SPIAA's $407m writedown signals caution ahead of deals ONE of the country's biggest energy distribution businesses, SPI (Australia) Assets, sounded a cautionary note ahead of mooted energy network privatisations by posting a $430 million profit reverse in 2013 when the sale of a controlling stake to State Grid Corporation of China triggered a writedown in the value of its assets. SPIAA, ultimately controlled by Singapore government investment group Temasek Holdings, wrote down the value of its Australian assets by $407m following the sale of the 60 per cent stake at an undisclosed price -- said to be more than $5 billion -- in May. The sale of the stake in SPIAA, alongside 20 per cent of Singapore Power's 51 per cent stake in the listed SP AusNet, is among the biggest M&A deals in Australia this year, if not the biggest. But it comes ahead of changes to rules on returns for energy networks, which are expected to reduce profits and make revenue less predictable, raising questions for investors and owners. The changes, to be finalised by the Australian Energy Regulator in November, followed a heated political debate over sharply rising household energy bills caused by network owners over-investing in their assets to lift regulated returns. SPIAA owns a swag of assets, including distribution businesses originally sold by the Victorian government in the 1990s and some of the assets of the Alinta business that Singapore Power bought for $7.4bn in partnership with failed infrastructure investors Babcock & Brown in 2007. They included the Jemena electricity network and a 34 per cent stake in United Energy Distribution that combined supply a million customers in Victoria, half of the ACTEW electricity distribution, the Jemena gas distribution business that supplies 1.1 million NSW customers, gas pipelines along the east coast and the Rosehill water recycling station. Accounts filed with the Australian Securities & Investments Commission show the writedown by SPIAA, along with higher interest costs and depreciation charges, forced SPIAA to a $239m loss for the year to March 31, compared with a $191m profit a year earlier. The writedown included $247m against the goodwill of the Zinfra infrastructure business established in April last year and which lost the service contract for the United Energy business one-third-owned by SPIAA, and $100m against the value of its holding in the Australian Capital Territory distribution business ActewAGL. Separate accounts for Jemena show profits fell 25 per cent to $138.4m after the Zinfra business was transferred to SPIAA. According to the accounts, SPIAA's total liabilities of $9.45bn exceed assets of $8.33bn by $736.65m, thanks to a $4.8bn shareholder loan from Singapore Power. The loan is interest free and subordinated but repayable on call and Singapore Power directors have undertaken not to call in payment in a way that would affect the company's ability to meet its obligations. SPIAA paid $400m of principal on the loan in 2012-13 but also increased interest-bearing long-term borrowing by a similar amount -- from $3.38bn to $3.74bn. It was not clear from the accounts how the shareholder loan would be split under the deal with State Grid Corporation of China if the deal to sell a 60 per cent stake goes ahead. But ratings agency Moody's Investor Service said it would downgrade the ratings for SP AusNet and SPIAA from A1 and A3 respectively when the deals went ahead. Moody's analyst Spencer Ng said that the likelihood of "parental support" from Singapore Power after the deal would no longer hold following the sale of a minority interest to State Grid. "In our view the announced divestment highlights a shift in SP's previous strategy towards its Australian investment, and the extent to which these remain as strategically important," Mr Ng said. The sale of the SP AusNet interest had little impact on the market, with analysts at Morgan Stanley saying the sale of the shares at $1.23, a discount of only 3 per cent to the market price, provided valuation support. The emergence of a new major shareholder in State Grid could also hasten moves to internalise management of the business, which would be welcomed by the market, analysts Phillip Bare, Scott Kelly and Julia Weng said in a note to clients. Despite the writedown, which was a non-cash item, the SPIAA business is expected to continue to produce strong profits. It posted $695.5m of earnings before interest, tax and depreciation, which would make the business worth $9.3bn based on the same 13.3 times historic earnings multiples for SP AusNet, which suggests State Grid could pay $5.6bn for the stake. "Post transaction SPIAA will contribute materially to (State Grid International Development's) overall earnings and will form part of SGID's international footprint, supporting SPIAA strategic value to the group," Moody's said. But its returns are expected to be affected by changes proposed by the Australian Energy Regulator giving it greater power to determine the returns of networks. The AER said network charges, which account for about 45 per cent of energy, had been the main driver behind a 91 per cent increase in residential electricity prices in the past five years. Moody's changed its outlook for the sector from stable to negative in February when the changes were first outlined and reiterated that view late last month when new rate of return guidelines were published. "We believe the new rules would reduce the predictability of revenues for the networks and would lower their profitability," Moody's said. A report for ANZ last week estimated state governments could raise $122bn by selling state-owned assets and recycle those proceeds to kickstart new infrastructure developments as NSW has done with the proceeds from the sale of NSW Ports this year to fund the Westconnex road development. Of that total, $69.8bn comes from electricity generation, distribution and transmission business in NSW and Queensland, many of which could be affected by the new return rules.