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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Sandy Hodge
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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.”

Year ended 30 June 2015

$M 2014

$M Change

(%)
Revenue 1,294.0 1,258.9 +2.8
Adjusted EBITDA 596.9 580.7 +2.8
Net profit 149.4 171.3 -12.8
Operating cash flow 369.2 366.6 +0.7
Dividend per share (cents) 15.5 15.25 +1.6

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.”

SEGMENT PERFORMANCE

Year ended 30 June 2015 2014 Change
$M $M (%)
Electricity
Revenue 670.8 631.3 +6.3
EBITDA 348.8 346.0 +0.8
Gas Transportation
Revenue 193.4 187.0 +3.4
EBITDA 143.2 133.4 +7.3
Gas Wholesale
Revenue 314.2 349.8 -10.2
EBITDA 46.9 50.9 -7.9
Technology
Revenue 158.4 137.0 +15.6
EBITDA 108.2 100.0 +8.2
Shared Services
Revenue 0.4 0.6 -33.3
Adjusted EBITDA (50.2) (49.6) -1.2
UNREGULATED BUSINESSES:

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 $

ends

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