to settle the present obligation, its carrying amount isthe present value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from athird party, the receivable is recognised as an asset if it is virtually certain that recovery will be received andthe amount of the receivable can be measured reliably.
u) Revenue recognition
Distribution Use of System revenue
Distribution Use of System revenue represents revenue earned from the distribution of electricity.Distribution Use of System revenue is recorded when electricity is provided.
Unbilled Distribution Use of System revenue is an estimate of the Distribution Use of System revenuerelating to electricity supplied to customers between the date of the last meter reading and year end and isincluded in the Balance Sheet as a receivable and in the Income Statement as operating revenue. Thisestimate is determined having regard to customers’ actual usage as well as previous consumption patterns.As Distribution Use of System revenue billing periods range from one month to three months, the estimatedreceivable from unbilled sales averages from fifteen days to one and a half months revenue
Contributed assets and contributions for capital works
Contributed assets and contributions for capital works are assets contributed or monies paid to theconsolidated entity by customers or developers seeking an augmentation of the electricity distribution systemin circumstances where, in the ordinary course of events, such augmentation would not be undertaken by theconsolidated entity. Contributed assets are recognised at fair value as operating revenue in the IncomeStatement in the period that control of the asset passes to the consolidated entity. Capital contributions arerecognised as operating revenue in the Income Statement in the year that the control of the contributionpasses to the consolidated entity.
Rendering of services
Revenue from a contract to provide services is recognised by reference to the stage of completion of thecontract.
Dividend and interest revenue
Dividend revenue is recognised on a receivable basis. Interest revenue is recognised on a time proportionatebasis that takes into account the effective yield on the financial asset.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
v) Comparative information – financial instruments
The consolidated entity has elected not to restate comparative information for financial instruments within thescope of Accounting Standards AASB 132 ‘Financial Instruments: Disclosure and Presentation’ and AASB139 ‘Financial Instruments: Recognition and Measurement’, as permitted on the first-time adoption of A-IFRS.
The accounting policies applied to accounting for financial instruments in the current financial year aredetailed in notes 1(a) to (u). The following accounting policies were applied to accounting for financialinstruments in the comparative financial year:
a) Accounts payable
Trade payables and other accounts payable are recognised when the consolidated entity becomesobliged to make future payments resulting from the purchase of goods and services.
b) Derivative financial instruments
Foreign exchange contracts
Exchange differences on forward foreign exchange contracts to hedge the purchase or sale of specificgoods and services are deferred and included in the measurement of the purchase or sale.
In the event of the early termination of a foreign currency hedge of an anticipated purchase or sale ofgoods and services, the deferred gains and losses that arose on the foreign exchange contract prior to itstermination are:
• deferred and included in the measurement of the purchase or sale when it takes place, wherethe anticipated transaction is still expected to occur; or
• recognised in net profit or loss at the date of termination, if the anticipated transaction is nolonger expected to occur.
Interest rate swaps
Gains and losses on interest rate swaps are included in the determination of interest expense.
c) Financial instruments issued by the company
Debt and equity instruments
Debt and equity instruments are classified as either liabilities or as equity in accordance with thesubstance of the contractual arrangement.
Interest and dividends
Interest and dividends are classified as expenses or as distributions of profit consistent with the balancesheet classification of the related debt or equity instruments or component parts of compoundinstruments.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
v) Comparative information – financial instruments (continued)
d) Foreign currency
General hedging transactions
Any costs or gains arising at the inception of a hedge are accounted for separately from the exchangedifferences on the hedging transactions. The costs or gains are deferred and recognised as assets orliabilities on entering the hedging transactions and amortised in profit or loss over the lives of thehedging transactions.
Hedging specific commitments
In relation to transactions intended to hedge specific purchases or sales:
• costs or gains arising at the time of entering into the transactions; and• exchange differences, to the extent that they arise up to the dates of purchase or sale,
are deferred and included in the measurement of the purchases or sales.
e) Borrowings
Bills of exchange are recorded at an amount equal to the net proceeds received, with the premium ordiscount amortised over the period until maturity. Interest expense is recognised on an effective yieldbasis.
Debentures, bank loans and other loans are recorded at an amount equal to the net proceeds received.Interest expense is recognised on an accrual basis.
Ancillary costs incurred in connection with the arrangement of borrowings are deferred and amortisedover the period of the borrowing.
f) Investments
Investments other than investments in subsidiaries, associates and joint venture entities are recorded atcost.
Interest revenue is recognised on a time proportionate basis that takes into account the effective yield onthe financial asset.
g) Receivables
Trade receivables and other receivables are recorded at amounts due less any allowance for doubtfuldebts.
Bills of exchange are recorded at amortised cost, with revenue recognised on an effective yield basis.
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ETSA Utilities
Notes to the financial statements
1 Summary of accounting policies (continued)
(v)
Effect of changing the accounting policies for financial instruments
Consolidated
31 Dec
2004
Effect of
adoption
1 Jan
2005
$'000 $'000 $'000
Current assets
Cash and cash equivalents 95,296 - 95,296Trade and other receivables 113,894 - 113,894Other financial assets 536,857 - 536,857Inventories 3,692 - 3,692Other 4,074 - 4,074
Total non-current assets 3,993,046 (20,741) 3,972,305
Total assets 4,746,859 (20,741) 4,726,118
Current liabilities
Trade and other payables 195,263 - 195,263Borrowings 649,562 - 649,562Other financial liabilities - 66,237 66,237Provisions 31,027 - 31,027
Total current liabilities 875,852 66,237 942,089
Non-current liabilities
Trade and other payables 145,529 (99,342) 46,187Borrowings 3,235,076 (19,996) 3,215,080Other financial liabilities - 137,983 137,983Provisions 100,041 - 100,041
Total non-current liabilities 3,480,646 18,645 3,499,291
Total liabilities 4,356,498 84,882 4,441,380
Net assets 390,361 (105,623) 284,738
Equity
Partners capital accounts 1,000 - 1,000Partners current accounts 389,361 (54,677) 334,684Reserves - (50,946) (50,946)
Total equity 390,361 (105,623) 284,738
Comparative information – financial instruments (continued)
The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1 January 2005 is shownbelow:
for the half-year ended 30 June 2005
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
1 Summary of accounting policies (continued)
v) Comparative information – financial instruments (continued)
No financial assets were designated as available for sale on adoption of AASB 139.
The following transitional provision has an effect on future periods. The effectiveness of hedgingrelationships are assessed from 1 January 2005; no adjustment is made in relation to hedges under thesuperseded policies which were not highly effective before 1 January 2005.
The main adjustments necessary that would make the comparative financial statements comply with AASB132 and AASB 139 are listed below. Similar adjustments were made at 1 January 2005 to restate the openingfinancial position of the consolidated entity to a position consistent with the accounting policies specified innote 1(a) to (u):
i) the measurement of financial assets designated as held-to-maturity and loans and receivables atamortised cost, rather than at cost or fair value in accordance with the superseded policy;
ii) the measurement of financial liabilities at amortised cost, rather than at cost in accordance with thesuperseded policy;
iii) the recognition and measurement of all derivatives (including any embedded derivatives) at fair value;
iv) the recognition in profit or loss of the movement in the fair value of derivatives which did not qualifyfor hedge accounting or were not designated as hedging instruments;
v) the transfer of deferred hedging gains and losses recognised as assets and liabilities arising from a cashflow hedge of a forecast transaction to the hedging reserve;
vi) the de-recognition of other deferred hedging gains and losses recognised as assets and liabilities;
vii) the deferral in equity of the effective portion of the movement in fair value of derivatives accounted foras a cash flow hedge;
viii) the recognition in profit or loss of the ineffective portion of the movement in fair value of hedginginstruments accounted for as a cash flow hedge;
ix) the recognition in profit or loss of the movement in fair value of derivatives accounted for as a fair valuehedge and the fair valuing of hedged items;
x) the adjustment to the carrying amount of items that would qualify as a fair value hedge under A-IFRSand were designated as a hedge under previous GAAP for the lower of the cumulative change in fairvalue of the hedged item for the designated hedge risk and the cumulative change in fair value of thehedging instrument; and
xi) the recognition of any current or deferred taxes in relation to the adjustments described above.
It is not practicable for the consolidated entity to detail the amounts of the adjustments to profit and loss andto opening retained earnings for the comparative period had the new accounting policies applied from thebeginning of the comparative period. In addition, it is not practicable for the consolidated entity to detail forthe current period, the amounts of the adjustments resulting to each financial statement line item as aconsequence of applying the accounting policies specified elsewhere in note 1.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
endedJune June2005 2004
$'000 $'0002 Profit / (loss) from operations
(a) Revenue
Revenue from the rendering of services:Distribution Use of System revenue 292,509 293,063Contributed assets and contributions for capital works 21,751 22,301Rendering of other services 41,441 39,794
Relevance of tax consolidation to the consolidated entity
Certain subsidiaries of the partnership have formed a tax-consolidated group with effect from 1 January 2003 and are thereforetaxed as a single entity from that date. The head entity in the tax-consolidated group is Utilities Management Pty Ltd. Themembers of the tax-consolidated group are identified at note 31.
The ETSA Utilities partnership is not part of a tax-consolidated group and therefore tax consolidation has no overall impact on theconsolidated entity.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
endedJune June2005 2004
$ $4 Key management personnel remuneration
The specified directors of ETSA Utilities during the half-year were:
Mr. Kam Hing-Lam (Non-executive)Mr. Tso Kai-Sum (Non-executive)Mr. Eric Kwan (Non-executive)Dr. Rupert Mak (Non-executive), resigned 9 May 2005Mr. Andrew J. Hunter (Non-executive)Mr. Edmond Ip (Non-executive)Mr. Dominic Chan (Non-executive)Mr. C.T. Wan (Non-executive)Mr. Charles Tsai (Non-executive), appointed 25 May 2005Ms. Cheryl Bart (Non-executive)Mr. Martin Cameron (Non-executive)
Auditor of the parent entityAudit or review of the financial report 57,370 68,126Taxation services 155,176 127,320Other non-audit services 47,918 156,933
260,464 352,379
The auditor of ETSA Utilities is Deloitte Touche Tohmatsu.
The compensation of the specified directors and specified executives, being the key managementpersonnel of the consolidated entity, is set out below:
The remuneration committee reviews the remuneration packages of all specified directors andspecified executives on an annual basis and makes recommendations to the board. Remunerationpackages are reviewed and determined with due regard to current market rates and are benchmarkedagainst comparable industry salaries, adjusted by a performance factor to reflect changes in theperformance of the consolidated entity.
Mr. William Shurniak (Chairman to 21 February 2005, Co-Chairman from 22 February 2005, non-executive)Mr. Peter Tulloch (Co-Chairman, non-executive), appointed 22 February 2005Mr. Basil Scarsella (Chief Executive Officer to 31 May 2005, non-executive from 1 June 2005)Mr. Philip Holberton (Special Assistant to Chairman, non-executive)
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
6 Current trade and other receivables
Distribution Use of System revenue trade receivables (i) 40,502 54,193Other trade receivables (ii) 23,317 16,487Allowance for doubtful debts (iii) (1,098) (972)
Raw materials - at cost 312 85Work in progress - at cost 201 202Finished goods - at cost 3,807 3,315
4,320 3,602
8 Other current assets
Prepayments 1,754 1,668
1,754 1,668
9 Non-current inventories
Finished goods - at cost 3,585 2,979
3,585 2,979
The average credit period on Distribution Use of System revenue is 15 days. No interest is charged on Distribution Use of Systemrevenue trade receivables.
The average credit period on other trade receivables is 70 days. No interest is charged on other trade receivables.
An allowance has been made for estimated irrecoverable amounts from Distribution Use of System revenue and other sales,determined by reference to past default experience. The movement in the allowance of $2,000 in the half-year ended 30 June 2005was recognised in the profit or loss for the current period.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
Balance at 30 June 2005 - - (984) (2,369) (464) (20,816) - (2,565) (129,269) (156,467)
Net book valueAs at 30 June 2004 46,122 4,223 15,888 87,036 13,248 114,287 91,389 7,726 2,147,031 2,526,950
As at 30 June 2005 46,122 4,223 15,231 109,462 10,349 114,986 126,187 7,171 2,150,147 2,583,878
Half-yearended
Half-yearended
June June2005 2004
$'000 $'000
Aggregate depreciation allocated, whetherrecognised as an expense or capitalised aspart of the carrying amount of other assetsduring the period:
Buildings (326) (327)Distribution network system assets (860) (760)Vehicles (545) (745)Plant, tools and office equipment (7,416) (6,734)Vehicles under finance lease (930) (792)Distribution network system assets underfinance lease (43,132) (53,232)
(53,209) (62,590)
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'00011 Intangible assets
Lease premium
Gross carrying amountBalance at 1 January 1,012,666 1,012,666
Balance at 30 June 1,012,666 1,012,666
Accumulated amortisation and impairmentBalance at 1 January (25,575) (20,512)Amortisation expense (i) (2,532) (2,532)
Balance at 30 June (28,107) (23,044)
Net book value
As at 30 June 984,559 989,622
(i)
12 Other non-current assets
Prepaid land lease (note 29) 410,598 412,710Refinancing fees:
Wholly-owned controlled entitiesOther related parties - Cheung Kong Infrastructure Finance - 1,847Other related parties - Hong Kong Electric International Finance - 555Other entities - 16,873
- 19,275
Amounts recoverable from insurers 1,700 2,926
412,298 434,911
13 Assets pledged as security
Amortisation expense is included in the line "depreciation and amortisation expense" in the incomestatement.
In accordance with the security arrangements of liabilities, as disclosed in notes 15 and 19 to the financialstatements, all assets of the consolidated entity have been pledged as security.
The consolidated entity does not hold title to the equipment under finance lease pledged as security.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
14 Current trade and other payables
Trade payables (i) 40,650 58,304Goods and services tax (GST) payable 3,695 2,633Deferred income 11,416 10,083Interest payable:
Other related parties - Cheung Kong Infrastructure Finance(Australia) Pty Ltd 43,818 32,941Other related parties - Hong Kong Electric International Finance(Australia) Pty Ltd 43,755 32,742Other entities 43,498 37,143
Secured by a fixed and floating charge on all the assets of the consolidated entity.
The average credit period on trade payables is 43 days. No interest is charged on trade payables. Theconsolidated entity has financial risk management policies in place to ensure that all payables are paidwithin the credit timeframe.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
18 Non-current trade and other payables
Currency swaps - 35,893Interest payable:
Other related parties - Cheung Kong Infrastructure Finance(Australia) Pty Ltd 32,379 45,254Other related parties - Hong Kong Electric International Finance(Australia) Pty Ltd 32,148 45,023
Other related parties - Cheung Kong Infrastructure Finance(Australia) Pty Ltd 632,360 635,000Other related parties - Hong Kong Electric International Finance(Australia) Pty Ltd 634,587 635,000
1,266,947 1,270,000
3,231,665 3,296,505
(i)
(ii) Secured by the assets leased.
(iii) The loans are subordinated to the secured borrowings.
20 Other non-current financial liabilities
At fair value:Interest rate swaps 115,052 -Currency swaps 7,564 -
Secured by a fixed and floating charge on all the assets of the consolidated entity.
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Notes to the financial statementsfor the half-year ended 30 June 2005
22 ProvisionsConsolidated
Selfinsurance
(i)
Siterestoration
(ii)
Unfundedsuperannuation
(iii)$'000 $'000 $'000
Balance at 1 January 2005 5,275 1,159 4,585Reductions arising from payments / other sacrifices offuture economic benefits - - (4,585)Reductions arising from re-measurement or settlementwithout cost (800) - -Unwinding of discount and effect of changes in thediscount rate - - -
The provision for self insurance represents the partners best estimate of the future sacrifice of economic benefits thatwill be required in connection with claims from third parties with respect to self-insured risks, where a presentobligation exists. Self insured risks include workers compensation and the insurance excess on bushfire and generalliability claims.
The provision for site restoration represents the partners best estimate of the future economic sacrifice of economicbenefits that will be required to remediate contaminated land and remove hazardous materials, where it is probablethat a present obligation exists, which can be reliably measured.
The Electricity Corporations (Restructuring and Disposal) Act (SA) 1999 required the consolidated entity to pay$84,763,000, plus interest, to the Electricity Industry Superannuation Scheme ("the Scheme"), in monthly instalmentsover five years, to meet the Scheme's unfunded liability for ETSA Utilities employees' superannuation benefits as at28 January 2000. The provision for unfunded superannuation represents the initial unfunded liability plus interest lessmonthly instalments paid.
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Notes to the financial statementsfor the half-year ended 30 June 2005
23 Defined benefit superannuation plans
The consolidated entity contributes to a defined benefit superannuation plan, the Electricity IndustrySuperannuation Scheme ("the Scheme"), in respect of employees of its subsidiary, Utilities ManagementPty Ltd.
The Scheme comprises four divisions: the Lump Sum Scheme, the Pension Scheme, the RG Scheme andthe Accumulation Scheme. All sub-schemes, except for the Accumulation Scheme, are closed to newmembers.
The Scheme provides retirement benefits to employees as follows:
Pension Scheme: retirement benefits are primarily in the form of pensions based on contributions, periodof membership and final salary. A pension may be commuted to a lump sum on retirement.
Lump Sum Scheme: retirement benefits comprise member contributions plus interest and employer-provided defined-benefit components
The consolidated entity has no legal liability to make up a deficit in the Scheme. If the Scheme were woundup, there would be no legal obligation to make good any shortfall. The Trust Deed of the Scheme statesthat if the Scheme winds up or the employer withdraws from the Scheme, the remaining assets are to bedistributed as set out in the Trust Deed following receipt of any contributions receivable.
The Scheme is a multi-employer plan for the South Australian electricity supply industry, operatingpursuant to the Electricity Corporations Act 1994 (SA). The Scheme is managed by the Electricity IndustrySuperannuation Board, a separate legal entity independent of the consolidated entity.
The Scheme is a funded plan. The Scheme computes its obligations in accordance with AccountingStandard AAS 25 ‘Financial Reporting by Superannuation Plans’ which prescribes a different measurementbasis to that applied in this financial report. The net deficit determined in the Scheme's most recentfinancial report, for the financial year ended 30 June 2004, was $19,621,000, of which $2,452,000 relatedto the consolidated entity (30 June 2003: net deficit of $56,970,000, of which $21,415,000 related to theconsolidated entity).
The Scheme actuaries have recommended that the current contribution level of $6.5 million per annumshould be increased to $11.5 million per annum as from 1 January 2006. Funding recommendations aremade by the actuaries based on their forecasts of various matters, including future Scheme assetsperformance, interest rates and salary increases.
The consolidated entity may benefit from any surplus in the Scheme in the form of a contribution reductionor contribution holiday. Any reduction in contributions would normally be implemented only after advicefrom the Scheme's actuary. On wind-up of the Scheme, the consolidated entity may benefit from anysurplus.
Accumulation Scheme: retirement benefits are calculated on an accumulation basis at a level at leastsufficient to ensure that the employer has no Superannuation Guarantee Charge liability.
RG Scheme: retirement benefits comprise member contributions plus interest and an employer-providedcomponent equal to 2 1/3 times the sum of the member contributions plus interest, subject to a limit basedon final salary, plus an additional defined-benefit component.
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Notes to the financial statementsfor the half-year ended 30 June 2005
23 Defined benefit superannuation plans (continued)June June2005 2004
% %Key assumptions used (expressed as weighted averages):Discount rate 4.50 4.50Expected return on plan assets 8.20 8.20Expected rate of salary increase 6.50 6.50Expeced rate of pension increase 3.00 3.00
June June2005 2004
$'000 $'000
Amounts recognised in income in respect of these defined benefit plansare as follows:
Current service cost 4,872 5,731Interest cost 4,637 5,260Expected return on plan assets (6,269) (6,822)
Total, included in "employee benefits expense" 3,240 4,169
Actuarial losses / (gains) incurred during the year and recognised in thestatement of recognised income and expense - 3,397
- 3,397
Cumulative actuarial losses / (gains) recognised in the statement ofrecognised income and expense 6,793 3,397
Consolidated
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Notes to the financial statementsfor the half-year ended 30 June 2005
June June2005 2004
$'000 $'000
23 Defined benefit superannuation plans (continued)
The amount included in the balance sheet arising from the entity'sobligations in respect of its defined benefit plans is as follows:
Present value of funded defined benefit obligations 283,832 240,078Fair value of plan assets (210,891) (171,461)
72,941 68,617Present value of unfunded defined benefit obligations - 14,445
Deficit 72,941 83,062
Net liability arising from defined benefit obligations 72,941 83,062
Included in the balance sheet:Current provision for employee benefits (note 17):
Defined benefit obligations 8,990 6,480Current provision for unfunded superannuation (notes 17 and 22) - 14,445Non-current provision for employee benefits (note 21):
Defined benefit obligations 63,951 62,137
Net liability arising from defined benefit obligations 72,941 83,062
Movements in the present value of the defined benefit obligations inthe current period were as follows:
Opening defined benefit obligation 272,914 235,829Current service cost 4,872 5,731Interest cost 4,637 5,260Contributions from plan participants 1,409 1,866Actuarial losses / (gains) - 7,637Benefits paid - (1,800)
Closing defined benefit obligation 283,832 254,523
Consolidated
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Notes to the financial statementsfor the half-year ended 30 June 2005
June June2005 2004
$'000 $'000
23 Defined benefit superannuation plans (continued)
Movements in the present value of the plan assets in the current periodwere as follows:
Opening fair value of plan assets 195,388 147,536Expected return on plan assets 6,269 6,822Actuarial gains / (losses) - 4,240Contributions from the employer 7,825 12,797Contributions from plan participants 1,409 1,866Benefits paid - (1,800)
Closing value of plan assets 210,891 171,461
The actual return on plan assets was $6,269,000 (2004: $10,450,000)
The fair value of plan assets includes no amounts relating to:- any of the consolidated entity's own financial instruments; and- any property occupied by, or other assets used by, the consolidated entity.
The history of experience adjustments is as follows:
Experience adjustments on plan liabilities - 7,637Experience adjustments on plan assets - 4,240
The consolidated entity expects to make a contribution of $8,990,000 (2004: $21,424,000) to the definedbenefit plans during the next financial year. The "target funding" method was used to determine thecontribution rates.
The overall expected rate of return of 8.2% (2004: 8.2%) is a weighted average of the expected returns ofthe various categories of plan assets held. The partners' assessment of the expected returns is based onhistorical return trends and analysts' predictions of the market for the assets in the next twelve months.
Consolidated
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Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
24 Partners capital accounts
Partners capital accounts 1,000 1,000
Partners capital accountsBalance at beginning of financial half-year 1,000 1,000
Balance at end of financial half-year 1,000 1,000
% %
CKI Utilities Development Limited 25.5 25.5HEI Utilities Development Limited 25.5 25.5CKI Utilities Holdings Limited 15.0 15.0HEI Utilities Holdings Limited 15.0 15.0CKI/HEI Utilities Distribution Limited 19.0 19.0
25 Partners current accounts
Balance at beginning of financial half-year 389,361 386,809Adjustments on adoption of accounting policies specified by AASB 132and 139 (refer note 1(v)) (54,677) -Restated balance at beginning of financial half-year 334,684 386,809Net profit / (loss) attributable to partners 21,226 (17,783)Actuarial losses (note 23) - (3,397)Deferred tax recognised directly in equity - -Balance at end of financial year 355,910 365,629
Partners capital accounts represents capital contributions by each of the partners in proportion to thepartners respective capital share of the partnership. Additional contributions may be made, in accordancewith the Partnership Agreement.
The partners have the right to vote and the right to distributions. The partners may resolve to pay interest onthe partner's capital contributions; no interest has been paid to date.
Refer to note 24 for the proportionate split between the partners.
The partners share in the capital account is split in the following proportions:
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Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
26 Reserves
Hedging (53,566) -
Hedging reserve
Balance at beginning of financial half-year - -Adjustments on adoption of accounting policies specified by AASB 132and 139 (refer note 1(v)) (50,946) -Restated balance at beginning of financial half-year (50,946) -Gain / (loss) recognised:
Deferred tax arising on hedges - -Balance at end of financial year (53,566) -
27 Commitments for expenditure
(a) Capital expenditure commitments
Plant and equipmentNot longer than 1 year 11,123 2,275
11,123 2,275
(b) Lease commitments
The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flowhedges. The cumulative deferred gain or loss on the hedge is recognised in profit or loss when the hedgedtransaction impacts the profit or loss, or is included as a basis adjustment to the non-financial hedged item,consistent with the applicable accounting policy.
Finance lease liabilities and non-cancellable operating lease commitments are disclosed in note 29 to thefinancial statements.
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Notes to the financial statementsfor the half-year ended 30 June 2005
28 Contingent liabilities
ConsolidatedJune June2005 2004
$’000 $’000
Environmental (i) - -Guarantees for performance (ii) 937 576Guarantee for workers compensation (iii) 1,334 1,334
(i) The nature of the consolidated entity’s business can create potential exposure to environmental matterswhich the consolidated entity may be required to remedy in the future. Hazardous materials are usedin the distribution network of the consolidated entity. A system of control to ensure that all suchhazardous materials are identified, managed and disposed of safely, in accordance with currentlegislation and other obligations has been implemented.
Certain matters associated with contaminants such as contaminated land and hazardous materials havebeen identified. A provision for site restoration has been established where the need for remediationhas been identified. No amount has been recognised where there is significant uncertainty as towhether any future costs will be incurred.
The consolidated entity’s operations are subject to changing environmental and related legislation,which could necessitate additional remedial work and breaches of this legislation could result in finesand penalties. It is not practicable to state an estimate of the potential financial impact of any suchchanging environmental and related legislation.
(ii) As at 30 June 2005, $936,803 (30 June 2004: $576,000) of guarantees for performance in respect ofstock, inventory or equipment procurement were outstanding.
(iii) As at 30 June 2005, there was an outstanding guarantee of $1,334,000 (30 June 2004: $1,334,000)given to WorkCover Corporation in respect of workers compensation.
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Notes to the financial statementsfor the half-year ended 30 June 2005
29 Leases
(a) Finance leases
Leasing arrangements
Finance leases relate to:
(i)
(ii)
Finance lease liabilities
Minimum Future LeasePayments
Present Value ofMinimum Future Lease
PaymentsJune June June June2005 2004 2005 2004
$'000 $'000 $'000 $'000
Consolidated
Not later than 1 year 4,924 1,753 4,362 1,412Later than 1 year and not later than 5 years 6,600 5,258 6,093 4,966
Present value of minimum lease payments 10,455 6,378 10,455 6,378
Included in the financial statements as:Current borrowings (note 15) 4,362 1,412Non-current borrowings (note 19) 6,093 4,966
10,455 6,378
(i)
Distribution network system assets leased from the Distribution Lessor Corporation, with a lease term of 200 years. The finance leaseliability for the distribution network lease has been prepaid.
Vehicles with lease terms of 3 years. At the conclusion of the lease, a final rental payment will be required if the market value of thevehicles is less than the residual value.
Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual.
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Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedJune June2005 2004
$'000 $'000
29 Leases (continued)
(b) Operating leases
Leasing arrangements
Operating leases relate to:
(i)
(ii)
Non-cancellable operating lease payments
Not longer than 1 year 80 152Longer than 1 year and not longer than 5 years 100 -
180 152
No liabilities have been recognised with respect to non-cancellable operating leases.
Properties with lease terms of up to 5 years. The consolidated entity does not have an option to purchase the leased asset at the expiry ofthe lease period.
Distribution network system land leased from the Distribution Lessor Corporation, with a lease term of 200 years. Payments due underthe distribution network land lease have been prepaid, as disclosed in note 13 to the financial statements. The consolidated entity does nothave an option to purchase the leased asset at the expiry of the lease period.
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Notes to the financial statementsfor the half-year ended 30 June 2005
30 Economic dependency
The business of the consolidated entity is dependent upon the continued safe and reliable operation of thegeneration and transmission services provided by other electricity industry entities.
31 Subsidiaries
Ownership Interest
Name of entityCountry of
incorporation2005
%
2004
%
Parent Entity
ETSA Utilities, a partnership of:CKI Utilities Development Limited The BahamasHEI Utilities Development Limited The BahamasCKI Utilities Holdings Limited The BahamasHEI Utilities Holdings Limited The BahamasCKI/HEI Utilities Distribution Limited The Bahamas
Subsidiaries
ETSA Utilities Finance Pty Ltd Australia 100 100Utilities Management Pty Ltd (i) Australia 100 100ETSA FRC Pty Ltd (i) Australia 100 100ETSA Ancillary Pty Ltd (i) Australia 100 100
(i) These companies are members of a tax-consolidated group.
32 Segment information
Business segments
The principal activity of the consolidated entity is the conduct of an electricity distribution business.
Geographical segments
The consolidated entity’s activities are conducted principally within South Australia.
33 Related party disclosures
(a) Equity interests in subsidiaries
Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 31 to the financialstatements.
(b) Key management personnel remuneration
Details of key management personnel remuneration are disclosed in note 4 to the financial statements.
(c) Transactions with other related parties
Other related parties include:• the parent entity;• entities with joint control or significant influence over the consolidated entity;• associates;• subsidiaries;• key management personnel of Hutchison Whampoa Limited;• former key management personnel; and• other related parties.
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Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
endedJune June2005 2004
$’000 $’000
33 Related party disclosures (continued)
(c) Transactions with other related parties (continued)
The interest cost of loans from related parties is disclosed in note 2. Accrued interest payable to other relatedparties is disclosed in notes 15 and 19. Borrowings from other related parties are disclosed in note 20.
During the half-year, the following debt issue costs were paid to other related parties:
Cheung Kong Infrastructure Finance (Australia) Pty Ltd 65 -Hong Kong Electric International Finance (Australia) Pty Ltd 8 22
73 22
During the half-year the consolidated entity purchased goods or services from thefollowing other related parties, on normal commercial terms and conditions:
Hutchison Telecommunications (Australia) Ltd 172 152Powercor Australia Ltd 5,288 24,634
5,460 24,786
During the financial year the consolidated entity provided goods or services to thefollowing other related parties, on normal commercial terms and conditions:
Hutchison Telecommunications (Australia) Ltd 982 242Powercor Australia Ltd 7,294 593
8,276 835
(d) Parent entities
The parent entity in the consolidated entity is ETSA Utilities.
The ultimate Australian parent entity is ETSA Utilities.
The ultimate parent entity is Hutchison Whampoa Limited, a company incorporated in Hong Kong.
34 Subsequent events
There has not been any matter or circumstance that has arisen since the end of the financial period, that hassignificantly affected, or may significantly affect, the operations of the consolidated entity, the results of thoseoperations, or the state of affairs of the consolidated entity in future financial periods.
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Notes to the financial statementsfor the half-year ended 30 June 2005
ConsolidatedHalf-year
endedHalf-year
endedJune June2005 2004
$'000 $'00035 Notes to the Statement of Cash Flows
(a) Reconciliation of cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents includescash on hand and in banks and investments in money market instruments, net ofoutstanding bank overdrafts. Cash and cash equivalents at the end of the financialhalf-year as shown in the cash flow statement is reconciled to the related items inthe balance sheet as follows:
Cash and cash equivalents 608,817 57,470
608,817 57,470
(b) Financing facilities
Secured bank loan facilities, reviewed annually:
Amount used 100,000 48,600Amount unused 20,000 41,400
120,000 90,000
(c) Reconciliation of profit / (loss) for the period to net cash flows fromoperating activities
Profit / (loss) for the period 21,226 (17,783)(Gain) / loss on disposal of property, plant and equipment 104 (139)Hedging (gains) / losses (25,670) -Depreciation and amortisation of non-current assets 56,796 66,177Foreign exchange (gain) / loss 15,461 -Interest income received and receivable (15,931) (1,675)Non-cash interest expense 3,265 3,341Gifted asset revenue (3,709) (4,494)
Changes in net assets and liabilities:(Increase) / decrease in assets:
Current receivables (6,874) (2,580)Current inventories (628) (266)Other current assets 2,320 1,669Non-current inventories (143) 453
During the financial period, the consolidated entity acquired property plant and equipment with a value of $3,709,000(30 June 2004: $4,494,000) through the gifting of assets by customers.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
36 Financial instruments
(a) Financial risk management objectives
(b) Significant accounting policies
(c) Foreign currency risk management
Forward foreign exchange contracts
There were no forward foreign exchange contracts outstanding as at reporting date (30 June 2004: nil).
Currency swaps
Outstanding ContractsJune June June June June June June June2005 2004 2005 2004 2005 2004 2005 2004
% % % % $'000 $'000 $'000 $'000Sell US Dollars
Less than 1 yearLIBOR+0.53% - 0.5952 - 42,000 - (9,264) -
1 to 2 years -LIBOR+0.53% - 0.5952 - 42,000 - (5,805)
576,530 42,000 (17,710) (5,805)Sell Hong Kong DollarsLess than 1 year 7.8200 - 4.6339 - 215,800 - (46,786) -1 to 2 years - 7.8200 - 4.6339 - 215,800 - (17,158)
215,800 215,800 (46,786) (17,158)
792,330 257,800 (64,496) (22,963)
(i)
The following table details the currency swaps outstanding as at reporting date.
Average Interest Rate Fair value
The consolidated entity’s Treasury function provides services to the business, co-ordinates access to domestic and international financial markets,and manages the financial risks relating to the operations of the consolidated entity.
The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Theuse of financial derivatives is governed by the consolidated entity’s policies approved by the board of management, which provide writtenprinciples on the use of financial derivatives. Compliance with policies and exposure limits is reviewed by the internal auditors on a continuousbasis.
The consolidated entity’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. Theconsolidated entity enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk,including:
- currency swaps to manage the foreign currency risk associated with foreign currency denominated borrowings; and
The coupons to July 2005 on these currency swaps, with a fair value of $(882,000), do not qualify for hedge accounting and have accordingly beenclassified as current liabilities in the balance sheet.
- interest rate swaps to mitigate the risk of rising interest rates.
Average Exchange Rate Contract value
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis onwhich revenues and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed innote 1 to the financial statements.
The group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rateexposures are managed within approved policy parameters utilising forward foreign exchange contracts and currency swap agreements.
It is the policy of the consolidated entity to enter into forward foreign exchange contracts to cover specific foreign currency payments and receiptswithin 0% to 100% of the exposure generated.
Under currency swap contracts, the consolidated entity agrees to exchange specified principal and interest foreign currency amounts at an agreedfuture date at a specified exchange rate. Such contracts enable the consolidated entity to mitigate the risk of adverse movements in foreignexchange rates.
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Notes to the financial statementsfor the half-year ended 30 June 2005
36 Financial instruments (continued)
(d) Interest rate risk management
Interest rate swap contracts
June June June June June June2005 2004 2005 2004 2005 2004
Less than 1 year 5.76 6.90 257,800 2,976,000 (10) (21,995)2 to 5 years 6.38 - 2,795,000 - (94,414) -5 years + 6.44 6.39 532,800 3,327,800 (20,638) (39,611)
3,585,600 6,303,800 (115,062) (61,606)
June June June June June June2005 2004 2005 2004 2005 2004
Average contracted fixedinterest rate Notional principal amount Fair value
The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at reporting date:
Interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts outside a specified "window" of floating rateswere designated as held for trading.
Average contracted fixedinterest rate Notional principal amount Fair value
From 1 January 2005, interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts were either designatedand effective as cash flow hedges or were designated as held for trading. Interest rate swaps outstanding at 31 December 2004 were recognised asfinancial liabilities on adoption of the accounting policies specified in note 1(v)).
The consolidated entity is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed bymaintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts.
Under interest rate swap contracts, the consolidated entity agrees to exchange the difference between fixed and floating rate interest amountscalculated on agreed notional principal amounts. Such contracts enable the consolidated entity to mitigate the risk of changing interest rates ondebt held. The fair value of interest rate swaps are based on market values of equivalent instruments at the reporting date and are disclosed below.The average interest rate is based on the outstanding balances at the start of the financial half-year.
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Notes to the financial statementsfor the half-year ended 30 June 2005
36
(d) Interest rate risk management (continued)
Maturity profile of financial instruments
The following table details the consolidated entity’s exposure to interest rate risk as at 30 June 2005:
Fixed maturity dates
Weighted Variable Less 1 - 2 2 - 3 3 - 4 4 - 5 5 + Non
average interest than 1 years years years years years interest Total
The following table details the consolidated entity's exposure to interest rate risk as at 30 June 2004:
Financial instruments (continued)
As at 30 June 2005, the consolidated entity had in place committed long-term bank facilities to re-finance $167,043,000 of debentures with maturity dates of less than one year andthese have therefore been classified as non-current liabilities in the balance sheet.
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Notes to the financial statementsfor the half-year ended 30 June 2005
The consolidated entity manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuouslymonitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.
The following tables detail the fair value (2004: net fair value) of financial liabilities:
Carrying Amount Net Fair Value
Other related parties - Cheung Kong Infrastructure Finance (Australia) PtyLtd
- the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing modelsbased on discounted cash flow analysis; and
- the fair value of derivative instruments, included in hedging assets and liabilities, are calculated using quoted prices. Where suchprices are not available use is made of discounted cash flow analysis using the applicable yield curve for the duration of theinstruments.
Transaction costs are included in the determination of net fair value.
Other related parties - Hong Kong Electric InternationalFinance (Australia) Pty Ltd
Fair value of financial instruments
Except as detailed in the following table, the partners consider that the carrying amount of financial assets and financial liabilities recorded in thefinancial statements approximates their fair values (2004: net fair value).
The fair values and net fair values of financial assets and financial liabilities are determined as follows:
- the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets aredetermined with reference to quoted market prices;
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. Theconsolidated entity has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as ameans of mitigating the risk of financial loss from defaults. The consolidated entity's exposure and the credit ratings of its counterparties arecontinuously monitored and the aggregate value of transactions concluded are spread amongst approved counterparties. Credit exposure iscontrolled by counterparty limits that are reviewed and approved by the audit committee annually. The consolidated entity measures credit risk on afair value basis.
Distribution Use of System revenue trade receivables consists of a small number of electricity retailers. Other trade accounts receivable consist of alarge number of customers, spread across diverse industries. Ongoing credit evaluation is performed on the financial condition of accountsreceivable and, where appropriate, credit guarantee insurance cover is purchased.
The consolidated entity has a significant credit risk exposure to a single counterparty and a group of counterparties having similar characteristics,namely electricity retailers and, in particular, one major electricity retailer. The credit risk on liquid funds and derivative financial instruments islimited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the consolidated entity’smaximum exposure to credit risk without taking account of the value of any collateral obtained:
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Notes to the financial statements
37
Supersededpolicies*
Effect oftransition to A-
IFRS
A-IFRS Supersededpolicies*
Effect oftransition to A-
IFRS
A-IFRS
Note $'000 $'000 $'000 $'000 $'000 $'000
Revenue 356,833 - 356,833 735,706 - 735,706Other income d 1,658 (1,519) 139 2,895 (2,811) 84
Transmission Use of System charges (71,524) - (71,524) (142,707) - (142,707)Employee and contractor costs c (35,716) (2,304) (38,020) (66,622) (4,607) (71,229)Raw materials and consumables used (8,121) - (8,121) (15,026) - (15,026)Services and other expenses d (34,327) 1,519 (32,808) (66,264) 2,811 (63,453)Depreciation and amortisation expense a, b (64,687) (1,490) (66,177) (109,937) (2,979) (112,916)Finance costs (158,113) 8 (158,105) (321,122) - (321,122)
Profit / (loss) before income tax expense (13,997) (3,786) (17,783) 16,923 (7,586) 9,337
Income tax expense f (2,488) 2,488 - (16,425) 16,425 -
Profit / (loss) for the period (16,485) (1,298) (17,783) 498 8,839 9,337
* Reported financial results under previous Australian GAAP.
for the half-year ended 30 June 2005
Impacts of the adoption of Australian equivalents to International Financial Reporting Standards
Half-Year ended Financial year ended
Effect of A-IFRS on the Income Statement for the half-year ended 30 June 2004 and the financial year ended 31 December 2004
30 June 2004 31 December 2004
The consolidated entity changed its accounting policies on 1 January 2005 to comply with Australian equivalents to International Financial Reporting Standards(A-IFRS). The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 ‘First-time Adoption of Australian Equivalents toInternational Financial Reporting Standards’, with 1 January 2004 as the date of transition, except for financial instruments, including derivatives, where thedate of transition is 1 January 2005 (refer note 1(v)).
An explanation of how the transition from superseded policies to A-IFRS has affected the consolidated entity’s financial performance, financial position andcash flows is set out in the following tables and the notes that accompany the tables.
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ETSA Utilities
Notes to the financial statements
37
Effect of A-IFRS on the Balance Sheet as at 1 January 2004
Superseded
policies*
Effect of
transition to
A-IFRS
A-IFRS
Note $'000 $'000 $'000
Current assets
Cash and cash equivalents 105,989 - 105,989Trade and other receivables 127,378 - 127,378Other financial assets - - -Inventories 3,336 - 3,336Other 3,337 - 3,337
Total current assets 240,040 - 240,040
Non-current assets
Inventories 3,432 - 3,432Property, plant and equipment a 2,396,015 96,528 2,492,543Deferred tax assets** f 216,574 (216,574) -Intangible assets b 925,364 66,791 992,155Other 439,198 - 439,198
Total non-current assets 3,980,583 (53,255) 3,927,328
Total assets 4,220,623 (53,255) 4,167,368
Current liabilities
Trade and other payables 150,291 - 150,291Borrowings 82,151 - 82,151Other financial liabilities - - -Provisions c 37,912 6,480 44,392
Total current liabilities 270,354 6,480 276,834
Non-current liabilities
Trade and other payables 129,453 - 129,453Borrowings 3,279,150 - 3,279,150Other financial liabilities - - -Deferred tax liabilities** f 589,690 (589,690) -Provisions c 29,615 64,507 94,122
Total non-current liabilities 4,027,908 (525,183) 3,502,725
Total liabilities 4,298,262 (518,703) 3,779,559
Net assets / (liabilities) (77,639) 465,448 387,809
Equity
Partners capital accounts 1,000 - 1,000Partners current accounts g (78,639) 465,448 386,809Reserves - - -
Total equity (77,639) 465,448 387,809
* Reported financial position for the financial year ended 31 December 2003.
Impacts of the adoption of Australian equivalents to International Financial Reporting Standards (continued)
** For the purposes of the reconciliation, deferred tax assets and deferred tax liabilities have not been offset againsteach other.
for the half-year ended 30 June 2005
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Notes to the financial statements
37
Effect of A-IFRS on the Balance Sheet as at 30 June 2004 and 31 December 2004
Superseded
policies*
Effect of
transition to
A-IFRS
A-IFRS Superseded
policies*
Effect of
transition to
A-IFRS
A-IFRS
Note $'000 $'000 $'000 $'000 $'000 $'000
Current assets
Cash and cash equivalents e 57,470 - 57,470 632,153 (536,857) 95,296Trade and other receivables 130,119 . 130,119 113,894 - 113,894Other financial assets e - - - - 536,857 536,857Inventories 3,602 - 3,602 3,692 - 3,692Other 1,668 - 1,668 4,074 - 4,074
Total current assets 192,859 - 192,859 753,813 - 753,813
Non-current assets
Inventories 2,979 - 2,979 3,442 - 3,442Property, plant and equipment a 2,431,741 95,209 2,526,950 2,474,528 93,890 2,568,418Deferred tax assets** f 210,487 (210,487) - 218,028 (218,028) -Intangible assets b 923,002 66,620 989,622 920,641 66,450 987,091Other 434,911 - 434,911 434,095 - 434,095
Total non-current assets 4,003,120 (48,658) 3,954,462 4,050,734 (57,688) 3,993,046
Total assets 4,195,979 (48,658) 4,147,321 4,804,547 (57,688) 4,746,859
Total equity (94,124) 460,753 366,629 (77,141) 467,502 390,361
* Reported financial position under previous Australian GAAP.
for the half-year ended 30 June 2005
** For the purposes of the reconciliation, deferred tax assets and deferred tax liabilities have not been offset against each other.
Impacts of the adoption of Australian equivalents to International Financial Reporting Standards
Half-Year ended Financial year ended
30 June 2004 31 December 2004
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Notes to the financial statements
37
Supersededpolicies*
Effect oftransition to A-
IFRS
A-IFRS Supersededpolicies*
Effect oftransition to A-
IFRS
A-IFRS
Note $'000 $'000 $'000 $'000 $'000 $'000
Cash flows from operating activitiesReceipts from customers 381,112 - 381,112 798,132 - 798,132Payments to suppliers and employees (190,663) - (190,663) (370,975) - (370,975)Interest received 1,764 (1,764) - 5,841 (5,841) -Interest and other costs of finance paid (131,444) - (131,444) (306,146) - (306,146)
Net cash provided by operating activities 60,769 (1,764) 59,005 126,852 (5,841) 121,011
Cash flows from investing activitiesPayments for investment securities e - - - - (536,857) (536,857)Proceeds on sale of investment securities - - - - - -Interest received - 1,764 1,764 - 5,841 5,841Payments for property, plant and equipment (79,022) - (79,022) (169,305) - (169,305)Proceeds from sale of property, plant and equipment 1,658 - 1,658 2,895 - 2,895
Net cash used in investing activities (77,364) 1,764 (75,600) (166,410) (531,016) (697,426)
Cash flows from financing activitiesPayment of debt issue costs (184) - (184) (3,929) - (3,929)Proceeds from borrowings 1,400 - 1,400 571,951 - 571,951Repayment of borrowings (33,140) - (33,140) (2,300) - (2,300)
Net cash (used in) / provided by financing activities (31,924) - (31,924) 565,722 - 565,722
Net increase / (decrease) in cash and cash equivalents (48,519) - (48,519) 526,164 (536,857) (10,693)
Cash and cash equivalents at the beginning of the period 105,989 - 105,989 105,989 - 105,989
Cash and cash equivalents at the end of the period e 57,470 - 57,470 632,153 (536,857) 95,296
* Reported cash flows under previous Australian GAAP.
for the half-year ended 30 June 2005
30 June 2004 31 December 2004
Effect of A-IFRS on the Cash Flow Statement for the half-year ended 30 June 2004 and the financial year ended 31 December 2004
Impacts of the adoption of Australian equivalents to International Financial Reporting Standards (continued)
Half-Year ended Financial year ended
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
37 Impact of the adoption of Australian equivalents to International Financial Reporting Standards(continued)
Notes to the reconciliations of income and equity
a) Property, plant and equipment
The consolidated entity elected to measure property, plant and equipment on transition to A-IFRS at fairvalue and has used that fair value as the item’s deemed cost at that date. The effect of the revaluation tofair value for property, plant and equipment previously held at cost is an increase in the carrying amountof property, plant and equipment of $96,528,000 at 1 January 2004 and a reclassification of any amountsin the asset revaluation reserve associated with these items to accumulated losses. An additionaldepreciation expense of $1,319,000 and $2,638,000 has been recognised under A-IFRS for the half-yearended 30 June 2004 and the financial year ended 31 December 2004 respectively.
b) Lease Premium
The consolidated entity has restated business combinations that occurred prior to the date of transition toA-IFRS, and accordingly, the carrying amount of the lease premium at the date of transition has changed.The effect of the restatement of business combinations is an increase in the carrying amount of the leasepremium by $66,791,000 at 1 January 2004. An additional amortisation expense of $171,000 and$341,000 has been recognised under A-IFRS for the half-year ended 30 June 2004 and the financial yearended 31 December 2004 respectively.
c) Defined benefit superannuation plans
The consolidated entity has restated business combinations that occurred prior to the date of transition toA-IFRS, and accordingly additional employee benefits (predominantly a defined benefit obligation),included in the provision for employee benefits, of $70,987,000 was recognised on 1 January 2004 ontransition to A-IFRS. Under superseded policies, contributions to defined benefit superannuation planswere expensed when due and payable and no assets or liabilities were recognised in relation to the plans.
For the half-year ended 30 June 2004, the employee benefits provision increased by a further $5,701,000to $76,688,000. Adjustments were made to recognise actuarial losses of $3,397,000 directly inaccumulated losses, and to increase employee benefit expense by $2,304,000 for the half-year ended 30June 2004.
For the financial year ended 31 December 2004, the employee benefits provision increased by a further$11,400,000 to $82,387,000. Adjustments were made to recognise actuarial losses of $6,793,000 directlyin accumulated losses, and to increase employee benefit expenses by $4,607,000 for the financial yearended 31 December 2004.
d) Revenue
Under superseded policies, the consolidated entity recognised the gain or loss on disposal of property,plant and equipment on a ‘gross’ basis by recognising the proceeds from sale as revenue, and the carryingamount of the property, plant and equipment disposed as an expense. Under A-IFRS, the gain or loss ondisposal is recognised on a ‘net’ basis, and is classified as income, rather than revenue. Accordingly, the‘gross’ amounts have been reclassified within the Income Statement for A-IFRS reporting purposes.
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
37 Impact of the adoption of Australian equivalents to International Financial Reporting Standards
(continued)
Notes to the reconciliations of income and equity (continued)
e) Cash and cash equivalents / Other financial assets
Under superseded policies, the consolidated entity classified certain short term investments with amaturity date of more than three months as cash and cash equivalents. Under A-IFRS, all short terminvestments with a maturity date of more that three months must be classified as other financial assets.Accordingly, the amounts have been reclassified within the Balance Sheet and Cash Flow Statement forA-IFRS reporting purposes.
f) Income Tax
Under superseded policies, the consolidated entity had early adopted Revised Accounting Standard AASB1020 “Income Taxes”, which is consistent with A-IFRS.
The impact of UIG 1052 “Tax Consolidation Accounting”, when considered with the partnership notbeing a taxable entity, is that on adoption of A-IFRS all tax balances, including deferred tax balances, ofthe partnership need to be derecognised.
g) Partners current accounts
The effect of the above adjustments on partners current accounts is as follows:
Consolidated
1 Jan
2004
$’000
30 June
2004
$’000
31 Dec 2004
$’000
Fair value as deemed cost 96,528 96,528 96,528Additional depreciation expense - (1,319) (2,638)Lease premium - additional amortisation expense (1,381) (1,552) (1,722)Provision for employee benefits (10,473) (16,174) (21,873)Adjustments to tax balances 380,774 383,270 397,207
Total adjustment to partners current accounts 465,448 460,753 467,502
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ETSA Utilities
Notes to the financial statementsfor the half-year ended 30 June 2005
38 Additional information
ETSA Utilities ABN 13 332 330 749
is a partnership of:
CKI Utilities Development Limited ABN 65 090 718 880HEI Utilities Development Limited ABN 82 090 718 951CKI Utilities Holdings Limited ABN 54 091 142 380HEI Utilities Holdings Limited ABN 50 091 142 362CKI/HEI Utilities Distribution Limited ABN 19 091 143 038(Each incorporated in The Bahamas)
Principal place of business:
1 Anzac HighwayKeswick, South Australia, 5035Australia
Telephone (08) 8404 5667
Postal address:
GPO Box 77, Adelaide, SA 5001
Website:
www.etsautilities.com.au
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ETSA Utilities
Partners’ StatementThe partners declare that:
(a) in the partners’ opinion, there are reasonable grounds to believe that the partnership will be able to pay its debts asand when they become due and payable; and
(b) in the partners’ opinion, the attached financial statements and notes thereto are in accordance with the PartnershipAgreement; including compliance with Accounting Standards in Australia and giving a true and fair view of thefinancial position and performance of the consolidated entity.
Signed in accordance with a resolution of the Board of Management.
On behalf of the Board of Management
Peter Tulloch Lewis OwensCHAIRMAN CHIEF EXECUTIVE OFFICER
Adelaide, 8 November 2005
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Liability limited by a scheme approved under Professional Standards Legislation.
INDEPENDENT REVIEW REPORT TO THE PARTNERS OF ETSA UTILITIES
ScopeThe financial report and partners’ responsibilityThe financial report comprises the balance sheet, income statement, cash flow statement, statement of changes inequity, accompanying notes to the financial statements and the partners’ statement for the consolidated entity forthe half-year ended 30 June 2005 as set out on pages 2 to 52. The consolidated entity comprises both ETSAUtilities (the partnership) and the entities it controlled at the end of the half-year or from time to time during thehalf-year.
The partners are responsible for the preparation and true and fair presentation of the financial report inaccordance with Australian Equivalents to International Financial Reporting Standards and AASB 1 “First-timeAdoption of Australian Equivalents to International Financial Reporting Standards” and other mandatoryprofessional reporting requirements in Australia. This includes responsibility for the maintenance of adequateaccounting records and internal controls that are designed to prevent and detect fraud and error, and for theaccounting policies and accounting estimates inherent in the financial report.
Review ApproachWe have performed an independent review of the financial report in order to state whether, on the basis of theprocedures described, anything has come to our attention that would indicate that the financial report is notpresented fairly in accordance with Australian Equivalents to International Financial Reporting Standards andAASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” andother mandatory professional reporting requirements in Australia, so as to present a view which is consistentwith our understanding of the consolidated entity’s financial position, and performance as represented by theresults of its operations and its cash flows.
Our review was conducted in accordance with Australian Auditing Standards applicable to review engagements.A review is limited primarily to inquiries of the entity’s personnel and analytical procedures applied to thefinancial data. These procedures do not provide all the evidence that would be required in an audit, thus thelevel of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, wedo not express an audit opinion.
StatementBased on our review, which is not an audit, we have not become aware of any matter that makes us believe thatthe half-year financial report of ETSA Utilities does not give a true and fair view of the consolidated entity’sfinancial position as at 30 June 2005 and of its performance for the half-year ended on that date in accordancewith Australian Equivalents to International Financial Reporting Standards and AASB 1 “First-time Adoption ofAustralian Equivalents to International Financial Reporting Standards” and other mandatory professionalreporting requirements in Australia.
DELOITTE TOUCHE TOHMATSU
J J HandelPartnerChartered AccountantsAdelaide, 8 November 2005
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financial services guide
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Financial Services GuideFinancial Services Guide of Spark Infrastructure RE Limited (ACN 114 910 984) Australian financial services
licence number 290436 in relation to the offer to arrange for the issue of Instalment Receipts. Spark
Infrastructure RE is liable and responsible for the contents of this Financial Services Guide. The persons
who have liability for the Prospectus and Product Disclosure Statement with which this Financial Services
Guide is combined are listed on the inside front cover of the Prospectus and Product Disclosure
Statement. The issuer of the Instalment Receipts is Spark Infrastructure Instalment Limited. Spark
Infrastructure Instalment Limited and Spark Infrastructure RE are related bodies corporate.
What is the purpose and content of this
document?
This Financial Services Guide (“FSG”) is dated18 November 2005 and is an important document.You should read it carefully and make sure youunderstand it. This FSG provides general informationabout Spark Infrastructure RE and the financialservices it offers in offering to arrange for the issueof Instalment Receipts. The FSG is intended to assistyou in deciding whether to accept the offer toarrange for the issue of Instalment Receipts.
The FSG contains:• information on relevant financial services that
Spark Infrastructure RE is authorised to provideand relevant financial products to which thoseservices relate;
• information about the capacity in which SparkInfrastructure RE acts when providing servicesto you;
• information about your rights and how complaintsagainst Spark Infrastructure RE will be dealt with;
• details on how you can instruct SparkInfrastructure RE in relation our offer to arrangefor the issue of Instalment Receipts; and
• information about remuneration that may be paidto Spark Infrastructure RE in relation to the Offerto arrange for the issue of Instalment Receipts.
This FSG is combined with a replacement Prospectusand Product Disclosure Statement (“Offer
Document”) for the Stapled Securities of SparkInfrastructure and Instalment Receipts. You shouldread the Offer Document carefully as it providesimportant information about the Stapled Securitiesand Instalment Receipts.
Who will be responsible for the financial services
given to you?
Spark Infrastructure RE is responsible for offering toarrange for the issue of Instalment Receipts.
What financial services are Spark Infrastructure
RE authorised to provide?
Spark Infrastructure RE is authorised to provide arange of financial services including dealing in andproviding financial product advice with respect tosecurities and interests in managed investmentschemes. The Australian Securities and InvestmentsCommission has given relief to allow persons whohold an Australian financial services licence coveringdealing in and providing financial product advice withrespect to interests in managed investment schemesto provide those services with respect to theInstalment Receipts.
What fees are payable to Spark Infrastructure RE
for offering to arrange for the issue of Instalment
Receipts?
Spark Infrastructure RE is not entitled to anyremuneration from Spark Instalment for offering toarrange for the issue of Instalment Receipts. SparkInfrastructure RE is entitled to fees and otheramounts in acting as the Responsible Entity of theSpark Infrastructure Trust, details of which are setout in the Offer Document.
In what capacity does Spark Infrastructure
RE act?
In offering to arrange for the issue of InstalmentReceipts Spark Infrastructure RE acts in a principalcapacity and not on your behalf.
What kind of advice will you receive?
Spark Infrastructure RE does not provide personalfinancial product advice. To the extent any advice isgiven in the Offer Document, it is general financialproduct advice and does not take account of yourpersonal circumstances, needs or objectives. Thusany resulting investment may not be appropriate toyour needs and objectives and you should carefullyassess how appropriate the recommendations are inlight of your particular investment objectives,financial situation and needs.
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How can you instruct Spark Infrastructure RE in relation to
the offer to arrange for the issue of Instalment Receipts?
In order to accept the Offer by Spark Infrastructure RE toarrange for the issue of Instalment Receipts, you mustcomplete the application form attached to the Offer Documentin accordance with the instructions in the Offer Document.
What can you do if you have a complaint?
If you have a complaint, then please write to SparkInfrastructure RE at the contact details shown below. If yourcomplaint is not satisfactorily resolved, please refer the matterin writing to the Complaints Handling Officer. SparkInfrastructure RE will use reasonable endeavours to deal withand resolve any complaint within a reasonable time.
If your complaint is not resolved within 45 days, you may havethe right to complain to the Financial Industry Complaints ServiceLimited (FICS) at PO Box 579, Collins Street, West Melbourne,Victoria 3007, Australia or by calling 1300 780 808. ASIC also hasa toll-free infoline – 1300 300 630 which you may use to make acomplaint and obtain information about your rights.
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Legal\101195797.4
Financial Services Guide ("FSG')
Financial Services Guide of Australian Executor
Trustees Limited ("AET") ABN 84 007 869 794
(AFS License Number 240023) in relation to the
offer of Stapled Securities under the replacementprospectus and product disclosure statement dated
18 November 2005 ("Offer Document") issued by
Spark Infrastructure RE Limited (as trustee of
Spark Infrastructure Trust), Spark Infrastructure
Holdings No 1 Limited, Spark Infrastructure
Holdings No 2 Limited and Spark Infrastructure
Holdings International Limited (collectively "Spark
Infrastructure" and each a "Stapled Entity").
Capitalized terms used but not defined in this FSG
have the same meaning as in the Offer Document.
What is the purpose of this Financial Services Guide ("FSG")?
It is to provide information about AET in its capacity
as the Security Trustee (as referred to in the Offer
Document) and the role of the Security Trustee in the
context of the offer of Stapled Securities, so that you
may take these into account when you make your
decision whether or not to participate in the offer of
Stapled Securities which involves the provision of
financial services by the Security Trustee.
This FSG also contains information about the
remuneration that may be paid to AET and other
relevant persons in relation to those financial services,
and how complaints against AET are dealt with.
Who is the Security Trustee in relation to the Stapled Securities?
AET is the Security Trustee. AET also holds the Loan
Notes on trust for the Noteholders pursuant to the terms
and conditions of Note Trust Deed. AET, established
in 1910, is one of Australia's largest and oldest
statutory trustee companies. AET is a wholly owned
subsidiary of Australian Wealth Management Limited,
a publicly listed company ("Australian Wealth
Management").
AET holds its own Australian Financial Services
Licence ("AFS licence") and is authorised under its
AFS licence to provide the following financial services
to wholesale and retail clients:
deal in certain financial products (eg derivatives,
interests in managed investment schemes,
securities and superannuation);
give financial product advice;
operate a custody service;
operate managed discretionary account services;
advise on certain financial products (eg
derivatives, basic deposit products, debentures,
interests in managed investment schemes,
securities and superannuation).
This FSG has been prepared by, and is the
responsibility of, the Security Trustee. The Security
Trustee is neither responsible nor liable for any part of
the Offer Document. The persons responsible for the
Offer Document other than this FSG are set out on the
inside front cover of the Offer Document.
What financial services will the Security Trustee provide in relation to the Stapled Securities ?
A. Custodial services in respect of Stapled Securities
If your application for Stapled Securities is accepted
and you have paid the First Instalment, you will
acquire Instalment Receipts (which evidence your
beneficial interest in the underlying Stapled Securities).
The legal interest in the Stapled Securities will be held
by the Security Trustee on trust for the Instalment
Creditor and you as the Holder until one of the events
specified below occurs.
B. Dealing in Stapled Securities
If, as a Holder, you pay the Final Instalment and all
Instalment Interest on the Final Instalment Payment
Date, the Security Trustee will transfer the underlying
Stapled Security to you as the Holder.
If you as a Holder fail to pay the Final Instalment and
all Instalment Interest on the Final Instalment Payment
Date, the Instalment Creditor may direct the Security
Trustee to sell the Stapled Security to which the
Instalment Receipts relate and apply the proceeds of
sale to pay all outstanding amounts owed by you as the
Holder (and if there is a balance from the sale it will be
paid to the Holder).
What is the relationship between the Security Trustee and Spark Infrastructure?
AET and Spark Infrastructure are not members of the
same group of companies and are not related in any
way.
How is the Security Trustee remunerated for the services it provides as Security Trustee?
AET will receive the following remuneration
(excluding GST) from Spark Infrastructure:
an establishment fee of $5,000 payable on
execution of the Note Trust Deed;
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an annual fee of $30,000 for AET's services as
the Security Trustee, payable quarterly in
arrears from the date of issue of the Stapled
Securities;
an annual fee of $60,000 for the first $1 billion
face value of the Loan Notes, then 0.005% of
the face value of the Loan Notes over $1 billion.
This fee is payable semi-annually in arrears, and
will be adjusted by CPI increases each 5 years,
from the date of issue of the Stapled Securities;
as a Security Trustee, AET has the benefit of
indemnities from Spark Infrastructure and the
right to recover from Spark Instalment or Spark
Infrastructure certain reasonable disbursements,
expenses and outgoings incurred by it which are
listed in the Securities Administration Deed and
include audit fees, accounting, legal and
administrative fees;
as a Note Trustee, AET has the benefit of
indemnities from the Responsible Entity and is
entitled to be reimbursed out of the assets of
Spark Infrastructure Trust for all reasonable
Costs (as defined in the Note Trust Deed)
incurred by it in relation to its duties in respect
of the Note Trust; and
AET is also entitled to fees based on time in
attendance in circumstances where an Event of
Default (as defined in the Note Trust Deed)
occurs and AET is required to take action to
recover the funds. Such fees would be
calculated on the basis of the applicable hourly
rates of the relevant staff attending to the
recovery action. The range of applicable hourly
rates would depend on the experience and
seniority of the relevant staff. As at the date of
this FSG, the range of applicable hourly rates
would be $250/hr to $350/hr (ex GST).
However, this range may change from time to
time at AET's discretion.
Our Staff
Our staff are salaried employees of an AET related
company. When they provide you with services on our
behalf, they do not get any payments, commission or
other benefits directly from the services provided.
Some employees may periodically be entitled to
bonuses or non-monetary benefits, based on their own
performance and/or the performance of their business
unit as a whole. Various factors are taken into account
when assessing such performance, including the total
value of assets invested through advisory services that
we provide and an individual adviser's contribution
towards this. Non-monetary benefits typically involve
attendance at conventions and conferences.
How can you contact the Security Trustee?
In the event you need to contact the Security Trustee
you may:
call us or write to us at any of our offices by using the contact details at the back of this FSG
visit our website at www.aetlimited.com.au
use your adviser's specific contact details.
You can choose how you will give us instructions, such as by telephone, fax or other means. Written instructions are required in certain limited circumstances.
Privacy
In order to be able to provide you with services, we
may need to obtain personal information about you
such as your name, address and telephone number. We
may disclose your personal information to our service
providers, to persons who act on your behalf in relation
to any of the assets in your portfolio and to any other
third party where the disclosure is required by law.
AET and other companies in the Australian Wealth
Management Group may also use your personal
information to provide you with information on
products or other services. If you do not wish to
receive such information please contact us.
AET is bound by the National Privacy Principles. To
obtain further information on our Privacy Policy,
please ask your advisor or visit our website on
www.aetlimited.com.au.
What should you do if you have a complaint?
AET is a member of the Financial industry Complaints
Services ("FICS"), an external industry complaints
resolution scheme. If you have a complaint about any
aspect of our services, you can call us on (08) 8218
4911 or write to our Complaints Officer at 44 Pirie
Street, Adelaide, South Australia 5000.
We will acknowledge your complaint within five
business days of receiving it. We will normally
respond in detail to your complaint within 20 business
days of receiving it. Some matters are more complex
and can take a little longer to resolve, and if that is the
case, we will keep you informed.
If you are not satisfied with our response to your
complaint, or if you consider that we have not
responded to you in a timely manner, you can contact
FICS on 1300 780 808 or write to them, indicating the
nature of your complaint, at the following address:
403
DEU109 SPARKS Prosp-Sect 18_D14 18/11/05 10:24 AM Page 403
3.
Legal\101195797.4
Financial Industry Complaints Service Limited
PO Box 579
Collins Street West
Melbourne Victoria 8007
The Australian Securities and Investment Commission
also has a freecall Infoline, 1300 300 630, which you
may use to make a complaint and obtain information
DEU109 SPARKS Prosp-Sect 18_D14 18/11/05 10:24 AM Page 404
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405
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application forms
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 407
A Number of Securities
Enter the number of Securities you wish to apply for. The applicationmust be for a minimum of 2,000 Securities. Applications for greater than2,000 Securities must be in multiples of 100 Securities.
Total amount of First Instalment
Enter the total amount of the First Instalment. To calculate the amount, multiply the number of Securities by $1.40.
Applicant Name(s)
Enter the full name you wish to appear on the statement of Securities.This must be either your own name or the name of a company. Up to 3joint Applicants may register. You should refer to the table below for thecorrect forms of registrable title. Applications using the wrong form ofnames may be rejected. Clearing House Electronic Subregister System(CHESS) participants should complete their name identically to thatpresently registered in the CHESS system.
Postal Address
Enter your postal address for all correspondence. All communications toyou from the Registry will be mailed to the person(s) and address asshown. For joint Applicants, only one address can be entered.
Contact Details
Enter your contact details. These are not compulsory but will assist us ifwe need to contact you.
CHESS
If you are a CHESS participant (or are sponsored by a CHESSparticipant) and you wish to hold Securities allotted to you under thisApplication on the CHESS subregister, enter your CHESS HIN.Otherwise, leave this section blank and on allotment, you will besponsored by Spark Infrastructure and allocated a Security holderReference Number (SRN).
B
C
F
D
E
Tax File Number
Enter your Tax File Number ("TFN") or exemption category. Businessenterprises may alternatively quote their Australian Business Number("ABN"). Where applicable, please enter the TFN or ABN for each jointApplicant. Collection of TFN(s) and ABN(s) is authorised by taxationlaws. Quotation of TFN(s) and ABN(s) is not compulsory and will notaffect your Application. However, if these are not provided, tax will berequired to be deducted at the highest marginal rate of tax (includingthe Medicare levy) from payments.
Payment
Make your cheque or bank draft payable to Spark InfrastructureSecurity Offer in Australian currency and cross it Not Negotiable. Yourcheque or bank draft must be drawn on an Australian Bank.
Complete the cheque details in the boxes provided. The total amountmust agree with the amount shown in box B.
Cheques will be processed on the day of receipt and as such,sufficient cleared funds must be held in your account as chequesreturned unpaid may not be re-presented and may result in yourApplication being rejected. Pin (do not staple) your cheque(s) to theApplication Form where indicated. Cash will not be accepted. Receiptfor payment will not be forwarded.
H
G
How to complete this formPlease complete all relevant sections of this Application Form in BLOCK LETTERS, using black or blue pen. These instructions are crossreferenced to each section in the Application Form.
The securities to which this Application Form relates are the Securities, being the Stapled Securities and the Instalment Receipts that representthe Stapled Securities until the Final Instalment and Instalment Interest are paid. The Stapled Securities comprise one unit in the SparkInfrastructure Trust, one share in Spark Infrastructure Company 1, one share in Spark Infrastructure Company 2, one CHESS Depositary Interestover one share in Spark Infrastructure Company 3 and one unsecured, subordinated loan note issued by the Responsible Entity (AFSL 290436)as trustee for the Spark Infrastructure Trust. Further details about the Securities are contained in the Offer Document lodged with ASIC on 18 November 2005 and any replacement or supplementary Offer Document issued by Spark Infrastructure. The Offer Document contains importantinformation about investing in Spark Infrastructure. You should read the Offer Document before applying for Securities. The Offer Document willexpire 13 months after the date of lodgement with ASIC.
ASIC requires that a person who provides access to an electronic Application Form must provide access, by the same means and at the sametime, to the relevant Offer Document and any replacement or supplementary Offer Document. This Application Form is included in the OfferDocument. During the offer period, paper copies of the Offer Document and any replacement or supplementary document will be sent free of charge on request.
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 408
Broker Firm Offer Application Form
Unit Street Number Street Name or PO Box /Other Information
Number of Securities applied forA B
Cheque details - Make your cheque or bank draft payable to ‘Spark Infrastructure Security Offer’HBSB Number Account NumberDrawer/Account Name Amount of cheque
A$
Cheque Number
(minimum of 2,000 Securities and thereafter in multiples of 100 Securities)
My/Our address is (Include State and Postcode):
City / Suburb / Town State Postcode
D
G
I/we lodge total amount of First Instalment
C Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)
Title or Company Name Given Name(s) Surname
Joint Applicant 2 or Account Designation
Joint Applicant 3 or Account Designation
E Enter your contact details - Contact Name
Broker Code Adviser Code
This Application Form is important. Please read the entire Offer Document and lodge yourApplication Form as soon as possible. The Offer will be open for a limited time. To meet therequirements of the Corporations Act, this Application Form must not be distributed unlessincluded in, or accompanied by, the Offer Document. The purchase price for the StapledSecurities is payable in instalments as set out in the Offer Document. The amount payable for theFirst Instalment per Stapled Security is $1.40. The Stapled Securities you are offered (if any) willbe issued to the Security Trustee (see Offer Document) and you will receive Instalment Receipts.Capitalised words and certain terms used in this form have the same meaning given to them inthe Offer Document.
Registry Use Only
A$ .
Telephone Number - Business Hours / After Hours
( )
Price per Security
x A$1.40
F CHESS Participant - Holder Identification Number (HIN)
XPlease note that if you supply a CHESS HIN but the name and address details on your form do notcorrespond exactly with the registration details held at CHESS your application will be deemed to bemade without the CHESS HIN, and any Securities issued under the Offer will be held on the issuersponsored subregister.
TFN/ABN type - if NOT an individual, please mark the appropriate box Company Partnership Trust Superfund
011782_B - V4
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 409
I/We understand that if I/we cannot make these representations and warranties, I/we may not use this Application Form to apply for Securities.
By returning this Application Form and paying the amount of the First Instalment, I/we have accepted the terms and conditions of this Offer including the agreements,acknowledgements, directions, representations and warranties set out above.
Lodgement of Broker Firm Offer ApplicationApplicant(s) who receive a firm offer of Securities from their Broker should return their completed Application Form and Application Monies in accordance with your Broker’sInstructions. If you are returning your Application Form by post, you should allow sufficient time for collection and delivery by postal services.No late forms will be accepted.
Privacy StatementPersonal information is collected on this Application Form by Computershare Investor Services Pty Limited ("CIS"), as registrar for Spark Infrastructure, for the purpose ofmaintaining registers of Security holders, facilitating distribution payments and other corporate actions and communications. Your personal information may be disclosed toSpark Infrastructure, to our related bodies corporate, to external service companies such as print or mail service providers, or as otherwise required or permitted by law. Yourpersonal information may be used to send you material (including marketing material) approved by Spark Infrastructure in addition to general corporate communications. Youmay elect not to receive marketing material by contacting CIS. If you would like details of your personal information held by CIS, or you would like to correct information thatis inaccurate, incorrect or out of date, please contact CIS. If some or all of the information is not collected then it might not be possible to process your Application oradminister your Security holding. You can contact CIS using the details provided on the front of this Application Form or E-mail [email protected].
If you have any enquiries concerning your application, please contact the Spark Infrastructure information line on 1300 730 579.
Type of Investor Correct Form of Registration Incorrect Form of Registration
Trusts- Use trustee(s) personal name(s)- Do not use the name of the trust
Individual- Use given name(s) in full, not initials
Joint- Use given name(s) in full, not initials
Company- Use company title, not abbreviations
Deceased Estates- Use executor(s) personal name(s)- Do not use the name of the deceased
Minor (a person under the age of 18)- Use the name of a responsible adult with an appropriate designation
Partnerships- Use partners personal name(s)- Do not use the name of the partnership
Clubs/Unincorporated Bodies/Business Names- Use office bearer(s) personal name(s)- Do not use the name of the club etc
Superannuation Funds- Use the name of trustee of the fund- Do not use the name of the fund
Mr John Alfred Smith
Mr John Alfred Smith & Mrs Janet Marie Smith
ABC Pty Ltd
Ms Penny Smith<Penny Smith Family A/C>
Mr Michael Smith<Est John Smith A/C>
Mr John Alfred Smith<Peter Smith A/C>
Mr John Smith &Mr Michael Smith<John Smith & Son A/C>
Mrs Janet Smith<ABC Tennis Association A/C>
John Smith Pty Ltd<Super Fund A/C>
J.A Smith
ABC P/LABC Co
Penny Smith Family Trust
Estate of Late John Smith
Peter Smith
John Smith & Son
ABC Tennis Association
John Smith Pty Ltd Superannuation Fund
John Alfred &Janet Marie Smith
1 agree that this application for Securities (being the Stapled Securities in SparkInfrastructure represented by Instalment Receipts) is made on and subject tothe terms and conditions of the Offer Document, the Constitutions of eachStapled Entity and the Securities Administration Deed;
2 agree to accept any number of Securities that may be allotted to me/uspursuant to the Offer Document;
3 acknowledge that the accompanying payment represents payment of the FirstInstalment only;
4 direct that the Stapled Securities I/we apply for are to be issued to theSecurity Trustee to hold in accordance with the Securities Administration Deedand acknowledge that I/we will be issued with Instalment Receipts in respectof these Stapled Securities;
5 agree to be bound by the terms and conditions of the offer to purchaseSecurities as set out in the Offer Document and the Securities AdministrationDeed, including without limitation:(a) the obligation to pay the Final Instalment and the Instalment Interest on
the Final Instalment Payment Date;(b) the obligation to pay any additional interest on, and costs associated with
the recovery of, the Final Instalment and Instalment Interest if thoseamounts are not paid when due; and
(c) the requirement that no encumbrance (such as a mortgage) may becreated or arise over a Stapled Security, and no person may acquire anyright before a court that could adversely affect, or make conditional, theInstalment Creditor's Reserved Interest, without the prior written consentof the Instalment Creditor until the Reserved Interest has been fullysatisfied; and
(d) the requirement that any transfer of Instalment Receipts is to be effectedin the manner prescribed in the Securities Administration Deed.
6 authorise the Security Trustee to complete and execute any documentsnecessary to transfer the Stapled Securities to me/us;
7 agree to become a member of each Stapled Entity and to be bound by theirrespective Constitutions as amended from time to time;
8 acknowledge that in certain circumstances Securities I/we hold may bedisposed of at the direction of the Stapled Entities or Spark Instalment inaccordance with their Constitutions and the Securities Administration Deedrespectively;
9 make the acknowledgments, representations, warranties and agreements inSection 3.14 of the Offer Document;
10 represent and warrant that:(a) I/we are not in the United States and are not and are not acting for the
account or benefit of a "US Person" (as defined in Regulation S) underthe US Securities Act; and
(b) the law of any other place does not prohibit me from being given theOffer Document, or making an application on this form;
11 all details and statements made by me are complete and accurate;12 state that I am or we are at least 18 years of age and not under any
legal disability preventing me/us from applying for Stapled Securities under theInstalment Purchase Arrangements and making the commitment to pay theFinal Instalment and the Instalment Interest when due;
13 cannot withdraw my/our application except when I/we have such a rightunder the Corporations Act;
14 personally received the Offer Document accompanied by or attached tothis Application Form and have read the Offer Document to which thisApplication Form relates;
15 acknowledge that acceptance of my/our application and the allocation ofSecurities will be at the discretion of Spark Infrastructure, which has the rightto reject my/our application and to allocate me/us a lower number ofSecurities than applied for;
16 acknowledge that the information contained in the Offer Document is notinvestment advice or a recommendation that the Securities are suitable forme/us given my/our investment objectives, financial situation and particularneeds; and
17 acknowledge that my/our investment in Securities is not a deposit or liabilityof Deutsche Bank. Securities can be subject to investment risk, includingpossible delays in repayment and loss of income and principal invested.None of Deutsche Bank, Spark Infrastructure nor Spark Instalment in anyway guarantee the capital value or performance of the Securities.
Declaration and statement
By lodging the Application Form I/we:
011782_B - V8
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 410
Application Form
Unit Street Number Street Name or PO Box /Other Information
Number of Securities applied forA B
Cheque details - Make your cheque or bank draft payable to ‘Spark Infrastructure Security Offer’HBSB Number Account NumberDrawer/Account Name Amount of cheque
A$
Cheque Number
(minimum of 2,000 Securities and thereafter in multiples of 100 Securities)
My/Our address is (Include State and Postcode):
City / Suburb / Town State Postcode
D
G
I/we lodge total amount of First Instalment
C Individual/Joint applications - refer to naming standards overleaf for correct forms of registrable title(s)
Title or Company Name Given Name(s) Surname
Joint Applicant 2 or Account Designation
Joint Applicant 3 or Account Designation
E Enter your contact details - Contact Name
Broker Code Adviser Code
This Application Form is important. Please read the entire Offer Document and lodge yourApplication Form as soon as possible. The Offer will be open for a limited time. To meet therequirements of the Corporations Act, this Application Form must not be distributed unlessincluded in, or accompanied by, the Offer Document. The purchase price for the StapledSecurities is payable in instalments as set out in the Offer Document. The amount payable for theFirst Instalment per Stapled Security is $1.40. The Stapled Securities you are offered (if any) willbe issued to the Security Trustee (see Offer Document) and you will receive Instalment Receipts.Capitalised words and certain terms used in this form have the same meaning given to them inthe Offer Document.
Registry Use Only
A$ .
Telephone Number - Business Hours / After Hours
( )
Price per Security
x A$1.40
F CHESS Participant - Holder Identification Number (HIN)
XPlease note that if you supply a CHESS HIN but the name and address details on your form do notcorrespond exactly with the registration details held at CHESS your application will be deemed to bemade without the CHESS HIN, and any Securities issued under the Offer will be held on the issuersponsored subregister.
TFN/ABN type - if NOT an individual, please mark the appropriate box Company Partnership Trust Superfund
011782 - V5
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 415
I/We understand that if I/we cannot make these representations and warranties, I/we may not use this Application Form to apply for Securities.
By returning this Application Form and paying the amount of the First Instalment, I/we have accepted the terms and conditions of this Offer including the agreements,acknowledgements, directions, representations and warranties set out above.
Lodgement of ApplicationApplication Forms must be received at the Sydney office of Computershare Investor Services Pty Limited by no later than 5.00pm Sydney time on 7 December 2005. Returnthe Application Form with cheque(s) attached to:Computershare Investor Services Pty Limited OR Computershare Investor Services Pty LimitedGPO Box 7115 Level 3, 60 Carrington StreetSydney NSW 2001 Sydney NSW 2000
Privacy StatementPersonal information is collected on this Application Form by Computershare Investor Services Pty Limited ("CIS"), as registrar for Spark Infrastructure, for the purpose ofmaintaining registers of Security holders, facilitating distribution payments and other corporate actions and communications. Your personal information may be disclosed toSpark Infrastructure, to our related bodies corporate, to external service companies such as print or mail service providers, or as otherwise required or permitted by law. Yourpersonal information may be used to send you material (including marketing material) approved by Spark Infrastructure in addition to general corporate communications. Youmay elect not to receive marketing material by contacting CIS. If you would like details of your personal information held by CIS, or you would like to correct information thatis inaccurate, incorrect or out of date, please contact CIS. If some or all of the information is not collected then it might not be possible to process your Application oradminister your Security holding. You can contact CIS using the details provided on the front of this Application Form or E-mail [email protected].
If you have any enquiries concerning your application, please contact the Spark Infrastructure information line on 1300 730 579.
Type of Investor Correct Form of Registration Incorrect Form of Registration
Trusts- Use trustee(s) personal name(s)- Do not use the name of the trust
Individual- Use given name(s) in full, not initials
Joint- Use given name(s) in full, not initials
Company- Use company title, not abbreviations
Deceased Estates- Use executor(s) personal name(s)- Do not use the name of the deceased
Minor (a person under the age of 18)- Use the name of a responsible adult with an appropriate designation
Partnerships- Use partners personal name(s)- Do not use the name of the partnership
Clubs/Unincorporated Bodies/Business Names- Use office bearer(s) personal name(s)- Do not use the name of the club etc
Superannuation Funds- Use the name of trustee of the fund- Do not use the name of the fund
Mr John Alfred Smith
Mr John Alfred Smith & Mrs Janet Marie Smith
ABC Pty Ltd
Ms Penny Smith<Penny Smith Family A/C>
Mr Michael Smith<Est John Smith A/C>
Mr John Alfred Smith<Peter Smith A/C>
Mr John Smith &Mr Michael Smith<John Smith & Son A/C>
Mrs Janet Smith<ABC Tennis Association A/C>
John Smith Pty Ltd<Super Fund A/C>
J.A Smith
ABC P/LABC Co
Penny Smith Family Trust
Estate of Late John Smith
Peter Smith
John Smith & Son
ABC Tennis Association
John Smith Pty Ltd Superannuation Fund
John Alfred &Janet Marie Smith
1 agree that this application for Securities (being the Stapled Securities in SparkInfrastructure represented by Instalment Receipts) is made on and subject tothe terms and conditions of the Offer Document, the Constitutions of eachStapled Entity and the Securities Administration Deed;
2 agree to accept any number of Securities that may be allotted to me/uspursuant to the Offer Document;
3 acknowledge that the accompanying payment represents payment of the FirstInstalment only;
4 direct that the Stapled Securities I/we apply for are to be issued to theSecurity Trustee to hold in accordance with the Securities Administration Deedand acknowledge that I/we will be issued with Instalment Receipts in respectof these Stapled Securities;
5 agree to be bound by the terms and conditions of the offer to purchaseSecurities as set out in the Offer Document and the Securities AdministrationDeed, including without limitation:(a) the obligation to pay the Final Instalment and the Instalment Interest on
the Final Instalment Payment Date;(b) the obligation to pay any additional interest on, and costs associated with
the recovery of, the Final Instalment and Instalment Interest if thoseamounts are not paid when due; and
(c) the requirement that no encumbrance (such as a mortgage) may becreated or arise over a Stapled Security, and no person may acquire anyright before a court that could adversely affect, or make conditional, theInstalment Creditor's Reserved Interest, without the prior written consentof the Instalment Creditor until the Reserved Interest has been fullysatisfied; and
(d) the requirement that any transfer of Instalment Receipts is to be effectedin the manner prescribed in the Securities Administration Deed.
6 authorise the Security Trustee to complete and execute any documentsnecessary to transfer the Stapled Securities to me/us;
7 agree to become a member of each Stapled Entity and to be bound by theirrespective Constitutions as amended from time to time;
8 acknowledge that in certain circumstances Securities I/we hold may bedisposed of at the direction of the Stapled Entities or Spark Instalment inaccordance with their Constitutions and the Securities Administration Deedrespectively;
9 make the acknowledgments, representations, warranties and agreements inSection 3.14 of the Offer Document;
10 represent and warrant that:(a) I/we are not in the United States and are not and are not acting for the
account or benefit of a "US Person" (as defined in Regulation S) underthe US Securities Act; and
(b) the law of any other place does not prohibit me from being given theOffer Document, or making an application on this form;
11 all details and statements made by me are complete and accurate;12 state that I am or we are at least 18 years of age and not under any
legal disability preventing me/us from applying for Stapled Securities under theInstalment Purchase Arrangements and making the commitment to pay theFinal Instalment and the Instalment Interest when due;
13 cannot withdraw my/our application except when I/we have such a rightunder the Corporations Act;
14 personally received the Offer Document accompanied by or attached tothis Application Form and have read the Offer Document to which thisApplication Form relates;
15 acknowledge that acceptance of my/our application and the allocation ofSecurities will be at the discretion of Spark Infrastructure, which has the rightto reject my/our application and to allocate me/us a lower number ofSecurities than applied for;
16 acknowledge that the information contained in the Offer Document is notinvestment advice or a recommendation that the Securities are suitable forme/us given my/our investment objectives, financial situation and particularneeds; and
17 acknowledge that my/our investment in Securities is not a deposit or liabilityof Deutsche Bank. Securities can be subject to investment risk, includingpossible delays in repayment and loss of income and principal invested.None of Deutsche Bank, Spark Infrastructure nor Spark Instalment in anyway guarantee the capital value or performance of the Securities.
Declaration and statement
By lodging the Application Form I/we:
011782 - V9
DEU109 SPARKS Prosp-Sect 19_D14 18/11/05 10:25 AM Page 416
SPARK INFRASTRUCTURE INSTALMENT
SPARK INFRASTRUCTURE – STAPLED ENTITIES
Spark Infrastructure RE Limited AFSL 290436Spark Infrastructure Company 1Spark Infrastructure Company 2Spark Infrastructure Company 3
Ord MinnettLevel 8255 George StreetSydney NSW 2000
Wilson HTMRiparian Plaza71 Eagle StreetBrisbane QLD 4000
Corporate DirectoryImportant informationThis replacement prospectus and newproduct disclosure statement (OfferDocument) replaces the originalprospectus and product disclosurestatement that was lodged with ASICon 9 November 2005 (OriginalDocument). This Offer Document isimportant and requires your immediateattention.This Offer Document is dated18 November 2005 and was lodged withthe Australian Securities andInvestments Commission (ASIC) on thatdate. This Offer Document has beenprepared by Spark Infrastructure RELimited (Responsible Entity) (in itscapacity as trustee of SparkInfrastructure Trust), SparkInfrastructure Holdings No 1 Limited(Spark Infrastructure Company 1),Spark Infrastructure Holdings No 2Limited (Spark Infrastructure Company2) and Spark Infrastructure HoldingsInternational Limited (SparkInfrastructure Company 3) (collectivelySpark Infrastructure and each aStapled Entity), and relates to the offerof Stapled Securities via an InstalmentReceipt mechanism (Securities). SparkInfrastructure is solely responsible forthis Offer Document. Each StapledEntity takes full responsibility for thewhole of this Offer Document otherthan the Financial Services Guidescontained in this Offer Document. ASICand Australian Stock Exchange Limited(ASX) take no responsibility for thecontents of this Offer Document. Thefact that ASX may admit SparkInfrastructure to the official list of ASXand quote Instalment Receipts andStapled Securities is not to be taken inany way as an indication of the meritsof Spark Infrastructure. No financialproducts will be issued on the basisof this Offer Document later than13 months after the date of this OfferDocument.This Offer Document contains aninvitation to apply to purchase StapledSecurities at a price of $2.00 for RetailInvestors (or such lesser amount ifadjusted in accordance with Section 3of this Offer Document) per StapledSecurity payable in two instalmentscomprising the First Instalment and theFinal Instalment plus the InstalmentInterest (Offer). Institutional Investorswill pay the price of the StapledSecurities as determined by theBookbuild. Each Stapled Securityacquired under this Offer will berepresented by an Instalment Receiptuntil payment of the Final Instalmentand Instalment Interest.The Instalment Receipts will be issuedby Spark Instalment. However ASIC hasmodified the operation of theCorporations Act so that:• for the purposes of Chapter 6D of the
Corporations Act, the persons whoare taken to offer the InstalmentReceipts insofar as they aresecurities are the Stapled Entities;and
• for the purposes of Part 7.9 of theCorporations Act, the person who istaken to issue the InstalmentReceipts insofar as they are aninterest in an interest in a managedinvestment scheme is theResponsible Entity.
The Responsible Entity is offering toarrange for the issue of InstalmentReceipts by Spark InfrastructureInstalment (Spark Instalment). Byapplying for Securities you accept theoffer by the Responsible Entity toarrange for the issue of the InstalmentReceipts which is subject to the termsof this Offer Document, including
acceptance of your Application. Theoffer by the Responsible Entity, and theissue of Instalment Receipts by SparkInstalment, are made under anagreement between Spark Instalmentand the Responsible Entity that is anintermediary authorisation for thepurposes of section 911A(2)(b) of theCorporations Act. Application will be made, within sevendays from the date of this OfferDocument, for Spark Infrastructure tobe admitted to the official list and forquotation of the Instalment Receiptsand Stapled Securities on ASX,although the Stapled Securities will notbe traded until payment of the FinalInstalment and Instalment Interest.Information is not financial adviceThe information contained in this OfferDocument is general information onlyand does not take into account theinvestment objectives, financialsituation and particular needs ofindividual Investors. You should obtainyour own independent financial advicefrom a qualified financial advisor andconsider the appropriateness of theOffer having regard to your objectives,financial situation and needs.It is important that you read the entireOffer Document before making anyinvestment in Securities. In particular, inconsidering the prospects of SparkInfrastructure, it is important that youconsider the risk factors that couldaffect the financial performance ofSpark Infrastructure and theassumptions underlying the FinancialInformation. Some of the risk factors thatshould be considered are in Section 13and the assumptions underlying theFinancial Information appear in Section11.No person is authorised to give anyinformation or to make anyrepresentation in connection with theOffer that is not disclosed in this OfferDocument. Any information orrepresentation not so contained may notbe relied upon as having beenauthorised by Spark Infrastructure,Spark Instalment, CKI, RREEFInfrastructure or the Joint LeadManagers in connection with the Offer.No guarantee of capital orinvestment returnsNone of Spark Infrastructure or any ofits controlled entities or any otherperson, guarantees the repayment ofcapital or the investment performanceof Spark Infrastructure or theSecurities. Investments in Securitiesare not deposits with or liabilities ofDeutsche Bank (subject to theInstalment Creditor’s obligation to fundSpark Infrastructure’s acquisition of a49% interest in the Asset Companies tothe extent the acquisition price exceedsthe Offer Proceeds attributable to theFirst Instalment, which will be repaidvia the Instalment PurchaseArrangements) or any other relatedparty or associate of Deutsche Bank.Deutsche Bank is not a Related BodyCorporate of Spark Infrastructure. Suchinvestments are subject to investmentrisk, including possible delays inrepayment and loss of income andcapital invested. Neither DeutscheBank nor any of its related parties orassociates gives any guarantee orassurance as to the performance of theSecurities, any particular rate of returnon the Securities or the repayment ofcapital or principal.No cooling offNo cooling-off rights apply to anapplication for Securities. This meansyou cannot withdraw your applicationonce it has been made.
Selling restrictionsThis Offer Document does notconstitute an offer or invitation in anyplace where, or to any person whom, itwould not be lawful to make such anoffer or invitation.In particular, the Securities have notbeen, and will not be, registered underthe US Securities Act of 1933, asamended (US Securities Act). SeeSection 3.14 for information regardingselling restrictions.The Securities Commission of TheBahamas is not responsible for thecontents of this Offer Document, thelatest published annual report or theaudited accounts of the AssetCompanies. Nothing in this OfferDocument constitutes a warrantyby the Securities Commission of TheBahamas as to the performance ofSpark Infrastructure and the SecuritiesCommission of The Bahamas shall notbe liable for the performance or defaultof Spark Infrastructure. Accordingly inregistering, or in respect of any filingby, Spark Infrastructure Company 3, theSecurities Commission of The Bahamasdoes not take responsibility for thefinancial soundness of SparkInfrastructure Company 3 or SparkInfrastructure or for the correctness ofany statements made or opinionexpressed in this regard.Persons, trusts and corporations whoor which have been designated as"resident for purposes of exchangecontrol" by the Central Bank of TheBahamas may not purchase or holdSecurities without the prior writtenpermission of that authority.TimingNo Securities will be issued and noApplications will be processed until the“exposure period” of seven days (or upto 14 days if ASIC so decides) afterlodgement of the Original Documentwith ASIC has expired. No offer ofSecurities is being made during theexposure period.Spark Infrastructure, in consultationwith CKI and the Joint Lead Managers,reserves the right to extend the Offer,close the Offer Period early orwithdraw the Offer, in each casewithout notice.Credit ratingA credit rating is not a recommendationto buy, sell or hold securities and maybe subject to a suspension, reductionor withdrawal at any time by anassigning rating agency and any ratingshould be evaluated independently ofany other information.Expert reportsWhile Spark Infrastructure isresponsible for this Offer Document,this Offer Document contains expertreports issued by Deloitte ToucheTohmatsu, Deloitte Corporate FinancePty Ltd, Deloitte Touche Tohmatsu Ltdand Mallesons Stephen Jaquesrespectively. Deloitte Touche Tohmatsuis responsible for its own reports(including its Financial Services Guide)subject to any disclaimer, waiver orindemnity. Deloitte Touche Tohmatsu isan independent party and isremunerated for its services asdescribed in Section 15.4. MallesonsStephen Jaques is an independentparty responsible for its own reportsubject to any disclaimer, waiver orindemnity and has been remuneratedfor its services as described in Section15.4. Details of experts’ remuneration isin Section 15.4.Industry and market dataIndustry and market data usedthroughout this Offer Document was, in
most instances, obtained from surveysand studies conducted by third partiesand industry and general publications.Spark Infrastructure has no reason todoubt that this information is reliable,however this has not been verified byany independent sources.Graphs and dataAll graphs and data presented in thisOffer Document are expressed as at30 June 2005, unless otherwise stated.Diagrams in this Offer Document areillustrative only and not drawn to scale.Definitions and abbreviationsDefined terms and abbreviations usedin this Offer Document have themeanings given in the Glossary.CurrencyAll financial amounts in this OfferDocument are expressed in Australiancurrency, unless otherwise stated.PhotographsPhotographs do not necessarily depictassets of Spark Infrastructure.Copies of the Offer DocumentPaper copies of this Offer Documentincluding the Application Form areavailable free of charge during theOffer Period by calling SparkInfrastructure Offer Information Line on1300 730 579.Electronic Offer DocumentThe Offer Document is also availableto Australian Investors on SparkInfrastructure’s website atwww.sparkinfrastructure.com. The Offerconstituted by this Offer Documentin electronic form is not available toInvestors in any other jurisdiction. Thefollowing conditions apply if the OfferDocument is accessed electronically:• you must download the Offer
Document in its entirety fromwww.sparkinfrastructure.com;
• your Application will only beconsidered where you have appliedon an Application Form thataccompanied the electronic OfferDocument. By making an application,you declare that you were givenaccess to the electronic OfferDocument together with theApplication Form;
• the offer of Securities constituted bythis Offer Document is only availableelectronically to Australian residentsaccessing and downloading orprinting the electronic version of theOffer Document in Australia; and
• you must mail or deliver yourApplication Form in the manner setout in Section 3.
The Corporations Act prohibits anyperson from passing on to any otherperson the Application Form unless it isattached to a hard copy of this OfferDocument or the complete andunaltered electronic version of thisOffer Document.Up to date informationInformation relating to the Offer maychange from time to time. Where thisinformation is of a kind that is requiredto be included in a supplementaryprospectus or product disclosurestatement, this information may beupdated and made available onSpark Infrastructure’s website(www.sparkinfrastructure.com) or byway of paper copy, free of charge, bycontacting Spark InfrastructureOffer Information Line on 1300 730 579(within Australia) or +613 9415 4286(outside Australia). Where updatedinformation about the Offer requires theissue of a supplementary prospectusor product disclosure statement inaccordance with the Corporations Act,a supplementary offer document willbe issued.
The Loan Notes forming part of the Stapled Securities are unsecured notes for the purposesof section 283BH of the Corporations Act and are issued by the Responsible Entity as trusteeof the Spark Infrastructure Trust. They are subordinated to all secured and unsecured creditorsof the Spark Infrastructure Trust for all amounts.
Prospectus and product disclosure statement
Joint Lead Managers and Joint BookrunnersManagement Joint Venture Parties Sole Global Coordinator and Sole Financial Advisor
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