Vector’s $1.75 billion meter sale: Its plan for the windfall - and five alternatives

Vector CEO Simon Mackenzie.

Vector says it has netted $1.75 billion from the sale of 50 per cent of its smart metering business to Queensland Investment Corporation (QIC) in a deal that closed on June 30.

The NZX-listed lines company is 75 per cent owned by community vehicle Entrust, which distributes an annual dividend to some 356,000 Auckland households.

But any Aucklanders looking for sale proceeds to go directly to a dividend bump are out of luck. Vector CEO Simon Mackenzie says the $1.75b is earmarked for paying down debt, which stood at $3.41b at the end of December.

On the flip side, Vector will lose half of its earnings from its metering operation - which contributed more than a third of operating earnings in the six months to December 31.

For the first half of FY2023, Vector Metering (for the period, still fully owned by Vector) contributed $96.4 million in adjusted earnings before interest, tax depreciation and amortisation as Vector reported total Ebitda of $274.0m.

Vector Metering owns or manages more than 2.3 million meters across the electricity and gas markets in Australia and New Zealand, but Mackenzie said there was a huge disparity between uptake in each country.

Mackenzie said smart meters were “basically at the replacement stage” in the mature New Zealand market.

In Australia, the main power regulator had mandated a move for a 100 per cent uptake of smart meters by 2030. While Victoria had completed a regulated rollout, there were still some eight million smart meters to be installed in other states, with most up for grabs.

However, winning market share would be capital intensive, Mackenzie said - which was why Vector had sought a partner, ultimately selecting QIC to take a half stake (the Queensland firm said it would finance the deal, and provide capex for Vector Metering, via a sustainability-certified “green” loan of $1.66b from a consortium of 11 lenders).

$3.41 billion debt

Vector’s net debt grew from $1.96b in 2016 (with 43.9 per cent gearing) to $3.41b (with 59.0 per cent gearing) by December last year - with $50m maturing in FY2023 then $1.27b falling due over the next two years.

Thanks to the Vector Metering proceeds, net debt will reduce to $1.9b.

Mackenzie said while the meter deal proceeds had been earmarked primarily for paying down debt, rather than a boost to the Entrust dividend (which was $303 per household last year), Entrust could potentially indirectly benefit from Vector being on a firmer financial footing. However, decisions about profit payout would not be made by the board until August.

In a June 15 research note - by which point the metering deal had gone unconditional ahead of its formal close on June 30 - Forsyth Barr retained its “underperform” rating but lifted its 12-month target price by 4c to $3.84 (in late Tuesday trading, shares were at $4.05).

Analyst Andrew Harvey-Green concentrated not on the meter sale, but on events on the regulated side of Vector’s business. In a recent Commerce Commission input methodologies review, “Vector had been hoping asset indexation would be scrapped, making capex funding much easier - but that did not happen,” Harvey-Green said (at least, not in the regulator’s draft decision).

Five alternatives

The Herald asked fund manager Lance Wiggs - part of a group that unsuccessfully challenged the incumbent C&R ticket in the 2021 Entrust board election - how he would like to see the meter sale proceeds spent.

Wiggs suggested three alternatives to primarily using it for paying down debt:

1. Vector’s market cap is $4.01b, with 25 per cent of shares floated and the rest owned by Entrust. The company could buy back the 25 per cent of listed shares, change its mandate to operate in the best interests of its customers - per Entrust’s own mandate - and lower prices to Aucklanders by around $250 per year per connection, no tax payment required, while ensuring it makes enough funds to meet debt obligations.

2. $1.5b would purchase 150,000 residential 10-kilowatt batteries, or 100,000 6kW residential solar panel installations, or a mix of solar/battery installations that would dramatically reduce the need for electricity generation and increase independence and resilience for homes. The sum could also be used as a UFB-like rolling fund, paying up-front costs for these and retrieving the payments at very low interest over time. There could be financed by Vector and owned by Vector (which is limited in how much generation it can own) or households.

3. $1.5b would allow Vector to rapidly remove existing constraints to the network that are restricting the adoption of EV charging, through an accelerated transformer and lines upgrade program. There is an opportunity to monitor every phase of a street’s transformer, proactively upgrading transformers and lines to meet the rising demand from overnight EV charging, which, if unaddressed, risks unbalancing and overloading transformers. The latest registration statistics show a shockingly fast progression towards EVs, and almost every company is under-forecasting the pace of change. Vector is proposing just over $500m in faster spending over four years. This could be upped substantially.

A second fund manager, Rohan MacMahon - who stood on the same ticket as Wiggs - had two additional suggestions.

4. Commence a gas switch-off. Use the funds as mentioned in point 3, but with a specific programme to convert households from gas-and-electricity to electricity-only and commence the wind-down of the residential gas network. Gas connections grew at 1.3 per cent in 2022, almost as fast as electricity connections (1.6 per cent). Everyone can see that running a reticulated fossil fuel distribution network for residential customers is going to be problematic in future.

5. Address energy poverty. As an entity that is majority-owned by the Auckland public, it’s also fair to ask if Vector should be doing more to reduce energy poverty. There are a range of ways it could do this. For example, a line discount for low income households, set up an investment trust to direct future returns to this purpose, either directly or through Entrust. Auckland has the highest level of energy poverty in New Zealand according to Stats NZ.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.