Vector to repay $540M of bank debt on sale of gas business, expects bigger drop in operating earnings

Monday 30th November 2015

Vector, the electricity and gas network operator, will immediately repay $540 million of bank debt on completion of the sale of its gas transmission and distribution assets outside Auckland, although the savings in interest costs won't make up for the reduction in operating earnings.

The Auckland based network company gave more details of the proposed transaction in a notice for a special meeting of shareholders whose approval is required because the value of assets involved amounts to more than 15 percent of Vector's market capitalisation. The meeting is to be held in Auckland on Dec. 16.

Subject to approvals, the company would sell Vector Gas for $952.2 million to Australian investor First State Funds. The sale will result in a gain for Vector of about $167 million and follows a strategic review of the company. Vector hired Goldman Sachs for the review after what it called unsolicited interest in the gas business, which is subject to contentious price regulation. The company has said it wants to focus on businesses that aren't regulated.

Selling the gas business isn't expected to affect Vector's BBB credit rating and stable outlook, the company said in the notice of meeting. Based on pro forma numbers that assume the sale had occurred at June 30, Vector's gearing would improve to 42 percent from 54 percent and goodwill would be released from the company's balance sheet sufficient to lift net tangible assets per share to $1.11 from 64 cents, it said.

Vector's shares last traded at $3.12 and have gained 7 percent this year, lagging behind the NZX 50 Index's 12 percent gain.

While Vector's future interest costs will fall, the reduction "does not quite offset the reduction in operating earnings due to the sale, and as a result, until such time as we are able to redeploy the proceeds and all other things being equal, we expect Vector's future earnings per share to reduce by around 10 percent compared to if Vector were to retain the businesses," it said.

The sale of Vector Gas, the holding company for regional gas distribution assets and transmission assets, will also see the company quit its contract to operate and maintain the Maui gas pipeline, which failed in October 2011 and took almost six days to repair, with subsequent government ordered inquiries identifying increasing risks of failure and heightened repair requirements as the ageing pipeline, already 31 years old, prepares for another 30 years of operation.

Vector had previously announced it was signing a memorandum of understanding with First State Funds "to consider opportunities to co-invest in regulated and unregulated energy infrastructure, both in New Zealand and offshore, and to cooperate operationally on gas distribution activities."

First State Funds comprises two infrastructure funds managed by First State Investments, known in Australia as Colonial First State Global Asset Management.

The sale is also conditional on approvals from the Overseas Investment Office and ministers. Settlement is anticipated by March 31 next year.

Vector's regional gas transmission business covers more than 2,200 kilometres of high pressure gas transmission pipelines, 233 stations and associated non-network assets that supply natural gas to industrial consumers, and distribution networks in most cities and large towns across the North Island of New Zealand.

The non-Auckland gas distribution business comprises networks in six regions in the North Island, consisting of more than 3,400 kilometres of main pipes and an additional 1,400 kilometres of service pipes. It provides gas distribution services to gas retailers who sell gas to more than 60,000 customers.

First State Investments' other New Zealand assets include bulk liquid storage facilities.

BusinessDesk.co.nz

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