Public

Spark Infrastructure Group (SKI) 2016 AGM Voting Intentions

Company/ASX Code : Spark Infrastructure Group (SKI)
Registry : Computershare Services
Poll/Show of Hands : Poll on all items
Webcast : No
Venue :
11.30am Radisson Blu Plaza Hotel
27 O'Connell Street
Sydney, New South Wales
Monitor : Mr Steven Watson
AGM Details / NoM : Friday 20th May, 2016

Sparks to fly – Do the positives exceed the negatives?

This company is monitored by Steven Watson, assisted by Allan Goldin. The company monitors had a pre-AGM meeting with incoming Chairman Dr Doug McTaggart.

ASA Position
Not Applicable
Annual accounts and reports

Financial performance

The underlying EBITDA was only up 0.7% compared to 2014, with Victoria Power Network (VPN) up 11% and SA Power Network (SAPN) down 10%. VPN benefitted from a 10% tariff increase 2.5% volume increase and flat capital expenditure. The SAPN suffered from a 26% tariff decrease in the second half due to a draft pricing decision, a true up traffic increase in July 2016 will to lead a recovery in the EBITDA.

The directors have provided medium distribution guidance for the next three years:

-    FY 2016 at least 12.5 cents (up ½ cent)

-    FY 2017 at least 13.00 cents

-    FY 2018 at least 13.5 cents

Key events

Tax: Both SA Power & Victoria Power were subject to “large business” audits by the Australian Taxation Office – the matter has been finalised and a one off, non-cash tax expense of $31.6 million has been taken up in the current year.

Capital raisings: The proceeds of a capital raising of $405 million in December 2015 has been used to reduce debt by $205 million and to acquire 15.01% of Transgrid from the NSW Government. The capital raising was a 5-for-34 non renounceable entitlement offer at $1.88 per share, a discount of 7.7% to TERP. The basis of the offer for retail and institutions was the same.

Divestment: The board has said that the company’s 11% effective shareholding in DUET is up for review, disposal would lead to net proceeds of some $200 million.

Key Board or senior management changes

The Chairman Brian Scullin has announced his decision to retire after the AGM. Dr Doug McTaggart of appointed as a director in December 2015 and will be his replacement. It is surprising that SKI did not have a succession plan in place to ensure that one of the existing directors could step in the chairman role. We suspect that the board recognises that a fresh approach is required.

Two shareholder activists Mr James Dunphy and Mr Michael Rhodes have launched a campaign to join the board – they claim the company has too much debt, director and senior management shareholding is too low, they are unhappy with the high price paid to acquire the Transgrid investment.

The company has advised that: “In light of our constitution which allows for up to 10 Directors on the Board, that each nominee who polls 50% or higher of votes cast will be elected. Following the current chair’s retirement at the AGM, there will be 6 NEDs plus the MD, giving a total of 7. Given that two of the nominees, Doug McTaggart and Andy Fay, are already on the Board, their re-lection would not change the total of 7. In other words, it is possible for all four of the nominees to the 2016 AGM to be elected.”

ASA focus issues

Shareholdings by directors & management:

The level of director and senior management shareholding in the company is very low - only one director Dr Turner has shares worth more than one year’s fees.

Alignment with shareholders:

The granting of performance rights to the CEO Mr Francis is subject to only one performance hurdle rather than the preferred two. In addition the one performance hurdle selected is not as straight forward as it appears. The company will use “risk adjusted excess total shareholder return methodology “the criteria to award the performance rights to the CEO. We understand SKI is the only listed company on the ASX to use such an exotic measure of performance (as even the company does not know any others). The incoming Chairman did not know what the risk adjusted TSR would be nor how it would compare to the TSR measure used by virtually every other listed company in Australia.

What is Risk Adjusted TSR and why is he ASA opposed to its use?

Risk adjusted TSR is based on Beta measured on the basis of historical returns and assuming the pattern of historical returns will repeat in the future. Further, it is assumed the pattern of historical returns will repeat in the same proportion and in the same order. So the company is comparing itself with only companies who during the four year period which have a similar share price and dividend stability as itself, rather than a comparator group of companies which can have large gains or losses.

The ASA believes that the efficacy of a LTI plan continues to be heavily dependent on the selection of the most appropriate comparator group as part of a Relative TSR performance measurement. This traditional approach provides a degree of objectivity, is easily understood and not over layered with complexity or the manipulation of input variables to determine a historic Beta nor seen to be judging a company’s relative performance, and, accordingly, effective in driving desired executive behaviour.

What the company is really saying when they choose to use risk adjusted TSR is that SKI is a company with stable earnings, low risk but will provide shareholders with a relatively low return in comparison to other ASX 200 companies. 

Summary


ASA Position
Against
Resolution 1: Adoption of Remuneration Report

While the SKI remuneration structure has improved on last year’s with the move from the award of notional securities to actual securities and a four year performance period, the use of “risk adjusted total shareholder return“ rather than the standard TSR is unexpected and detracts from alignment of the CEO with the interests of shareholders. The LTI is also determined by one measure rather than two as preferred by the ASA.

To vote in favour of the remuneration report would risk other companies seeking to adopt the concept of Risked Adjusted Total Shareholder Return leading to the loss of one of the key measures investors have, TSR, to assess the comparative success of their investments. 

Further, the disclosure of the STI hurdles in the report is poor and the non-executive directors fees are also on the high end.


ASA Position
For
Resolution 2: Election of Dr Douglas McTaggart as a Director

Dr McTaggart was appointed in December 2015 and will replace Mr Brian Scullin as Chairman at the end of the AGM. Dr McTaggart has had a very extensive academic and business career, he is a director of Suncorp and is a member of the Prime Minister’s Advisory Panel on the reform of the Federation.


ASA Position
For
Resolution 3: Re-election of Mr Andrew Fay as a Director

Mr Fay was appointed in March 2010, he is a director of SA Power, Victoria Power, BT investments Management Ltd and Gateway Lifestyle Group. Mr Fay has had a very extensive business career.


ASA Position
For
Resolution 4: Election of non-board endorsed director candidate Mr James Dunphy

The incoming Chairman Dr Doug McTaggart, based on candid discussions with the ASA, has indicated that he has taken seriously the concerns raised by the share activists Mr Dunphy & Mr Rhodes, concerns also raised by the ASA and other institutional shareholders.

While ASA believes that the new Chairman should be given time to address the issues in a considered way, the election of an activist shareholder may very well speed the adoption of the reforms required. A more activist approach to corporate governance is to be encouraged. 

Mr Dunphy appears to know the business well and has a strong investment and finance background. We accept that he will be able to add value to the board. 

Mr Dunphy and Mr Rhodes if elected to the board will need to act in the interests of all shareholders.


ASA Position
Against
Resolution 5: Election of non-board endorsed director candidate Mr Michael Rhodes

Based on the material included in the Notice of Meeting, Mr Rhodes has a legal background and limited company director experience. We cannot see how he will add value to the Board, especially as there are already legal skills on the Board.


ASA Position
Against
Resolution 6: Grant of performance rights to the CEO Mr Rick Francis

The decision of the ASA to vote against this resolution is based on two factors – the use of the criteria “Risk Adjusted Total Shareholder Return” and the use of only one criteria rather than two to determine the award of the performance rights. As stated earlier, SKI is the only company listed on the ASX to use “Risk Adjusted Total Shareholder Return” rather than the standard TSR.  The ASA wants to align the interests of the shareholders with the performance/rewards of the CEO and not with some obscure mathematical model.


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