VCT
21/02/2014 08:35
HALFYR
REL: 0835 HRS Vector Limited
HALFYR: VCT: Financial Results for the half year to 31 December 2013
Regulatory price resets weigh on Vector 1H result
Results meet expectations, technology division continues to grow
Key points:
- Revenue falls 1.7% to $657.9 million from $669.1 million as growth in
Technology segment partially offsets impact of price resets
- Adjusted EBITDA falls 5.5% to $317.8 million from $336.3 million
reflecting Electricity and Gas Transportation regulatory price resets and the
end of legacy priced Kapuni gas
- Net profit falls 11.4% to $104.6 million from $118.0 million
- Interim dividend rises 0.25 cents per share to 7.50 cents per share
- Targeting market consensus forecasts for the full year
Vector's earnings in the six months to 31 December 2013 show a strong
performance across our portfolio of operations in the face of well-signalled
price reductions imposed by the regulator on our electricity and gas networks
and a challenging market environment.
Revenue for the six months to 31 December 2013 fell by 1.7% to $657.9 million
from $669.1 million in the same period last year, with the price resets
weighing heavily on our financial performance.
Net profit fell 11.4% to $104.6 million from $118.0 million. Adjusted EBITDA
fell 5.5% to $317.8 million from $336.3 million.
Vector Chairman Michael Stiassny said: "Vector has performed well. We have
delivered a result in line with expectations and we are well placed to
continue to grow over the long term, given the concentration of our assets in
the strong-growing Auckland region and the emergence of new growth
opportunities including those available to our technology operations.
"We remain committed to our core goal of delivering sustainable and growing
dividends, by delivering services attuned to customers' needs, growing our
portfolio of energy infrastructure businesses and driving improvements in
operational performance.
"We also continue to seek better regulatory outcomes and to maintain and
promote the health and safety of our employees and those who live and work on
and around our energy networks.
"The New Zealand economy is showing signs of a good recovery and in this
environment Vector should continue to prosper. Reflecting Director's
confidence in the future and the importance of our dividend to shareholders,
the Board has resolved to pay a fully-imputed interim dividend of 7.5 cents
per share for the half year, up from last year's 7.25 cents per share interim
dividend," he said.
Vector Group Chief Executive Simon Mackenzie said: "The results for the six
months to 31 December 2013 are testament to the benefits of Vector's
diversified portfolio of businesses.
"Vector has implemented and weathered regulatory price resets. These, along
with production constraints at the Kapuni gas field, and the end of our
entitlements to Kapuni gas at legacy prices have weighed on our financial
results in the last six months.
"However, we are one of the lowest cost providers of electricity distribution
services in New Zealand on measures such as the cost per unit of electricity
distributed and the average cost per customer.
"We have met market expectations and we have benefited from continued growth
in our technology business, LPG tolling volumes and customers and continued
cost control.
SUMMARY FINANCIAL RESULTS
Six months ended 31 December 2013
$M 2012
$M Change
(%)
Revenue 657.9 669.1 -1.7
Adjusted EBITDA 317.8 336.3 -5.5
Net profit 104.6 118.0 -11.4
Operating cash flow 225.9 267.7 -15.6
Dividend per share 7.50 7.25 +3.4
Capital expenditure
Growth 90.4 75.8 +19.3
Replacement 57.9 53.0 +9.2
"Over the longer term our focus on the opportunities emerging from the
convergence of infrastructure management technology and information
technology will position us well for the future.
"The balance of power is shifting from utility service providers to consumers
as technology allows customers to switch suppliers, switch energy solutions
and switch from the grid.
"Customers are more technologically savvy and more aware of alternatives than
before. They are looking for utility providers that are committed to the
highest standards of service and those that can provide choice and do both at
a low cost.
"Meanwhile, customers say spending on utilities is a significant area of
concern and they are targeting this as an area for saving money.
"We are already seeing the effects of these trends in falls in average
consumption per connection. Consumers are also increasingly considering the
merits of new technologies such as domestic solar cells, energy efficient
appliances and electric cars.
"These new technologies have important implications for Vector's network
investment plans. If domestic solar facilities, for example, are not
moderated by battery storage, we will need to invest in capacity to manage
their two-way and fluctuating power flows.
"Vector is innovating to respond to customer demands early; setting the
agenda and ensuring we are at the forefront of change.
"Vector continues to be an efficient provider of energy infrastructure
services and is embracing these new technologies to ensure they are
accessible to the widest possible audience.
"We encourage customers to ensure they are on the appropriate electricity
tariff and to examine the merits of low-user tariff options. We also
encourage customers to check tariff options with their retailer or check any
of the tariff switching websites.
"We are working with the industry to oppose the Electricity Authority's
latest proposals for transmission pricing. These proposals have the potential
to unfairly disadvantage Auckland customers and those in other regions where
there has been substantial growth or under-investment in the national grid.
"We are also working with Housing New Zealand to ensure its housing stock
features the most energy-efficient technology such as LED lighting. We
installed solar panels on the Ng?ti Wh?tua Marae to assist iwi understanding
of the benefits.
"Our customer engagement through the web and social media; our highly
successful smart phone outage app and our internationally-recognised metering
business, which allows us to monitor and proactively address energy demand
trends, will also help prepare us for the future.
Regulation
"We welcome the government's recent announcement to review regulatory
arrangements under the Commerce Act as well as the Productivity Commission's
investigation into making improvements to the design and operation of
regulatory regimes in this country.
"The regime is far from optimal. Consumers do not appear to be benefiting
from the price reductions Vector has made. And, it is clear the frequency of
change to the core elements of the regime for each new regulatory period is
adding significant cost to New Zealand infrastructure providers.
"International rating agency Standard and Poor's recently downgraded Vector's
corporate credit rating by one notch to the 'investment-grade' BBB, from
BBB+, due to what it saw as instability and greater risk in the New Zealand
regulatory regime.
"The share market's disappointment with news the Commerce Commission is again
considering a review of the allowable return on our regulated assets only
reinforces this point.
"All regulated infrastructure providers in New Zealand are affected in the
same way by these factors. This is an issue that is critical to the future
prosperity of the country and we are hopeful Standard & Poor's comments will
provide the catalyst for change in regulatory outcomes for all regulated
entities.
"We were, meanwhile, disappointed the merits review of the regulatory regime
brought by Vector and six other infrastructure companies did not redress the
imbalances we see.
"The court said the alternative approaches proposed by Vector and others did
not provide a 'materially better' outcome than the Commission's approach.
"It is now evident that the 'materially better' test is unworkable. The High
Court's decision gives the regulator wide discretion over the conduct of New
Zealand's critical infrastructure, but it gives no guidance to how the test
of 'materially better' can be assessed robustly. Therefore the country's
infrastructure providers are deprived of an effective process to challenge
the regulator's determinations.
"We are reviewing the implications of all these issues on Vector. We had
decided against appealing the decision. However, as the Major Electricity
Users Group is appealing the decision we are now assessing whether to cross
appeal.
Investment for growth
"Auckland continues to grow and we continue to invest in a way that is
aligned with the needs of our customers. Over the half year we added 3,575
connections to our gas and electricity networks.
"Meanwhile, the Auckland Housing Accord provides for the construction of an
additional 39,000 houses over the next three years.
"Vector welcomes and supports the Auckland Council and the government's
growth aspirations. We will continue to innovate and invest appropriately in
solutions to service the needs of our customers raise the bar on safety and
reliability standards and investigate new technologies.
"We expect continued growth in our metering business in New Zealand and we
are also continuing to explore opportunities to grow our metering business
offshore, particularly in Australia.
"We also continue to explore the opportunities offered by new technologies
such as solar cells supported by battery storage as well as customer
information services.
OUTLOOK
"We continue to target adjusted EBITDA for the 12 months to 30 June 2014 to
be in line with market consensus estimates, assisted by our focus on growth
in our technology business and continued tight cost control.
"In a complex and changing environment we are well positioned to deliver long
term growth. We will continue to innovate and be at the forefront of change
in a way that is aligned with the advances in technology and changes in
customer preferences," said Mr Mackenzie.
SEGMENT PERFORMANCE
Six months ended 31 December 2013 2012 Change
$M $M (%)
Electricity
Revenue 326.4 334.8 -2.5
EBITDA 191.3 202.0 -5.3
Gas Transportation
Revenue 105.5 114.4 -7.8
EBITDA 78.0 88.7 -12.1
Gas Wholesale
Revenue 184.7 195.5 -5.5
EBITDA 25.1 34.0 -26.2
Technology
Revenue 66.5 52.8 +25.9
EBITDA 48.1 36.7 +31.1
Shared Services
Revenue 0.3 0.2 +50.0
Adjusted EBITDA -24.7 -25.1 +1.6
Electricity
Revenue fell 2.5% to $326.4 million from $334.8 million due to the Commerce
Commission's requirement for Vector to reduce prices on our network by 10%
from 1 April 2013. A fall in consumption due to warmer than average
temperatures and the continuing trend by consumers to reduce power
consumption by exploring new energy efficient technologies also played a
role.
These effects were partially offset by a favourable customer mix across new
pricing options and higher pass through charges including Transpower charges,
which are passed directly through to customers.
EBITDA fell 5.3% to $191.3 million from $202.0 million largely due to weaker
revenues. Operating expenditure was inflated by higher pass through charges.
Indirect costs were lower as the prior year bore the costs associated with
the merits review.
Power transported across our networks fell 1.2% on the prior year to 4,271
GWh from 4,321 GWh. July 2013 was the second driest July in Auckland since
records began, while August 2013 was the warmest August on record. Heating
degree days were 683 and were 9.1% lower than the 751 recorded in the prior
year.
Electricity customers increased 0.8% to 541,444 from 537,268, while the net
movement in customers rose 8.4% to 2,212 from 2,040 due to an increase in
construction activity in Auckland.
SAIDI - our measure of network reliability - rose 58.9% to 114.9 from 72.3
over the six month period due to a higher number of storms and high wind
events and a number of other unplanned outages.
Gas Transportation
Revenue fell 7.8% to $105.5 million from $114.4 million due largely to the
reset of our gas transmission and distribution prices from 1 October 2013.
The price reductions were set by the regulator at 29% for gas transmission
and 18% for gas distribution.
Gas volumes on our distribution networks fell 0.9% to 11.6 PJ from 11.7 PJ
due to the warmer weather. Transmission volumes rose 0.9% to 59.3 PJ from
58.8 PJ.
EBITDA fell 12.1% to $78.0 million from $88.7 million.
Distribution customers increased 1.6% to 158,315 from 155,863, while the net
movement in customers rose 12.3% to 1,363 from 1,214, due to the increase in
construction activity.
Gas Wholesale
A fall in production at the Kapuni field from 41.4 TJ per day in the first
half of 2013 to 32.1 TJ per day in the 2014 period, due to the timing of
wells coming on stream, weighed on the results.
Revenue fell 5.5% to $184.7 million from $195.5 million due to a 6.5% fall in
natural gas sales to 13.0 PJ from 13.9 PJ and a 6.0% fall in gas liquid sales
to 36,659 tonnes from 39,000 tonnes.
This reflected lower demand from electricity generators due to warmer weather
and weaker industrial and commercial revenue due to lower prices.
These falls were partially offset by continued growth in the bottle swap
business and an increase in our customers' LPG exports. LPG tolling volumes
increased 15.2% to 84,528 tonnes from 73,369 tonnes.
EBITDA fell 26.2% to $25.1 million from $34.0 million. An increase in LPG
tolling partially offset the effects of weaker natural gas and LPG prices,
the end of our entitlements to Kapuni gas at legacy prices and higher
maintenance charges and levies.
Vector's rights to approximately 7.3 PJ of Kapuni gas at legacy prices were
confirmed by the High Court. The High Court judgment dismissed appeals by the
suppliers of Kapuni gas against an arbitral award in Vector's favour. Vector
also retains the right to purchase 50% of the gas remaining in the Kapuni
field from 1 April 1997 and we are in the process of resolving the price for
the next tranche of that gas.
Technology
Revenue increased 25.9% to $66.5 million from $52.8 million, largely due to a
36.3% increase in the number of deployed smart meters to 597,596 from 438,419
at the same time last year. The gas metering business acquired last year also
lifted revenue.
Vector is now contracted to install 850,000 smart meters, up from 670,000 a
year earlier following new contracts with Genesis and Mighty River Power. We
are now nearly three quarters of the way through that deployment. In November
we installed a record 19,500 meters and we expect to continue to install
13,000 meters to 15,000 meters a month over the next six months. EBITDA
increased 31.1% to $48.1 million from $36.7 million.
Vector Communications continues to make a valuable contribution to the
business.
Cash flow and capital expenditure
Operating cash flow fell to $225.9 million from $267.7 million. Capital
expenditure increased 15.1% to $148.3 million from $128.8 million. Of this
$90.4 million has been directed at growth initiatives and a further $57.9
million to maintain the quality of our assets.
The increase continues to be driven by investment in the smart metering
programme and investment in our networks to accommodate growth and raise the
bar on safety and reliability standards.
Capital Structure
Vector's balance sheet remains strong. Standard & Poor's rating action will
not have any immediate financial or customer impact given the long dated
duration of the company's debt portfolio. We remain an 'investment-grade'
credit risk. Our gearing, as measured by net debt to net debt plus equity,
fell slightly from 51.1% at the year ended 30 June 2013 to 50.7%. Our
interest cover is 2.7 times compared with 2.8 times for the year ended 30
June 2013.
-Ends-
Contact:
Investors: Media:
Dan Molloy Sandy Hodge
Chief Financial Officer External Communications Manager
Tel: +64 9 213 5179 Tel: +64 9 978 7638
Mob: +64 21 441 311 Mob: +64 21 579 522
About Vector: (www.vector.co.nz)
Vector is New Zealand's leading multi-network infrastructure company which
delivers energy and communication services to more than one million homes and
businesses across the country. The company owns and manages a unique
portfolio which consists of electricity distribution, gas transmission and
distribution, electricity and gas metering installations and data management
services, natural gas and LPG and fibre optic networks. Vector is listed on
the New Zealand Stock Exchange with ticker symbol VCT. Our majority
shareholder, with voting rights of 75.4%, is the Auckland Energy Consumer
Trust (AECT).
APPENDIX
Non-GAAP profit measures
Vector's standard profit measure prepared under New Zealand GAAP is net
profit. Vector has used non-GAAP profit measures when discussing financial
performance in this document. The Directors and management believe that these
measures provide useful information as they are used internally to evaluate
performance of business units, to establish operational goals and to allocate
resources. For a more comprehensive discussion on the use of non-GAAP profit
measures, please refer to the policy 'Reporting non-GAAP profit measures'
available on our website (vector.co.nz).
Non-GAAP profit measures are not prepared in accordance with NZ IFRS (New
Zealand International Financial Reporting Standards) and are not uniformly
defined, therefore the non-GAAP profit measures reported in this document may
not be comparable with those that other companies report and should not be
viewed in isolation or considered as a substitute for measures reported by
Vector in accordance with NZ IFRS.
Definitions
EBITDA: Earnings before interest, taxation, depreciation and amortisation.
Adjusted EBITDA: EBITDA adjusted for fair value changes, associates,
impairments and significant one-off gains, losses, revenues and/or expenses.
GAAP to non-GAAP profit reconciliation
EBITDA and Adjusted EBITDA 31 DEC 2013
6 MONTHS
$M 31 DEC 2012
6 MONTHS
$M
Reported net profit for the period (GAAP) 104.6 118.0
Add back: interest costs (net) 84.8 83.3
Add back: tax (benefit)/expense1 42.1 47.5
Add back: depreciation and amortisation 91.2 86.3
EBITDA 322.7 335.1
Adjusted for:
Impairment of investments in associates - 2.2
Associates (share of net (profit)/loss) (1.1) (0.7)
Fair value change on financial instruments (3.8) (0.3)
Adjusted EBITDA 317.8 336.3
End CA:00247313 For:VCT Type:HALFYR Time:2014-02-21 08:36:00
