Concerns overdone

• Bushfires and a writ. Bushfires in Victoria, Australia on 7 Feb 09 affected about 1% of SPN’s electricity distribution assets and caused power outage to 6,000 customers. Weather and arson were cited as the culprits. However, a court writ was filed against SPN for “faulty and/or defective power lines”, alleging that strong winds felled a stretch of its power lines, sparking fire in a nearby pine forest.

• Legal issues. SPN believes that the claim is premature and inappropriate, given the establishment of a Royal Commission of Inquiry into the Victorian bushfire crisis. It also says that it will vigorously defend itself against any claims.

• Asset damage and lost revenue. We estimate that SPN may have to bear the replacement and repair cost of up to 3,478 poles, amounting to A$17.4m, which will affect our FY10 net profit forecast by 8.2%. Lost revenue from the 6,000 customers is insignificant, at only 0.6% of our FY09 net profit forecast.

• Maintain Outperform, lower target price of S$1.31 (from S$1.44). We have reduced our FY10-11 net profit forecasts by 3-9% to account for the repair of damaged assets, translating to a lower DCF-derived target price of S$1.31 (WACC 10%). SPN continues to be well supported by an attractive yield of over 10%.

SP AusNet faces class-action lawsuit

Groups in Victoria state claim its power lines caused bushfires

SP AusNet, a subsidiary of Singapore Power, is facing a class-action lawsuit relating to the bushfires that have ravaged south-eastern Australia.

The Australian electricity and gas distributor said yesterday that a writ had been filed in the Supreme Court of the state of Victoria from groups claiming that faulty power lines had caused loss and damage. This confirmed earlier Australian media reports of the law suit.

A company spokeswoman said ‘the claim is premature and inappropriate, given the establishment of the Royal Commission’ and that SP AusNet will vigorously defend the claim.

‘Our bushfire mitigation and vegetation management programmes comply with Electricity Safety (Bushfire Mitigation) Regulations and are audited annually by Energy Safe Victoria,’ the spokeswoman said yesterday.

SP AusNet, which is 51 per cent owned by Singapore Power and listed on the Australian and Singapore bourses, services more than one million customers in south-eastern Australia. It owns Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network located in central and western Victoria.

Some 1,500 properties had power restored by SP AusNet crews over the weekend, including more than 200 in parts of King- lake, Kinglake West, Castella, Glenburn and Marysville.

SP AusNet and mutual aid crews have restored power to more than 11,200 homes since last Saturday’s firestorm ripped through the state.

‘The areas still to be restored include those hardest hit by the fires in King- lake, Marysville, Narbethong and Flowerdale areas. There are still about 2,800 connections to be made in these areas, where possible,’ SP AusNet said.

Yesterday, the company also stressed that it has insurance policies in place consistent with industry standards.

Listed on the Singapore Exchange (SGX) in December 2005, SP AusNet had said in its IPO prospectus that it carried various types of insurance, including property damage and combined liability (including bushfire liability, product liability, personal injury, automobile liability and professional indemnity).

But it had also mentioned that while it maintained insurance that it believed was consistent with industry standards to protect against operating and other risks, not all risks were insured or insurable. SP AusNet self-insures its towers, poles and wires and associated equipment.

Extensive bushfires in 2003, which destroyed 185 electricity poles and disrupted service to numerous customers, cost SP AusNet some A$1.3 million (S$1.3 million) in repair costs.

Aussie inferno survivors file lawsuit against SP Ausnet

Australian wildfire survivors have launched a lawsuit against a Singapore-owned electricity firm alleging a downed power line sparked one of the blazes, it was reported yesterday.

Kinglake residents are launching a class action against SP Ausnet and the Victoria state government claiming that the power line set off a fire near the town that killed at least 100 people, The Age newspaper said.

The newspaper said that police investigating the causes of the fires had removed a length of fallen cable and a power pole as evidence.

The firm reportedly handling the class action, Melbourne-based Slidders Lawyers, on its website urges residents affected by the bushfires to contact it and seek compensation.

SP Ausnet, part of the Singapore Power Group, refused to comment directly on the lawsuit, saying its priority was restoring power to fire-affected areas as quickly as possible.

‘We stand ready to assist the relevant authorities with their inquiries if it is necessary for us to do so,’ it said in a statement.

The fire at Kinglake, about 50 kilometres north of Melbourne, was one of the most ferocious to sweep through Victoria state last week, killing at least 100 people and destroying about 1,000 homes.

Victoria Police chief commissioner Christine Nixon said authorities were still determining how the Kinglake fire started.

‘At this stage we are not able to confirm how it started. I understand there is some legal action that people are taking, but at this stage we’re still investigating its cause,’ she told Channel Nine television.

More than 180 people have been killed in multiple blazes in Australia’s worst ever bushfire disaster. — AFP

Steady and predictable


• Steady demand in Victoria state. As the second most populous state in Australia with an annual population growth rate of 1.7%, the establishment of new townships and customer connections for gas and electricity distribution can drive steady demand growth for SPN.

• Certainty of revenue and cash flow. Management reiterated that regulated revenue (90% of group revenue) has been locked in until 2011. All the latest resets were done by Apr 08 and there are no further regulatory resets until 2011.

• Focus on maintaining A rating. While management acknowledges that mediumterm interest rates could fall and it may miss the opportunity to refinance at lower rates, its focus is on managing its long-term average cost of debt. Its key objective is to continue to meet and exceed credit rating criteria to maintain its A debt rating. This is important as A ratings will make it easier for SPN to secure future financing

• Reiterate Outperform, maintain forecasts. We maintain our core net profit forecasts and DCF-derived target price of S$1.44 (WACC 10%). Distribution for 1H09 was within guidance and the stock will go ex-dividend on the SGX on 28 Nov 08 for an interim dividend of 5.927 A cts.

Steady as she goes

• Core within expectations. 1H09 core net profit of A$122.5m (+2.4% yoy) constitutes 66% of our FY09 forecast and 68% of consensus. This is within expectations as 1H is seasonally stronger. Revenue grew 8.9% yoy to A$636m, driven by favourable price changes with recent regulatory price resets, higher volumes on increased customer connections and higher usage stimulated by favourable weather. EBITDA margins rose to 47.7% from 45.7% a year ago on improved cost management. An interim distribution per stapled security of 5.927 A cts (+2.6% yoy) was declared, payable on 18 Dec 08.

• One-off adjustment. 1H09 accounts include a one-off non-cash impairment adjustment of S$30.3m after tax. This was due to a revised timetable by the Victorian government for the rollout of smart electricity meters by end-2013. Management has prudently taken an impairment charge for existing meters, as well as accelerated depreciation for these meters of A$7m per year until Mar 2014.

• No debt refinancing obligations until 2011. SPN had refinanced its obligations in early 2008, and will not have further refinancing obligations until 2011. While it may potentially miss out on benefits should interest rates fall, management’s long-term objective is to manage its long-term cost of debt, rather than be opportunistic.

• Outlook. SPN has locked in 100% of its regulated revenue until 2011, representing over 90% of group revenue and providing highly predictable cash flows. So far, it has not detected any weakness despite the bleak economic situation. Meanwhile, reductions in management performance fees, a new relationship with Jemena (100% owned by Singapore Power Int’l) should improve profitability from 2H09 onwards. Another potential growth area is SPN’s non-regulated services like testing, metering and communications support.

• Core forecasts maintained; maintain Outperform. We have adjusted our forecasts for the one-off impairment charge but maintained our core net profit forecasts. With the volatility of the A$-S$ rates in past months, we now peg A$-S$ at parity, which translates to a new DCF-derived target price of S$1.44 (WACC 10%), from S$1.71 previously. SPN is well supported by an attractive yield of over 10%.