Valuecruncher has valued each Vector share at $2.94, with a range of $2.37 to $3.50. The share price closed at $2.78 on the 7th of March.

Vector is subject to significant regulatory uncertainty in it’s core businesses of electricity distribution and gas distribution and transmission. Vector’s electricity distribution is subject to a price path threshold through until 2009 with no regime finalised beyond this point. Threats from the Commerce Commission to take control of Vector’s electricity distribution assets have compounded this uncertainty. These factors restrict the ability to forecast Vector’s revenues and cash flows.

A key valuation variable associated with Vector is the expected capital expenditure. Issues surrounding the regulatory environment resulted in Vector instigating an internal review of all of their potential capital expenditure projects. Valuecruncher has projected capital expenditure to continue at the current level.

Revenue Growth

Due to the regulatory uncertainty and price path thresholds imposed on Vector’s electricity distribution Valuecruncher has conservatively forecast revenues to grow at 2%.

EBIT Margins 

EBIT margins are projected forward at the current rate of 32%.

Discount Rate (WACC) 

The WACC used for this analysis is 10%. 

Terminal Growth 

Terminal growth has been set at 2%.    

Vector Valuation Report                                 

Valuecruncher has valued each King Country Energy (KCE) share at $4.87, with a range of $4.31 to $5.46. The share price closed at $4.90 on the 2 March 2007. 

KCE shareholder Todd Energy has announced an intention to make a partial takeover offer for 14.72% of the ordinary shares in KCE at $5.00 per share. Todd Energy currently owns 35.38% of KCE. The independent directors of KCE commissioned Grant Samuel to provide an independent advisers report outlining the merits of a previous offer made by Todd Energy of $4.40 per share made in late 2006. The Grant Samuel report valued KCE at $4.80 to $5.26 per share.

The Valuecruncher mid-point valuation reflects the current operations of KCE. Two key value components not included that could justify a higher valuation are the proposed Mokau hydro scheme and a potential carbon charge for thermal generators.

The proposed Mokau hydro scheme is before the Environment Court and if successfully consented would provide increased operational flexibility to KCE and reduce dependence on an illiquid hedge market to cover existing retail commitments.

The implementation of a carbon charge on thermal generators would would see the cost passed through to all electricity consumers due to the marginal pricing nature of the electricity market. KCE’s portfolio of hydro generation plant would not be liable for a significant carbon charge and therefore result in KCE obtaining higher margins from generation operations.

Valuecruncher has not modelled the value of these components explicitly but believes the upside value they represent justifies KCE trading in the top half of the valuation range (i.e. $4.87 - $5.46) which is consistent with both the Grant Samuel report and the indicative offer of $5.00 per share from Todd Energy.

The uncertainty surrounding these to factors illustrates the issue of regulatory uncertainty that faces the entire electricity industry.

The WACC used for this analysis is 9%. 

Terminal growth has been set at 2%.  

King Country Energy Valuation