Vector profit down on price cuts, reduced energy consumption

Auckland electricity and gas network operator Vector [NZX: VCT] saw net profit after tax fall 16.9 percent to $171.3 million in the year to June 30, as regulator-mandated cuts to its monopoly assets bit into revenues, along with lower consumption of both electricity and natural gas, reflecting consumer trends and less use of gas-fired power stations by electricity generators.

Offsetting the downward trend in the regulated parts of its business were increased revenues and earnings contribution from its technology business, pushed along by the rapid roll-out of electricity smart meters and acquisition of Contact Energy's gas metering business during the financial year.

Earnings before interest, tax, depreciation, amortisation fell to $580.7 million from $630.5 million the year before and are not expected to regain the previous year's levels in the current financial year, despite forthcoming increases in regulated gas network charges.

The company warned the regulatory regime for monopoly distribution assets is increasingly outdated and is a barrier to investment in secure electricity and gas distribution networks, even though Auckland is experiencing strong population growth, which spurs both demand for and the potential efficiency of Vector's asset base.

Directors announced a flat final dividend of 7.75 cents per share, although total distributions for the year are up 0.25 cps from last year, marking the eighth consecutive year of dividend increases.

"However, further regulatory actions place additional pressure on future dividends and investment in our regulated assets," said chairman Michael Stiassny in a statement with Vector's filings to the NZX this morning. "Given the concentration of our assets in Auckland, Vector's energy infrastructure business is well-positioned to grow over the long term, as long as commercial rationality emerges in the regulation of our energy networks."

Total revenue for the year was down 1.6 percent at $1.259 billion, and operating cashflow was 14.6 percent lower than the previous year at $366.6 million, with the largest revenue falls seen in gas transportation revenues, down 14.8 percent to $187 million, while wholesale gas revenues fell 6 percent to $349.8 million.

That saw gas transportation Ebitda fall 21.7 percent to $133.4 million, despite strong growth in gas connections associated with Auckland population growth, reflecting price reductions imposed by the Commerce Commission, which will be partially reversed by mandated price increases this year.

While there was a 5.8 percent fall in gas volumes, primarily reflecting less use of Contact Energy and MightyRiverPower's Auckland gas-fired power stations, 90 percent of gas transmission revenues are fixed under contract to reserve pipeline capacity and are largely independent of volumes transmitted.

Electricity revenues fell 0.3 percent to $631.3 million, producing a 7.1 percent reduction in segment Ebitda of $346 million. Revenues remained flat despite a 10 percent cut in regulated transmission prices, thanks in part to passing through substantial increases from the national grid operator, Transpower, which has completed major upgrades and is able to charge more on its regulated assets.

Electricity transported over the Vector network declined slightly from 8,332 Gigawatt hours the previous year to 8,252GWh, despite a net 17.9 percent increase in electricity connections during the year, as consumers seek ways to save power and "record warm" months were recorded in April 2013 and June this year.

Gas wholesale Ebitda was down largely because the company lost access to gas from the Kapuni field at legacy prices, lower total volumes sold, and "greater competition among natural gas wholesalers."

The technology segment offset soggy earnings in the other parts of the business, with revenues up 25.6 percent to $137 million and Ebitda of $100 million a 31.1 percent gain on the previous year, driven by growth in its smart metering business and integration of the gas metering assets previously owned by Contact Energy.

Total capital expenditure of $339.2 million for the year was up 13.6 percent, of which the largest single element was electricity assets, at $162.3 million, split roughly 50/50 between maintenance and growth, and an 8.1 percent increase on the previous year.

The technology segment was second largest recipient of capex at $105 million, up 18.1 percent on the previous year, at $105 million, of which $96.5 million was investment for growth.

On the regulatory environment, chief executive Simon Mackenzie said the Commerce Commission's pricing regime assumed network assets had a 40-year commercial life, with most of the returns to Vector coming in the latter years of that lifespan.

But this required Vector "to commit to significant upfront capital expenditure and accept a cash flow profile that does not reflect the risk we are taking," said Mackenzie. "Vector faces significant risk that, over a 40-year period, essential assets may become redundant and cash flows deferred under the regulatory regime may not be recovered."

This was because consumers were increasingly able to control energy costs and may, over time, start moving off the distribution network in favour of distributed generation alternatives.

(BusinessDesk)