I must advise you that this conference call is being recorded today. I would now like to hand you over to Vector's Chair, Doug McKay, who will take you through the call. Please go ahead, Doug.
Hello, everyone, and welcome to this presentation. I'm Doug McKay, Vector's Chair. Today, we're going through Vector's results briefing for the half year ended 31 December 2023. Joining me on the call is Group Chief Executive, Simon Mackenzie, and Chief Financial Officer, Jason Hollingworth. We'll start the presentation with comments from Simon on overall group performance, then Jason will go into more detail. Simon will then talk about the current and future market outlook, then I will come back to talk about the dividend.
After that, we'll be happy to take your questions. I'll now hand over to Simon to start the presentation.
Thanks, Doug, and hello, everyone. Our goal has been to present these results in a way that makes it easy for year-on-year comparison, specifically noting the significant transaction at the end of the last financial year involving Blue Current, which was formerly Vector Metering. For the six- months to 31 December 2023, Vector has delivered a solid half year result, with adjusted EBITDA of NZD 185 million, growing by 7% over the same period in 2023. As a reminder, adjusted EBITDA excludes customer contributions, which is how we fund the majority of the customer-initiated growth costs on the network.
Underlying net profit after tax was up 29% on the prior period. However, the group reported net profit after tax was NZD 22 million from continuing operations, as it includes a NZD 60 million impairment of our gas distribution business. This impairment was driven by the Commerce Commission's regulatory decision to lower future returns to owners of gas distribution networks and interest rate changes. We note that Claris, another, transmission and gas distribution network operator, is appealing the Commerce Commission's decision on the gas WACC.
Total capital expenditure was NZD 238 million, an increase of 6% on the prior period. This continues the trend of year-on-year increases in capital expenditure. I'll now hand over to Jason to go over the detail behind these high-level numbers.
Thank you, Simon. I'm on slide seven. This slide shows the segmental contributions towards the top line adjusted EBITDA figure. Adjusted EBITDA from regulated networks was up NZD 4 million, gas trading up NZD 6 million, and corporate and other, up NZD 1 million on the prior period. Group net profit after tax from continuing operations was NZD 22 million. Simon has already spoken about the impairment, but another significant impact is net interest costs, which is NZD 43 million down on the prior period due to the sale of metering and the resulting impact on Vector's debt.
The NZD -19 million other bar is due to our share of Blue Current's losses for the period, and also the year-on-year tax difference, with tax being higher by NZD 11 million this year, noting that the impairment is not subject to tax. Slide 9, which is a recap of the metering transaction. We thought it'd be useful here to briefly recap how the metering transaction was structured and how we now report as a 50% owner. Last year, at 30 June 2023, we completed the sale of 50% of a 50% interest in Vector Metering to QIC. Vector Metering is now known as Blue Current.
The sale resulted in proceeds of NZD 1.75 billion and was used to reduce debt, with Vector's gearing decreasing from 59% to 36%. Our interest in Bluecurrent is accounted for as an investment in an associate, with our 50% share of their net earnings reported below Adjusted EBITDA. Bluecurrent has arranged debt facilities to fund the future rollout of meters. The shareholders have agreed to distribute a minimum of 85% of free operating cashflow.
For FY 2024, we expect to receive a cash distribution of between NZD 40 million-NZD 50 million from our 50% investment in Bluecurrent. This will be reported in our cash flow statement, not in our profit and loss. The business's operating performance is currently ahead of expectations, and the total meters deployed is 2.48 million at 31 December. Slide 10, which looks at gross CapEx. Total capital expenditure in the first six months was NZD 238 million, up 6% on the prior period. Capital contributions were down 4% to NZD 93 million, largely attributable to lower residential subdivisions and relocation work.
Lower residential subdivision activity could be expected to flow through to lower future connections. The year-on-year increase is driven by an additional NZD 31 million of replacement CapEx on the network. The next slide looks at the group debt. Debt and gearing has fallen since the sale of the 50% interest in Blue Current. Remaining proceeds from the transaction are currently on term deposit and will be used to repay the wholesale bonds due later this financial year.... Looking at the segment performance from our regulated networks.
Electricity revenue is up NZD 15 million due to an increase in net connections, combined with higher volumes and price adjustments. In the year to 31 December 2023, total electricity connection numbers grew by 2.2%, with new electricity connections for the six months up 12.5% on the comparative period in the prior year. Auckland's growth has continued, and we've seen 8,857 new electricity connections in the six months to 31 December, a record number for a six-month period.
Slide 14 is looking at the segment performance of gas trading. Adjusted EBITDA in the gas trading segment was NZD 13 million. LPG volumes for the six months are up 8.3% compared to the December 2022 period, due to higher bulk sales. Bottle swap has seen a 2.3% increase in the number of 9 kg bottles swapped in the six months to 31 December, compared to the same period in the prior year. In liquid gas, LPG tolling volumes are down 3.1% on December 2022 comparative period due to lower customer demand.
We are also now classifying our natural gas trading business as a discontinued operation, as we've entered into a conditional agreement to sell the remaining assets of this business. The volume of gas traded has been reducing over recent years as legacy contracts have come to an end. We've said for a number of years, we are winding down this business as we've consumed all our historic legacy gas. We expect the sale to complete on 1 July 2024 for a sale price of NZD 9.7 million. Now I'll hand back to Simon.
Thanks, Jason. Before I get to our guidance for the full year results, I want to comment briefly on the overall market. We know there is a significant need to invest more over the coming years to help the national transition to electrification, decarbonization, and climate resilience, and this applies obviously to Auckland. Later this year, the Commerce Commission will decide on the allowable revenue for our regulated electricity business to take effect from 1 April 2025, which will then be locked in for the next five years.
This is known as Default Price Path 4 or DPP 4. Vector's focus is on the interest of our customers, and our aim is to invest in the smartest and the most efficient way possible to enable the energy transition in a way that's more affordable for customers, as well as being commercially viable. While significant investment is needed now, our strategy uses digital international partnerships, such as with Amazon Web Services and innovation, to get more out of our electricity network rather than only building traditional infrastructure.
We will keep advocating for regulatory and policy changes, which, alongside our strategy, have the potential to avoid around NZD 3 billion of extra cost to Auckland consumers by 2025, as we've set out in our TCFD report last year. That's NZD 3 billion worth of extra expenditure, which would translate through into price to customers. Our future revenue and the debt we can raise determines how much we can invest in the network. The Commerce Commission's decision is therefore critical for our customers, shareholders, and for the future of our electricity network.
Globally, there's recognition of the need to make these decisions with pace and urgency. The opportunity for the commission is to create the right environment for Vector and other lines businesses to invest enough in energy infrastructure to ensure we are not left playing catch up years down the track, when resilience, electrification, and decarbonization are even more critical, and when the cost burden on consumers could be prohibitive.
The special context for the commission's decision this year is the interest rate environment and how much it's changed since the current revenue allowances were last set in 2019. Interest rates at that time were significantly lower, and those low rates were reflected in the revenue we've been receiving in the current DPP.
Since then, interest rates have increased significantly, and this is recognized in the Commerce Commission's input methodology, which is used to set the new revenues limits for EDBs in the next, defined price path, but obviously alongside capital and OpEx allowances. I'll talk now about guidance for the full year. We're now tracking towards 16,000 new electricity connections for the year. As you've seen and heard, connections and infrastructure activity remain elevated, necessitating significant capital expenditure.
We provided adjusted EBITDA guidance of NZD 350 million-NZD 365 million in August, and we are currently tracking towards the high end of this range. The Commerce Commission finalized their input methodologies review in December 2023. It is currently consulting on the next default price path, DPP4, and how this transition will occur. DPP4 covers the period from 1 April 2025 to 31 March 2030. The key impact will be the increase in weighted average cost of capital as a result of the change in interest rates going from 1.12% in the last reset, when rates were at historic lows, to 4.6% now.
This determination will have significant impacts on the timing of Vector's revenue, subsequent investment levels, and investor returns. Just like to briefly thank all the team and our crews out in the field for all the work they've done over the six months. And now I'd like to hand back to Doug.
Thank you, Simon. Could I just go back where I think you might have said 2025 when you meant 2050?
Oh, sorry. Yeah.
The capital avoidance of around NZD 3 billion of extra cost to customers by 2050, as we've set out in our TCFD report. So-
Thanks, Doug. Yep.
Thank you. The board has determined an interim dividend of NZD 0.0925 per share with no imputation. The increase in dividend is to mitigate the impact of the loss of imputation credits. As we mentioned in our market release, key regulatory decisions impacting our future cash flow have still yet to be determined, and so the board has been unable to consider an updated dividend policy. These key regulatory decisions are the same ones Simon was talking about, the revenue allowance under the DPP4 reset.
We expect to have a better understanding of this by August, although the Commission's final DPP4 reset decision will not be released until November. There are a number of milestones along the way to a final decision, and Vector will be engaging fully with the Commission throughout this process. That brings us to the end of our presentation, and just before we move to questions, I'd like to thank Simon and his executive team, and everyone else at Vector, and our field service providers on behalf of the board for their hard work over the period to deliver for Vector customers and shareholders.
Simon, Jason, and I are now happy to take any questions.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. And if you are on a speakerphone, please pick up your handset to ask your question. First question today comes from Andrew Harvey-Green at Forsyth Barr. Please go ahead.
Hi, good morning, team. A couple of questions from me. First of all, just interested in terms of the slight change in the dividend approach, going fully unimputed, and as opposed to partially imputed. And then second part of that question, I guess, is, are you able to give us an indication of when you think imputation credits might be able to come back onto dividends?
Yeah. So, the first question, Andrew, we have Vector has accumulated tax assets on its balance sheet that it intends to utilize before it starts imputing dividends again. So that was the reason for the change. In terms of how quickly it'll take us to use those tax assets, really will depend on the reset decision and the commission the amount of revenue the commission will give us, and obviously, the earnings that flow out of that. So it's hard to have a view on that until we get our final DPP4 reset. But, yeah, maybe 2028 sort of timeframe, but we'll have to wait until the reset.
Yeah. Okay. And I guess the second question, I, I guess my numbers sort of suggest, given the CapEx profile ahead, you might be challenged to get back to fully imputed dividends, just given the depreciation tax shield, is it? That's a reasonable assumption to work with?
Look, our internal forecast, again, depending on where the reset gets, does have us, yeah, returning to tax paying, you know, later in 2028 type of timeframe. So, yeah, that's not what we're currently forecasting.
Sure. But sufficient to fully impute the dividend again at that point, or more likely to go back to some higher level?
The policy will change to distribute the tax we're paying. My recollection is we end up becoming full taxpayers eventually.
Okay. Okay. Second question is just around, I guess, the capital contribution number, and I noticed the comments around fewer subdivisions. But, I guess that was a little bit of a surprise for me, given you know the strong connection growth. Do you have sort of much visibility for what we're looking at for the second half of the year around capital contributions?
It has been slower in the first six months in terms of just the amount of subdivisions and relocation work that's been going on. Sort of, it's a bit outside our control, and the connections you see are sort of a lag from the work that was happening probably 18 months ago to 2 years ago. So we haven't seen that pick up yet, but again, it's sort of outside of our control.
I think. Sorry, Andrew, I think the point Jason's making is that the capital contribution, we get that as the project starts, but the connection-
Yeah
Typically happens, you know, a year to 18 months later. So that's where that timing difference arises.
There's a couple of large point loads in Auckland that have been delayed that, you know, are scheduled to come, but they'll probably come in early in the next financial year, I believe. So it's just—it's again, it's just subject to some of these loads connecting and starting the work associated with those connections.
Yeah. Yeah. Okay. Next question I just had was on the natural gas business that's been sold. I mean, I guess relative to the EBITDA for the half, you know, the price is, I guess, relatively low. Is that because I assume that there is a fairly significant drop-off in volumes you're expected to be in that business? Well, 'cause I guess the remaining size of the book at the end of this financial year, is that the best way to think about it-
That's right.
Or is there something else?
Yeah, Andrew, no, the book's been winding down actually over the last three or four years. So as we've been trading out of that book and haven't been mainly because we haven't had access to attractive gas, renewing those contracts. So it just reflects a wind down of the book, and the last assets are being sold at the end of this financial year. It's been a profitable business for Vector-
Are you-
Yeah, over time.
Yeah. Yeah, yeah, indeed. Yep. Yeah, I'd hate to think what it was go back about 10 years ago. It was, yeah, it was quite, quite attractive. Are you able to say who the buyer is?
No, I think we need consent to do that.
Okay. And last question from me was just on the net interest. I just noticed there's quite a big difference, I guess, between the cash interest and the cash flow statement, and the interest, which is much lower than the P&L. Is there some sort of big non-cash item that's gone through this half, and is that sort of expected to continue?
There are some accrued interest associated with Blue current. It could be that, just off the top of my head, that's been paid post 31 December, so could be that accrual. I'll get back to you on that.
Yeah, that's okay.
Sorry, Andrew.
No, that was all from me.
Yes.
Okay.
Okay.
Thank you. Your next question comes from Phil Campbell at UBS. Please go ahead.
Yeah, morning, everyone. Just a few questions from me, Jason. Just on the metering numbers, they're a bit higher than what I was going for. It looks like the variance is in New Zealand. Was it i s that like an acceleration of the Genesis meters, or is there something else going on there?
Not that I'm aware of. I know we are deploying some smart meters for another party in New Zealand. That would be part of it. So it's part of a smart gas meter rollout. That could be part of it.
Yeah, there's nothing, there's nothing, you know, new contractual-wise in New Zealand. It's just basically probably just the timing, that there's some, you know, I guess, as we note there, that it's performing well and performing at, you know, at expectations and slightly better, both here and in Australia.
Right. In terms of the, obviously, the dividend that's coming back, your portion of it, the NZD 40-NZD 50 million, can you is that accessible for tax purposes? And kind of what would be the ongoing. Are we assuming that number is gonna grow, or is it kind of, is there some one-offs which make the number a bit bigger this year? And what's the kind of guidance on that?
So the structure is complex. There's New Zealand and Australian companies, which both have different tax arrangements. We receive income in New Zealand, but have tax assets in New Zealand, so that's helpful. We expect with the forecast to continue deploying meters, you know, that gets delivered over time, then those distributions should increase. The key thing that's driving the distributions is that the company has a debt facility to fund the rollout of its meters, and that's enabling it to distribute its operating cash flow. So as the numbers of meters that are deployed grows, the distributions to shareholders should track that.
Great. And then I noticed that IntelliHub had purchased, I think, Downer. Is the metering business, is there other metering businesses out there that Blue Current could look at acquiring as well? Or is it gonna be pretty much organic?
Yeah, well, I mean, I guess with regards to metering businesses [crosstalk] there's been consolidation. We've seen that more and more over time. I think the bigger focus is more around the available contracts, primarily in Australia. And, you know, we're really pleased with how that's tracking in Australia now. There's obviously from time to time, some people may have a different view around whether they want to hold metering assets or not, but as it stands at the moment, I think the primary focus is on contracting with customers, and, you know, if an entity did decide to look at divesting its assets, then obviously with our partners, QIC, and our balance sheet capacity, we've got every ability to enter into that process as well.
Is there any update on the Australian, you know, the accelerating the smart meter rollout? I think they've agreed it in principle, and they've got to look at changing some rules. Is there any update on how that process is going?
Yeah, well, then, that's basically now AEAR's basically identified they want the rollout of smart meters by 2030, so that's what everyone's working to in Australia now.
Yeah. Okay, awesome. And then maybe just the last one from me, just in terms of the ComCom decision on the financeability. Like, what- do you know what the consensus is? Because obviously you've got, I think it's a revenue cap of 10% in any one year. Like, is there kind of an expectation amongst yourselves and the other lines companies that, you know, there's a possibility that ComC om may allow you to increase by more than 10% in a particular year?
I'm not too sure whether you saw the financeability paper that just came out. We were obviously looking forward to that with keen interest, but you may see in the paper that it doesn't actually go into any conversations about potential price caps or any potential kind of adjustments. We've met with the Commerce Commission yesterday, and it'd be fair to say that in that conversation, that's still a process that they're considering, and we have to put in our asset management plan for 31 March. And then in May, we're expecting draft decisions on what they're looking at for that price path change and how they will look at whether there's price caps or PNOT adjustments.
It would be just absolute speculation at the moment where that sits, but we'd also note that one of the positive adjustments that were made by the commission in the input methodology review was that they identified that any price cap that was imposed on us would not be inclusive of Transpower, whereas that was historically the case, where Transpower charges were embedded into our charges, and we were capped at that. So if Transpower had a large increase, then we were squeezed out the bottom end. So we saw that as a positive step forward by the commission. But as I say, there's nothing in any of the material around what levels will actually arise, and we wait for May.
Which will also be important because, you know, obviously there's a lot of expenditure required, and the commission will take that into account in their draft decisions, looking at asset management plans and what the, I guess, the robustnesses of those across the country. And they obviously all fall into the final kind of draft decisions before they make final decisions later in the year.
Okay, great. Awesome. Thank you.
Thank you. Once again, if you do wish to ask a question, please, register by pressing star then one on your phone. Your next question comes from Stephen Hudson at Macquarie Securities. Please go ahead.
Good morning, Simon, Jason, Doug. Just three from me, if I could. Just on that last point, Simon, on your expenditure, I think you've or the EDBs have been forced to share some interim asset management plans with the Commerce Commission prior to Christmas. Can you give us a bit of a feel for what you've shared with them in terms of, you know, particularly replacement CapEx, building and resilience expenditure, and what changes we might see in the final asset management plan in April or whenever it comes out?
Yeah. Hi, Stephen. With regards to our approach to the response to what was known as the 53 ZD notice, we're obviously updating that now because we need to do the asset management plan for March. But basically, I think the simplest way to respond there is, there has been some increase in, you know, replacement and network expenditure. Obviously recognizing that most of the growth forecasts in that is funded through customers, so net CapEx. All in all, there's not a material adjustment based on that, based on the 53 ZD. There is some additional things like replacement of transformers, but we're not talking NZD hundreds of millions.
The issue is, what the approach we've taken is with the topics that is actually driving some of the real big, for want of a better word, potential increases in capital expenditure and asset management plans across EDBs, is what is the assumptions being made around resilience or what are the assumptions being made around EV growth? The approach we've taken is to say, is that is still a highly uncertain topic. We've got with resilience, kind of a few dimensions to that. One is that, you know, how, how do you work out what is the appropriate capital expenditure for a 1 in 250-year event or a 1 in 100-year event?
We've obviously identified that, but in identifying what additional expenditure we could do to improve resilience for those extreme outliers, what we have also identified is that you could undertake, for example, undergrounding a whole lot of assets, but these assets typically lie in areas where there's a lot of overhead network and also vegetation, and 65% of the impacts through Cyclone Gabrielle came from vegetation. So we're awaiting decisions from MBIE, and, you know, this has been hanging around the hoop far too long, that that needs to basically say, what is the decisions made on vegetation management? Because it's a materially lower cost to improve resilience than actually undergrounding assets, for example.
As a result of that, what the approach we've taken with the commission is, and we've foreshadowed this, and we've discussed it with them, is saying: We're setting that level of resilience aside. We're identifying what the type of expenditure could be, what the different trade-offs would be, what would be the decision points that would enable those to go ahead, i.e., a decision around vegetation management or. Well, that's, that's primarily it. And we would seek a reopener for that when there was more certainty, because we're not minded to load up the asset management plan now with CapEx and then have that flow through into price increases to customers with a high degree of uncertainty. And pretty much the same dynamic with EVs.
So with EVs, we're identifying what we think is a reasonable forecast, but it isn't like a high growth forecast, and so we're also ring-fencing that out and saying that we would seek a reopener. Doug may want to comment, but we had a very constructive conversation with the commission about that approach, and I think to be blunt, they appreciated that we were trying to identify those elements but not take a view of loading them into the asset base, causing problems with regards to price impact on customers?
No, that's exactly right. Hi, Stephen. So, yeah, we're very mindful that these impacts on customer pricing could be very significant, yet we may not be spending that money anytime soon. So we're going to hold off. And the Commission were very positive around that course of action, but also flagged to us what you might foreshadow that expenditure could be if you wanted to bring it forward. And then, if we go for a Reopener, they will have already had some forewarning and foreknowledge of where we are coming from, and we'd back it up with more detail. What they don't want is us just turning up out of the blue with a wish list of things we might want to reopen on.
The problem with reopeners, as I understand it, I haven't been through the process of one yet, but, there's no timeframe attached to them. So we're looking for more certainty about from the time we submit, when would we expect to get an answer? So the process of reopeners, we've still got to talk through with them and get more confidence in. But that's our approach at the moment.
That's useful. Thanks, Doug and Simon. Just a couple of quick, quick ones, more from me. I think your risk-free rate gets locked across June to August. Will you still continue to unhedge [crosstalk] you won't hedge your debt book at that point, like Transpower do? I suppose that's one question to Jason. And then just another quick, quick one. The move by the Commerce Commission on the percentile weight from P67 to P65, that some people might take as neither here nor there, but others may sort of think it's a slippery slope, and it's the beginning of the end, you know, endpoint of P50. So just interested in your view there.
I'll deal with the hedging one, Stephen. So look, that's something that we are considering. It was a different, quite a different balance sheet structure when we owned a large metering business. And when we've become more heavily focused on regulated assets, then we will need to consider just how we manage that risk profile. So we haven't made that decision yet, but it's something that we're gonna review.
I think it'd be fair to say, though, when you look at the debt book, there's still quite a lot of debt that'd be outstanding. And, you know, I guess that's - I mean, it's a bit of a philosophical kind of conversation, 'cause I think. Well, certainly, you know, we, we don't see most of the EDBs in the country, and I think, even suspect Transpower, they don't fully hedge all their position on those dates. And, you know, our kind of view would be that you couldn't go to the market to fully hedge it, 'cause you're just gonna create a massive kind of rush of capital that wants to be kind of hedged and borrowed from.
But, be that as it may, I think the other point you raised was around the percentiles, the 67th going to 50th, and so forth. Yeah, look, I think, you know, the 67th going to 65th is a minor adjustment, but I think it'd be fair to say that, you know, we have long maintained, and you know, the theory should be that there should be that 65th, 67th. In fact, most of our experts were saying it should be higher because of the investment requirements. That's something that obviously can't be adjusted now until the input methodology is seven years on from now. But, you know, obviously, with the nature of the long-term assets, that's something that we'll always have to be mindful about: would they potentially look to move that down?
As it stands at the moment, that's locked in for seven years.
That's useful. Thanks, [crosstalk]
Thank you. Your next question comes from Grant Lowe at Jarden. Please go ahead.
Oh, hi, team. Can you hear me okay?
Yep.
Great. Yeah, I didn't, well, while sifting through results today, I haven't read anything about what's happening with the corporate segment. I know that there was some softness in some of those business units in past or recent results. Can you just touch on how those businesses are performing in the corporate segment?
They're performing flat, I think would be a summary. It's been, yeah, I mean, it's. Yeah, we're talking about HRV, we're talking about the PowerSmart business that we've actually ceased operating at the end of the year. So again, that was marginal. Yeah, it's a pretty flat result for the six months in those areas.
Okay. Obviously tracking fairly well towards the top end of guidance. Those aren't a risk for the second half.
Biggest risk there is actually weather, in terms of some of the things we can't control. So, we learned about that with Gabrielle last year, and it had an impact on our full-year results. So, we're just mindful that weather does have an impact. We are also exposed on just input costs for some of the LPG that we purchase. Again, that's another exposure we have. So, another two things that can move and impact our results in the second half.
Okay. That's great. That's all for me. Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Doug McKay for closing remarks.
Thank you. If there are no further questions, we'll end the teleconference and the webcast. If analysts and investors have any further questions, please feel free to contact Jason. For media, please contact Matt Britton, or call our usual media phone number. Thank you, everyone, for joining us.