Energy industry 'whale' migrates into local waters

In the electricity industry, Chinese government-owned State Grid Corporation is the global whale. Its revenue was the equivalent of $US266 billion in 2011. It earned $US5.7 billion, had total assets of $US351 billion, and employed more than 1.5 million people.

Now it poised to become one of the biggest energy infrastructure investors in Australia too, with a double-barrel deal with the Temasek-owned Singapore Power worth close to $3 billion.

The deal was negotiated without leaks for about six months by State Grid and its advisors, Goldman Sachs and Macquarie, and Singapore Power and its advisors, Lazard and Credit Suisse.

It adds Victoria, NSW and the ACT to the South Australian foothold that the Chinese behemoth created late last year when it paid the Queensland government's network operator, Powerlink, $500 million for a 41 per cent stake in South Australia's high-voltage power transmission network owner, ElectraNet.

State Grid will pay Singapore Power $824 million for a 19.9 per cent stake in ASX-listed energy distributor SP Ausnet, cutting Singapore Power's stake in the company from 51 per cent to 31 per cent. It will also purchase a 60 per cent stake in SPI (Australia), a Singapore Power subsidiary that trades as Jemena.

Among other things, Jemena distributes electricity in Victoria to more than 300,000 homes in north-west Melbourne, delivers gas to more than a million homes and businesses in NSW, owns and operates pipelines that connect Queensland with the Cooper and Surat basins, and NSW with Victoria's Bass Strait, and has a half-share of the ACT's gas and electricity distribution networks.

The bulk of the assets inside Jemena are ones that Singapore Power kept as its share of the top-of the market $7.4 billion purchase of energy assets from Alinta in 2007, executed in league with Babcock & Brown, one of Australia's crisis casualties.

The agreed price for the 60 per cent stake was not disclosed on Friday, but Jemena's earnings are running about $800 million before tax, interest, depreciation and amortisation, which suggests it would be valued about $8 billion including debt. There is about $4.5 billion of debt in Jemena, so Singapore Power should get about $2 billion, taking its total proceeds to about $3 billion.

If cleared, the deal will "right-size" Singapore Power's Australian exposure after unsuccessful previous attempts.

It was clever in the '90s as the Kennett government secured first-mover prices for Victorian energy assets, limiting itself to kicking the tyres as other groups including America's Texas Utilities paid up.

In 2004, it paid a more realistic $US3.7 billion for TXU's entire Australian energy portfolio, and in 2005 got about $2.2 billion back by selling power generation and retailing assets in the TXU portfolio to the Kadoorie family's Hong Kong-based China Light & Power group.

It sold 49 per cent of the remaining assets later that year for about $1 billion by publicly floating the business as SP Ausnet and was sitting pretty, but in 2007 succumbed to boom fever, and joined with Babcock & Brown for the $7.4 billion Alinta acquisition.

Later in 2007, as the global financial crisis expanded, it tried but failed to sell the Alinta assets into SP Ausnet, and has since been overweight on Australia, essentially. The businesses here accounted for 69 per cent of group assets last year, and contributed 46 per cent of its revenue and 55 per cent of earnings.

The approaches from other groups failed to produce a deal, but by the time serious negotiations with State Grid began last October, demand for and the prices of infrastructure assets had risen as crisis-hardened investors chased dependable earnings and dividends.

State Grid will be scrutinised as a foreign investor and will receive special attention because it is government-owned, but it did get foreign investment clearance for its South Australian acquisition, and will probably clear the hurdle again.

China's overseas investment drive is driven partly by a desire to balance inflows that have pushed its foreign reserves up to $US3.4 trillion. However, in key sectors, including minerals and agricultural products, it also reflects deep-seated concerns about resource security.

The acquisition of energy distribution networks gives the giant State Grid group a foreign hedge similar to the one China as a nation achieves as it invests beyond its own borders.

The group's aim is to have 20 per cent of its assets invested outside China by 2020. Based on its stated assets of $US351 billion in 2011, that is a $US70 billion acquisition plan, and it has barely begun. State Grid acquired electricity transmission infrastructure in the Philippines for $US3.95 billion in 2007, paid $500 million for Brazilian transmission assets in May last year before its ElectraNet deal in South Australia, and in February this year paid about $US1.8 billion for a 25 per cent stake in Portugal's electricity grid.

State Grid's expansion here does not fit the resources security agenda in China that most piques the interest of Western regulators including Australia's Foreign Investment Review Board, however. Energy transmission networks are geographically bound, and the gas and electricity cannot be diverted to China.

It is also buying minority stakes in the two Australian businesses - and buying them from another foreign sovereign seller, in effect: Singapore investment fund Temasek owns 100 per cent of Singapore Power, and the Singapore government owns 100 per cent of Temasek.

mmaiden@fairfaxmedia.com.au