Vector Financial Results
Financial Results for the Six Months to 31 December
Leading energy industry change
Vector’s earnings rise as new technology, business transformation and strong cost control accelerates drive towards a new energy future; business on track to achieve full-year guidance
- Vector benefits from growth in Auckland and metering, strong cost control across the regulated businesses and price increases in Gas Transportation
- Net profit rose 14.7% to $100.1 million from $87.3 million, due to increased operating earnings and positive mark-to-market derivative adjustments, partially offset by higher depreciation
- New Zealand smart meter fleet exceeds one million and Vector gained accreditation to operate as a metering services provider in Australia
- Won the Tomorrow’s Workforce and the Supreme Award at the EEO Diversity Awards
- Sale of Vector Gas (which owns the gas transmission and non-Auckland gas distribution businesses) approved by shareholders before Christmas
- Absent the sale, the business is performing in line with August guidance for the year to 30 June 2016 of adjusted EBITDA, excluding capital contributions, of $550 million to $565 million
- Interim dividend rises to 7.75 cents per share with a record date for dividend entitlements of 31 March 2016and a payment date of 14 April 2016
New Zealand’s leading energy infrastructure company Vector Limited today reports improved earnings for the six months to 31 December 2015 and good progress positioning itself for the significant growth opportunities it sees emerging from new technologies and growth in Auckland.
Group half-year revenue fell 3.5% to $663.0 million from $687.1 million on the back of lower volumes at the Gas Trading division. Adjusted EBITDA rose 6.3% to $305.9 million from $287.9 million, with the company’s Technology, Gas Transportation and Electricity businesses offsetting the effects of the tough conditions faced by the Gas Trading segment.
Adjusted EBITDA across our regulated businesses rose 6.2% to $248.8 million from $234.3 million supported by growth in connections and energy volumes in Auckland, regulated price increases in the Gas Transportation business and a strong focus on cost control.
Adjusted EBITDA across our unregulated businesses rose 3.9% to $82.2 million from $79.1 million, with ongoing growth in the New Zealand metering business offsetting the costs associated with the push into Australia and the well-signalled weakness in the Gas Trading business.
Operating cash flow increased 22.4% to $248.8 million from $203.3 million, reflecting the improved earnings and the timing of tax payments.
Net profit rose 14.7% to $100.1 million from $87.3 million, due to increased operating earnings, and positive mark-to-market derivative adjustments, partially offset by higher depreciation.
Vector Chairman Michael Stiassny said: “Vector has made considerable progress in the half year. We have reported improved earnings for the six months - a period during which we successfully negotiated the $952.5 million sale of Vector Gas, which owns the company’s gas transmission business and its gas distribution business outside Auckland.
“This sale realises full value for the business and allows Vector to repay debt and recycle capital into higher growth opportunities. Meanwhile we have benefited from continued growth in Auckland, and made significant progress in areas we have identified for future growth such as metering in Australia, electric vehicle charging infrastructure and batteries.
“These gains have been diluted by the ongoing challenges for the Gas Trading business. Should the trading outlook for this business continue to weaken, we will carefully review the carrying value of the Gas Trading assets and goodwill at year-end.
“Vector’s balance sheet is strong with gearing as at 31 December 2015 at 53.4% up slightly from the 52.9% achieved twelve months earlier. Gearing will reduce substantially following the completion of the sale of Vector Gas and, as set out at our special meeting in December, we expect to retain our investment grade credit rating following completion of the sale.”
“The Vector Board has today declared a fully-imputed interim dividend of 7.75 cents per share up 0.25 cents on the prior year’s interim dividend. This increase reflects directors’ confidence in the financial strength of Vector following the sale of Vector Gas.”
The record date for dividend entitlements is 31 March 2016 and the payment date is 14 April 2016.
“Vector is looking forward to the remainder of the year with confidence. Absent the sale of Vector Gas, the Group is performing in line with our previous guidance for adjusted EBITDA, excluding capital contributions, of $550 million to $565 million,” Mr Stiassny said.
“However, the final result for the year to 30 June 2016 will be impacted by the timing of the sale of Vector Gas, which is now conditional only upon approval by the Overseas Investment Office. We are targeting completion to occur by the end of March.”
|Six months ended 31 December||2015|
|Operating cash flow||248.8||203.3||+22.4|
|Dividend per share (cents)||7.75||7.5||+3.3|
Vector Group Chief Executive Simon Mackenzie said: “We see significant potential emerging across the energy infrastructure sector from customers’ ever-increasing demands for greater choice and improved service and the ongoing and rapid advances in technology. In addition, continued growth in Auckland presents numerous attractive opportunities on our core energy distribution businesses.
“Vector’s strategy to make the most of these trends is to create a new energy future, by leveraging our heritage and creating options. This means taking advantage of the strong position we occupy as an Auckland-centric provider of energy infrastructure and by identifying and developing options that will deliver value, choice and service for our customers and improve shareholder returns.
“The most tangible evidence of this strategy over the past six months has been negotiating the $952.5 million sale of Vector Gas, which owns the group’s gas transmission pipelines as well as gas distribution networks across six regions in the North Island outside of Auckland.
“This sale, which shareholders approved before Christmas, will allow us to recycle capital into attractive growth opportunities and allow us to begin to earn a return on the significant goodwill on our balance sheet currently allocated to Vector Gas. This goodwill is not recognised by the Commerce Commission when it sets our allowable return.
“Meanwhile, we have made significant progress positioning the company for the future.
“In January, we achieved a significant milestone in Australia when the Australian Energy Market Operator granted us accreditation to operate as a Metering Provider and Metering Data Provider in the National Electricity Market.
“This accreditation allows us to provide metering services to energy retailers in the contestable residential metering market. It was the culmination of two years of hard work to meet Australia’s stringent requirements and required Vector to demonstrate a full operating capability in Australia, including the establishment of a new office in Melbourne.
“We are well positioned to make the most of the considerable potential we see across the Tasman, not least because the move builds on our position as the leading provider of advanced metering services in New Zealand, where we now operate a fleet of more than one million smart meters.
“While still at an early stage, our expansion into the provision of electric vehicle (EV) charging infrastructure is gaining momentum.
“With the support of our major shareholder the Auckland Energy Consumer Trust (AECT) we have installed two rapid chargers at our Hobson Street substation, two rapid chargers and a standard charger at our Newmarket substation, and standard chargers at Britomart and at our headquarters in Newmarket. We have plans to deploy another 17 rapid chargers across our network over the coming months.
“In January we received our first significant shipment of Tesla Energy Powerwall batteries, one of the first shipments of these batteries to be delivered to a customer outside of the US.
“Among the first to receive these batteries in New Zealand will be the winners of the Future of Energy competition, which we ran last year also with the support of the AECT. The programme will give deserving Auckland families, schools and community groups solar and battery units to use for free for 10 years. The first installations will occur in the coming months.
“We also intend to install a Tesla Energy Powerpack utility-scale battery into one of our zone substations later this year. The battery will store power generated during periods of low demand and discharge power when demand is high. It is promising to be a more cost-effective solution than relying on traditional feeder circuit upgrades to meet electricity demand from the surrounding suburbs.
“These initiatives, which we expect to show how new technologies can augment traditional networks, highlight the benefits of our move in 2014 to create a team dedicated to enhancing growth through innovative customer solutions and technology.
“We are currently focussed on rolling out these new technologies inside our own network. The installations will then provide important reference sites as we look to rollout more widely across our own and other networks.
“Across Vector’s energy networks we are taking advantage of new data analysis technologies to understand customers, target new capital investment opportunities and respond to the significant change we are seeing in the sector. Such tools will be a key enabler of our future development.
“SAIDI, our measure of electricity network service quality, was 78.3 minutes (excluding extreme events) for the nine months to 31 December 2015, an improvement on the 126.7 minutes posted for the same period last year.
“This is a creditable result especially given our reduction in ‘live-line’ work as part of our drive for better health and safety outcomes across the business. That said Vector continues to believe the new SAIDI target set by the Commerce Commission for the 2015-2020 Default Price-Quality Path will be challenging.
“We have acknowledged the disruption caused by the 2014 fire at Transpower’s Penrose substation, which along with unusually stormy weather weighed on the previous corresponding period’s SAIDI figures. We have offered a service level payment to impacted customers. The claims window, which closes 4 March 2016 allows impacted customers to make a claim by calling 0508 4 PENROSE or by going online to www.vector.co.nz.
“Meanwhile, we are continuing to have positive discussions with the Commerce Commission over the unique challenges Vector faces as a provider of essential infrastructure to Auckland.
“As we have noted before, Vector needs a regulatory solution that recognises customer demands for choice, Auckland’s significance to the broader economy and the unique challenges we face as we provision for growth in the region.
“The rapid technological change sweeping the energy distribution industry increases the risk that investments could be made redundant even before investors have recovered their capital.
“Additionally, the capital required to provide for Auckland’s growth is significant. In the coming 10 years Vector has forecast that around $1.8 billion of capital investment will be required for the city’s energy networks.
“Our discussions with the regulator cover this year’s review of the input methodologies as well as arrangements ahead of the next gas distribution regulatory reset in 2017 and the next electricity distribution regulatory reset in 2020.
“Looking forward, we continue to review the configuration of our business and expenditure particularly in light of the Vector Gas sale and the new growth opportunities we have identified. Around 130 staff will transition to Vector Gas’ new owner, First State Funds, and Vector has agreed to provide transitional services to First State Funds for up to 9 months following completion.
“Our active and broad ranging programme of safety leadership and training throughout the business continues and has ensured we are well positioned for the Health and Safety at Work Act, which comes into full effect in April of this year.
“Our focus on promoting diversity and inclusion has been recognised for providing leadership in New Zealand. We were delighted to be announced the winner of the Supreme award at the Equal Employment Opportunities Trust Diversity Awards in August 2015 as well as the winner of the Tomorrow’s Workforce award, which recognises innovative responses to tackling future labour force challenges.
“We continue to engage positively with key stakeholders, including our shareholders, our employees, our contractors, our business partners and regulators, to ensure continued improvement in all aspects of our business. Vector is in good shape and we are excited about the opportunities we see ahead of us,” Mr Mackenzie said.
|Six months ended 31 December||2015|
TECHNOLOGY: Smart meter roll out continues to drive growth but establishment costs in Australia and business development expenditure dilute gains
Technology division revenue rose 16.4% to $88.5 million from $76.0 million a year earlier, while adjusted EBITDA rose 14.5% to $57.0 million from $49.8 million.
The division benefited from a significantly higher installed smart meter base. This was due to the acquisition of Arc Innovations and an increase in the rate of deployment of smart meters, with 86,467 new smart meters installed over the six month period, up from 71,385 in the prior corresponding period.
This rate of deployment is expected to continue at least over the next 6 months and we expect to deploy approximately 170,000 meters (including SmartCo and replacement meters) in the course of the financial year.
Vector Communications has meanwhile delivered an improved result and is growing its market share within its network footprint.
Ongoing business development expenditure related to Australian metering, batteries, solar solutions and home energy management systems diluted these gains.
GAS TRADING: Challenging trading environment continues
Revenue at the Gas Trading division fell 18.6% to $151.4 million from $185.9 million a year earlier, while adjusted EBITDA fell 14% to $25.2 million from $29.3 million as the division faces a challenging trading environment.
Natural gas volumes continued to decline, falling 27.2% to 9.1 PJ from 12.5 PJ. This reflected a reduction in demand from gas fired electricity generators and the end to some entitlements to Maui gas. This was partially offset by an increase in volume sold to industrial and commercial customers.
Continued weakness in the price for natural gas in New Zealand has weighed on margins. Additionally, EBITDA was impacted by lower production and lower processing fees at the Kapuni Gas Treatment Plant (KGTP) and lower natural gasoline and LPG prices. Liquigas’ tolled volumes fell 12.8% to 86,868 tonnes from 99,628 tonnes, largely due to fewer exports, as lower international prices made exports less attractive to Liquigas customers.
In September 2015, Vector received an arbitral award regarding the price and terms for the next tranche of Kapuni gas which it has been taking since July 2013. The award was broadly in line with the amounts the company provided for in its accounts.
Todd Petroleum Mining Company Limited and Shell (Petroleum Mining) Company Limited have subsequently applied to the High Court to set aside certain parts of the award, and for leave from the High Court to appeal certain parts of the award. Vector is opposing both applications.
The Kapuni field redetermination process and the KGTP processing fee proceedings are continuing.
Bottle swap volumes continued to increase with volumes 13.7% higher at 302,109 from 265,662 a year earlier, supporting our decision to invest in a new bottling facility in South Auckland.
ELECTRICITY: Auckland continuing to deliver connection and volume growth
Electricity division revenue fell 1.9% to $344.3 million from $350.8 million a year ago while adjusted EBITDA rose 1.7% to $173.7 million from $170.8 million. Revenue for the half year was impacted by lower pass through costs, partially offset by volume growth. Additionally, the prior corresponding period’s revenue was higher due to one-off prior period adjustments.
Volumes transported across the network grew 0.7% to 4,368 GWh from 4,337 GWh, driven by cooler winter temperatures and a 3.6% increase in new connections to 3,916 over the six month period, maintaining the historically high level of connection activity seen in the prior corresponding period. Total connections to the network at the end of the half year stood at 547,319, up 0.9% from 542,329 a year ago.
Costs were controlled, with expenditure (excluding pass through costs) $4.5 million less than the prior corresponding period.
GAS TRANSPORTATION: Price increases and Auckland growth lift earnings
Gas Transportation revenue rose 7.6% to $103.4 million from $96.1 million a year ago, while adjusted EBITDA rose 18.3% to $75.1 million from $63.5 million.
The segment benefited from regulated price increases. Transmission volumes declined 4.0% to 55.7 PJ from 58.0 PJ, largely due to a reduction in demand from gas-fired electricity generators.
The gas distribution business benefited from a 4.1% increase in volumes year-on-year, reflecting a 3,088 increase in connections to 164,840 from 161,752 a year earlier and a return to cooler winter temperatures in line with historic averages.
Following the agreement to sell Vector Gas to First State Funds, the gas transmission and non-Auckland gas distribution assets are now categorised as held for sale and so we have ceased depreciation of these assets.
Overall capital expenditure is largely consistent with the prior corresponding period.
|Six months ended 31 December||2015|