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Vector looks to meters, solar for earnings growth

Friday 24th August 2018

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Vector is aiming for a slight lift in operating earnings this year, buoyed by the accelerating smart meter roll-out in Australia and stronger than expected on-going meter work locally.

The company installed almost 40,200 meters for five major retailers in Australia in the year ended June, and almost 85,000 in New Zealand. In the current year those figures will flip to possibly 100,000 in Australia and about 70,000 in New Zealand.

The company also expects a bigger contribution from the E-Co Products business it acquired last year.

Chief financial officer Dan Molloy told investors he was surprised at the level of on-going meter work in New Zealand, which is largely a function of strong new connection growth.

“We are still in a very strong position in that space in New Zealand,” chief executive Simon Mackenzie told investors and journalists on a conference call.

Vector, the country’s biggest electricity distributor and the second-largest gas distributor, is investing in solar, batteries and other new technologies to keep pace with the rapidly widening options its customers have for energy use and supply.

The firm, three-quarters owned by a community trust, also needs its customers to use some of those technologies so that it can minimize spending on traditional gas pipelines and power lines in the country’s fastest growing city. Vector expects to have to invest about $2 billion during the next decade to keep up with Auckland’s growth.

The company today reported flat operating earnings for the year through June of $470.1 million, in part due to $4.4 million of unplanned maintenance costs from a major storm in April. Only the firm’s technology division – which includes meters, solar and broadband – reported a gain.

For the current year the group forecasts earnings before interest, tax, depreciation and amortisation to be between $470 million and $480 million.

Vector added PowerSmart Solar and home ventilation firm HRV to the technology business in early 2017 to help accelerate its expansion in those areas.

While PowerSmart and the HRV ventilation business had performed well, the overall growth was less than Vector had been counting on. The Eco-Products business suffered from restructuring costs and launch costs for the HRV Solar business. Competition also increased pressure on margins in the heat pump business.

Excluding those one-off costs, Molloy said E-Co Products would have delivered about $7 million in earnings. While the firm expects some growth this year, higher earnings will largely be due to the absence of those one-off costs this year.

Mackenzie noted that while solar growth in Auckland had slowed, HRV would look to expand beyond Auckland in time.

Vector shares fell 9 cents to $3.27 on the NZX, taking their decline this year to almost 5 percent.

The company, which has delivered 12 consecutive years of dividend growth, signalled that it may need to review its commitment to progressive dividends depending on the Commerce Commission next power price reset taking effect in April 2020.

Net profit also included a $16.7 million tax benefit from the cancellation of a historic intercompany loan between Vector and the former Mercury Networks business. MEL Networks was deregistered in March.

Despite that gain, net profit fell to $149.8 million, from $168.9 million a year earlier, which included almost $19 million in one-off gains from insurance proceeds and a favourable tax ruling related to the firm’s leasing of capacity in the Penrose tunnel to Transpower.

While Vector’s gas earnings fell 7 percent from the year before, Molloy noted the 2017 result included the $5.3 million insurance benefit. Volumes across all products had been strong and earnings would have been almost 9 percent higher excluding the one-time benefit the year before.

Vector added a record 14,000 gas and power connections in Auckland in the past year. It is expecting about 11,000 power connections again in the current year.

Despite that growth, Mackenzie noted that earnings from the regulated gas and power networks remain constrained. Piped gas prices were reset lower in October and returns on the electricity network remain hampered by forecast errors when the Commerce Commission last reset the prices in 2015.

Whereas the commission assumed volume growth of 1.1 percent, it has actually been closer to 0.3 percent, due to falling household consumption. Consumer price inflation has also been about half the 1.6 percent the commission assumed.

Mackenzie said errors like that have reduced the firm’s electricity revenue in the latest regulatory year by about $28 million. While that should be corrected for the 2020 reset, the earnings are gone.

Until then, that under-recovery is likely to climb to about $30 million a year due to those factors and penalties from the commission for earlier breaches of its reliability standards.

He said it remained a “significant concern” that at a time of major growth, the firm was only earning a 5.49 percent return on its electricity assets, when regulation had allowed up to 7.19 percent.

The company noted that the system duration of outages on its network had jumped 226 minutes in the year ended April, from 174 minutes the year before and 117 in the year ended 2016.

Mackenzie said much of that reflects the firm’s decision to stop crews working on live lines, and to de-energise fallen lines as a matter of course.

Accordingly, the company is seeking a new reliability standard from the commission to reflect those changes in health and safety policy, and the increasing challenges of working in Auckland.


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