Vector Limited · NZX:VCT
Vector — FY2006 Earnings Presentation
40 slides from Vector's earnings presentation, Aug 14, 2006
Slide 1: 2006 annual result
2006 annual result Michael Stiassny, Chairman Mark Franklin, Chief Executive Officer Peter Fredricson, Chief Financial Officer Simon Mackenzie, Group General Manager Strategy, Regulation & Performance 14 August 2006
Slide 2: Health chart
Health chart Year ended 30 June Earnings ($m) Extreme SAIDI Normal 1200 1,132.9 118.1 120 1000 870.9 SAIDI Minutes 2005 100 82.5 800 80 85.5 2006 578.6 600 60 466.1 39.9 40 400 22.9 20 143.7 200 104.3 0 0 RY05 Q1 05 RY06 Q1 06 Revenue EBI TDA NPATA RY = regulatory year ended 31 March Q1 = 3 months e
Slide 3: Financial Results
Financial Results Peter Fredricson Chief Financial Officer
Slide 4: Results summary
Results summary Year ended 30 June $m 2006 2005 % 2006 May ’06 Change Prospectus projection EBITDA 578.6 466.1 +24.1 578.8 In line with prospectus EBIT 362.7 307.2 +18.1 358.3 n/a NPATA 143.7 104.3 +37.8 134.8 142 - 146 NPAT 45.1 40.8 +10.5 36.5 43 - 47
Slide 5: Financial results
Financial results Year ended 30 June 2005 2006 $ millions 1200 1,132.9 1000 870.9 800 578.6 600 554.3 466.1 404.8 400 362.7 307.2 200 143.7 104.3 40.8 45.1 0 Revenue Operating EBI TDA EBI T NPAT NPATA Expenditure
Slide 6: Financial highlights
Financial highlights Year ended 30 June 2006 Actual Prospectus % 60 51.1 50.3 50 40 32.0 31.1 30 20 12.7 11.7 10 4.0 3.2 0 EBI TDA/ Operating EBI T/ Operating NPATA/ Operating NPAT/ Operating revenue Revenue Revenue revenue
Slide 7: Dividends
Dividends 14 12.0 12 11.5 10 8 7.1 CPS 6 4 2 0 FY 2006 FY 2005 FY 2006 Prospectus Actual All dividends shown are fully imputed FY 2005 based on 751 million shares FY 2006 based on 1 billion shares
Slide 8: Divisional results
Divisional results Year ended 30 June 2006 Electricity Gas Technology Corporate Total /Other Operating Revenue 580.1 486.1 60.3 6.4 1,132.9 Operating Expenditure (215.6) (279.0) (18.4) (41.3) (554.3) EBITDA 364.5 207.1 41.9 (34.9) 578.6 % Revenue 62.8 42.6 69.5 n/a 51.1 EBIT 269.8 121.7 12.9 (41.7)
Slide 9: Capital expenditure ($225.2million)
Capital expenditure ($225.2million) Year ended 30 June 2006 • Electricity - $146.3 million, comprising $m Growth Maintenance/ Total Improvement Auckland 36.9 37.4 74.3 Northern 23.4 23.1 46.5 Wellington 8.5 17.0 25.5 Total 68.8 77.5 146.3 • Gas – $44.2 million • ($27.7m growth; $16.5m maintenance/im
Slide 10: Capital expenditure ($225.2million)
Capital expenditure ($225.2milion) Year ended 30 June 2006 Capital expenditure – by business Other Electricity Technology 3% 65% 12% Gas Capital expenditure – by type 20% Other Technology 3% 12% Growth 43% Maintenance/ Improvement 42%
Slide 11: Capital structure
Capital structure Asset Backing and Capital Structure 2004 2005 Prospectus (1) 2006 Net Debt $m 1,783.9 3,147.6(2) 3,067.8 3,081.1 Equity/Total assets % 30.8 21.6 28.0 33.7 Debt*/Debt*+Equity % 65.4 75.1 67.9 61.5 Interest (net) cover X times 1.6 1.6 1.6 1.6 *net debt (1) Prospectus as at 30 June 20
Slide 12: Looking ahead
Looking ahead Vector to adopt New Zealand International Financial Reporting Standards (NZ IFRS) from 1 July 2007 Good access to debt markets Treasury policies – transparent Capital bonds first election date 15 December 2006 $200 million MTNs due for repayment 7 April 2007
Slide 13: Commerce Commission Intention to Declare Price Control
Commerce Commission Intention to Declare Price Control
Slide 14: Regulatory - background
Regulatory - background 2001 - 04 CC process to develop thresholds regulatory regime for lines companies under Part 4A of the Commerce Act 1986 Vector fully engaged in process Price and Quality thresholds regime put in place Price regime: CPI – X (not a rate of return) Tax methodology: NZG
Slide 15: Regulatory – background
Regulatory – background 2004 disclosure reveals minor technical breaches of thresholds set by CC: price breach of $76,000 on $477m of revenue (0.016%) due to difference in budgeted vs actual Transpower transmission costs quality threshold breach due to severe storms CC accepts that price pat
Slide 16: Rebalancing - background
Rebalancing - background Vector acquired UnitedNetworks inheriting different pricing structures and ROIs CC introduced interim thresholds for all lines businesses in 2003/04 pending finalisation of current thresholds Vector identified under investment by previous owner posed asset and public s
Slide 17: Rebalancing - background
Rebalancing - background Lines companies were advised via energy conference on July 17 that rebalancing was necessary and should be completed by 2009 (ie: when CC resets price thresholds) There is no CC methodology or regime on rebalancing There has been no formal guidance on the process
Slide 18: Rebalancing – action taken
Rebalancing – action taken Vector moved quickly to address rebalancing once thresholds regime implemented Vector’s rebalancing programme aimed at: level playing field - consistent/equalised return structure across Vector’s seven customer categories in three regional networks fewer tariff lev
Slide 19: Rebalancing – CC involvement
Rebalancing – CC involvement CC requested an update on rebalancing progress in October 2005 In June 2006 CC suggested administrative settlement formalising rest of rebalancing to clear 2003/04 breaches Vector put forward a draft offer in July 2006
Slide 20: Rebalancing – CC involvement
Rebalancing – CC involvement Draft offer by Vector not accepted In response the CC raised concerns about overall returns from electricity networks for first time in July 2006 CC initiates post-breach inquiry in July 2006 (Vector informs market) Vector provides extensive information to CC und
Slide 21: Government's policy statement released
Government’s policy statement released One week ago today Focus on infrastructure investment and security of supply Statement requires: regulatory transparency, consistency realistic commercial returns to encourage investment no cross regulation in other investments CC must “have regar
Slide 22: Intention to declare control
Intention to declare control CC advises of intention to declare control – Wednesday 9 August Implication is Vector’s pricing strategy is to cross subsidise customer groups Fact is Vector strategy is to voluntarily correct historical customer anomalies Note: CC tax methodology to assess ROI dif
Slide 23: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m
Slide 24: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return
Slide 25: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return Average $1m 50% $1m 5%
Slide 26: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return Average $1m 50% $1m 5% Distance $200,000 10% $1.8m 10%
Slide 27: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return Average $1m 50% $1m 5% Distance $200,000 10% $1.8m 10% Age (75% $50,000 10% $450,000 10% depreciated)
Slide 28: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return Average $1m 50% $1m 5% Distance $200,000 10% $1.8m 10% Age (75% $50,000 10% $450,000 10% depreciated) Asset Type $50,000 10% $450,000 10% (
Slide 29: Rebalancing – illustration of issues
Rebalancing – illustration of issues Cust Cust A B GXP 1km 10km Underground cable $2m/km, return 10%, asset value $20m Methodology A B Price Return Price Return Average $1m 50% $1m 5% Distance $200,000 10% $1.8m 10% Age (75% $50,000 10% $450,000 10% depreciated) Asset Type $50,000 10% $450,000 10% (
Slide 30: The claims and the facts
The claims and the facts Claim Vector is abusing its monopoly power by overcharging/undercharging customers. Fact Untrue. Vector is aware of the need to rebalance and commenced a voluntary four-year programme two years ago to address imbalances. The CC is aware of rebalancing progress to date and ha
Slide 31: The claims and the facts
The claims and the facts Claim Vector is not making sufficient progress to redress the imbalances Fact Untrue: We have made good progress. CC was fully aware of our plans and commitment to rebalance. Only last month the CC indicated that lines companies have until 2009 to correct price differentials
Slide 32: The claims and the facts
The claims and the facts Claim Vector is focussed on the short term interests of customers who are also AECT beneficiaries. Response Untrue. Vector’s pricing strategy is to have balanced returns across its customer tariff groups and geographic networks. Auckland residential users have already sustai
Slide 33: The claims and the facts
The claims and the facts Claim Vector is earning excess revenues. Vector will earn $13m- $75m in excess revenue per year over the next few years. Price reductions of 2%-11% per year are needed to bring returns to a “normal” level. Facts Untrue. Vector is operating within the CC thresholds and delibe
Slide 34: The claims and the facts
The claims and the facts This table replicates CC Appendix B , adds upper bounds returns $’000 2005 2006 2007 2008 2009 Est. return on ODV 8.37% 8.04% 8.25% 9.03% 9.12% Excess returns calculation - lower bound efficient at WACC * ODV 139,569 144,348 152,678 161,073 169,894 WACC 7.35% returns - effic
Slide 35: Vector's response to CC's move
Vector’s response to CC’s move CC has not held industry consultation on rebalancing despite calling for it to be done by 2009. Nor is there a methodology. Vector criticised by CC for rebalancing process, yet vacuum of CC guidance CC did not consult with Vector on effect of the Government polic
Slide 36: Vector's response
Vector’s response Inconsistent with previous CC decisions in similar cases: CC recognised 2004 price breach minor and beyond Vector’s control in 2004 cleared six other lines businesses for similar or greater breaches with no evidence of investigating pricing and return imbalances Indicates V
Slide 37: Where to now
Where to now Vector will provide submissions and follow process Vector will seek to continue administrative settlement discussions with CC Legal action under consideration – no firm decision made We have suspended plans to resurrect or accelerate investment projects
Slide 38: Other regulatory issues
Other regulatory issues Other significant regulatory developments: CC proposal for Final Authorisation for controls over Vector’s Auckland gas networks 8 July CC decision not to amend the Provisional Authorisation nominal price freeze will remain until the Final Authorisation submissions clo
Slide 39: Where we're headed – future strategy
Where we’re headed – future strategy Continue to manage core business beyond integration All large and new investments suspended depending on resolution of regulatory issue Existing capital expenditure plans on electricity and gas networks (and corresponding operations) being reviewed
Slide 40: Questions?
Vector \7 Questions?