Vector 1H profit falls 17% on regulatory impost, mark-to-market losses, borrowing costs

Vector, the Auckland gas and electricity distribution company, posted a 17 percent drop in first-half profit as a gain in sales was offset by regulated price reductions, mark-to-market losses on derivatives and increased borrowing costs.

Profit fell to $87.3 million in the six months ended Dec. 31, from $104.6 million a year earlier, the company said in a statement. Sales rose 4.4 percent to $687 million.

Vector kept its full-year guidance unchanged at $588 million, on an adjusted earnings before interest, tax, depreciation and amortisation basis, up 1.3 percent from 2014, even while affirming that the Commerce Commission's decision to cut the allowable rate of return on capital for regulated network monopolies would dent earnings and force the company to review its spending plans. The company also kept its first-half dividend unchanged at 7.5 cents,

"The decision will have significant implications for investment in our regulated assets especially when the returns are compared to those available to Vector in unregulated markets," said chief executive Simon Mackenzie. "We are therefore increasingly seeking to allocate capital into our unregulated activities and we are continuing to review how we fund network growth."

Unregulated Ebitda from gas wholesaling, metering and Vector Communications, rose almost 11 percent to $81 million in the first half, reflecting continued growth in the company's technology business, the benefit to gas wholesaling from higher Kapuni production, high LPG tolling volumes and favourable gas purchasing arrangements, Vector said.

Regulated Ebitda fell 4.2 percent to $257.9 million, with price reductions imposed by the commission eroding earnings by about $24 million, the company said. It also faced charges related to storm damage in July and an outage at Penrose.

Gas wholesaling posted the biggest gains across Vector's business units in the first half, lifting earnings by 17 percent to $29.3 million (Ebitda) on revenue growth of just 0.6 percent to $185.9 million. Its technology unit lifted earnings by 7.5 percent to $51.7 million as sales rose 14 percent to $76 million.

Electricity earnings fell 1.6 percent to $188 million as sales rose 7.5 percent to $350.8 million and gas transportation reported an 11 percent decline in earnings to $69.6 million as sales fell 8.9 percent to $96.1 million.

Interest costs rose to $90 million from $84.8 million a year earlier and fair value adjustments on financial instruments amounted to $4.9 million from $3.8 million, the company said.

In affirming its full-year guidance, the company said it is "finally seeing some growth in electricity and gas distribution volumes, after several periods of decline." Electricity and gas connections and volumes are rising in Auckland. Vector's metering business is "positioned to grow strongly" with a target of more than 1 million smart meters.

The company is looking at opportunities in Australia and "increasingly seeking to allocate capital into our unregulated activities" and reviewing how it funds network growth.

Vector shares last traded at $2.91 and have gained 25 percent in the past 12 months.