Brian Gaynor: Foreigners plug in to power reforms

UnitedNetworks' annual meeting was held in front of a sparse crowd at the Sky City Theatre on Tuesday. It was a far cry from the antagonistic and crowded meetings in the 90s when two determined bidders were fighting for control of the North Shore-based utility.

The company has gone through major changes over the past eight years and has come through them in a strong position. The utility's evolution gives a fascinating insight into recent developments in the electricity sector, particularly the major reforms of the 90s.

UnitedNetworks' story begins on July 1, 1994, when the North Shore-based Waitemata Electric Power Board and Thames Valley Power Board merged to form Power New Zealand.

The new company was created under the Energy Companies Act 1992, which required all power boards to become companies.

Free shares were distributed to 226,000 customers of the new company and several local authorities. UtiliCorp, a joint venture between US-based UtiliCorp United (79 per cent) and Todd Corporation (21 per cent), was issued 13.5 million or 8.9 per cent of the company at $3.03 a share.

The battle for control of Power New Zealand began on October 26 when Mercury Energy announced it intended to make an offer for 20 per cent of Power New Zealand at $3.40 a share. Mercury indicated that it wished to bid for 100 per cent but was restricted by the 20 per cent shareholder's cap in place at the time.

Power New Zealand's directors rejected the bid. The two power boards on either side of Auckland Harbour had a frosty relationship and WEPB had consistently rejected any attempts by its larger neighbour to dominate it.

The battle for control of Power New Zealand lasted four years and can be summarised as follows:

* The 20 per cent shareholder cap was removed in mid-1995.

* Mercury raised its offer to $4.50 a share and acquired a 29.5 per cent stake by the end of July 1995. By then 177,000 of Power New Zealand's original 226,000 shareholders had sold out.

* Attempts by Power New Zealand to merge with the Hutt-based EnergyDirect and Hamilton based WEL Energy were foiled because of opposition from the community trust shareholders of both companies.

* UtiliCorp kept pace with Mercury and by October 1996 both parties were offering $8.00 a share for Power New Zealand. UtiliCorp held 29.5 per cent and Mercury 33 per cent.

* In May 1997 UtiliCorp and Mercury announced they would establish a 50-50 joint venture company to hold their combined 64 per cent shareholding and would make a takeover offer to minority shareholders at $6 a share. Power New Zealand strongly opposed the proposals and they did not proceed.

The impasse was resolved in September 1998 when UtiliCorp agreed to buy Mercury's 33.2 per cent shareholding and WEL Energy's 7.9 per cent stake at $6.625 a share. The transaction was completed on October 7, nearly four years after battle for control began. UtiliCorp now held 78.6 per cent of Power New Zealand and the Takapuna-based company had only 21,000 shareholders.

Power New Zealand had the same experience as many other companies under the Energy Companies Act 1992; namely control was transferred to foreign interests and a majority of the original consumer shareholders sold out at an early stage.

The reforms were flawed because the assets of the power boards were badly undervalued when they were turned into companies.

The new companies were thrown to the wolves instead of being given time to improve their operating efficiencies and raise their asset values. Overseas interests took advantage of this situation by buying cheap assets while consumer shareholders sold out at low prices.

In 1998 Energy Minister Max Bradford introduced the Electricity Industry Reform Act. The act had two main features. ECNZ, the state generator, was split into three companies - Genesis, Meridian Energy and Mighty River Power - and the power companies were required to concentrate on either lines or retailing and sell the other activity.

The reforms also tried to establish a procedure that would make it easier for consumers to shop around and find the cheapest supplier.

Bradford said the object of the reforms was to "drive down prices for consumers. Not everyone will see prices drop but they will have a choice."

Industry experts, analysts and business commentators greeted the reforms with scepticism. Peter Kammler of the electricity watchdog group Power for Our Future asked the following questions:

* Does Bradford expect his 80-year-old neighbour to make innumerable toll calls (to find the cheapest electricity supplier), only to be met with a lot of complex information?

* Would oil prices fall if Saudi Arabia was split up?

Power New Zealand decided to focus on the lines business and in December 1998 bought the Hutt Valley and Wellington network assets of TransAlta New Zealand (formerly EnergyDirect) for $590 million. As part of the transaction it sold its retail business to TransAlta for $140 million.

The following month Power New Zealand changed its name to UnitedNetworks and bought TrustPower's line business in the Bay of Plenty for $485 million.

In April 2000 the group entered the gas business, buying the natural gas distribution assets of Orion in Auckland, Hawkes Bay, Manawatu, Horowhenua and Wellington for $550 million. These were formerly part of the listed gas company Enerco NZ.

A year later UtiliCorp United sold 13 million shares to reduce its holding in UnitedNetworks from 78.8 to 70.2 per cent. The sale price was $8.00 a share, well above the US company's average purchase price (Todd Corporation is no longer involved with the UtiliCorp shareholding).

The thick North American accents of chairman Keith Stamm and chief executive Dan Warnock dominated UnitedNetworks' annual meeting on Tuesday. They both expect a positive future for the group and emphasised that it had three main business streams: electricity, gas and a fibre-optic communications network in the Auckland and Wellington CBDs.

The communications network was established in the company's standby gas pipeline at a fraction of normal construction costs. The company now has 50km of fibre-optic cable in the two major North Island cities that can be used by telecommunication and IT companies.

UnitedNetworks has achieved strong earnings growth since it was formed in July 1994. Earnings per share have risen from 19.9c to 77.1c and the company has paid total dividends of $2.60 a share, tax-free. It is a shame that over 200,000 consumer shareholders have sold out, the majority below $4.00 a share, and most of the benefits of the group's strong performance have gone overseas.

Although the company didn't give any updated earnings figures at this week's meeting, Stamm said the group should be able to achieve earnings growth at 10 per cent per annum. On this basis the stock has a prospective price/earnings ratio of 9.7 and a tax-free dividend yield of 4.7 per cent at $8.15 and looks attractive for investors who take a medium to longer-term view.

UnitedNetworks is strategically well positioned, but the jury is still out on Bradford's reforms. The early indications are not positive as the range of choice for retail consumers has reduced; there has been minimal increase in generation capacity; and prices rose sharply during last winter's hydro lake crisis.

Consultants, accountants and lawyers have earned huge sums from electricity restructuring but there have been limited benefits to individual consumers. It is hard to imagine there would be many benefits to individual consumers when the number of intermediaries between them and the producer has been increased from two to three.

It is also inconsistent that the old power companies were required to separate their lines and retail businesses but several generators now have retail operations.

* Disclosure of interest: none.

* bgaynor@xtra.co.nz