Vector Financial Results for the Year To 30 June 2015
Friday, 28 August 2015, 8:58 am Press Release: Vector Limited
Vector Financial Results for the Year To 30 June
2015
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FINANCIAL RESULTS FOR THE YEAR TO 30 JUNE
2015
Creating a new
energy future
Earnings ahead of guidance as new technology
and a focus on customers drives innovation at New
Zealand’s largest integrated infrastructure company
HIGHLIGHTS:
-
Revenue rises 2.8% to $1,294.0 million and adjusted EBITDA[1] is $596.9 million, ahead of the
prior period’s $580.7 million and ahead of market
expectations
- Strong growth in Auckland, higher
energy volumes and continued growth in the technology
operations lift Vector’s financial performance, offsetting
well-signaled price cuts to the regulated energy networks
and falling demand and weaker prices in the gas wholesale
business
- Net profit falls 12.8% to $149.4
million from $171.3 million primarily due to non-cash
mark-to-market derivative losses and higher borrowing
costs
- Embarked upon a new, ground-breaking,
relationship with Silicon Valley pioneer Tesla Energy
through which Vector expects to bring commercial and
residential battery solutions to New Zealand
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-
Commenced a strategic review of the gas transmission and gas
distribution assets outside Auckland
- Acquired the
Arc Innovations metering business and entered into a
long-term metering services contract with Meridian Energy
- Full year dividend increases for the ninth
consecutive year to 15.5 cents per share, following the
declaration of a fully imputed final dividend of 8.0 cents
per share. The record date for dividend entitlements is 14
September 2015and payment date is 21 September 2015
-
Confident of meeting analysts' expectations of adjusted
EBITDA for the 2016 financial year, which range from $605
million to $620 million
- Continued strong health
and safety focus across the group reduces Vector’s Total
Recordable Injury Frequency Rate (TRIFR), by 42.5% to 7.45
in the 2015 nancial year from 12.9 in 2014
New
Zealand’s leading integrated energy infrastructure
company, Vector today reports earnings for the year to 30
June 2015 ahead of guidance given in February and an
acceleration in the transformation of its energy
infrastructure networks.
Despite significant price cuts to
its regulated energy networks, falling natural gas volumes
and weaker prices at the gas wholesale business, the company
has delivered an improved adjusted EBITDA result. It has
benefited from strong growth in Auckland, a return to cooler
temperatures in line with historic averages and ongoing
growth in its technology operations.
Annual revenue rose
2.8% to $1,294.0 million from $1,258.9 million. Increases in
Transpower charges, rates and levies that are passed through
to customers directly, lifted revenue by around $28 million,
diluting the significant cost savings Vector has passed on
to customers in recent years.
Adjusted EBITDA rose 2.8%
to $596.9 million from the prior year’s $580.7 million,
ahead of the $588 million guidance given in February.
Capital contributions were up $12.8 million to $56.5 million
as a result of development activity in Auckland and
significant relocation activity in the Gas Transportation
business. Excluding capital contributions, adjusted EBITDA
was up $3.4 million to $540.4 million.
Net profit fell
12.8% to $149.4 million from $171.3 million. This result
included higher borrowing costs and $11.0 million of
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 today delivered a strong result ahead of
market expectations and over the last year we have continued
to prepare the company for a future that is significantly
different from the past.
“Vector’s vision is to create
a new energy future for our customers by leading the
adoption of technology that will transform the electricity
industry worldwide and by creating new opportunities for the
company.
“In particular, reinforcing our status as an
energy industry leader, this year we have embarked upon a
new ground-breaking relationship with Silicon Valley pioneer
Tesla Energy through which we expect to bring residential
and commercial battery solutions to New Zealand.
“Our metering business continues to grow and we are
well positioned to leverage our New Zealand credentials to
support a smart meter roll-out that is beginning to gain
momentum across the Tasman.
“Our metering business has
also been bolstered by the $20 million acquisition of Arc
Innovations. We also commenced a strategic review of our gas
transmission assets and our gas distribution assets outside
Auckland.”
The Board has today declared a fully imputed
final dividend of 8.0 cents per share, taking total
dividends for the year to 15.5 cents per share, up 0.25
cents per share on the prior year’s 15.25 cents per
share.
“It is the ninth year running that Vector has
delivered an increase in dividends to shareholders. The
dividend represents a pay-out of 69% of free cash flow[2]. This is ahead of our policy to
target a pay-out of 60% and compensates for below target
pay-outs in the four years prior to the last financial
year,” Mr Stiassny said.
“Our balance sheet is strong
with gearing[3] at 53.6% compared to 52.5% in the
prior year and we retain an investment-grade credit rating.
“Vector continues to benefit from its position as a
provider of essential infrastructure to Auckland, the
country’s economic powerhouse.
“We expect capital
expenditure in Auckland to increase in the coming year, in
line with the significant increase we are seeing in new
electricity connections. We are also investing to open new
markets and creating new options for growth with investments
in new technologies such as solar panels, batteries,
electric vehicle charging infrastructure and home energy
monitoring services.
“Looking ahead to the remainder of
the 2016 financial year, Auckland continues to grow and this
will underpin growth in our Auckland energy distribution
networks as well as the company’s new areas of growth. We
are also confident of continued growth in our metering
business and our bottle swap operation.
“Our wholesale
gas business still enjoys a strong position in the market,
but faces increased competition, uncertainty over the
quantity of gas reserves remaining in the Kapuni field and
the price we pay for the gas. The business also faces
tighter margins due to weaker global oil and gas prices and
weaker demand from the major electricity generators.
“Nevertheless, we are confident of meeting analysts'
expectations of adjusted EBITDA for the 2016 financial year,
which range from $605 million to $620 million. Excluding
capital contributions, which are volatile and driven by
developer and relocation activity, we expect adjusted EBITDA
to be in the range of $550 million to $565 million.”
Vector Group Chief Executive
Simon Mackenzie said: “Vector’s vision to create a new
energy future reflects the new reality we
face.
“Customers are seeking and gaining greater choice
over the source of energy they use. They expect energy
services to be delivered like any other service. They want
them to be at their fingertips; they want to be in
control.
“And, given the rise in electricity prices over
the last few years, customers, increasingly, are becoming
incentivised to make use of all of these developments to
manage their energy costs.
“In addition to seeking
sustainable growth, Vector is meeting these challenges by
continuing to place customers at the centre of our thinking,
by engaging and collaborating with new partners to develop
innovative options, by excelling operationally and doing all
of this while setting standards for health and safety."
NEW PARTNERSHIPS
Vector’s relationship with Tesla
Energy illustrates the approach. Tesla Energy batteries,
which can offer energy storage at a price that is
significantly lower than other systems, represent a game
changer for the country’s energy industry. Also they are
expected to open an array of new markets for Vector,
including the provision of back-up power supply systems and
new network services.
Tesla Energy’s Powerwall Home
Battery system is within the reach of a large section of the
population. Combined with Vector’s solar solutions, it
will allow customers to store energy generated by solar
panels during the day for use in the evening, when daily
electricity prices are highest. This is but one of many
applications for the Tesla Energy system.
Tesla
Energy’s larger Powerpack Commercial Battery systems are
meanwhile creating new options for network investment. Later
this year, Vector intends to deploy a cohort of the larger
batteries to the network. Depending on the circumstances,
these systems can be more cost effective than a traditional
upgrade would be.
Vector is not a mere distributor of the
battery systems. It has developed the engineering that
adapts batteries to local conditions including the control
systems, the interface with local networks as well as the
appropriate health and safety protocols and systems.
“By
playing a key role in the commercialisation of solar panels
and batteries in New Zealand, we are better positioned to
manage the challenges the technologies pose to our core
electricity networks, including reduced demand for
electricity network services," Mr Mackenzie said.
“The
technology also allows us to build a deeper and more
enduring relationship with the more than 544,000 electricity
customers we serve across the Auckland region with
complementary technologies such as solar panels and home
energy management systems.
“At the same time, we expect
to gain new customers. Already, we have fielded inquiries
from businesses across New Zealand as to whether Vector
could install Tesla Energy Powerpack systems and we see
plenty of other opportunities further afield.
Such
transformations are taking place across Vector’s portfolio
of operations. Vector is working with a number of other
leading edge technology providers globally to deliver
innovative solutions for customers.
The acquisition of Arc
Innovations added almost 140,000 smart meters to the Vector
fleet and led to a new long-term metering services contract
with the vendor Meridian Energy. These agreements, combined
with others the company has struck over the last few years,
have lifted the installed base of Vector smart meters to
958,146[4] as at 30 June 2015 from 675,555 a
year earlier.
Vector has added Meridian and the SmartCo
consortium of power companies to its deployment programme
and it is now contracted to install over 1.2 million smart
meters across the country, up from 0.9 million a year
earlier.
Following a great deal of work over the past
two years, Vector’s metering business is now
well-positioned to leverage its New Zealand expertise to
support the smart meter roll-out in Australia.
Vector is
well advanced towards achieving accreditation in Australia
to operate as a metering services provider. Meanwhile, the
unbundling of meters from distribution networks this year
and Australian Energy Market Commission rule changes, which
come into effect in 2017, are providing a catalyst for
change.
Retailers now must move towards assuming
responsibility for mass-market metering in a model that
closely follows the development of the highly-successful New
Zealand market. Ahead of the shift, electricity retailers
and distribution companies are considering whether to set up
their own smart metering subsidiaries or whether to contract
services from experienced operators such as Vector.
In
recognition of customers' preference for the convenience of
swapping empty 9kg gas bottles and the resulting burgeoning
demand for pre-filled gas bottles, Vector this year gave the
green light to the construction of a $22 million
state-of-the-art LPG bottling plant.
The company is
working with Auckland City BMW to provide charging solutions
for those customers that have bought the company’s new
eye-catching electric vehicles (EVs). In addition to this we
are working to deploy the public infrastructure to support
EVs.
In July Vector launched a charging station outside
its headquarters in Newmarket. Also, Vector is targeting the
development of another that can charge an EV in under an
hour at its Hobson Street substation and more across the
city over the next year.
The company has established the
role of Chief Networks Officer to oversee the customer,
commercial, engineering and regulatory aspects of its
regulated gas and electricity networks businesses. This
follows on the creation of a new role of Group General
Manager Development to explore ways to enhance the company's
growth and development, through innovative customer
solutions and technology.
The company is also working to
streamline the business to ensure it is responsive to
customer demand. For example, this year it launched its
online gas connection portal, which cuts the time it takes
to get a quote for a residential connection to the gas
network from five days to just a few seconds. The company
plans to deploy similar tools on the electricity
network.
Vector’s outage app for smartphones, which
provides the details of power outages and the likely time to
restoration, continues to provide customers with the
information they need to manage their lives in the event of
energy supply disruptions. The more than 8.8 million total
visits to the app and the website over the last two years
and the popularity of our Twitter feed demonstrate Vector is
delivering the information customers are seeking.
ENABLING AUCKLAND’S
GROWTH
Vector's Auckland
energy networks have seen a strong step up in connections
and are laying the foundations for further growth. New
connections to the electricity network rose 26.0% to 7,813
from 6,202 in 2014.
Vector expects this growth to
continue. In the coming ten years, Vector forecasts around
$1.8 billion of capital investment will be required for its
Auckland energy networks. Were this investment ring-fenced
into a stand-alone company, it would create the country’s
second largest energy distribution company after
Vector.
This level of investment is critical given
Auckland’s significance to the national economy and stands
in sharp contrast to those regions that have little or no
growth.
“As we have previously indicated, we believe the
current regulatory regime does not adequately recognise the
rising risks - due to advances in technology - that new
investments could be made redundant before they have
delivered a return to investors,” Mr Mackenzie
said.
“Furthermore, most distribution companies do not
earn the returns allowed by the regulator, since actual
energy volume growth and the rate of inflation have been
consistently and significantly below the forecasts used by
the Commission to set our revenue. In the last three years
alone, these forecasting differences have cost Vector $175
million in lost electricity revenue.
“These factors,
combined with the continued concern over the potential for
further significant change to the regime, create
disincentives to new investment. To invest in our energy
networks, Vector needs confidence that the regulatory
environment will enable us to recover our capital and earn a
fair return.
“The Commerce Commission is reviewing the
key inputs that determine the prices Vector can charge for
use of its network and the company welcomes the
Commission’s focus on customer adoption of new
technologies and the impact of this on network
infrastructure investment.
“We are also firmly of the
view that the regulatory environment needs to recognise that
Auckland is a special case. The region is growing strongly,
it has the highest demands for capital and it drives the
growth of the national economy. Vector, with its investment
requirements, is at the sharp end of this issue.
“We
believe infrastructure providers should be able to reach
binding, long-term ‘special undertakings’ that enable
investment in the face of these challenges.”
Such
arrangements, which are already working with some success in
the UK and Australia, could allow Vector, and others, to
seek credible long-term tailored regulatory commitments,
which aim to match the asset life and expected recovery
times of either existing or new infrastructure
investment.
Such arrangements could allow infrastructure
providers to bring forward cost recovery to reward efficient
investment and minimise the risks associated with new
technologies by matching allowable cash flows with real cash
flows.
The electricity network endured a particularly
difficult year, weathering four major events over the
regulatory year to 31 March 2015 that challenged Vector’s
strong record for providing a reliable electricity supply.
This number of major events is well ahead of the average of
less than one over the prior ten-year period.
Three of the
events were the major storms in April, June and July, when
the company recorded the highest ever sustained wind speeds
and high winds lasting considerably longer periods than it
has seen in any other year. The fourth was the fire at
Transpower’s Penrose substation last October.
As a
result SAIDI, Vector’s key measure of network reliability,
was 155 minutes, exceeding the Commerce Commission’s
quality threshold of 127 minutes. As foreshadowed in
February we have informed the Commission that we have
breached the service quality requirement that we do not
exceed the threshold two out of every three years.
We
continue to work with the Electricity Authority (EA) and
Transpower on the investigation into the Penrose outage.
Vector and Transpower have delivered their draft technical
report into the outage to the EA, which is now completing
its report for the Minister of Energy and Resources.
The
investigation and reporting process being undertaken by all
parties will ensure contributing factors to the outage are
accurately identified and any necessary risk management
improvements are being actioned quickly.
Vector is
meanwhile advocating on behalf of Auckland consumers against
the EA’s recently announced proposed transmission pricing
options, which could result in Auckland households and
businesses bearing a greater share of Transpower’s
electricity transmission costs.
“The EA’s base option
would result in a 59% increase in transmission costs in
Auckland. This increase is the equivalent of $192 per year
for the average customer in the region and is nearly 60% of
the annual dividend payments our major shareholder the
Auckland Energy Consumer Trust distributes to its
beneficiaries. These costs would dilute the significant
price cuts we have made for the benefit of the Auckland
region in recent years,” Mr Mackenzie said.
“It is
unfathomable that a generator located at the bottom of the
South Island can supply energy into Auckland and not have to
pay for transport. The price customers pay for their energy
may in fact reduce if generators had to pay Transpower for
transporting their energy to their customers.
HEALTH AND
SAFETY
Vector’s headline
Health and Safety measure, the Total Recordable Injury
Frequency Rate (TRIFR) has fallen 42.5% to 7.45 in the 2015
nancial year, from 12.95 in 2014 due to a continued focus
on workplace health and
safety.
“We
have an active and broad ranging programme of safety
leadership and training throughout the business. We have
this year ceased live-line work except in special
circumstances where health and safety risk could be
exacerbated by conducting the work with the lines
de-energised.
“We have also reviewed and enhanced our
Health Safety and Environment Management system, policies,
procedures and reporting in preparation for the enactment of
the Health and Safety Reform Bill,” Mr Mackenzie
said.
“We have implemented initiatives such as
pre-winter health checks, on-site occupational health
providers and access to physiotherapy services.
“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.”
Vector’s
unregulated businesses generated EBITDA of $155.1 million,
2.8% ahead of the $150.9 million achieved in the same period
last year. The Technology business continued to benefit from
strong growth in metering and the acquisition of Arc
Innovations.
TECHNOLOGY: Smart meter
roll-out continues to drive
growth
Technology
revenue increased $21.4 million or 15.6% to $158.4 million
from $137.0 million in the prior year reflecting the
increase in smart meters to 958,146[5] from 675,555 in the prior year. The
increase in meters includes the contribution from the
December 2014 acquisition of Arc Innovations and the
deployment of meters for the SmartCo consortium of
electricity distribution companies.
Vector Communications
grew its revenue by 8.5%; a good result given the
competitive pressures in the sector. These gains in segment
revenue were partially offset by a decrease in revenue due
to a decline in installed legacy meters.
Vector deployed
130,000 meters in the 2015 financial year down from 170,000
in the prior year. This figure excludes the nearly 140,000
meters acquired with Arc and the 13,609 deployed for the
SmartCo consortium.
Vector is now contracted to
install more than 1.2 million smart meters up from 889,000
in the prior year.
EBITDA increased 8.2% to $108.2
million. Growth in EBITDA lagged revenue growth due to
investment in the Australian metering business, Arc
acquisition and integration costs and investment into new
energy technologies.
Depreciation and amortisation rose to
$57.0 million from $46.5 million, again due to the increase
in the size of the smart meter fleet, the contribution to
depreciation from Arc and higher software amortisation
expenses.
GAS WHOLESALE: Entitlement
proceedings dominate
Gas Wholesale revenue fell
to $314.2 million from $349.8 million due to falling demand
from the major power generators and lower oil and gas
prices. Natural gas volumes fell 20.4% from 24.5 PJ to 19.5
PJ.
Lower revenues flowed through to EBITDA, which fell
to $46.9 million from $50.9 million. The result was also
lower due to higher maintenance costs and costs relating to
arbitration over the price Vector must pay for the next
tranche of Kapuni gas. These costs offset gains from higher
gas liquid sales and margin improvements in the natural gas
portfolio.
Our gas bottle swap business continues to grow,
with the numbers of bottles swapped rising 17.9% to 505,927
bottles from 428,951. Liquigas performed strongly,
increasing its tolling volumes by 4.5% to 186,626 tonnes.
Production at Kapuni was up marginally, while sales of gas
liquids were in line with the prior year at 71,092
tonnes.
Vector is awaiting an award from a recent
arbitration hearing over the price it is required to pay for
the next tranche of Kapuni gas, which it has been taking
since July 2013. Vector has rights to take 50% of the gas
remaining in the field from 1 April 1997.
In late 2014,
the Kapuni Mining Companies (KMCs) issued a redetermination
notice for the Kapuni field, proposing a reserves figure
that would reduce the quantity of Kapuni gas Vector
considers it is currently entitled to.
Vector’s
international expert, considers the remaining reserves are
currently some 103 PJ more than the KMCs propose. The
parties are currently trying to agree on a reserves
figure.
In addition
to the arbitration and redetermination issues, the KMCs have
also issued legal proceedings in relation to the ongoing
application of a 1999 arbitral award setting terms for gas
processing of the KMC’s share of Kapuni gas at the Kapuni
Gas Treatment Plant.
Legal proceedings
notwithstanding, the gas wholesale business is facing
headwinds due to changes to the pricing of gas processing at
Kapuni, lower prices for oil and gas globally and lower LPG
exports.
REGULATED
BUSINESSES
Regulated EBITDA
was up 2.6% on the same time last year with growth in
connections, higher capital contributions and higher volumes
offsetting regulated price cuts.
ELECTRICITY:
Volume and connection growth offset price
cuts
Electricity
revenue increased $39.5 million or 6.3% to
$
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