controversial valuation, page-4

Hi jfc,

Just saw the funding extension for UEC, where Alinta Finance will now take on the obligations previously held by UEL. See ASX/R commentary, below.

Originally, the UEC facility was to expire (and be paid back, beginning) 1 July 2003.

On 9 May 2003, this was extended to 29 December 2004 for drawdown and repaid by 29 June 2007.

Today's announcement extends the drawdown rights to 29 June 2006 with (what appears to be) no other change in conditions.

As such, the facility still needs to be repaid by 29 June 2003, and carries an 8% fixed rate of interest. Compared to current 10-year corporate bond yields (closed 14/7 @5.015%), this means that the UEC financing facility is priced at a 298BP (let's round this to 300BP) premium to the 10-year bond rate.

Another way of expressing this is that the UEC facility is priced today at 60% above the prevailing bond rate, and at >30% risk premium to what should have been the prevailing rate of 6% (or less).

Even UEL's own bank loans are much less than this. The bank loans are on a floating rate basis with an fy02 weighted interest rate of 5.66%. The US$ swap rate was slightly higher than this, at 5.78%.

Even that struggling O/B company, TMS, is on a weighted average interest rate of <6%, as the AR02 (5.8% average) and the recapitalisation documents demonstrate.

The question, therefore, is why UEC is being funded by internal sources at a rate of 200BP+ above the funding conditions available to its parent (ie: UEL, now ALN), and why, when last year, CFO Dawson said that he was going to look to cheaper external sources of funding (08/02), nothing occurred?

Clearly UEL, and now ALN, are attributing a dynamic risk profile to UEC's business going forward.

Any valuation assumptions made for UEC, therefore, need to factor for this risk. My earlier assessment of jfc's valuation criteria did so, by factoring for a 30% discount, and then adding back a 20% control premium.

This may well prove erroneous, or subject to controversy in its own right. But similarly, a 0% discount for risk is controversial and, in my view, not sustainable. Not when UEL (and ALN) price UEC's debt risk exposure at >30% to market.




MEDIA RELEASE 15-Jul-2003

Uecomm announces enhancement to funding facility

Uecomm Limited today announced that it has reached agreement to transfer the $80 million funding facility currently provided by 66% shareholder United Energy Limited ("United Energy") to Alinta Finance Pty Ltd ("Alinta Finance").

The agreement is conditional upon the successful completion of the scheme of arrangement between Alinta Limited ("Alinta"), AMP Henderson Global Investors Limited and Power Partnership Pty Limited ("Scheme"). The completion date is expected to be about 23 July 2003.

The transfer of the funding facility will become effective 6 business days after a copy of the court order approving the Scheme is lodged with ASIC.

Uecomm's Chief Executive Officer, Mr Peter McGrath, said "I am happy to announce that Uecomm has also reached agreement with Alinta Finance to extend the last day upon which the funding facility can be drawn upon by an additional 18 months to 29 June 2006. Alinta Finance is wholly owned and guaranteed by Alinta."

Mr McGrath said that, subject to completion of the Scheme, the 66% shareholding in Uecomm currently held by United Energy would also be transferred to Alinta.

The existing $80 million funding facility will be taken over by Alinta Finance subject to a number of conditions precedent including:
" the scheme of arrangement becoming effective
" no material adverse change affecting the financial or trading position or prospects of the Alinta Group including a change that would reduce Alinta or Alinta Finance's credit rating below a "BBB" rating (if it were to be rated).

Mr McGrath re-iterated that it was "business as usual at Uecomm" in terms of the Company providing corporations and government organisations with high-speed, high-quality broadband data services and that Uecomm looked forward to maximising value for all shareholders.

Uecomm will release its half-year financial results later this month.

Further information will be provided to the market regarding the implications, if any, of the change in Uecomm's majority shareholder as it relates to the interests of Uecomm shareholders as and when it becomes available.