SP AusNet internalises management

SP AusNet has terminated a decade long management contract with its major shareholder, Singapore Power, in order to internalise management of the company’s Victorian electricity transmission and distribution networks.

The transition to internalised management was prompted by Singapore Power selling 20% of its 51% stake in SP AusNet to State Grid Corporation of China for $824m (the equivalent of $1.23 per share).

SP AusNet will pay Singapore Power $50m to terminate the contract and a further $7.5m to disentangle the companies’ IT systems. This will bite into 2014 net profit but is to the long term benefit of shareholders.

SP AusNet will no longer be liable to pay performance fees to the external management company which in 2013 amounted to $20m.

The current management team will all be offered positions with SP AusNet, so there shouldn’t be any material change to the ongoing operations of the company. The only difference is that rather than SP AusNet paying a ‘Management Service Charge’ to Singapore Power, a lower charge will be paid as ordinary salaries.

All in all, we expect it to be business as usual at SP AusNet. Of greater importance is how the Australian Energy Regulator (AER) responds to its proposed price hikes at the next regulatory reset.

The AER recently rejected the 7.4% price rise sought by TransGrid in NSW, and instead demanded that it cut prices by 2.3%. In a similar move, Transend of Tasmania had its proposed 1.7% price cut rejected and instead ordered to cut prices by 6.4%.

While a heavy-handed AER is a positive for consumers, it’s much more problematic for electricity networks as they will find it harder to increase their Regulated Asset Bases and increase revenue (see Storm brews for Spark Infrastructure on 23 Sep 13 (Hold – $1.65)).

SP AusNet’s share price has increased 5% since SP AusNet: Interim result on 12 Nov 13 (Hold – $1.25) and is close to our Sell price so members should be especially mindful of our portfolio limits. HOLD.