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Vector 2012 earnings sustained by smart growth initiatives

Vector 2012 earnings robust: sustained by smart growth initiatives

Highlights

· Underlying net profit after tax[1] rose 16.1 percent to $198.8 million from $171.3 million after adjusting for the 2011 sale to Transpower of rights to use Vector’s Penrose to Hobson Street tunnel. Net profit after tax fell 1.3 percent to $198.8 million from $201.4 million.

· Achieved robust earnings growth across our portfolio of businesses despite muted economic conditions and rising regulatory costs.

· Technology and gas wholesale segments growing strongly, underscoring success of
growth initiatives.

· Capital investment of $261.8 million provides for continued growth and maintenance of safe, secure and efficient energy networks to Auckland and the broader economy;

· Balance sheet remains strong; gearing[2] stands at 52.5 percent. Standard & Poor’s BBB+/stable investment-grade credit rating reaffirmed.

· A final dividend of 7.50 cents per share taking 2012 total dividends to 14.50 cents per share, extending Vector’s strong record of delivering returns to shareholders and putting more than $100 million into the pockets of Auckland Energy Consumer Trust (AECT) beneficiaries.

Financial Highlights

· Group revenue increased 0.6 percent to $1,252.6 million in the 12 months to June 30 from $1,244.6 million in 2011.

· Group earnings before interest, tax, depreciation and amortisation (EBITDA) fell 1.4 percent to $627.4 million from $636.6 million.

· Underlying EBITDA, adjusted for the 2011 sale to Transpower of rights to use Vector’s Penrose to Hobson Street tunnel, rose 5.6 percent to $627.4 million from $594.2 million.

· Net profit after tax fell 1.3 percent to $198.8 million from $201.4 million, but underlying net
profit after tax rose 16.1 percent to $198.8 million from $171.3 million.

New Zealand's largest multi-network infrastructure company Vector today reported a robust result for the 12 months to 30 June 2012, achieving growth across its portfolio of businesses despite rising regulatory costs and adverse economic conditions.

Vector Chairman Michael Stiassny, said the Board had declared a final dividend of 7.50 cents per share, bringing total dividends for the year to 14.50 cents per share (2011:14.25) representing a payout ratio[3] of 53 percent (2011: 56 percent) relative to the dividend policy of 60 percent average over time. The final dividend is payable on 17 September 2012 to shareholders registered on 10 September 2012.

Vector Group Chief Executive Officer Simon Mackenzie said the results were a testament to the deep resources of expertise and innovation upon which the company draws.

“They also show a mixed ownership company, being jointly owned by the public through the Auckland Energy Consumer Trust and private investors successfully delivering on the expectations of shareholders, Auckland and the national economy.

Business performance

“Vector operates a portfolio of infrastructure businesses that operate in un-regulated and regulated markets. Our metering, telecommunications and gas wholesale businesses are in the former category and delivered strong growth despite robust competition and the adverse economic environment. Our electricity and gas distribution and transmission networks are in the latter category and still delivered improved returns even though our prices are set by the Commerce Commission.

“The standout performance came from our growing technology business, which generates revenue from the provision of metering and related information services and telecommunications. It grew revenue and EBITDA by 11.5 percent and 16.8 percent respectively.

“Vector is recognised internationally for being at the forefront of developing smart metering technology and we are only halfway through our contracted deployment of 670,000 meters. And even after these installations are completed, it offers great promise.

“The gas wholesale business, another unregulated business grew revenue by 2.3 percent and EBITDA by 10.4 percent. This is due to large gas users turning to Vector as they recognise our willingness to configure gas supply to meet their specific needs and our ability to offer greater price certainty and supply security thanks to our multiple long-term contracts with diverse gas suppliers,” he said.

Mr Mackenzie said Vector’s regulated business – the gas distribution and national transmission networks and the core Auckland electricity network - grew revenue and earnings, benefiting from weather returning to more normalised patterns.

“Volume through our electricity network increased by 1.3 percent to 8,424 GWh from 8,319 GWh, due to more normal weather patterns. Average temperatures in the financial year fell by 1 degree to 15.2 degrees, closer to the long run average, from the unusually high 16.2 degrees last year.

“Growth in our electricity customer base, to 535,228 from 532,607 was muted. However, we grew the number of industrial and commercial customers and the number of small and medium sized business customers by 2.3 percent and 0.8 percent respectively. This is a strong result given the tough economic conditions and they show the core Vector business can continue to grow even while the broader economy struggles. Our gas customer base grew 1.4 percent to 154,649 from 152,508.

“Meanwhile, Vector has delivered on our commitments to customers to provide a reliable critical national infrastructure to customers. The Rugby World Cup matches were played in Auckland without a noteworthy network incident and in the period after the tournament we deftly managed the outage of the Maui Pipeline.

“Although Vector does not own the pipeline, as the critical contingency operator and Maui Pipeline operator, our gas transmission team performed an exemplary job, speedily managing the repair; optimising capacity on the smaller Vector-owned gas transmission network that runs parallel to the Maui Pipeline and working with customers to manage their demand,” he said.

Mr Mackenzie said Vector has continued to focus on safety throughout the year, ensuring that staff, customers and the public were safe around our networks.

“Our focus on safety is reflected in the fact that we are one of the first companies in New Zealand to have our safety management system certified against the new NZS7901 Safety Management System for Public Safety standard across our electricity networks. This is an achievement we are very proud of.

Capital investment

“Vector is New Zealand’s fifth largest listed company by market capitalisation and one of the economy’s largest contributors. Capital investment directed at growth and maintaining the existing critical energy infrastructure rose 1.8 percent to $261.8 million, from $257.1 million in the prior year. Of this sum more than half was directed at growth investments.

“This investment, of which the majority is spent locally, underpins the livelihood of many thousands of people, and ensures Auckland, the engine of the national economy, is supplied with energy and is given the capacity to thrive and grow.

“Key projects include the investment in substations in Hobson Street in the Auckland CBD and Wairau Road on the North Shore. Transpower is locating its new ‘grid exit points’ at these substations and when completed in 2014, these substations will provide additional security of electricity supply to Auckland and the North Shore and will provide additional capacity for economic growth in both localities.

“Vector continues to invest in innovation and research to ensure we are at the forefront of developing energy technologies. We understand energy will be provided to the nation in a myriad of different ways into the future.

“It is for this reason we have invested so much in our metering business. But we are also excited about a number of other technologies including solar power, which we believe could play an important role in
New Zealand’s energy future.

“Over the last year we have further developed our capabilities in this area working with the Department of Conservation to install arrays of batteries and solar panels on islands in the Hauraki Gulf and
Raoul Island in the Kermadec Group. These installations will supply up to 80 percent of DOC’s needs on the islands and deliver substantial cost savings. Soon New Zealand homes and business may enjoy similar benefits.”

Regulation

“New Zealand’s lack of regulatory certainty on critical infrastructure is of concern to international investors. This leads to higher borrowing costs and it is therefore impinging on our international competitiveness.

“The country urgently needs a regime that recognises the national need to incentivise international
capital markets to make the long-term commitment to fund safe, secure and cost-effective ports,
airports and telecommunications and energy networks, while striking the appropriate balance with the consumer’s short- term desire for cheaper services.

“The current regulatory regime, as framed is some way from achieving that balance. It also fails to recognise Vector’s unique mixed-ownership structure where our 75.1 percent shareholder, the Auckland Energy Consumer Trust, faces strong disciplines to deliver outcomes that benefit the broader community.

“We are at half-time in the regulatory process. The second-half will resume later this year when we along with others take our Merits Review of the regulatory regime to the High Court. We continue to believe the Commerce Commission has not determined the fundamental inputs nor provided the complete regulatory package and the certainty needed for sound long-term investments.

“Its determination of key regulatory inputs - from its asset valuation and allowable return methodologies through to its lack of incentives for cost savings and energy efficiency is fundamentally flawed.

“We do not take legal action lightly, but only through testing this still immature regulatory regime through the courts will we arrive at the balance and stability the country needs,” said Mr Mackenzie

Outlook

Vector expects continued revenue growth from our technology business and our gas wholesale business and growth in the volume of electricity and gas transported across our regulated energy networks.

However, as we have previously articulated, Vector faces a number of challenges that make it difficult to predict with certainty the outcome for the 2013 financial year including the Commerce Commission’s decision on the starting prices on our regulated electricity network for the current regulatory period; the outcome of the Merits Review court action on the regulatory regime and negotiations over our rights to gas at the Kapuni field and the price we pay for that gas.

Our objective is to maintain EBITDA broadly in line with this year and market consensus, recognising these uncertainties.

ENDS

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