Lurking bureaucrats can't defeat United Networks' optimism

Friday 5th April 2002

In medieval England, market forces were banned. Prices were required to be set according to people's ability to pay a so-called fair price.

Several hundred years later, the dreaded word "fair" is emerging again in response to the government's desire to regulate the energy sector.

This topic takes up a decent slice of energy distribution company United Networks' latest annual report.

Chairman Keith Stamm stresses the company's commitment to "working with the government to ensure targeted regulation delivers fair value" while chief executive Dan Warnock says the goal is "providing good returns to our shareholders while at the same time producing good service and fair prices to customers."

The concept of having some grey-faced bureaucrat who has never run a company deciding what profits it can make must be a terrifying prospect but United Networks remains upbeat.

Mr Stamm crows about the company meeting the forecast made a year ago of delivering 10% in earnings growth.

This was achieved without one of the company's regular acquisitions to boost the numbers, leaving the company to "focus on its core competencies." He says these are in network management rather than the traditional lines operation.

Citing management consultancy McKinsey, he says focus "requires us to be proficient in finance, regulatory management, risk assessment, performance contracting, data gathering and information management and integrated engineering and commercial decisionmaking."

Mr Warnock also explains why the company has chosen to focus on network management.

"Due to technology and communication advances, all network services (with the exception of physical network construction and maintenance) can be provided remotely." This is already being done from an operations centre in Auckland.

The report suggests the company has a major new growth path in mind when it points out "it is now quite feasible for the networks operations centre to manage any electricity network anywhere in the world."

As well as extending internationally, the company is also considering broadening the types of assets it manages, if its investment in a "vegetation management" company mentioned in the notes is anything to go by.

For investors who have ever wanted a second opinion on valuations that have been approved by the auditor, the United Networks report is a wish come true.

It says a highlight of the year was winning a seal of approval from the Commerce Commission, which "after a comprehensive audit, approved our asset valuation report with minimal adjustments."

This is significant as the company's asset base is substantial. The report shows its assets are worth $2.3 billion, roughly the same as for the previous year.

However, shareholders' funds are up 12.7% to $908.5 million, reducing the gearing ratio from 61% to 57%. Contributing factors were the delay of $25 million in dividend payments into the next financial year as required by a new financial reporting standard and higher retained earnings brought about by lower debt costs.

A five-year table of results is prominently shown at the front rather than hidden in the back as in many other reports. Unfortunately, comparisons are made tricky by a change of balance date in 1999.

At least the past two years can be compared. This shows revenue fell fractionally to $455 million but net profit rose 10.5% to $121 million. The table also shows an entry for "earnings before non-recurring and extraordinary items." While this is common in reports that want to explain away a poor bottom line, the United report is unusual in that it gained from one-off items to record an improved net profit. This information can always be found in the accounts (the usual gain came from the sale of business operations) but it is rare for a company to be so upfront in its highlights pages.

Although overdesigned, the United Networks report presents information to readers in a clear and lucid manner. Its welcome use of tabs to show different sections of the report makes it easy for readers to quickly find the part that interests them, without having to wade through the rest.

Where the report best succeeds is in giving a sense of the complexities, the opportunities and even the excitement inherent in ensuring consumers can turn on the lights, cook a meal or surf the web.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz; email: davidm@mcewen.co.nz

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