Singapore Power’s sell-down of some of its extensive Australian energy utility interests to China’s State Grid Corporation is an unusual transaction. But then State Grid is an unusual organisation.
Singapore Power announced today that it would sell almost 20 per cent of the listed SP AusNet and 60 per cent of the shares in the unlisted SPI (Australia) Assets vehicle to State Grid Corp. The SP AusNet sale is an $824 million deal and, while the SPIAA transaction value hasn’t been disclosed, it is estimated to be as much as $5 billion once State Grid's share of the debt within SPIAA is taken into account.
SP AusNet’s key assets are the Victorian electricity transmission network, a Victorian electricity distribution network servicing more than 650,000 customers and a gas distribution in network, also in Victoria, with 620,000 customers.
SPIAA has electricity distribution assets in Victoria, a gas distribution network with more than a million customers in NSW, partly-owned distribution networks in the ACT and Victoria, gas transmission pipelines across the eastern seaboard and a recycled water project in NSW.
What’s interesting about the deals are that, despite their scale and the fact that it would have a majority interest in SPIAA, State Grid is effectively taking up portfolio interests in both of them, with Singapore Power remaining the operator of the SPIAA business.
State Grid is the world’s largest utility company which describes its core businesses as the investment, construction and operation of power networks. Its operations span about 88 per cent of China’s landmass and represent the world’s largest power grid. It is also regarded as a world leader in ultra high-voltage technology and smart grids.
In other words it has considerable experience and capabilities in building, owning and operating major energy networks and ought to be more than capable of managing SPIAA’s businesses.
Over the past five years State Grid has been expanding offshore and it now has interests in power transmission businesses in the Philippines, Brazil, Portugal and in South Australia’s ElectraNet, which it acquired last year.
The offshore strategy appears to be tilted towards passive investment and a co-investment model with local partners and management.
That may be a risk-mitigation strategy, given the mixed record of Chinese state-owned enterprise investments offshore. It would also tend to diminish the inevitable political sensitivities to Chinese ownership of essential infrastructure if the operation of those networks remains with the existing managers – the deal announced today will require federal government endorsement, although a sale by one foreign entity to another ought not to be overly controversial.
State Grid’s expertise in ultra high-voltage technologies – the ability to create large capacity networks that can move energy over long distances with low losses – its experience with smart grid technologies and its ability to integrate renewable energy into its networks means that it does have quite a lot to offer at an operational level.
For Singapore Power, the sell-down of its interests in SP AusNet and SPIAA will release a lot of capital and reduce, but not end, its exposure to this market. It will retain 40 per cent of SPIAA and 31.1 per cent of SP AusNet.
It has been talking to State Grid, which has a stated ambition of investing $US50 billion outside China by the end of the decade, for about a year as part of a strategy to downsize its exposure to Australia.
Given State Grid’s deep pockets, Singapore Power might not be the last of the utility owners to have that type of conversation.