Payout ratio hits 108.3% of NPAT as free cash flow falls to $88.5m

Capex rose 14.6% to $544.0m (45.5% of revenue, up from 43.0%), and gross borrowings increased 10.0% to $2.3b.

Operating cash flow grew 22.8% to $632.5m and cash conversion improved to 94.0% of EBITDA from 84.3%, but this still sits below Vector's historical range of 97.2%-245.9% (mean 148.3%), so the improvement is relative rather than a return to normal.

Revenue rose 8.3% to $1.2b and EBITDA 10.1% to $673.1m, driven substantially by the first full year of the Commerce Commission's electricity distribution pricing reset from 1 April 2025 rather than broad-based volume growth.

FCF-to-NPAT conversion fell to 36.8% from 175.8%, and the payout ratio of 108.3% sits above Vector's historical range (mean 68.4%). This matters because continued dividend growth (final dividend 13.5 cents versus 13.0 cents; full-year 26.0 cents versus 25.0 cents) now depends more on regulated asset growth and debt capacity than on free cash flow.

Tax and comparability distort headline growth. PBT grew 41.5% versus NPAT growth of 44.3%, a gap driven by the effective tax rate falling to 29.6% from 35.9%, so PBT growth is the cleaner operating read. Prior-year NPAT also included $13.0m from the now-divested Gas Trading discontinued operation, which current-year NPAT does not, meaning the two periods are not fully like-for-like.

Leverage optics are favourable but EBITDA-dependent. Net debt/EBITDA improved to 3.34x, its lowest point in the historical window (mean 5.34x), even as gross borrowings rose 10.0%. This reflects EBITDA growth outpacing debt growth rather than balance-sheet deleveraging, so the ratio could re-widen if EBITDA growth slows once the pricing reset annualises.

The interim period showed a broadly even shape, with first-half EBITDA at 50% of the full year and first-half NPAT at 47%, implying second-half NPAT of about $127.2m versus $113m in the first half.

Because growth this year is substantially explained by the one-off pricing reset, the more useful test is how revenue and EBITDA growth look in FY27 once that reset is fully annualised and no longer provides a step-change comparison.

That combination warrants caution before treating the current margin as the new baseline.

Cash quality is the weaker link. Operating cash flow grew, but capex intensity absorbed most of it, and the dividend now exceeds net profit after tax.

• Operating cash flow $632.5m less capex $544.0m equals free cash flow before financing of $88.5m, down from $292.6m in the prior year.

This briefing cannot assess whether the underlying regulated revenue reset is expected to recur or step down in FY27, since no forward guidance was disclosed.