ANNUAL REPORT 2020 The interplay of today and tomorrow.
Second to second. Decade to decade. THE INTERPLAY OF TODAY AND TOMORROW
At Vector, the interplay of daily living, detail and foresight – now and in the future – motivates us to ensure our essential services are delivered for customers, but also that we continue to evolve to meet future challenges. Our focus is on being proactive, leading, and creating, not waiting for the future to arrive. This year, the COVID-19 lockdowns further highlighted the need for everyone who uses our services to have as close to uninterrupted supply as possible. Our people are dedicated to making that happen. We continue to lift our responsiveness to ensure our energy system operates at peak efficiency. We continue to sharpen our networks and increase new technologies. We question the rules that seem to hold energy consumers back. In the longer term, as the very nature of how customers source their power changes, we’ll be at the heart of a digital and technological revolution that will accelerate decarbonisation and see our customers empowered as never before. We have a key role to play in creating a cleaner energy future. Already, we’re engaging in new technologies, partnerships and global alliances that will redefine the possibilities in the years ahead.
About this report
This report, dated 26 August 2020, is a review of Vector’s financial and operational performance for the year ended 30 June 2020. The financial statements have been prepared in accordance with appropriate accounting standards and have been independently audited by KPMG. The financial and operational information has been compiled in line with NZX Rules and recommendations for investor reporting. The report has drawn from a wide range of information sources. This includes: our stakeholders, customers, communities, sustainability framework, value drivers, risk register, Board reports, asset management plan, financial statements and our operational reports. Throughout the report, we have focused on what matters most to our stakeholders and our business. Care has been taken to ensure all information in this report is accurate, including internal assurance and verification processes and Board approval. Forward-looking statements in this report are based on best- available information and assumptions regarding Vector’s businesses and performance, the economy and other future conditions, circumstances and results. As with any forecast, forward-looking statements are subject to uncertainty. Vector’s actual results may vary from those expressed or implied in these forward-looking statements.
THE INTERPLAY OF TODAY AND TOMORROW
Chair and Group Chief Executive report
Chief Financial Officer report
Our management team
Entrust, majority shareholder of Vector
Joint ventures and investments
Financial performance trends
Non-GAAP financial information
Independent auditor’s report
Financial calendar and directory
Energy systems in New Zealand and globally are under pressure to respond to the uptake of new consumer energy technology, electrification of transport, demands for decarbonisation, increased consumption of renewable energy and energy poverty. Disruption is here, and while some energy companies choose to take a “wait and see” approach, Vector has been an active leader in the disruption for years. We have long recognised the potential benefits of energy sector transformation, and we’ve been
3. Optimise the system – leverage smart energy solutions, future focused using technology and data to support an agile system which can unlock new products and solutions for our customers. 4. Capture the value of coordination – enable an energy system that is more than the sum of its parts through coordination between customers and their energy systems, between distributed energy resources, and across energy supply chains. Symphony is how Vector is creating a new energy future, supporting a cleaner, more affordable and reliable energy system.
leading the adoption of new energy technologies in New Zealand as we gear our business towards putting the customer at the heart of the energy system. We’ve recently named this strategy ‘Symphony’, in which each of our six business units has a key role to play to: 1. Design energy solutions and systems around the customer – transforming our systems to start with demand, not supply. 2. Keep it local – locate energy systems in the community to increase resilience and system-wide efficiencies.
THE INTERPLAY OF TODAY AND TOMORROW
Customer benefits of Symphony
Cost efficiencies can be delivered by harnessing the power of data to build efficient assets and provide new products and services to our customers
Climate action is enabled by supporting New Zealand’s electrification of transport and transition to a low emissions economy
RELIABILITY & RESILIENCY
Reliability and resiliency will increase, due to data insights into operational and asset performance and customer trends
Customer choice increased across a range of competing services to create healthier and smarter homes that will optimise energy use to suit their needs
THE FUTURE OF ENERGY
Electrification of public transport
Energy efficiency apps
Community generation & storage
Peer to peer trading
How we’re creating a new energy future: ‒ Intelligent Distribution Network ‒ Harnessing the power of data analytics and new technology ‒ Working with aligned partners and sector specialists to accelerate our progress and ensure best practice ‒ Working collaboratively across the Vector Group to unlock potential ‒ Keeping the customer at the heart of every decision
‒ Connecting network assets and distributed energy resources with a focus on cyber security ‒ Enabling customers to have cleaner, more reliable and affordable energy ‒ Advanced meters allowing customers to develop new products and services for changing consumer needs.
Data & electricity Smart distribution network
OUR ENERGY SYSTEMS
$ 488.7 M INVESTED GROSS CAPITAL EXPENDITURE INVESTMENT ACROSS VECTOR GROUP
15,432 NEW ELECTRICITY AND GAS CONNECTIONS ADDED
CUSTOMERS AND COMMUNITY
STRATEGIC ALLIANCE WITH AMAZONWEB SERVICES TO CREATE THE NEW ENERGY PLATFORM 119,000 + ADVANCED METERS INSTALLED IN AUSTRALIA
GROUP (B.I.G.) SPEARHEADED AN INDUSTRY-WIDE EFFORT TO DEVELOP A CIRCULAR ECONOMY PRODUCT STEWARDSHIP SCHEME FOR END-OF-LIFE BATTERIES
STATUS DURING COVID-19 ALERT LEVELS 4 AND 3 – THANK YOU TO OUR PEOPLE AND PARTNERS FOR ENABLING VECTOR TO KEEP THE LIGHTS ON AND ENERGY FLOWING FOR OUR CUSTOMERS DURING THE PANDEMIC
THE INTERPLAY OF TODAY AND TOMORROW
WAIHEKE ISLAND SUPPORTING THE GOAL TO BECOME THE WORLD’S FIRST ELECTRIFIED ISLAND THANKS TO AN EECA FUNDING GRANT TO VECTOR TO INSTALL SMART EV CHARGING INFRASTRUCTURE
VECTOR POWERSMART CLEAN ENERGY SYSTEMS DELIVERED FOR THE GOVERNMENT OF NIUE (WITH SUPPORT FROMMINISTRY OF FOREIGN AFFAIRS AND TRADE) ANDWATERCARE
GENDER DIVERSITY 35 %
17 % REDUCTION IN OUR TRIFR COMPARED WITH FY19, 11% INCREASE IN LTIFR 1
AT THE DIVERSITY WORKS AWARDS FOR OUR COMMITMENT TO BUILDING AN INCLUSIVE AND SUPPORTIVE WORKPLACE CULTURE
FEMALE EMPLOYEES (UP FROM 34% FY19)
MORE THAN $ 1 B SUCCESSFUL DEBT RAISING AND $ 490.0 M ADJUSTED EBITDA 2 REFINANCING ACROSS NEW ZEALAND ANDUNITED STATES FINANCIAL MARKETS 16.5 CENTS PER SHARE FULL-YEAR DIVIDEND
$ 97.3 M GROUP NET PROFIT AFTER TAX
SALE OF KAPUNI GAS TREATMENT PLANT AND ASSOCIATED ASSETS TO TODD ENERGY
1. Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Injury Frequency Rate (TRIFR). 2. Refer to Non-GAAP reconciliation on page 34.
Steady earnings performance The Group delivered a steady earnings performance for the year, with the adjusted EBITDA of $490.0 million, $4.2 million ahead of FY19. Our revenues continued to grow from investment in metering in New Zealand and Australia, however we still face challenges given the recent electricity regulatory reset and interest rate environment. These gains were partially offset by increased maintenance expenditure to improve electricity network reliability, as well as the impact of COVID-19, which was particularly significant for the E-Co Products Group, which had demonstrated improved performance prior to ceasing operations during Alert Level 4 lockdown. Group net profit after tax was $97.3 million which is an improvement on the previous year. More detailed information about our financial performance is provided in the Financial Review on pages 12 to 13. Dividend As announced in our interim report, the Board has decided to move from a progressive dividend policy, to a policy of maintaining the current dividend of 16.5 cents per annum, with the expectation of future dividend growth based on projected growth in Vector’s businesses. This year, shareholders will receive a final dividend of 8.25 cents per share imputed at 10.5%, taking the full-year partially imputed dividend to 16.5 cents per share. The final dividend will be paid to investors who are on the register at 14 September 2020 and distributed to investors on 21 September 2020.
COVID-19 network demand impact Understanding how and why demand patterns change over time is essential for efficient network planning and investment. Throughout each stage of the COVID-19 lockdown, Vector observed significant changes in consumption trends across our electricity and gas networks. At the start of Alert Level 4 on 25 March 2020, volume across our electricity network dropped by approximately 15% compared with the average consumption of the previous three years. Across our gas network it dropped by approximately 22%. For the first time, weekday commercial load profiles across both networks resembled those of a typical weekend. With more people living, working and schooling from home, residential consumption during Alert Level 4 increased by approximately 13%. We also noticed morning peaks started later in the day and a midday peak forming for the first time on record. When the country entered COVID-19 Alert Level 1, residential trends largely returned to normal; however, commercial energy usage remains suppressed compared with historical averages. Vector continues to advocate for greater access to customer advanced meter data. These insights would allow us to harness the latest data analysis technologies to improve investment decisions and forecasting methods for new customer growth, as well as improve customer experiences by enabling more accurate customer communication about a network outage and more coordinated outage responses.
One of the biggest lessons from the past year is how important it is to be ready and willing to adapt to change within an unchartered and fast- moving environment. As a provider of essential services, Vector is proud of the way our people responded to the COVID-19 global pandemic. Whether it meant putting the needs of our customers and communities ahead of their own fears or working collaboratively to find an innovative solution to a new problem – our people showed courage and determination at every turn. As well as a summary of our past year’s performance, this report includes tributes to the outstanding commitment and dedication of our people and field service partners, who went above and beyond for our customers in the most unsettling of circumstances. In addition to adapting admirably to change, our people and partners have been the driving force behind Vector’s exciting progress towards our new energy future vision in FY20. Despite the challenges of today, our integrated Group strategy we call ‘Symphony’ is preparing us for the opportunities of tomorrow. Through Symphony, we are tracking well towards our objective of providing shareholders with more options for sustainable returns – further defining our company as an innovative energy group with a growing local and international impact.
Chair and Group Chief Executive report
THE INTERPLAY OF TODAY AND TOMORROW
Accelerated momentum across the Group During the initial COVID-19 lockdown, our teams were busy finalising an exciting strategic alliance with global cloud provider Amazon Web Services (AWS). While the agreement was signed after the balance date, this alliance is a critical part of unlocking the new energy future. Our multi-year partnership with AWS will see us co-develop a cloud- based New Energy Platform (NEP) which will radically improve the way we collect and process energy consumption data from advanced meters. The strategic alliance to jointly develop the NEP is the first of its kind for AWS in New Zealand, and for AWS in the global energy sector. The NEP will help to unlock innovative energy products and services to benefit consumers. We look forward to working alongside AWS and our energy industry partners initially in New Zealand and Australia to bring these to market over time. This year, Vector Metering has expanded its leadership position in the Australian and New Zealand markets. Our investment in people, systems and digital platforms has enabled us to optimise our installation process over the past year, comfortably meeting service level agreements and enabling us to consistently and reliably scale up meter installations. In October 2019, Vector Metering announced an innovative partnership with Genesis Energy to roll out advanced gas meters to their customers across New Zealand. The advanced metering solution will see Genesis become the first energy retailer
to move customers from an analogue to digital platform, resulting in greater transparency and visibility over customer gas use. The sale of the Kapuni Gas Treatment Plant and associated assets to Todd Energy marked a key milestone for our Gas Trading business this year. The process has constructively reset the relationship. The deal includes long- term supply agreements, which means Vector can support our customers who value gas as a preferred energy choice. Vector’s LPG business, Vector OnGas, continues to operate in an increasingly competitive retail marketplace. The sustained strong performance from the Vector OnGas team is testament to their commitment to safety and customer service excellence, as well as innovating to provide new customer solutions and optimise existing operations. Our new energy solutions business, Vector PowerSmart, has delivered several major projects in New Zealand and the Pacific this year – further enhancing our reputation as a leading provider of advanced energy solutions in the region. The build of the floating solar array at Watercare’s Rosedale Water Treatment Plant is complete with commissioning in late August. Our Vector Fibre business has continued to perform well this year, progressing plans to create new products and services to capitalise on changes in the telecommunications landscape. Vector Fibre remains focused on seeing our fibre network support the roll-out of 5G technology against the backdrop of regulation opportunities to increase
industry competition. A key component of this strategy is investment in digital platforms to enhance the way our customers interact with us through the provisioning process. As we continue our efforts to create a new energy future for New Zealand, Australia and beyond, the power of the Symphony strategy lies in combining our many strengths. As an integrated Group united under one strategy, this enables us to overcome challenges and capitalise on the best opportunities to empower our customers now and into the future. Lifting customer service In a year characterised by constant change, our commitment to improving customer service in our regulated electricity and gas businesses has remained constant, and we are pleased to report continued progress. We invested $317.1 million – or $6.1 million every week – to make our networks more intelligent and resilient and to keep pace with Auckland’s growth. Furthermore, we have actively embraced new ways of working that have reduced the frequency and duration of outages across the electricity network. In FY20 we ran an internal programme to significantly reduce our System Average Interruption Duration Index (SAIDI) and continuously drive reliability and performance. We are proud of the progress we made, and will work hard to build on these achievements to deliver a favourable network performance outcome in the coming year.
DAME ALISON PATERSON CHAIR
SIMON MACKENZIE GROUP CHIEF EXECUTIVE OFFICER
CHAIR AND GROUP CHIEF EXECUTIVE REPORT
Vector Technology Services In the past year, Vector carried out a review of our assets and business activities to support the delivery of our future-focused Symphony strategy. In addition to the movement of some assets between wholly-owned entities within the Group, the restructure saw several digital assets moved to a new entity, which we have named Vector Technology Services (VTS). Our Symphony strategy has a fundamental technology overlay across all business units, including our electricity business, and there are opportunities to commercialise these solutions. Beyond creating another revenue stream for the Group, taking these proprietary solutions to market will support other infrastructure companies on a similar digital transformation. The review found that such activities can be more effectively and transparently achieved through a new subsidiary company with its own incentives and leadership. At first, VTS will focus on our industry-leading cyber security capability which was developed by Vector’s own cyber experts with input from expert global partners. We will also take to market our Distributed Energy Resource Management Systems (DERMS), the system co-developed with our partner, mPrest. In future, we will look to add
In the past year, Vector has progressed work on a digital platform to enhance the way we monitor the condition, performance and future potential of the many thousands of assets that make up our electricity network, such as poles, wires and transformers. Working collaboratively with our field service providers (FSPs), we are now collecting and storing more detailed, accurate and consistent data to track the general health and condition of our network assets. This capability is paving the way for more precise and real-time information flow to customers via the Outage Centre and other customer information channels. Funding efficient investment As a country – and now more than ever – we must be strategic and focus on creating a high-value economy that is built on innovation, moving from volume to value. This way of thinking is the embodiment of our Symphony strategy and is a central theme in our ongoing discussions with our regulators, as we continue to advocate for changes to reflect the environment we are in. In November 2019, our Default Price- Path 3 (DPP3) regulatory settings were confirmed through to 2025 – providing targets for electricity network quality and allowable revenues for the five-year period, which commenced 1 April 2020. A significant issue we are facing is the
impact of the inflation assumptions selected by the Commerce Commission. Those assumptions used in setting our new price path have for a decade systematically over-forecast inflation and in turn reduced our revenues below levels consistent with a fair return. This is an impact that will be further exacerbated through to 2025 given radically different inflation expectations since DPP3 was determined in late 2019. Nor do we believe this is a sustainable outcome or one that is consistent with the legislation intended to ensure regulated businesses can invest for the long-term interests of consumers and earn an appropriate return. This is not an issue that is exclusive to Vector, as other regulated entities in New Zealand face the same challenges and a review is underway in Australia with their regulator. We will actively engage with the Commerce Commission to seek a constructive solution. Vector considers this to be a critical matter that must be worked through collaboratively to ensure Auckland growth and government infrastructure investments are supported through aligned regulatory settings, while ensuring fair returns to our shareholders. Despite this obvious cashflow challenge, Vector remains committed to upgrading, extending and maintaining Auckland’s electricity network to the best of our ability for the benefit of energy consumers.
“As a country – and now more than ever – we must be strategic and focus on creating a high-value economy that is built on innovation, moving from volume to value.”
THE INTERPLAY OF TODAY AND TOMORROW
to our catalogue of services, working alongside appropriately skilled partners. Leadership Continuing to use Symphony as the strategy to deliver a new energy future vision has led us to implement a new approach to working across the Group. Under our new model, we draw on the power of cross- functional team-based collaboration to prioritise and achieve our business goals. In the past year, we have commenced our evolution towards a new operating model where employees are better supported to succeed personally, professionally and through business performance. This way of working has already fostered the development of new technical skills throughout our workforce, opened career pathways and released new ways of thinking that support our direction as a business and the sort of culture we aspire to. In August 2019, we were pleased to be awarded the Empowerment, Diversability and overall Supreme Award at the Diversity Works Awards for our commitment to building an inclusive and supportive workplace culture. For the Supreme Award, Vector was chosen from 36 other entrants and 76 entries across nine categories. This is the second time we have won the Supreme Award, the first being in 2015.
responsibility to deliver essential services at affordable prices for customers. We firmly believe that our Symphony strategy is the right one for us as we strive towards our vision of a new energy future. As a shareholder, in the next year you can expect to see Vector to continue to execute our Symphony strategy, investing wisely to benefit customers. We will embrace change and disruption and harness innovation with a relentless commitment to improving outcomes for our customers.
In November 2019, we announced the launch of the Battery Industry Group (B.I.G), a cross-industry collaboration to design reuse and recycling solutions for large batteries, commonly found in electric vehicles or in stationary energy storage. We are also an active participant in the Aotearoa Circle, Sustainable Finance Forum, Sustainable Business Council and Climate Leaders’ Coalition. Our cultural leadership has already been recognised by other like-minded organisations, for example AWS, which appreciated the strong cultural alignment when forming our strategic alliance. Looking to tomorrow Vector is focused on managing the demands of today while preparing our people, customers and wider energy sector for the opportunities of tomorrow. We have the right talent, strategy and partners to enable us to forge ahead towards our new energy future vision. We remain committed to growing, advancing and maintaining our networks so they can continue to deliver for our customers and evolve in line with their changing energy needs and preferences. Like all businesses we will continue to experience the impact and uncertainties caused by a COVID-19 world. We remain concerned about the regulatory settings and the impact on our ability to invest. We must balance these external pressures on Vector with our
Dame Alison Paterson Chair
Simon Mackenzie Group Chief Executive
Board succession planning Succession planning is key to ensuring continuity as the business environment continues to evolve. Earlier this year Vector announced our Deputy Chair, Jonathan Mason, will take over from our Chair, Dame Alison Paterson – who has made the decision to retire at our upcoming annual meeting on 25 September 2020. The Board is deeply thankful to Dame Alison for 13 years of outstanding service on Vector’s Board, including the past two years serving as our Chair. Her achievements and standing within both Vector and New Zealand’s wider business community are unparalleled. While we are reluctant to farewell Dame Alison, the Board acknowledges it is fortunate to have a director of Jonathan’s calibre ready to take up the position of Chair in September. Jonathan joined Vector as a non-executive director in 2013, bringing with him extensive experience in the energy and financial services sectors. He has a strong governance background that includes directorships on the boards of leading companies, such as Air New Zealand, Zespri and Westpac New Zealand. We look forward to welcoming Jonathan as he takes the reins from Dame Alison to continue the Board’s work supporting Vector’s Symphony strategy and enabling our vision to create a new energy future.
CHAIR AND GROUP CHIEF EXECUTIVE REPORT
Vector’s financial performance for the year benefitted from continued advanced meter deployment in New Zealand and Australia. However, this was offset by the regulatory Default Price-Path 3 reset from 1 April 2020 and the impact of COVID-19 which resulted in lower electricity network volumes and therefore revenue, driven by a significant drop in commercial sector consumption as well as an impact on the wider business. We recorded adjusted EBITDA 1 of $490.0 million. This was up $4.2 million or 0.9% on last year’s result. Group net profit after tax was $97.3 million and includes a non-cash impairment of $32.0 million in respect of E-Co Products Group. COVID-19 impact With restrictions in place under COVID-19 Alert Levels 3 and 4, electricity volumes across our network decreased by approximately 10% leading to a fall in revenue for the period. Under DPP3 regulatory settings, any increase or decrease in electricity revenue relative to our maximum allowable revenue (MAR) targets set by the Commerce Commission, can be adjusted (up or down) through electricity prices from 1 April 2022. We are evaluating the ways in which we can minimise
networks after Alert Level 4 lockdown began on 25 March 2020. In FY20 we invested $317.1 million of capital expenditure to improve the safety, reliability and resilience of our network and facilitate Auckland’s growth. This represents an increase of 21.5%, or $56.2 million, on a year earlier. Gas Trading adjusted EBITDA was $33.9 million, up $2.6 million against the prior year total of $31.3 million. During the period, we sold the Kapuni Gas Treatment Plant and associated assets to Todd Energy. The effective date of this transaction was 31 March 2020. The sale resulted in a decline in adjusted EBITDA for Q4 FY20, which was largely offset by interest income on the sale consideration, reported below the line as part of net interest costs. This will continue in future. The overall impact to earnings was not material to the FY20 result. The Gas Trading result benefitted from improved Natural Gas margin and higher Liquigas throughput. The LPG business delivered a strong result, despite the COVID-19 lockdown. Residential cylinder LPG and Bottle Swap operations saw increased volumes, while commercial cylinder and bulk LPG supplies were lower, due to variable take by a large customer in the petroleum industry. The gas market is competitive, and as such, we continue to evolve our approach.
impacts on customers through price adjustments through a range of factors, including market rebates. We continue to be concerned with the regulatory settings, particularly in light of the COVID-19 environment. The FY20 performance of our unregulated E-Co Products Group and Gas Trading businesses was also impacted by the COVID-19 pandemic. Across the Vector Group, we estimate that adjusted EBITDA earnings were adversely impacted by approximately $10 million. Despite improved performance from E-Co in the first half of FY20, Level 3 and 4 restrictions and the subsequent impact on the wider economy and consumer confidence, have impacted E-Co’s growth trajectory resulting in us taking a conservative approach and impairing the carrying value of the E-Co Products Group. Segment adjusted EBITDA 1 Adjusted EBITDA for our Regulated Networks was $337.6 million, down $29.4 million (8.0%) against the prior year. The lower result was driven by: the DPP3 price reset which came into effect on 1 April 2020 and saw prices reduce by 6.9%; higher maintenance activity linked to the improvement in reliability and resilience of the network; as well as the impact of COVID-19, which saw lower volumes across our electricity and gas
1. Refer to Non-GAAP reconciliation on page 34.
JASON HOLLINGWORTH CHIEF FINANCIAL OFFICER
$ 490.0 M ADJUSTED EBITDA 1
$ 97.3 M GROUP NET PROFIT AFTER TAX
Chief Financial Officer report
THE INTERPLAY OF TODAY AND TOMORROW
Capital expenditure Capital expenditure was $488.7 million, $63.6 million (15%) higher than last year. This increase reflected ongoing investment in infrastructure to support Auckland’s continued growth, higher network replacement expenditure, and increasing deployments of advanced meters as market demand continues to accelerate in Australia. Network investment included a programme to replace and upgrade automated switching equipment in approximately 180 feeders across the network to improve circuit options to remotely restore power to customers experiencing an outage. This was one of a number of initiatives aimed at meeting quality targets and improving reliability. Re-financing and balance sheet Vector continues to maintain a strong balance sheet. Our 30 June 2020 gearing, as measured by economic net debt to economic net debt plus adjusted equity rose to 55.2% from 52.2% at the beginning of the year.
Adjusted EBITDA for Vector’s metering segment grew $16.1 million (11.6%) to $154.8 million, as a result of continued growth in advanced meter deployments in New Zealand and Australia. Capital contributions Capital contributions grew by 9.0% to $86.4 million during the year, resulting from continued connection growth and significant infrastructure development taking place across Auckland. The challenge of investing to keep pace with Auckland’s growth remains and Vector continued to review and test our pricing framework in FY20. We have adjusted our capital contributions position to reflect regulatory settings while remaining committed to facilitating these projects. Cash flow Operating cash flow was 14.1% higher at $397.3 million. This increase was largely due to a number of factors including lower interest paid, higher receipts associated with loss rental rebates, and higher capital contributions.
We successfully raised over NZ$1.1 billion of debt in the financial year, utilising both the domestic and the US markets. In one of the largest deals for a New Zealand-based entity in recent times, we secured US$500 million from the US Private Placement market for 12 and 15 years, which has allowed us to further extend the maturity profile of the Group’s debt portfolio and preserve liquidity. We remain an ‘investment-grade’ credit risk with a Baa1 rating from Moody’s and BBB from Standard & Poor’s. Dividend This year, shareholders will receive a final dividend of 8.25 cents per share imputed at 10.5%, taking the full-year partially imputed dividend to 16.5 cents per share. The final dividend will be paid to investors who are on the register at 14 September 2020 and distributed to investors on 21 September 2020.
“Capital expenditure was $488.7 million, $63.6 million (15%) higher than last year. This increase reflected ongoing investment in infrastructure to support Auckland’s continued growth, higher network replacement expenditure, and increasing deployments of advanced meters as market demand continues to accelerate in Australia.”
GROUP CAPITAL EXPENDITURE $ MILLION
DIVIDEND DECLARED CENTS PER SHARE
Chief Financial Officer Report
Working and living around risks of electricity, gas and other energy systems drives our ‘safety always’ approach. During the COVID-19 pandemic, this focus expanded to include new controls and processes to protect the health of our people and communities. Cautious and considered at every stage, we were successful in ensuring continuity of service while upholding the high health and safety standards we set for ourselves and our contractor partners. Progress towards our Group safety goals To track our progress against our safety goals, Vector continues to record reactive measures across the Group, specifically Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Injury Frequency Rate (TRIFR). Beyond tracking progress, these measures are critical for indicating which areas require ongoing improvement. In the past year we observed a 11% increase in LTIFR and a 17% improvement in TRIFR across the Group. The severity rate, which measures number of lost days per 1 million hours worked, increased by 235.6%. This was impacted by a FY19 injury, where time away from work was incurred in the 2020 financial year. In alignment with our Symphony strategy, our approach to managing safety across the Group is evolving – moving away from a standardised approach, to one where the unique
The programme was based on management of change safety protocols which required each part of the business to step back and assess risks before developing controls to protect our people, their families and communities while COVID-19 was still active. These included robust training around hygiene and physical distancing controls when working with each other and interacting with members of the community. It also included thorough mechanisms commitment and courage during this time, adapting quickly and adeptly to the rapidly changing circumstances and safety requirements asked of them. Vector continues to provide health and safety guidance to our office and operational teams in New Zealand, Victoria and New South Wales, where, at the time of writing, community transmission was still being managed. Wellness while working from home When it became certain that our office- based employees would work from home during COVID-19 lockdowns, to record contact tracing data. Our people showed remarkable Vector introduced a range of initiatives to ensure their physical environment could be as safe and comfortable as possible. During lockdown, Vector provided regular advice to staff about resilience and well- being and ensured mental health and wellness resources were available to them. We outline other initiatives in the People section of this report.
needs and circumstances of different situations directly inform risk mitigation. Our focus on managing safety will still centre around the proactive steps we can take to avoid incidents, and our reporting system will still serve to highlight areas where we can make continuous improvements. The change in approach is receiving positive feedback from our leadership teams and operational staff, who see this collaborative approach as a more effective and practical way to manage safety. Safety during the COVID-19 pandemic As an essential service, thousands of New Zealanders were relying on us during the COVID-19 lockdowns. In Australia, our metering customers were relying on our teams to continue operations to support customers on their behalf. Vector needed to do everything we could to keep our people safe and healthy, so they could continue to keep the lights on and energy flowing for those depending on us. Vector’s COVID-19 “Warrant of Fitness” (WOF) training programme was created to ensure our operational teams were fit to work in the field under COVID-19 Alert Levels. The WOF programme was later adapted to support our office teams to re- enter our workplaces safely under Level 1. We also had leading external experts review our safe work practices and assist with ensuring our staff communications were evidence based.
“As an essential service, thousands of New Zealanders were relying on us during the COVID-19 lockdowns.”
THE INTERPLAY OF TODAY AND TOMORROW
EMPLOYEES BY AGE
Ultimately, our people are the ones who will deliver the future of energy. Over the past year, we have continued to invest in our people through a range of award-winning initiatives, further strengthening Vector’s reputation as an employer of choice. FY20 has also seen Vector purposefully shape our organisation to amplify the skills and competencies necessary to continue to deliver our Symphony strategy. We are integrating lessons from our global partners to help cultivate a nimble, innovative and collaborative culture to propel the business forward and deliver for our customers. Developing talent from within Vector remains committed to diversity and inclusion as we recognise the importance of a dynamic workplace to drive a range of views that are representative of our communities and customers. In August 2019, Vector was pleased to win the overall Supreme Award at the 2019 Diversity Works Awards for our commitment to building an inclusive and supportive workplace culture. We also took home the Empowerment Award in acknowledgement of our programmes to improve gender diversity and the Diversability Award for our work to make Vector a more accessible environment for people with disabilities. In the past five years, we have seen a significant gender composition shift within our executive team with the number of female executives increasing
from 17% to 44%. In the same period, we have seen a gender composition shift with the number of female employees increasing from 34% to 35% across the organisation. Age-wise, in the past year our employees aged 20 to 39 have increased to 49.8% – up from 43.0% one year ago. Those aged 40 and over have decreased by 8.7%. Our ethnicity profile has moved only slightly, with Māori representation up 1% to 6.1% and Pasifika static at 3.1%. In January we commenced a pilot coaching programme for an initial cohort of leaders – all provided positive feedback on the value of coaching techniques to increase staff engagement and grow performance within their sphere of influence. Flexibility and the future The productivity benefits of working from home have long been discussed by business experts the world over and the COVID-19 lockdown provided an opportunity for Vector to test our own thinking around workplace flexibility. We canvassed the views of our people through a working-from-home survey which found 90% of people found their productivity levels were the same or higher compared with working from the office. The most popular working- from-home benefit was ‘avoiding the commute’, which has the flow-on benefit of allowing people to strike a better work-life balance. The survey is helping the business evolve our ways-of-working framework for the future.
EMPLOYEES BY GENDER
EMPLOYEES BY ETHNICITY 1
1. HRV and Vector PowerSmart staff numbers included in gender and age data only, not ethnicity.
Adapting to a COVID-19 world Alongside a thorough programme of employee communications, the People and Culture response team established a confidential care- call initiative where every employee was contacted on a regular basis to ask them if they were coping under the extraordinarily challenging circumstances. In the event anyone needed extra help – whether that be in the form of additional ergonomic equipment, counselling support or a safe environment to seek help, the team was there to source confidential advice and support where it was needed. The People and Culture teammade over 2,000 confidential calls to over 1,000 staff during lockdown, receiving feedback that people felt supported and cared for by Vector. The initiative proved particularly beneficial to several of our Christchurch-based staff who experienced overlaid trauma from the Christchurch earthquakes and appreciated the personal assistance.
* Middle East, Latin America and Africa
Protecting our people and communities in a pandemic
The regulated gas and electricity distribution networks that stretch across the Auckland region serve thousands of homes and businesses every day. Maintaining their integrity while also preparing them for the opportunities of tomorrow are top priorities for the Group. This past year, the continuing pressures of population growth, climate change and new technology adoption were compounded by the extraordinary circumstances of the COVID-19 pandemic. Despite a challenging year, Vector, with support from our field service providers (FSPs), continued to deliver for our communities and made solid progress towards our commitment to comply with network quality standards. Volumes and new connections Reflecting Auckland’s continued growth, new electricity connections in the year increased to 12,231 from 11,000 in the prior year. Total electricity connections stood at 580,060, up 1.6% from 571,125 a year earlier. We also added 3,201 new gas connections. As at 30 June, total gas connections were 113,960, up 2.1% on a year ago. Both gas and electricity distribution volumes were impacted when only essential businesses were permitted
to operate during COVID-19 lockdown. Gas volumes were down 0.7% at 14.3 PJ from 14.4 PJ a year earlier and volumes transported across the electricity network fell 1.1% to 8,315 GWh from
With families and communities based from home and even more reliant on the continuity of power, Vector temporarily halted planned outages across our electricity and gas networks to minimise disruption during the COVID-19 lockdowns. Only works relating to maintenance necessary for safety or to support other essential services continued, for example, upgrading the network to allow a supermarket to install a new storeroom. COVID-19 restrictions led to the suspension of several non-critical maintenance and capital works projects across our gas and electricity networks. When restrictions eased, we worked collaboratively with our FSP partners to recover time lost. This has included increasing our programme of weekend and night works which has the added benefit of reducing the inconvenience planned outages have on customers during busy times of the day and week. The intention is to continue these practices as part of our ongoing commitment to customer service excellence and network improvement. Like many businesses, Vector moved quickly to prioritise essential energy services to best protect our people, communities and customers during the COVID-19 lockdowns. We commend the remarkable commitment and courage of our essential workers who worked
8,410 GWh in the prior year. Improving reliability for our customers
In FY20 we invested $317.1 million to improve the safety, reliability and resilience of our gas and electricity networks and facilitate Auckland growth. This is a 21.5% lift on the previous year’s investment and reflects our ongoing commitment to reduce the frequency and duration of outages across our electricity network through a mix of new initiatives and innovative approaches to asset management. In FY20 we significantly reduced SAIDI minutes and aim to build on the achievements of the past year in FY21. Critical to this will be the continued adoption of new technologies and more advanced operating practices to drive better outcomes for our customers. However, challenges remain, such as climate change, volatile weather patterns, increased traffic and more cars hitting poles. We also continue to work with Auckland Council and MBIE on vegetation issues affecting the network.
$ 337.6 M ADJUSTED EBITDA 1 , DOWN 8% FROM A YEAR EARLIER 12,231 NEW ELECTRICITY CONNECTIONS
1. Refer to Non-GAAP reconciliation on page 34.
THE INTERPLAY OF TODAY AND TOMORROW
throughout lockdown to keep the lights on and energy flowing for our customers. The future of gas In recent years, industries and governments both in New Zealand and globally have taken a growing interest in the role hydrogen technologies could play in the decarbonisation of our energy systems. However, our focus remains on investing in the gas distribution business to ensure the network can grow in line with Auckland while surpassing expectations around safety and network quality. Vegetation management Trees falling into powerlines during high winds continues to be one of the leading causes of power outages that disrupt our customers. Improving vegetation management is key to strengthening network resilience and reliability – and is an area where partnership with our customers and community stakeholders is critical. Increasingly volatile weather systems, together with Auckland’s sub-tropical climate, mean regulations concerning vegetation management need to change. We are working urgently with Auckland Council to address this challenge. Key to this is advocating for improved risk management measures - including greater clarity around cutting and trimming responsibilities - to reduce the network events that cause disruption to customers.
Waiheke’s goal to become a fully electrified island In August 2019, Vector was awarded funding from the Government’s Low Emission Vehicles Contestable Fund (LEVCF), administered by the Energy Efficiency and Conservation Authority (EECA), to install and manage at least 80 electric vehicle (EV) 7.2kW smart chargers in homes across Waiheke Island, along with ten 7.2kW public EV chargers and one mobile EV charger. The funding will see us put in place the technology needed to support Waiheke’s goal to become fully electrified. The technology includes network-ready EV chargers and public charging infrastructure as well as smart EV charging systems that will enhance network resilience and avoid the need for costly traditional network infrastructure. With the numbers of EVs on the island doubling year-on-year, this new technology will better manage the expected surges in network demand from increased EV uptake. The new chargers will connect to Vector’s intelligent utility networking system of systems, known as DERMS (Distributed Energy Resource Management System), which the company has co-developed to help manage and optimise the growth in solar, battery, EVs and other distributed energy sources and network connected devices. Evolution and innovation of work practices Over the last 12 months, we have invested in new equipment including bypass cables that enable work to be performed on de-energised assets while the power remains on for customers. To integrate bypass cable technology into our approach to managing the network, we spent time in South Korea learning the skills and capabilities to bring back to New Zealand and up- skill our workforce. The first deployment of this new technology on Auckland’s electricity network occurred in December 2019 in Tapora. Many in the community would not have been aware of the maintenance work underway because the bypass cable technology keeps the power on while the work is being done.
3,201 NEWGAS CONNECTIONS
$ 6.1 M PERWEEK INVESTED TO IMPROVE THE SAFETY, RELIABILITY AND RESILIENCE OF OUR GAS AND ELECTRICITY NETWORKS AND TO FACILITATE AUCKLAND’S CONTINUED GROWTH
SALE OF KAPUNI GAS TREATMENT PLANT AND ASSOCIATED ASSETS TO TODD ENERGY 701,923 9KG BOTTLE SWAPS, A 6.6% LIFT FROM FY19 116,024 LIQUIGAS LPG TOLLING (TONNES), UP 5.0% FROM A YEAR EARLIER $ 33.9 M ADJUSTED EBITDA 1 , UP $2.6M FROM A YEAR EARLIER
In December 2019, Vector announced the sale of the Kapuni Gas Treatment Plant and associated assets to Todd Energy. This transaction was completed on 31 March 2020. The deal aligns our shared interests in seeing the Kapuni field developed further. New natural gas and LPG supply agreements have been secured as part of this deal to ensure Vector has long- term access to gas products on behalf of our customers. The sale has had no material impact on adjusted EBITDA earnings for the FY20 result. Looking ahead to FY21, the decline in adjusted EBITDA is largely offset by interest income on the sale consideration. Interest income is reported below the line as part of net interest costs. Gas volumes Natural gas volumes were down, due to field outages and constraints on the supply side. However, the teammanaged these challenges well, which led to improved margins over the period.
Total natural gas supply in the period was 12.4 PJ, down 23.0% on last year, largely due to the loss of a major customer part way through the year. Growth in LPG The LPG side of the Gas Trading business continues to strengthen, solidifying its reputation as a versatile and convenient energy choice for homes and businesses across New Zealand. Bottle Swap 9kg cylinder volumes were up by 6.6% to 701,923 swaps and sales from 658,159 a year earlier. Liquigas tolling volumes were up 5.0% to 116,024 tonnes, mainly due to the signing of a new enterprise customer in the second half of the year. Commercial cylinder and bulk LPG supplies were down, driven by a decline in demand during COVID-19 Alert Levels 4 and 3. Gas liquid sales were down 2.2% to 43,338 tonnes.
1. Refer to Non-GAAP reconciliation on page 34.
Group collaboration for customer benefit LPG and natural gas sales and distribution continued during lockdown and experienced unprecedented demand for the time of year as customers sought to stock up on supplies. In a strong display of collaboration, members of the Gas Trading and HRV office-based teams rolled up their sleeves to support the efficient distribution of Gas products to our customers. HRV staff made outbound calls to commercial customers to understand their gas requirements given the lockdown restrictions, LPG was then diverted to meet spiking residential demand. Our Bottle Swap delivery partner, Carr & Haslam, also assisted with the massive task of distributing 9kg orders by providing additional vehicles and drivers to deliver product across the country. The collective determination and outstanding teamwork of our partners and operational teams meant we could deliver product to our customers, while largely maintaining our residential five-day delivery service level.
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