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Windfall saves Vector trustees' bacon

By Shoeshine

Friday 17th October 2003

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The Auckland Energy Consumer Trust paid out this month to eligible power customers the dividend it received from giant lines company Vector.

Despite the costs of last year's acquisition of UnitedNetworks (UNL) the trust was able to credit $155 each to householder's bill, up from $145 in 2002. As the trustees are up for re-election ­ voting forms went out this week ­ this was a jolly happy position to be in.

Only the curmudgeonly will complain that, as this year's payment covers a 15-month period, the rebate was effectively cut by 14%. To match last year's it would have to have been $181.

As it was, the trust struggled even to find the cash for $155.

Vector's dividend to the trust this (15-month) year was $32.2 million, down from $42.8 million in the previous 12-month period and $14.2 million less than was needed for this year's rebates.

Fortunately for the trust, it had $12 million set aside while the High Court decided whether a certain category of former Mercury Energy customers was entitled to it. The court decided in the trust's favour. Interest earned of $1.75 million and a quick rummage through the financial cupboard made up the shortfall.

The question now is whether Vector and the trust will be able to keep the great unwashed happy next year.

Despite their outward perkiness, the trustees and Vector's board must be feeling the pressure. Their agreement is that Vector will "endeavour" to pay out 85% of net profit as a dividend. The latest payout was 65%.

Vector made a $49.7 million profit for the 15 months to June.

Taking out the months of April, May, and June last year gives two 12-month periods to compare ­ the year to June 2003 and the year to March 2002. On that basis, Vector's latest profit was $33.9 million, down a whopping 45% on the March 2002 year.

Even comparing the full 15-month year to the March 2002 year the profit is down 19%. And anyway you cut it, things look a great deal worse now than they did in 2001, when Vector made $72.3 million.

So is Vector on an alarming downward slide? Not necessarily, but the situation is worth watching.

One reason the profit was lower this year was simply that revenues were hit by the power crisis in May and June this year, when consumers were urged to cut 10% from their usage.

The others are all the results of last year's $1.5 billion takeover of UNL.

In the annual report, Vector chairman Michael Stiassny cites "significant" financing and one-off integration costs, "much of which should be viewed as an investment in positioning the company to deliver future value."

Chief executive Mark Franklin told Shoeshine less than 5% of the rise in total expenses between 2002 and 2003 was attributable to one-offs.

Operating expenses rose too. For several months Vector/UNL ran with two sets of overheads while management worked on merging the two head offices. Those costs will also be absent next year.

But the biggest risers by far ­ 95% of additional expense, according to Franklin ­ was costs that won't drop out this year: the interest bill, depreciation and amortisation.

With the UNL takeover, Vector tripled (not doubled, as trust chairwoman Karen Sherry told consumers this month) in asset size, to $3.08 billion.

As a result it has $1.8 billion of long-term debt. The interest bill rose to $105 million from $11 million in 2002.

The debt-to-equity ratio doesn't look onerous. It's worth noting a $194 million asset revaluation last year didn't hurt on that front but it was probably aimed more at keeping the Commerce Commission at bay.

The cash situation is the one to watch.

Adding UNL's cash income streams, operating cash inflows for the 15 months were $535 million, up from $239 million in the 12 months to June 2002.

But payments to suppliers and employees rose by an even greater factor. Adding the effect of the vastly increased interest bill, net operating cash flow of $113 million wasn't much higher than 2002's $105 million when the company was a third of its present size.

If you annualise the 2003 year, the operating cash flow actually fell by about 17%.

This year, as a result of not floating, Vector will have an additional $4.6 million pre-tax to pay in bonds interest but that's relatively small bikkies.

As a result of taking on UNL's networks, the depreciation bill rose to $103.3 million from $31.7 million. Amortising UNL goodwill took $28.7 million. Both of these are, of course, non-cash but affect Vector's bottom line and therefore its dividend-paying ability.

Credit rating agency Standard and Poor's has a stable BBB plus rating on Vector. Analyst Mark Legge told Shoeshine Vector had a very strong credit profile, low operational risk and "very good operational numbers in recent times."

One threat to the whole industry is the convoluted progress toward a regulatory regime.

Vector at least seems likely to end up in the least-at-risk group in the Commerce Commission's model.

That's just as well, as it would be a bizarre situation if price controls were imposed on it.

One group of consumers ­ those the trust represents ­ are in the position of being both customers subject to Vector's charges and shareholders via the trust, benefiting through increased dividends in any higher prices the company might be able to charge.

People in the other group aren't "shareholders" but are protected from monopoly price-gouging because they can't be charged a different price from the owners.

The expense of responding to the commission and participating in the regulatory exercise is just a waste of consumer/shareholders' money, as so much regulatory activity is.

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