In Singapore Power's annual report (31 March 08), the group balance sheet listed intangible assets of $4.57bn. The main item there is a $3.27bn "goodwill".
When a company buys something and pays a price above the value of the net tangible asset (sometime known as fair value) of that something, the excess amount is defined as goodwill.
In this case, the asset is Alinta, a package of Australian gas and electricity network. Singapore Power announced the acquisition in March 07. Joint buyer is Babcock & Brown. The price was A$7.4bn. (www.iht.com/articles/2007/03/30/business/alinta.php) A month later, Singapore Power and other buyers chased up the price by another 7%. The acquisition was completed on 31 Aug 07.
In Singapore Power's book, the $3.27bn is the amount Singapore Power paid above the book value of Alinta. Normally, this excess amount has to be depreciated over 20 years. That would have meant a $164m negative impact on the annual bottomline for the next 20 years. It would have lowered the 2008 earning by 14%, still tolerable considering Singapore Power's profit would have been still close to $1bn.
However, Singapore Power with foresight changed its accounting rule on 1 April 05 and discontinued amortisation of goodwill. The goodwill is henceforth subject to "testing for impairment". My layman understanding is this means every year the management will haggle with its auditors on whether or not to reduce the value of the goodwill.
Obviously, Singapore Power did not intend to engage in such unproductive debate with its KPMG auditors.
Singapore Power owns 51% of SP Australian Network (SP Ausnet), which is listed on Singapore Stock Exchange. SP Ausnet has stated from onstart that it is the investment vehicle for electricity/gas assets for Singapore Power.
Exploiting an arbitrage opportunity like a good investment banker, Singapore Power had intended to buy Alinta assets and onsell to SP Ausnet. In Sep 07, SP Ausnet announced that it would buy Alinta assets being purchased by Singapore Power and pay Singapore Power A$8bn, the price being paid by Singapore Power, plus additional "transaction costs and holding costs" incurred by Singapore Power. Also, the price being paid by Singapore Power is subject to "adjustment and assumptions of liabilities" by Singapore Power.
Which means, if the transaction has gone through, Singapore Power would have earned something. How much is that something, I would not know. Since Singapore Power is the majority shareholder of SP Ausnet, why did it not ask SP Ausnet to buy Alinta assets directly from Alinta shareholders? I don't know. I like to guess that perhaps Singapore Power wanted to earn extra investment banking fee.
Unfortunately for Singapore Power, the credit crisis hit the whole world in end 2007. SP Ausnet subsequently called off the purchase of Alinta assets from Singapore Power in Dec 07.
Fast forward. On 29 Sep 08 Singapore Power announced a 22% increase in electricity price in Singapore for 4Q 08. It stated that the reason was its price was pegged to forward fuel price which had increased to S$155/ barrel. I am shocked, like a lot of its customers.
But wait. Let's come back to the Alinta goodwill on Singapore Power's balance sheet. The $3.27bn comprises (i) $1.6bn classified as "management services", (ii) $1.16bn as "gas transmission" and (iii) $491m as "others". The largest item, "management services," sounds like the type of business not backed by much assets, and could arguably have a very low market value. I note that the auditors were saying that there was a 12 month deadline for Singapore Power's management to assess "impairment", if there were significant changes in underlying assumptions. That deadline fell on 31 Aug 2008 (a month later came the 22% increase in price). I also note that Babcock & Brown, the parent company of Singapore Power's partner in the Alinta deal, has meanwhile seen its share price torpedoed from A$28 in Dec 07 to 16 cent currently. Market has completely discounted the value of its underlying assets. Amongst the many things that Babcock & Brown does is infrastructure and project financing involving power.
Is Singapore Power trying to capitalise on the "peg" on high oil price to squeeze more money from its customers, to make up for reduction of the value of goodwill in its book? If I am a shareholder, I will be happy that the management is doing this. Sadly, I never feel like a shareholder of Singapore Power.
Can Singapore Power not control its cost? Singapore Power claims that since it is only a messenger, it is subject to the mercy of oil price fluctuation. Fair enough, although I would have expected the management to use hedging tools to minimise volatility. And if management does not hedge volatility, then rightfully if you want to pass high cost to customers, you should also pass proportionate amount of cost saving back to your customers when oil price comes down. You want to live by the sword, then you die by the sword. And let me remind Singapore Power, your job is to provide public goods efficiently, not to make money.
And I want Singapore Power to know this. Never ever squeeze me, who is your public goods buyer, if you have failed your stint as an investment banker. If I ever find out that is the case, boy, that would really make me angry.
When a company buys something and pays a price above the value of the net tangible asset (sometime known as fair value) of that something, the excess amount is defined as goodwill.
In this case, the asset is Alinta, a package of Australian gas and electricity network. Singapore Power announced the acquisition in March 07. Joint buyer is Babcock & Brown. The price was A$7.4bn. (www.iht.com/articles/2007/03/30/business/alinta.php) A month later, Singapore Power and other buyers chased up the price by another 7%. The acquisition was completed on 31 Aug 07.
In Singapore Power's book, the $3.27bn is the amount Singapore Power paid above the book value of Alinta. Normally, this excess amount has to be depreciated over 20 years. That would have meant a $164m negative impact on the annual bottomline for the next 20 years. It would have lowered the 2008 earning by 14%, still tolerable considering Singapore Power's profit would have been still close to $1bn.
However, Singapore Power with foresight changed its accounting rule on 1 April 05 and discontinued amortisation of goodwill. The goodwill is henceforth subject to "testing for impairment". My layman understanding is this means every year the management will haggle with its auditors on whether or not to reduce the value of the goodwill.
Obviously, Singapore Power did not intend to engage in such unproductive debate with its KPMG auditors.
Singapore Power owns 51% of SP Australian Network (SP Ausnet), which is listed on Singapore Stock Exchange. SP Ausnet has stated from onstart that it is the investment vehicle for electricity/gas assets for Singapore Power.
Exploiting an arbitrage opportunity like a good investment banker, Singapore Power had intended to buy Alinta assets and onsell to SP Ausnet. In Sep 07, SP Ausnet announced that it would buy Alinta assets being purchased by Singapore Power and pay Singapore Power A$8bn, the price being paid by Singapore Power, plus additional "transaction costs and holding costs" incurred by Singapore Power. Also, the price being paid by Singapore Power is subject to "adjustment and assumptions of liabilities" by Singapore Power.
Which means, if the transaction has gone through, Singapore Power would have earned something. How much is that something, I would not know. Since Singapore Power is the majority shareholder of SP Ausnet, why did it not ask SP Ausnet to buy Alinta assets directly from Alinta shareholders? I don't know. I like to guess that perhaps Singapore Power wanted to earn extra investment banking fee.
Unfortunately for Singapore Power, the credit crisis hit the whole world in end 2007. SP Ausnet subsequently called off the purchase of Alinta assets from Singapore Power in Dec 07.
Fast forward. On 29 Sep 08 Singapore Power announced a 22% increase in electricity price in Singapore for 4Q 08. It stated that the reason was its price was pegged to forward fuel price which had increased to S$155/ barrel. I am shocked, like a lot of its customers.
But wait. Let's come back to the Alinta goodwill on Singapore Power's balance sheet. The $3.27bn comprises (i) $1.6bn classified as "management services", (ii) $1.16bn as "gas transmission" and (iii) $491m as "others". The largest item, "management services," sounds like the type of business not backed by much assets, and could arguably have a very low market value. I note that the auditors were saying that there was a 12 month deadline for Singapore Power's management to assess "impairment", if there were significant changes in underlying assumptions. That deadline fell on 31 Aug 2008 (a month later came the 22% increase in price). I also note that Babcock & Brown, the parent company of Singapore Power's partner in the Alinta deal, has meanwhile seen its share price torpedoed from A$28 in Dec 07 to 16 cent currently. Market has completely discounted the value of its underlying assets. Amongst the many things that Babcock & Brown does is infrastructure and project financing involving power.
Is Singapore Power trying to capitalise on the "peg" on high oil price to squeeze more money from its customers, to make up for reduction of the value of goodwill in its book? If I am a shareholder, I will be happy that the management is doing this. Sadly, I never feel like a shareholder of Singapore Power.
Can Singapore Power not control its cost? Singapore Power claims that since it is only a messenger, it is subject to the mercy of oil price fluctuation. Fair enough, although I would have expected the management to use hedging tools to minimise volatility. And if management does not hedge volatility, then rightfully if you want to pass high cost to customers, you should also pass proportionate amount of cost saving back to your customers when oil price comes down. You want to live by the sword, then you die by the sword. And let me remind Singapore Power, your job is to provide public goods efficiently, not to make money.
And I want Singapore Power to know this. Never ever squeeze me, who is your public goods buyer, if you have failed your stint as an investment banker. If I ever find out that is the case, boy, that would really make me angry.
