VCT
22/08/2014 08:30
FLLYR
REL: 0830 HRS Vector Limited
FLLYR: VCT: Annual Results FY14
FINANCIAL RESULTS FOR THE YEAR TO 30 JUNE 2014
Meeting customer demand
Results in line with market expectations, Technology business continues to
grow, demonstrating the benefits of Vector's portfolio diversification.
Well-signalled price resets to the electricity and gas networks and the end
to Kapuni gas at legacy prices weigh on group revenue and net profit.
KEY POINTS:
- Price resets to regulated energy networks weigh on revenue, down 1.6% from
$1,279.2 million to $1,258.9 million. Price reductions partially offset by an
increase in transmission pass-through costs and growth in the Technology
segment;
- Adjusted EBITDA falls 7.9% from $630.5 million to $580.7 million
reflecting Electricity and Gas Transportation regulatory price resets and the
end of our entitlement to Kapuni gas at legacy prices;
- Adjusted EBITDA slightly ahead of consensus by around $2 million;
- Net profit falls 16.9% from $206.2 million to $171.3 million;
- Final dividend flat at 7.75 cents per share taking the total dividend for
the year to 15.25 cents per share, up 0.25 cents per share last year;
- The dividend record date for dividend entitlements is 8 September 2014 and
the payment date is 15 September 2014
New Zealand's leading integrated energy infrastructure company Vector reports
earnings for the year to 30 June 2014 in line with market expectations.
The results from the Technology business and notably our smart metering
business partially offset the end of our entitlements to Kapuni gas at legacy
prices and significant and well-signalled price reductions on our regulated
energy networks.
Revenue fell 1.6% to $1,258.9 million from $1,279.2 million, while adjusted
EBITDA fell to $580.7 million from $630.5 million. Net profit fell 16.9% to
$171.3 million from $206.2 million. The regulated price reductions on our
energy networks were responsible for most of the fall.
Vector Chairman Michael Stiassny said: "Vector has faced a challenging year
but we continue to deliver on our goal: to be New Zealand's first choice for
delivering integrated energy infrastructure.
"We have met our goal to continue to generate sustainable increases in
dividends to our shareholders. The board has declared fully-imputed dividends
for the year totalling 15.25 cents per share, up 0.25 cents on the prior
year's total dividend.
"This is the eighth consecutive year of increases, reflecting prudent
management of our capital in the lead up to regulator-imposed price
reductions on our energy networks and our determination to provide investors
stability through regulatory periods. It also reflects our success in
delivering services attuned to our customers, growing our portfolio of
businesses and driving operational excellence.
"However, further recent regulatory actions place additional pressure on
future dividends and investment in our regulated assets.
"We are investing in our people and supporting diversity in our business.
This year we joined the 25 Percent Group of New Zealand companies, which
promotes diversity in board rooms and we celebrated the fact that 25% of our
directors are women. We understand diversity is about diverse thinking that
provides for better governance and a better bottom line.
"Vector is helping to foster the next generation of directors with the
appointment of Tony Arthur to the board as part of the Future Directors
scheme. Tony, head of BNZ's retail network, participates fully in board
discussions, but does not have formal voting rights.
"Given the concentration of our assets in Auckland, Vector's energy
infrastructure business is well positioned to grow over the long term, as
long as commercial rationality emerges in the regulation of our energy
networks. We also continue to see the emergence of opportunities particularly
in our Technology operations."
Vector Group Chief Executive Simon Mackenzie said: "Our commitment to
understanding and taking into account customers' current and future
perspectives is delivering for Vector's shareholders, Auckland and the
broader national economy.
"Only a few years ago OnGas Bottle Swap, our smart metering business and
Vector Communications made a negligible contribution to the group result.
Today they make a significant contribution to our bottom line. Their success
demonstrates our ability to generate new revenue streams by leveraging our
role as New Zealand's leading integrated energy infrastructure provider.
"We have similar aspirations for a number of emerging businesses within our
portfolio of operations. We have this year installed close to 200 of our
award-winning SunGenie solar units across Auckland in a trial of this
technology and we believe distributed photo-voltaic generation technology is
maturing to the point of mass market appeal."
As at 30 June 2014, Vector had installed 675,555 smart meters. We are
contracted to install almost 900,000 smart meters, up from 764,000 a year
earlier following new contracts with Contact Energy and the SmartCo
consortium of electricity distribution businesses.
SUMMARY FINANCIAL RESULTS
Year ended 30 June 2014
$M 2013
$M Change
(%)
Revenue 1,258.9 1,279.2 -1.6
Adjusted EBITDA 580.7 630.5 -7.9
Net profit 171.3 206.2 -16.9
Operating cash flow 366.6 426.2 -14.0
Dividend per share 15.25 15.0 +1.7
New Technology
"We understand the pace of change in our industry will increase exponentially
over the next decade and we are prepared. The balance of power is shifting
from utility service providers to consumers. Energy distribution technology -
largely unchanged for decades - now allows customers to switch suppliers,
switch energy solutions and switch from the grid.
"Customers are demanding choice and the highest standards of service from
utility service providers. They are targeting energy consumption as an area
for saving money and they are actively managing their energy needs. They are
also environmentally conscious and more technologically savvy and therefore
willing to adopt technology such as solar panels that allow them to generate
their own electricity.
"These trends are of course challenging. As a direct result, the consumption
of energy transported across our network is falling and the pace of this
decline will increase in line with the growing affordability of new
technology.
"Vector is at the forefront of this evolution. We are working on numerous
initiatives around distributed generation, battery storage, smart metering,
energy management, electric vehicles and gas smart meter technologies.
"New communications technologies such as our outage manager app, which
provides details of outages and the likely time to the restoration of power
to smart phones and the Vector website, are meanwhile improving the customer
experience. Since inception the outage manager received more than 2.6 million
hits and it was used heavily during the recent storms. We are now looking at
making this technology available to other network companies around the
country.
Regulation and investment
"We are concerned the regulatory regime is not keeping pace with this
technological change and global trends. Over the long-term, this could
discourage investment in regulated energy networks and put at risk the
security of the energy supply.
The regime assumes that new network investment will have an average life of
more than 40 years and that the bulk of our positive cash flows should be
skewed towards the end of that period as we are preparing for the renewal of
those assets. As a result it requires Vector to commit to significant upfront
capital expenditure and accept a cash flow profile that does not reflect the
risk we are taking.
"Investors will look warily at such a long duration investment proposition,
especially in the face of such disruptive technological and social change.
Vector faces significant risk that, over a 40 year period, essential assets
may become redundant and cash flows deferred under the regulatory regime may
not be recovered. We believe a more sensible approach is for the Commerce
Commission to allow Vector to generate cash flows that better reflect the
useful life of assets. It has allowed other operators in the sector to adopt
this very approach.
"Because the regulator's assumptions for asset revaluation rates do not match
the actual rates, we are not able to generate the returns determined by the
regulator. PwC, for instance, has calculated that differences between
recorded inflation and the Commission's forecasts for inflation will result
in electricity distribution businesses recovering $150 million less than they
are allowed over the 2013-2015 regulatory period. The regulator's model takes
no account of this. Over the current regulatory period this has cost Vector
$57 million and we are seeking to recover this amount.
"Finally, the Commerce Commission's draft decision in July to adjust the
method it uses to determine our cost of capital - and therefore reduce the
allowable returns on our assets - gives us further cause for disquiet. The
decision runs contrary to a position the Commission has held for a
considerable period of time and one that has been backed up by a body of
analytical work over time.
It is clear the frequency of change to core elements of the regulatory regime
is adding significant cost to New Zealand infrastructure providers.
International rating agency Standard and Poor's this year 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.
"Vector operates its regulated networks safely and efficiently. Our
electricity distribution network is among the lowest cost in the country on
measures such as operating expenditure per unit of electricity delivered and
average operating expenditure per connection.
"Auckland continues to grow and with it our regulated asset base. Indeed, in
the last year it has driven an increase in connections to our gas and
electricity distribution networks from 696,184 to 703,691.
"The Government and Auckland Council are targeting an additional 39,000
houses over the next three years. We welcome and support this aspiration. The
pace of development in Auckland has picked up reflecting these initiatives,
favourable economic conditions, strong net migration to the region and a
gradual recovery in the housing market after several years of sluggish growth
in the wake of the global financial crisis.
"We have invested in good faith to support this growth with capital
expenditure on our electricity network rising 8.1% or $12.1 million in the
2014 financial year to $162.3 million, while capital expenditure on our gas
transmission and distribution networks rose 26.9% or $10.1 million to $47.6
million.
"Nevertheless, the unattractive cash flow profile and the allowable returns
on our regulated networks are making it increasingly difficult to advocate
for incremental capital to be allocated to our regulated businesses,
especially when we see the potential for much more appropriate commercial
outcomes in our non-regulated activities.
"We will continue to work with the regulators and government to address the
imbalances we see.
Outlook
"The coming financial year will be challenging with regulatory pricing
adjustments relating to prior periods and an expected continued decline in
per capita electricity usage offsetting the growth in connection rates.
However, at this stage we are comfortable with consensus estimates for
adjusted EBITDA of $588.2 million for the 2015 financial year, subject to
finalisation of regulatory parameters in November 2014, Auckland growth and
energy demand.
We have a great team committed to our core goals and we remain focused on
customer solutions, the demands of our gas customers, delivering on the
potential of our Technology operations and - assuming commercial rationality
in the regulation of our energy networks emerges - meeting population growth
in Auckland.
SEGMENT PERFORMANCE
Year ended 30 June 2014 2013 Change
$M $M (%)
Electricity
Revenue 631.3 632.9 -0.3
EBITDA 346.0 372.5 -7.1
Gas Transportation
Revenue 187.0 219.6 -14.8
EBITDA 133.4 170.4 -21.7
Gas Wholesale
Revenue 349.8 372.2 -6.0
EBITDA 50.9 60.4 -15.7
Technology
Revenue 137.0 109.1 +25.6
EBITDA 100.0 76.3 +31.1
Shared Services
Revenue 0.6 0.6 -
Adjusted EBITDA (49.6) (49.1) -1.0
Electricity
Weather had a significant impact on the Electricity business in the 2014
financial year. Warmer winter temperatures contributed to an overall 1.0%
decline in consumption whilst an unusually high number of extremely windy
days contributed to a significant increase in normalised SAIDI - our measure
of network reliability. This rose to 141.3 minutes for normal operations in
the regulatory year to 31 March 2014 from 95.8 in the previous regulatory
year, exceeding the Commerce Commission threshold of 127 minutes.
We have devoted significant effort to improving our ability to prepare and
respond to storm events. Together with our field service provider partners,
we make a huge effort to minimise customer outages. We have also focused on
improving communications during outage events, particularly via the Vector
outage manager app and we will continue to promote prudent tree management
with our customers to assist in the protection of power lines during a storm.
We are starting to see the impacts of Auckland Council's housing initiatives.
Net new electricity connections for 2014 were 4,721, up 17.9% on the
previous year. Electricity customer numbers increased 0.9% to 543,953.
Despite the increase in connections, power transported across our networks
fell to 8,252 GWh from 8,332 GWh. The trends for consumers to use less energy
and to continue to look for ways to reduce their consumption as well as the
warmer weather were responsible for this decline. Both August 2013 and June
2014 claimed 'warmest on record' status. Heating degree days were 1,077 and
were 6.3% lower than the 1,150 recorded in the prior year.
Electricity revenue was in line with last year, although this result includes
an approximately $14.3 million increase in pass-through charges (primarily
due to a 17.2% increase in Transpower transmission charges) and a $6.2
million increase in capital contributions (on the back of higher new
connections and significant Auckland infrastructure activity). These other
revenue lines broadly offset the decline in consumption and the weighted
average total 10% price reduction imposed by the Commerce Commission since
April 2013.
EBITDA fell 7.1% to $346.0 million from $372.5 million. The key drivers of
this decline were lower consumption, regulated price reductions and higher
maintenance costs.
Gas Transportation
The Gas Transportation result for 2014 reflected price reductions set by the
Commerce Commission on our gas transmission and distribution networks from 1
October 2013. Prices will increase this year albeit to a level that is still
below the October 2013 prices. We had sought to smooth these prices over the
two periods, but our approach was rejected by the regulator.
Just as we are seeing in electricity, our gas distribution networks are
starting to experience significant connection growth - overall new
connections were up 21.0%.
Increased gas usage by industrial and commercial customers was a key driver
in lifting gas distribution volumes by 2.3% to 21.9 PJ from 21.4 PJ. Gas
transmission volumes on the other hand fell by 5.8% to 111.3 PJ from 118.2
PJ, primarily due to lower demand from power stations. Gas transmission
revenues however are approximately 90% fixed (relative to capacity
reservation) and are therefore largely independent of actual transmission
volumes.
Overall, Gas Transportation revenue fell 14.8% to $187.0 million from $219.6
million. An increase in capital contributions; distribution volumes; and
other revenues (predominantly pass-through costs relating to the operation of
the Maui pipeline) contributed $9.7 million, going some way to offset the
impact of the October 2013 price cuts.
Gas Transportation EBITDA fell 21.7% to $133.4 million from $170.4 million,
as the reduction in revenue flowed through to EBITDA.
Gas Wholesale
The Gas Wholesale result was supported by strong growth in our LPG business.
This partially offset a weaker result for gas trading, due to increased
competition and the end of our entitlement to Kapuni gas at legacy prices.
LPG volumes were up over the previous year, with strong growth in wholesale
and across all cylinder markets. Liquigas LPG tolling volumes increased 17.8%
to 178,510 tonnes from 151,544 tonnes. Competitive pressures in the market
are intense, but we continue to grow our position.
Natural gas trading volumes fell 7.5% to 24.5 PJ, reflecting lower demand
from electricity generators, while industrial and commercial volumes were
flat. Production issues at the Kapuni field during the first quarter were
largely rectified by the field operator, with average production of 39.0 TJ
per day in 2014, back up to over the 2013 levels of 38.8 TJ per day.
Revenue fell 6.0% to $349.8 million from $372.2 million, due largely to lower
sales volumes and greater competition among natural gas wholesalers. EBITDA
fell 15.7% to $50.9 million from $60.4 million as natural gas trading margins
contracted due to the end of our entitlements to Kapuni gas at legacy prices
and increased competition for customers.
Vector's rights to approximately 7.3 PJ of Kapuni gas at legacy prices were
confirmed by the High Court. The High Court dismissed appeals by the
suppliers of Kapuni gas against an arbitral award in Vector's favour. The
High Court subsequently dismissed an application for the decision to be
further appealed to the Court of Appeal, and made an award of costs to
Vector.
Vector retains the right to purchase 50% of the gas remaining in the Kapuni
field from 1 April 1997. We are in the process of resolving the price for
the next tranche of that gas via arbitration, which is scheduled to commence
in April 2015.
Technology
Vector's metering business continued to drive strong growth in our Technology
business during 2014. Revenue increased 25.6% to $137.0 million from $109.1
million, reflecting a 33.5% increase in the number of deployed smart meters
and the successful integration of the Contact gas metering business acquired
at the end of the last financial year. EBITDA increased 31.1% to $100.0
million from $76.3 million.
The focus of the metering business over the 2014 financial year was on
delivering on existing contracts and developing an enterprise scale meter
data management platform. We installed approximately 170,000 smart meters
during the year, an average of over 14,000 meters per month.
We are approximately three quarters of the way through our currently
contracted deployment, and we expect to maintain our current rate of
deployment over 2015.
There are still approximately 845,000 legacy meters remaining across New
Zealand, which will most likely be replaced with smart meters over the next
three to five years. We expect the upcoming metering certification deadline
of 1 April 2015 to drive deployment of smart meters over the next nine
months, and we are well positioned to rollout these meters.
Vector Communications continues to grow its footprint as it gets closer to
both its reseller and direct customers. Our network now reaches more than
10,000 Auckland business addresses. Enhancements to our product and service
capabilities coupled with improved online quoting, reporting, and
notification tools, have better equipped us to leverage our own and third
party telecommunications infrastructure and provide a higher level of support
to our customers.
CAPITAL EXPENDITURE
Year ended 30 June 2014 2013 Change
$M $M (%)
Electricity
Growth 80.2 69.2 +15.9
Replacement 82.1 81.0 +1.4
162.3 150.2 +8.1
Gas Transportation
Growth 21.1 12.9 +63.6
Replacement 26.5 24.6 +7.7
47.6 37.5 +26.9
Gas Wholesale
Growth 3.8 3.3 +15.2
Replacement 6.3 5.0 +26.0
10.1 8.3 +21.7
Technology
Growth 96.5 80.5 +19.9
Replacement 8.5 8.4 +1.2
105.0 88.9 +18.1
Shared Services
Growth 1.0 1.7 -41.2
Replacement 13.2 12.0 +10.0
14.2 13.7 +3.6
Total Group
Growth 202.6 167.6 +20.9
Replacement 136.6 131.0 +4.3
339.2 298.6 +13.6
CAPITAL CONTRIBUTIONS
Year ended 30 June 2014 2013 Change
$M $M (%)
Electricity 31.6 25.4 +24.4
Gas Transportation 6.2 3.7 +67.6
Technology 5.9 3.6 +63.9
43.7 32.7 +33.6
Total capital expenditure increased 13.6% to $339.2 million from $298.6
million. Capital expenditure directed at growth initiatives was $202.6
million, and was split evenly between the regulated and non-regulated
businesses. Capital expenditure focused on maintaining the quality of our
assets was $136.6 million, with almost 80% of this spend focused on the
regulated networks.
On the electricity network capital expenditure was up $12.1 million, driven
by increased connections and significant reinforcement expenditure in rapidly
growing areas such as Flatbush, East Auckland.
Gas Transportation capital expenditure rose from $37.5 million to $47.6
million. This reflected growth in residential customer connections in line
with the growth in Auckland, as well as new industrial and commercial
connections, notably the new connection to Yashili New Zealand Dairy's new
factory in Pokeno.
In the Technology business capital expenditure of $105.0 million, up from
$88.9 million in the previous year, was primarily targeted at funding the
meter rollout and IT investment programme.
Capital Structure
Vector maintains a sound balance sheet. We have a well-diversified debt
portfolio with a weighted average duration of 5.0 years as at 30 June 2014.
We have recently refinanced our senior bonds, which mature in October 2014,
with an equivalently sized issue into the US private placement market.
Our gearing, as measured by net debt to net debt plus equity, rose to 51.6%
as at 30 June 2014 from 51.1% at the beginning of the year. Our 2014
interest cover is 2.3 times compared with 2.8 times for the year ended 30
June 2013.
Standard & Poor's rating action will not have any immediate financial impact
on our business given the long dated duration of our debt portfolio. We
remain an 'investment-grade' credit risk, with a BBB/stable rating from
Standard & Poor's and a rating of Baa1/stable from Moody's.
-ENDS-
End CA:00254231 For:VCT Type:FLLYR Time:2014-08-22 08:30:30
