We offer the following comments relating to the Ownership Review reports
Our first observation after reading the PwC report, and the associated Directors report, is that the entire focus of both reports is on the question . . “what is best for Unison”. The second observation is that there is an undeniable bias towards the Directors preferred outcome . . “retain Trust ownership”. That is hardly surprising.
The PwC report canvasses many ownership options that are not available to Unison while in Trustee ownership, confuses consumer vs. community objectives, and introduces the red-herring “intergenerational”. Why is it not focussed on the real issues at hand?
We question, how is this helpful to the Beneficiaries in determining what is best for them?The Trustees must act in accordance with their fiduciary duties. Failing to do so amounts to a breach of Trust. This requires the Trustees, when considering alternative ownership options for Unison Networks and its business, to consider a variety of factors such as:
The market value of the whole of the Unison Networks business;
The value of the parcel of shares to be distributed to the Beneficiaries;
The future value of the whole of the Unison Networks business and the likely dividends should ownership remain with the Trust
The benefit to Unison Networks should the business list on the NZX;
Any detriments to the beneficiaries should the shares in Unison Networks be distributed.
Where is the discussion and the detail around these issues of “value” which the Trustees must consider, and ought to disclose to the Beneficiaries?
The Trustees and Directors have described the PwC report is as “independent”. It is NOT. How can it be when:
“The Directors have had input to and considered the PwC report and have discussed with PwC the advantages and disadvantages (from the Company’s perspective) of the various ownership options outlined in the report.”
We also know that the Trust chair was interviewed by PwC and had input to the report
What is the “market value” of Unison shares?
If the Trustees do not understand or don’t know the value of the shares that they hold, for and on behalf of the Beneficiaries of the Trust then that clearly demonstrates that they are incompetent to hold office and should resign.
Alternatively, if they do know and understand the value of the shares, but fail to act for the Beneficiaries, and disclose that information during the course of an “ownership review”, then that would be a serious omission and the Trustees would be in breach of trust.
It is a straightforward calculation to establish a “market value”. The Unison financial reports show shareholder funds at $509 million. There are 64 million shares on issue, and 61,000 Beneficiaries. That means that each beneficiary would be entitled to a parcel of 64m/61k shares, i.e. about 1049 shares each. Each parcel of shares would have a “book” value today of $509m/61k, i.e. about $8,300, and each share would be valued at 8,300/1049, i.e. about $7.90 each. It is not unreasonable for a large infrastructure company, providing it demonstrated competent performance, to expect the shares to attract a premium of 50% on the open market. That would therefore establish the market value of the parcel of Unison shares at approximately $12,000.
In order for Beneficiaries to capitalise on the cash value of their allocated shares, the shares would have to be tradeable on the “market”. That would require Unison to apply for listing on the NZX. It is not an expensive process. For a company of this size the initial listing fee would be approximately $350,000. The Beneficiaries details are already known to the share registry which administers the distribution of the annual dividend. Some additional costs would be incurred, but would be easily met by the $3.3 million that the Trust already holds in reserve.
We would also expect Unison to establish a mechanism whereby shares belonging to Beneficiaries could be sold into the market, for a defined period, at no cost. This is a very common process amongst public companies today.
The PwC comments about the costs of listing on the NZX are entirely irrelevant, and have been mis-interpreted in recent Trustee statements. The PwC comments relate to companies seeking an initial public offering, an IPO, which is absolutely not the case when distributing shares to Beneficiaries.
There are some errors of significance in the reports. We illustrate just two here:
PwC reports the dividend generated and paid out to the Trust over the review period as $91.3 million. The Directors repeat the claim . . “$91.3M in dividends paid by the Company to the Trust over the last five years”. That is not correct. The dividend paid out over the past 5 years is $78.6 million. Did the Directors not check the facts?
By the way, even $78.6 million sounds like a big number, but it represents a return on shareholder funds of only about 3%. Similarly the often quoted “$250 million distributed since 1992” sounds impressive. It is not. That also represents a return of only 3%.
We are also concerned about the way that data is shown in charts, supposedly comparing Unison performance with the performance of the other lines business that PwC chose. Some of these charts are indexed to 100% which makes a true comparison impossible.
Note that there is no mention of a very significant financial loss very likely to be incurred by Unison. Unison's 2023 financial reports identify that Unison Fibre is up for sale. UFL has an asset value of $35M and a current book value of $24M. UFL is a loss maker for Unison. But who would buy that business if significant returns are not evident. We expect that, if indeed Unison is able to sell UFL, that they would have to book a loss of perhaps $15M to $20M. Not mentioning that possibility in the PwC report, nor the Directors' report is a serious omission.
Is Unison actually performing well under the Trust “ownership”? Here are two “highlights” in the PwC report:
Unison Group EBITDA growth of 0.5% reflects a compounding growth rate of 0.1% p.a.
Unison Networks EBITDA over the review period had a compounding average growth rate of negative 2.2%
Is that a reflection of a good performance, under Trust ownership? With a NEGATIVE growth rate? We don’t think so.
One of the repeating themes in the PwC report that is not given prominence is the absolute need for additional capital over the next 10 years, or more. Up to $100 million per year is a figure often reported. A fundamental question follows . . how would Trust ownership support that increased level of funding? The basic options are selling off some of the present assets, or additional borrowing.
PwC says:
"The next decade will require significant investment by Unison in electricity network infrastructure which will need to be funded by a combination of regulated revenue recovered from customers and other sources of funds, including borrowing. This is relevant to the ownership review as Unison’s current shareholders, Hawke’s Bay consumers, cannot provide additional capital. If Unison is cash constrained, it may not be able to maintain its dividend flow to the Trust. "
So, will the Trustees have any concern about the real possibility that dividends will reduce or stop altogether? Will they tell you?
Unison borrows money to fund its operational needs already. Presently it is borrowing about $26 million each year to fund its capital and operational needs, and that will increase. That level of borrowing should be compared with the dividend declared, $22 million [inclusive of imputation credits].
Does paying Beneficiaries an annual dividend while having to borrow at commercial rates to fund operational needs make sense? The Trustees probably demand it to make their annual “Christmas present” of $240 look attractive.
The Trustees are making frequent statements regarding the nature of, and the objects of the Trust which are completely incorrect.
The Trust is NOT a community Trust. The word community does not appear in the Trust Deed.
The Trust is NOT designed to run in perpetuity. The Trust was established as a transitional mechanism following the significant organisational changes in the electricity industry around 1993. The Trust Deed itself clearly envisages and authorises the option of distributing the shares in Unison Networks to the Beneficiaries. The Trust was NOT established with a purpose of holding the assets of Unison Networks in perpetuity. If it had been, the trust deed would have mandated that. In fact, the reverse is clear, identifying alternative ownership options in Rule 4, and mandating a regular review procedure, every 5 years.
The Trust MUST distribute the shares in Unison, and any other assets held, at the latest on 1 January 2072 TO THE BENEFICIARIES AT THAT TIME. Following that the Trust MUST be wound up. Based on its present performance will Unison still exist at that time?
The concept of “intergenerational” does NOT exist in the Trust Deed. The Trust could cease to exist following any of the 5 yearly “ownership reviews”. The Beneficiaries are defined as those power consumers who are customers of Unison [within the defined geographical area] at the particular date when the ownership change occurs.
[By way of clarification, it is reasonable to consider Unison as having “intergenerational” obligations, as would most commercial businesses. But that concept CANNOT be applied to the Trust.]
There are express engagement obligations imposed on the Trustees. Public Consultation does not serve any purpose if it is vague and ambiguous. A meaningful process requires the development of alternative scenarios. The Trustees must not close their minds to any scenarios or any outcome.