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Vector warns upcoming price review may crimp future dividends

Tuesday 26th February 2019

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Vector has warned the upcoming review of its regulated prices may stifle its ability to keep raising dividends and kept today's interim return to shareholders unchanged. 

The electricity, gas, and telecommunications lines company's board will review its dividend policy once the Commerce Commission has completed its reset for Vector's default price path for the April 2020-March 2025 period. A draft decision is due by the end of May with the final report in late November. 

Vector's board declared an unchanged interim dividend of 8.25 cents per share, or $82.5 million, in line with analysts' forecasts at First NZ Capital and Forsyth Barr. 

"What is increasingly clear is that, given the pace of change, the existing regime for quality control, last reset in 2015, no longer reflects the reality of the changed operating environment, particularly related to health and safety legislation and the impact of Auckland growth," the company said in a statement.

"Vector’s future earnings and ability to pay ongoing increasing dividends could be significantly influenced by the reset of our electricity network revenues for the period 1 April 2020 to 31 March 2025."

Net profit attributable to shareholders was $82.6 million in the six months ended Dec. 31, up from $79 million a year earlier. Earnings were boosted by higher electricity volumes, increased gas production, and greater smart meter deployment. 

Adjusting accounting changes, earnings before interest, tax, depreciation and amortisation rose 5.9 percent to $264.7 million on a 1.7 percent rise in revenue to $688.6 million. FNZC had picked ebitda of $256.6 million. 

Vector adjusted its guidance for the new accounting rules, and now predicts ebitda of $480-490 million for the year ending June 30, up from the $470-480 million forecast provided in August. The lines company anticipates earnings will be at the upper end of that range if strong electricity volumes persist into the second half. 

The company's regulated electricity business lifted earnings 3.1 percent to $198.7 million on higher volumes as Auckland's population continues to grow and a colder winter lifted demand. Vector had 567,009 customers at Dec. 31, up from 559,777 a year earlier, while the volume distributed increased to 4,390 gigawatt hours from 4,352/GWh. 

The gas trading division boosted earnings 13 percent to $20.7 million on increased production at the Kapuni Gas Treatment Plant, higher LPG sales and greater cost efficiencies at its 9kg bottle swap processing plant in south Auckland. Gas customers rose to 110,489 from 108,270 a year earlier, while volumes distilled were unchanged at 7.7 petajoules. 

Vector's technology division lifted earnings 13 percent to $72.9 million as it deployed more smart meters across New Zealand and Australia. However, its E-Co Products unit, better known as HRV, fell short of expectations and Vector has closed the retrofit windows business, launched a new residential solar offering, and installed a new chief executive, Colin Daly. 

The company welcomed last week's release of the Electricity Pricing Review Panel options paper, calling it "largely encouraging". It favours options that reflect new technology, provide greater resilience and customer choice, and increased transparency to deal with practices that may limit competition and unfairly penalise some consumers. 

"We also hope to see an even greater focus on options that improve energy efficiency, and, most importantly, address problems experienced in the wholesale market," Vector said. 

The company said it had joined an 'Undesirable Trading Situation' submission by independent retailers asking the Electricity Authority to look closely at the wholesale market after last year's volatility "appeared to be significantly out of kilter with market conditions".

Vector said it joined the submission because it doesn't want to see new retailers being squeezed out of the market, which it said would be bad for competition. 

The company's shares last traded at $3.54, and have gained 8.9 percent over the past 12 months. 


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