VCT
20/02/2015 08:34
HALFYR
PRICE SENSITIVE
REL: 0834 HRS Vector Limited
HALFYR: VCT: Vector FY15 Interim Results
FINANCIAL RESULTS FOR THE HALF YEAR TO 31 DECEMBER 2014
Vector confirms earnings guidance
Vector continues to effectively execute its strategy. Unregulated operations,
including the recently-acquired Arc Innovations smart metering venture,
continue to bolster financial performance.
KEY POINTS
- Revenue rises 4.4% to $687.1 million from $657.9 million with growth in the
Technology business and higher Electricity volumes and pass through costs
offsetting around $24 million of price cuts to regulated networks
- Unregulated EBITDA up 10.7%, due to continued growth in the Technology
business and the Gas Wholesale business benefiting from increased production
at Kapuni, increased Liquigas tolling volumes and more favourable gas
purchasing arrangements
- Regulated EBITDA down 4.2% due to price reductions imposed by the Commerce
Commission, storm and Penrose outage costs, and one-off non-recoverable
transmission charges, partially offset by higher electricity and gas
distribution volumes
- Adjusted EBITDA of $313.4 million, slightly down on the prior period's
$317.8 million
- Net profit of $87.3 million, down from $104.6 million, largely due to
non-cash mark-to-market losses on derivatives and higher borrowing costs
- Acquisition of Arc Innovations finalised 1 December 2014, adding a further
159,664 meters to Vector's metering business. We also secured a contract to
provide smart metering to the majority of Meridian's retail business
- Extended solar programme with the launch of a mass-market solution prior to
Christmas
- Interim dividend flat at 7.5 cents per share with a record date for
dividend entitlements of 31 March 2015 and a payment date of 15 April 2015
- We remain comfortable with our initial guidance for FY 2015 adjusted EBITDA
given in August 2014 of $588 million
- Continued strong health and safety focus across the group reduces rolling
12 month total recordable injury rate (TRIFR) by 28% from 13.5 to 9.7
New Zealand's leading integrated energy infrastructure company Vector today
confirms its adjusted EBITDA guidance for the year to 30 June 2015 as its
unregulated Technology and Gas Wholesale operations continue to bolster
company earnings.
Vector expects to deliver a full year adjusted EBITDA of around $588 million,
in line with guidance given at the time of the group's annual result in
August. For the six months ended 31 December 2014, adjusted EBITDA is largely
unchanged at $313.4 million compared to the $317.8 million posted in the same
period last year.
Six months ended 31 December
2014
$M 2013
$M Change
(%)
Revenue 687.1 657.9 +4.4
Adjusted EBITDA 313.4 317.8 -1.4
Net profit 87.3 104.6 -16.5
Operating cash flow 203.3 225.9 -10.0
Dividend per share (cents) 7.5 7.5 -
Half-year revenue rose 4.4% to $687.1 million from $657.9 million, with
growth in the Technology business and higher Electricity volumes and pass
through costs offsetting price cuts to our regulated networks.
Regulated EBITDA fell 4.2% to $257.9 million from $269.3 million, due to
around $24 million of price reductions on our energy networks imposed by the
Commerce Commission and higher maintenance charges as a result of several
storms and the Penrose outage. Vector also incurred an additional one off
non-recoverable $3.3 million transmission charge following a court judgement
over the usage of a section of Auckland's electricity transmission
infrastructure. Increased volumes in the Electricity and Gas Distribution
businesses provided a partial offset to these factors.
Unregulated EBITDA rose 10.7% to $81.0 million from $73.2 million due to
continued growth in the Technology business and the Gas Wholesale business
benefiting from higher production at Kapuni, higher Liquigas tolling volumes
and more favourable gas purchasing arrangements.
Net profit fell 16.5% to $87.3 million from $104.6 million. Over a third of
this movement was due to non-cash mark-to-market losses on derivatives -
principally reflecting a weakening of the New Zealand dollar against the US
dollar.
Vector Chairman Michael Stiassny said: "Vector has continued to effectively
execute its strategy over the last six months. Our unregulated Gas Wholesale
and Technology operations, including the recently-acquired Arc Innovations
smart metering venture, continue to bolster our financial performance.
"The success of these businesses demonstrates the benefits of our focus on
understanding and taking into account customers' current and future
perspectives in everything we do, and our strategy to diversify our earnings
from regulated energy networks.
"The Vector Board has resolved to pay a fully-imputed interim dividend of
7.5 cents per share, unchanged on last year. The record date for dividend
entitlements is 31 March 2015 and the payment date is 15 April 2015.
"Given the impact of the regulator-imposed tariff cuts and the
recently-announced change to the Commerce Commission's method to determine
the industry's cost of capital, directors believe the most prudent course of
action at this time is to maintain a flat interim dividend.
"Nevertheless, we are looking ahead to the remainder of the year with
confidence. Auckland continues to grow, as evidenced by a significant pick up
in connections to our networks," Mr Stiassny said.
"Given the concentration of our assets in Auckland we are benefiting from
growth in the region. And we continue to see the emergence of opportunities,
particularly in our metering operations and new energy solutions such as
solar, battery storage and electric vehicles."
"We continue to seek to deliver sustainable increases in dividends to
shareholders. We are proud to be one of the few companies in the NZX 50 Index
to have steadily increased dividends over the past decade; a period that
included the worst financial crisis in nearly a century," Mr Stiassny said.
"Nearly half of our dividend is generated from investments outside our
Electricity assets, while recent dividend growth has come from our
unregulated assets across the country.
"Our majority shareholder, the Auckland Energy Consumer Trust, has played a
key role in this achievement. Its long-term vision and commitment to the
business and the Auckland region has allowed Vector to look through economic
cycles and make investments that deliver sustainable and growing returns
across generations.
Vector Group Chief Executive Simon Mackenzie said: "Over the last six months
we have made good progress on our strategy. Our commitment to customers and
new solutions is delivering for Vector's shareholders, Auckland and the
broader national economy.
"We increased our growth with the $20 million acquisition of the Arc
Innovations metering business, which added over 139,000 smart meters and
17,000 plus legacy meters to the Vector fleet, primarily in Canterbury and
the Hawkes Bay. We are also working with the vendor, Meridian Energy, in a
new long-term metering services contract.
"Only a few years ago our Technology business made a small contribution to
the group result. Today we are contracted to install well over one million
smart meters across the country, up from 889,000 in June.
"And, now the New Zealand market has stabilised until the next cycle of
competition, we are exploring opportunities across the Tasman. Vector
Communications, meanwhile, continues to grow its footprint as it gets closer
to both its resellers and direct customers.
"We have similar aspirations for a number of emerging businesses within the
group. Before Christmas we extended our solar programme with the launch of a
mass-market solution. The programme is a direct response to the change
sweeping the industry globally.
"Energy distribution technology - largely unchanged for decades - now allows
customers to switch suppliers, switch energy solutions and switch from the
grid. Customers are meanwhile demanding choice and the highest standards of
service from utility service providers and they are targeting energy
consumption as an area for saving money.
"Vector's solar solution meets these challenges. Solar has been around for a
long time, but until recently it's only really worked for people able to
finance or buy expensive systems outright, or those people practical enough
to tinker and put together their own systems.
"We have designed Vector Solar with everyday New Zealand families in mind. We
have simplified the technology and controlled costs, and for a year we will
top up the price of any power exported to the network by our installations to
16 cents per kWh.
"We also continue to work on numerous initiatives around distributed
generation, battery storage, electricity and now gas smart metering, energy
management and electric vehicles.
"Our regulated energy networks have faced a challenging year. The winter of
2014 was one of the stormiest on record. We saw the highest ever sustained
wind speeds and these wind speeds lasted over considerably longer periods
than we have seen in any other year.
"This weather, coupled with the October fire at Transpower's Penrose
substation has impacted SAIDI , our measure of network reliability, which
stood at 116.9 minutes for the nine month regulatory period from 1 April
2014, compared to 105.1 minutes in the prior regulatory year.
"It now appears we will exceed the Commerce Commission's quality threshold
for the 12 months to 31 March 2015 of 127 minutes. This will follow Vector
exceeding the threshold in the previous regulatory year. As a result we are
likely to breach the service quality requirement that we do not exceed the
threshold two out of every three years. We have had early discussions with
the regulator over this likely breach.
"Our joint investigation with Transpower into the Penrose outage is
progressing well and we hope to conclude this in the coming months. We
meanwhile await the outcome of the Electricity Authority's investigation into
the incident. We will obviously take the findings of these investigations
into account in the management of our networks.
"Over the last ten years we have invested $1.4 billion in capital expenditure
in our electricity network and a further $460 million in operating
maintenance expenditure. In conjunction with Transpower, this has included
the construction of new substations at Hobson Street, Wairau Road and a high
voltage circuit from Albany to Penrose, plus other upgrades.
"Our majority shareholder, the Auckland Energy Consumer Trust requires us to
have independent reviews of our electricity assets conducted by international
experts. These experts review asset management, security, planning,
maintenance, risk and future trends in comprehensive studies. Over the last
eight years, these reviews have been conducted by Siemens International,
Sinclair Knight Mertz (twice) and most recently PA Consulting using their
North American expertise.
"In all cases these reviews have endorsed our management of the network.
They have also provided some suggested areas for consideration, which we have
addressed in each case.
"The PA Consulting report, released last year, noted: 'PA considers Vector to
be a high performing utility with low expenditure and strong reliability when
compared to U.S. utilities, Australian utilities and New Zealand electricity
distribution businesses'.
"Our Electricity and Gas Distribution networks have continued to benefit from
growth in Auckland. Both saw increased energy volumes and connections and we
believe these businesses will continue to underpin Vector's prospects well
into the future.
REGULATION
"In late November 2014 the Commerce Commission released its decision on the
default price path that will apply to Vector's Electricity business over the
five years to 31 March 2020.
"In essence, the Commerce Commission has set the maximum revenue that can be
generated by our electricity network at $395 million for the year ending 31
March 2016. Thereafter revenue growth is limited to the rate of volume growth
plus inflation. On this basis, we expect weighted average distribution prices
for the period ending 31 March 2016 to be 0.4% higher than those for the
previous period.
"In setting Vector's prices, the Commerce Commission has assumed Vector's
capital and operating expenditure over the regulatory period beginning 1
April 2015 will be around 8% lower than the figures set out in the most
recent Vector asset management plan filed with the Commission. As a result we
are reviewing our expenditure plans across the electricity network.
"The Commerce Commission has also moved away from its long-favoured method
for determining the industry's cost of capital. As we noted at the annual
shareholders' meeting in October, this decision will reduce our Electricity
EBITDA by around $9 million per year and the Gas Transportation EBITDA by
around $4 million per year .
"The decision will have significant implications for investment in our
regulated assets especially when the returns are compared to those available
to Vector in unregulated markets.
"We are therefore increasingly seeking to allocate capital into our
unregulated activities and we are continuing to review how we fund network
growth.
HEALTH AND SAFETY
"Our continuing focus on health and safety leadership and performance across
the organisation has been rewarded through the first six months of the 2015
financial year with a reduction in our rolling 12 month Total Recordable
Injury Frequency Rate (TRIFR) of 28% from 13.5 to 9.7.
"We have an active and broad ranging programme of safety leadership and
training throughout the business. We have also reviewed and enhanced our
Health Safety and Environment management system, policies, procedures and
reporting in preparation for the significant legislative changes, which are
expected to come into effect in the second half of the year when the new
Health and Safety Reform Bill is passed.
We continue to engage positively with all our key stakeholders: our
employees, our contractors, our business partners and regulators to ensure
continued improvement in all aspects of our business.
SEGMENT PERFORMANCE
Six months ended 31 December 2014 2013 Change
$M $M (%)
Technology
Revenue 76.0 66.5 +14.3
EBITDA 51.7 48.1 +7.5
Gas Wholesale
Revenue 185.9 184.7 +0.6
EBITDA 29.3 25.1 +16.7
Electricity
Revenue 350.8 326.4 +7.5
EBITDA 188.3 191.3 -1.6
Gas Transportation
Revenue 96.1 105.5 -8.9
EBITDA 69.6 78.0 -10.8
Shared Services
Revenue 0.3 0.3 -
Adjusted EBITDA (25.5) (24.7) -3.2
UNREGULATED BUSINESSES
Our unregulated businesses - Gas Wholesale, Metering and Vector
Communications - generated EBITDA of $81.0 million, 10.7% ahead of the $73.2
million achieved in the same period last year. The Gas Wholesale business in
particular benefited from improved production levels and more favourable gas
purchasing arrangements.
TECHNOLOGY: Smart meter roll out continues to drive growth
The Technology segment has delivered another solid performance during the
first half of this financial year. Revenue increased 14.3% to $76.0 million
from $66.5 million and EBITDA increased 7.5% to $51.7 million from $48.1
million, reflecting the increase in the number of deployed smart meters.
Our metering business is now focused on the integration of Arc Innovations
and the deployment of new meters. As at 31 December 2014, Vector had an
installed base of 884,453 smart meters, up 48.0% from 597,596 at 31 December
2013. This figure includes the over 139,000 smart meters acquired with Arc
Innovations. We are now contracted to install over one million smart meters
in total.
Over the first six months of this financial year we installed 69,780 smart
electricity meters. This represents a fall of 23.9% on the prior year and
reflects some deployments nearing their end with the remaining meters being
more difficult to install.
We expect deployment rates to increase in the second half of the year as we
begin to rollout for Meridian. Beyond this we expect the smart meter
installation program to continue for the next two to three years, by which
time New Zealand's initial smart electricity meter rollout will be largely
complete and the focus will shift to a more established business model.
Meanwhile, we are trialing smart gas meters across the North Island, and if
successful we intend to install this new technology whenever we establish a
new connection or replace meters that reach the end of their useful life.
We have also for some time signaled our desire to expand our smart metering
operations into Australia. We have a small business development team of
experienced metering professionals across the Tasman and we are starting to
see the necessary regulatory progress that would allow the adoption of a New
Zealand-style retailer-led smart electricity meter rollout. Opportunities are
also emerging for other applications of our metering expertise.
Vector Communications continues to grow its footprint as it gets closer to
both its reseller and direct customers. 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.
GAS WHOLESALE: Short-term dominated by entitlement proceedings
The Gas Wholesale business performed well over the first six months of the
current financial year. We renewed contracts with a number of large,
long-term customers, despite significant competition.
Production at Kapuni was up 32% to 45 TJ a day, Liquigas increased its
tolling volumes by 17.9% to 99,628 tonnes and sales of gas liquids were up
2.5% at 37,580 tonnes.
Revenue increased 0.6% to $185.9 million from $184.7 million. EBITDA
increased 16.7% to $29.3 million from $25.1 million. The improved result was
driven by increased production at Kapuni, increased tolling at Liquigas and
favourable gas purchasing arrangements, which offset the 3.8% fall in natural
gas sales.
Vector has rights to take 50% of the gas remaining in the Kapuni field from 1
April 1997. With our rights to legacy priced gas now exhausted, Vector and
the Kapuni Mining Companies (KMCs) are in the process of resolving a dispute
over the terms and price for the next tranche of gas. As at 31 December 2014
we had already taken 9.5 PJ of this gas.
In addition, in December 2014, the KMCs issued a redetermination notice for
Kapuni, proposing a reserves figure some 40PJ below the most recent estimate
of P50 reserves. Vector has engaged an international expert to advise and
assist us with the redetermination. If the redetermination process results in
a lower redetermination figure, the amount of gas that Vector is able to
extract from the Kapuni field may be reduced. We are continually managing
our supply arrangements and will eventually replace the supply of gas from
the Kapuni field as it is used up.
Looking beyond the legal proceedings, the Kapuni field may yet offer
significant opportunities. The Ministry of Business, Innovation and
Employment published Kapuni's contingent reserves at over 850PJ. The timing
and quantity of these reserves will ultimately depend on their technical,
economic feasibility and the commercial terms under which they are extracted.
REGULATED BUSINESSES
Regulated EBITDA was down 4.2% on the same time last year, due to the impact
of the significant price reductions imposed by the Commerce Commission and
higher maintenance and Transpower charges, partially offset by higher
electricity and gas distribution volumes.
ELECTRICITY: Tariff cuts, increased maintenance & transmission offset volume
growth
Electricity revenue rose 7.5% to $350.8 million from $326.4 million, due
mainly to a $17.4 million increase in transmission and other charges that
Vector passes through to consumers.
Excluding these charges, prices were lower due to the regulator clawing back
revenue from 1 April 2014 to compensate for the one year delay to the start
of the current price-quality determination. The price-quality determination
was due to start on 1 April 2012, but was delayed following a legal
challenge.
Electricity EBITDA decreased 1.6% to $188.3 million from $191.3 million.
Gains from increased connection activity and higher electricity consumption
were diluted by: tariff reductions; higher maintenance charges, primarily
associated with storms in July 2014 and the Penrose substation outage in
October 2014; and a one-off non-recoverable $3.3 million transmission charge
following clarification from the court.
For the six months to 31 December 2014, new electricity connections were
3,780, up 25.9% on the previous year. Electricity customer numbers increased
1.0% to 547,128.
After a period of declining consumption, electricity volumes over the first
half of the year were up 1.5% to 4,337 GWh from 4,271 GWh at the same time
last year, largely due to connection growth and cooler winter temperatures
driving increased residential consumption. Heating degree days were 13.6%
higher than last year at 777, up from 684 in the prior year and back in line
with the long-term average.
GAS TRANSPORTATION: Tariff cuts dominate again
Gas Transportation revenue fell 8.9% to $96.1 million from $105.5 million,
due primarily to regulator-imposed price reductions. Prices rebounded in
October 2014 .
Gas Transportation EBITDA decreased 10.8% to $69.6 million from $78.0 million
as higher gas distribution volumes and higher capital contributions offset
some of the impacts of the tariff cuts.
Overall new gas connections were up 3.6% on the prior period to 2,112 and
total customers were 161,752 at 31 December 2014. Auckland showed much
stronger growth than the rest of the North Island, with new connections up
8.5%. Gas distribution volumes were up by 4.3% to 12.1 PJ from 11.6 PJ,
largely driven by increased non-residential consumption.
Gas Transmission volumes were down 2.2% on last year to 58.0 PJ from 59.3 PJ,
primarily due to a reduction in thermal generation load in the upper North
Island. Gas transmission revenues are largely independent of actual
transmission volumes but are subject to annual capacity reservation
decisions.
CAPITAL EXPENDITURE
Year ended 31 December 2014 2013 Change
$M $M (%)
Electricity
Growth 35.1 37.0 -5.1
Replacement 36.9 36.0 +2.5
72.0 73.0 -1.4
Gas Transportation
Growth 11.8 6.7 +76.1
Replacement 11.2 10.3 +8.7
23.0 17.0 +35.3
Gas Wholesale
Growth 1.6 1.6 -
Replacement 3.0 1.9 +57.9
4.6 3.5 +31.4
Technology
Growth 42.8 44.4 -3.6
Replacement 5.0 4.3 +16.3
47.8 48.7 -1.8
Shared Services
Growth 0.3 0.7 -57.1
Replacement 5.9 5.4 +9.3
6.2 6.1 +1.6
Total Group
Growth 91.6 90.4 +1.3
Replacement 62.0 57.9 +7.1
153.6 148.3 +3.6
Capital contributions
Electricity 17.5 15.9 +10.1
Gas Transportation 6.1 2.5 +144.0
Technology 1.9 3.3 -42.4
25.5 21.7 +17.5
Total group (net of capital contributions) 128.1 126.6 +1.2%
Total capital expenditure increased 3.6% to $153.6 million from $148.3
million. Net of contributions, capital expenditure was only up 1.2%. Capital
expenditure directed at growth initiatives was $91.6 million, and was split
evenly between the regulated and non-regulated businesses. Capital
expenditure focused on maintaining the quality of our assets was $62.0
million, with 77.6% of this spend focused on the regulated networks.
On the electricity network capital expenditure was down $1.0 million. Capital
expenditure in the Gas Transportation business was up 35.3% or $6.0 million
due largely to a 4% increase in gross new connections mainly in the Auckland
region, and a higher level of relocation activity in Gas Transmission.
Capital expenditure in the Technology and Corporate areas was similar to the
previous corresponding period.
Cash Flow and Capital Structure
Operating cash flow fell 10.0% to $203.3 million from $225.9 million due to
the fall in adjusted EBITDA and the timing of cash flows following the
alignment of our northern and southern electricity network agreements.
Vector's balance sheet remains strong. Standard & Poor's and Moody's have
recently confirmed our credit rating at BBB and Baa1 respectively, both with
stable outlook. We remain an 'investment-grade' credit risk. In October 2014
we repaid at maturity $150m of listed senior bonds. These were refinanced by
a private placement into the US market.
Our gearing as at 31 December 2014, as measured by net debt to net debt plus
equity, was 52.9%, compared to 51.6% at 30 June 2014 and 50.7% at 31 December
2013. Our interest cover for the six months to 31 December 2014 was 2.4 times
compared to 2.7 times for the prior corresponding period.
For further information 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
services more than 700,000 customers around New Zealand. The company owns
and manages a unique portfolio of businesses, 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 a 75.1% stake, is the
Auckland Energy Consumer Trust (AECT).
APPENDIX
NON-GAAP PROFIT REPORTING 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
Period ended 31 December 2014
$m 2013
$m
Reported net profit for the period (GAAP) 87.3 104.6
Add back: interest costs (net) 1 90.2 84.8
Add back: tax (benefit)/expense1 35.1 42.1
Add back: depreciation and amortisation1 95.9 91.2
EBITDA 308.5 322.7
Adjusted for:
Associates (share of net (profit)/loss) 1 - (1.1)
Fair value change on financial instruments1 4.9 (3.8)
Adjusted EBITDA 313.4 317.8
1 Extracted from reviewed financial statements.
End CA:00260906 For:VCT Type:HALFYR Time:2015-02-20 08:34:08
