Vector freezes $430m after Commerce Commission threats

The country's biggest electricity and gas distributor Vector said today that it has frozen $430 million worth of expenditure after the Commerce Commission threatened it with price controls.

In the latest move between the company and the country's business regulator, Vector said in a statement: "What happened last week says to New Zealanders, regulatory creep is over, it's now a regulatory avalanche."

Vector said it was reviewing $230 million worth of expenditure on top of the frozen spending.

Among the capital expenditure on hold is a large gas pipeline project through the middle of Auckland that could supply a power station on the Kaipara Harbour.

Speaking at the Vector annual meeting, chairman Michael Stiassny said the Commerce Commission's move would send a strong message of caution to any infrastructure companies and investors.

"The fact is we are operating in an extraordinarily volatile, uncertain and frustrating regulatory environment and achieving these aims is increasingly challenging."

He added that it would be "irresponsible for us to proceed with investment in this uncertain regulatory environment."

Vector's lawyers are looking at all options.

The commission announced last week it might impose price controls because Vector had not delivered quickly enough on commitments to remove price disparities between some of its customers.

It claimed Vector's Auckland residential customers were getting a free ride at the expense of others, particularly those in Wellington, and has proposed average price cuts of between 2 per cent and 11 per cent over the next two years.

The latest moves come as Vector today reported a 10.5 per cent increase in annual profit on the back of cost-cutting and gains from acquisitions.

Vector, which last week was threatened by the Commerce Comission with price controls due to alleged excessive profits from business customers, said its June year net profit rose to $45.1 million.

The company, which listed last August after the second-largest initial public offering in six years, declared a final dividend of 6c per share.

It said in May it expected net profit of between $43m to $47m compared with the $36.5 million forecast in its float documents.

Analysts surveyed by Reuters had forecast a profit of around $43.5m.

Auckland Consumer Energy Trust, owned by Auckland City, sold a quarter of Vector last August, but retained the balance.

The company, which listed last August after the second-largest initial public offering in six years, declared a final dividend of 6c per share.

Total operating revenue rose to $1.13 billion from $871m. The pre-tax profit rose to $134.2m from $113.8m.

Earnings per share fell to 4.6c from 5.4c a year earlier.

Net earnings after tax and before amortisation (npata) of $143.7m, were $37.8 per cent higher than in 2005, 6.6 per cent above the prospectus projection of $134.8m, and within the upgraded forecast range of $142m to $146m.

Vector said the year-on-year earnings were not directly comparable due to the acquisition of gas distributor NGC last August.

Other previously reported factors influencing the results included a $5m benefit from Vector's earlier than expected move to full ownership of NGC on August 10, 2005, increased borrowing costs, and an additional $17.6m amortisation of goodwill arising from the completion of the NGC acquisition.

Cash flow generation rose 44.4 percent to $353.1m.

The full year dividend of 12cps was half a cent higher than the prospectus forecast and represented 84 percent of net profit after tax and amortisation.

Vector chairman Michael Stiassny described the result as "very satisfactory given the challenging trading conditions during the year".

"The effects of the unseasonably warm 2005 winter on energy usage, and consequently our electricity and gas revenues, were only partially offset by heavy demand during the cold snap in the last few weeks of the financial year," he said.

The company had experienced "pleasing levels of new customer connections".

Vector's asset value grew by approximately $867m to $5.72 billion as a result of its capital investment programme and a revaluation of the company's electricity and Auckland gas networks' assets.

Net debt stood at $3.01 billion, leaving the company with a 61.5 percent gearing ratio.

Chief executive Mark Franklin said the integration of NGC was largely complete and the company could concentrate on getting more value from its assets.

He said the commission decision last week had created deep uncertainty.

"A major challenge for our business is the incorporation of smart technology solutions across our networks and unfortunately we will not proceed until we have clarity on the regulatory regime," he said.

Vector shares last Monday shot up 10 percent after the Government announced new electricity industry initiatives that the market interpreted as putting harsher regulation off the agenda. Less than 24 hours later, they lost all that and more after the commission declared its intention to impose controls.

After initially rising 5c today, the shares were down 2c to 2.30 at 11.10am.

- NZHERALD, NZPA