The tragic Victorian fires that occurred on 7 February 2009 and sadly claimed many lives have been attributed to a faulty power line owned by SP Ausnet (ASX: SPN). A class action run by law firm Maurice Blackburn began this week alleging SP Ausnet was negligent in the maintenance of its infrastructure and will bring in to focus the maintenance capital expenditure (capex) of the firm.
SP Ausnet provides electricity and gas distribution and electricity transmission throughout Victoria. An electricity transmission network requires substantial spending to be maintained — this is generally referred to as maintenance capex. It is important when reviewing companies to compare their profit and loss statements with their cash flow statements, as this can provide many insights. A review of SP Ausnet’s most recent interim result shows that while the depreciation expense was only $13 million, the maintenance capex was over $153 million.
Comparing these two charges over an extended time period can provide insights into whether a company is overstating or understating profits. Ongoing spending requirements differ across assets. For example, fellow electricity distributors Spark Infrastructure (ASX: SKI) and DUET Group (ASX: DUE) also have to invest relatively heavily to maintain their networks. On the other hand, pipelines often require lower ongoing maintenance and this can be seen in the accounts of pipeline owner and maintenance provider APA Group (ASX: APA) and natural gas distributor Envestra (ASX: ENV).
Like most regulated assets, SP Ausnet carries a hefty debt load. With the cost of any potential class action pay-out unknown and insurance coverage also unclear, the potential for the balance sheet to come under stress is hard to gauge at present.
First, the profit and loss statement should never be solely relied upon. The cash flow statement will give a much clear picture as to the current spending on maintaining assets.
Second, companies need to adequately maintain their assets. An investor alert to this can potentially identify and avoid future trouble.
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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.