Vector Annual Report 2017

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REPOWERED.

LIFE.

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The whole concept of an ‘internet of energy’ changes the frameworks for how Vector works and plans. Our goal is for New Zealand’s energy to be cleaner and more accessible than ever before and sourced from a multitude of renewable sources. But the real difference will be in how that energy is stored, managed, traded and delivered.

01 Life. Repowered:// Our view of our role in the lives of people is changing as we rethink how consumers connect with the energy they need in rapidly growing cities like Auckland.

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Learn more about our work with Ngāti Whātua Ōrākei, our acquisition of PowerSmart, the new mPrest technology and our vehicle-to-grid (V2G) initiative.

02 Reimagining Vector:// Real examples of how our new approach is coming to life now, and the impacts we expect to see in the years ahead.

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We’re proud of the way the company continues to perform strongly across all its businesses.

03 Taking a sustained approach:// We look back at what we achieved this year, specifically: our highlights, results, strategy and financials.

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VECTOR.CO.NZ LIFE REPOWERED

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THE FUTURE OF POWER WILL BE DRIVEN BY BRILLIANT NEW INFRASTRUCTURE THAT WILL SEE TRUE ON-DEMAND ENERGY DELIVERED IN BOLD NEW WAYS . UNPRECEDENTED INTEGRATION AND STORAGE CAPACITIES WILL REDEFINE HOW CONSUMERS GENERATE, SOURCE, STORE AND TRADE ENERGY .

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Networks wi l l become smal ler, more agi le, more responsive.

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This wi l l influence so many aspects of how we l ive.

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SUSTAINABLY.

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VECTOR.CO.NZ REIMAGINING VECTOR

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REIMAGINING

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LEADERS Philosophy

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BOLDLY APPROACHING CHALLENGES

We won’t answer the issues of tomorrow by relying on industry models that just look to what’s been done before.

Attitudes continue to hold this industry back and therefore hold back the potential for consumers. For some time, our collective view as a board and management team has been that Vector has a responsibility to deliver all customers real choices and to make meaningful contributions towards decarbonising the economy. While some energy businesses are starting to recognise the need to shift thinking in the sector, others remain committed to protecting their legacy models. We believe that meeting the future needs of Auckland is not about continuing to invest in bigger traditional assets. integration. Distributed generation, customer- owned distributed energy resources, smarter distribution technology and advanced analytics give us access to new options and choices. The challenges of tomorrow lie in how we build revolutionary energy systems that are highly effective, faster, smaller, more economical and provide environmental and social benefits. Greater understanding To find those systems, we’ve gone looking for new convergences. Through our relationship with mPrest, for example, we’ve used learnings from defence systems to achieve new levels of synergy, machine learning and rapid and cumulative decision-making. Equally, We believe we have to reinvent ourselves as agents of change and facilitators of

Simon Mackenzie — GROUP CHIEF EXECUTIVE

Michael Stiassny — CHAIRMAN

with PowerSmart, we’ve identified that solar/battery microgrids already offer compelling economic and environmental benefits to remote communities and over time will increasingly disrupt traditional supply- demand economics across our industry. Much more nimble Feedback from our customers clearly underscores the need for us to move forward with flexibility and careful investment. Average household energy consumption is declining, as people renovate, building standards improve, we incorporate more energy efficient appliances and lighting into our homes and businesses, and responsive technology delivers new energy solutions. That’s why we’re investing in assets that can be moved around as required and are not sunk or tethered to one location. One example is a battery that can be deployed in one area to meet a period of need and then redeployed in another area as consumer usage rises or falls. These assets also provide a logical solution to the need for affordable, innovative infrastructure development to support Auckland’s growth. The Tesla Powerpack battery storage system we installed at the high voltage substation in Glen Innes has reduced peak demand by up to 13%. That in turn has enabled us to defer or avoid significant investment that would otherwise be required.

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We’re serious about sustainability in its broadest sense We believe the United

A different mandate Applying learnings gained from working with offshore and local technology companies, we are also opening up new opportunities and new markets: selling smart meter solutions into Australia; partnering with mPrest and becoming a reseller of their revolutionary network management technology; and working with PowerSmart across Australasia. There are certainly those in other parts of the energy sector that would like us to get back in the corner they have consigned us to. Our view is that we need to pursue a different mandate. The rationale for Vector embracing new technology and focusing on our customers’ shifting energy needs is clear. Nor are we solely focused on electricity. We are committed, for example, to bringing safer and more efficient gas solutions to customers — and our new OnGas bottle filling plant in Papakura is an example of that. We’re also working with telecommunications providers to enable customers to access high-speed secure fibre as well as enabling immediate response to devices on our network. To make all that happen, our conversations are continuing with regulators, investors, our communities, our people, our partners and, of course, our customers about regulatory frameworks, pricing structures, rates of growth and more.

Nations Sustainable Development Goals need to sit at the very heart of our business. Our decisions must be based on integrated environmental and socially responsible views that are agile enough to meet quarterly demands and yet strong enough to truly shape and prepare the business for the long term. As we explain later in this report, we have committed to all 17 United Nations Sustainable Development Goals, but for the short to medium term, we’re focusing on seven that specifically support our strategic focus on decarbonisation and climate action and social inequalities. The more we pursue this approach, the greater the opportunities that we discover. For example, in an Australasian first, we will be deploying a solution that utilises recycled Nissan Leaf batteries as mobile battery units that act like diesel generators to support customers during planned and unplanned work on the network.

Future

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NGĀTI WHĀTUA ŌRĀKEI Community

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POWERING A REAL SENSE OF COMMUNITY

Introducing solar energy and batteries changes the whole energy profile.

Kāinga Tuatahi in Kupe Street is a 30-home residential development for iwi first home owners delivered by Ngāti Whātua Ōrākei. Vector has collaborated with Ngāti Whātua Ōrākei to demonstrate how a future community energy solution might operate by installing solar and battery storage in each home. Not only is this already changing how these residents consume power, but how they will one day share it as well. Located on trust land on a four-hectare site close to the centre of Auckland, the community provides environmentally efficient, socially

integrated housing for the descendants of Auckland’s largest hapū. Eighty percent of the houses meet the Government’s affordable definition, meaning they cost

$550,000 or less. Batteries included

There’s an inverter and a Tesla Powerwall battery at each property. Residents stay connected to mains power and pay for that, but their monthly energy bills have fallen to as low as $13. Each system is paid for as part of a monthly development fee that residents pay to Ngāti Whātua Ōrākei, which also includes their mortgage repayments. The energy that’s stored in the neighbourhood could one day stay in the neighbourhood That capability is a glimpse into the future we see for New Zealanders: neighbour-to-neighbour distribution, potentially allowing people with excess power to exchange it with those who need more but don’t have the means, or to sell it to their neighbour or back to the grid for additional income.

Photo credit: Paperboy and Michael Lewis.

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A year in, the project’s proving a win-win. Ngāti Whātua Ōrākei has fulfilled its commitment to care for its land and the environment. From December 2016 to April 2017, the households were provided 47% of their electricity needs directly from their individual solar systems, saving the equivalent of 12.55 tonnes of carbon dioxide equivalent (CO 2 e). For Vector, our involvement reflects our commitment to a lower carbon economy and greater social equality. We absolutely believe that the pursuit of competitive returns is compatible with our drive to deliver clean and affordable energy, innovate the infrastructure we’re responsible for, and contribute to more sustainable cities and communities. And the best place for us to start doing that is at home, in Auckland. New behaviours Perhaps most importantly, this initiative is making a real difference at a of this community has made them more aware of their power bills, and that’s pushing them to really try to reduce their bill as much as possible. So we’re seeing a shift in personal behaviour over and above the changes prompted by the technology. Residents can directly influence the impact that the solar panels are having – on their lives and on the lives of those around them. day-to-day level for the people who are using this new technology. Residents at Kupe Street have said that being part

When my cousin got her first bill she said ‘this is great’. And it was like $50. Then she actively tried to challenge herself to bring it down … now, I think one of the lowest power bills she got was $13.

COMMERCIAL IMPERATIVES:// This is a real-life opportunity for Vector to understand the potential impact of new technologies and new business models in a rapidly changing energy environment. We can directly appraise the impact and usage patterns of networked solar and batteries, both at a household level and across a cluster of households. This will help us plan the longer-term network infrastructure requirements for Auckland as it continues to rapidly expand. Vector and Ngāti Whātua Ōrākei’s already strong relationship has been further strengthened because everyone’s needs are being met. SOCIAL IMPERATIVES:// The Vector-Ngāti Whātua Ōrākei relationship is undertaken in a spirit of true partnership, providing an energy- focused model for engaging with the community, delivering meaningful social and economic benefits. By encouraging greater self-sufficiency, Ngāti Whātua Ōrākei has been able to stay true to its core principles as kaitiaki (guardians) of the land. Vector has enabled all residents to achieve access to the very latest technology. This initiative aligns with our commitments to four United Nations Sustainable Development Goals: Affordable and Clean Energy; Reduced Inequalities; Climate Action; and Partnerships for the Goals.

— NGĀTI WHĀTUA ŌRĀKEI RESIDENT

Savings

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POWERSMART Solar expertise

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MAKING SMART INVESTMENT DECISIONS

We can’t just settle for improvements.

Energy today demands new mindsets.

PowerSmart is a leading New Zealand solar energy company. It specialises in the development of reticulated energy systems that use a combination of solar photovoltaic cells and battery storage, managed using the latest technology, with the ability to have no connection to the outside world. PowerSmart has already proven that solar and batteries provide a compelling economic and environmental solution for remote communities in the Pacific, and increasingly in remote parts of Australia. The focus on the Pacific and opportunities in Australia will remain, but PowerSmart will also be helping us at home in New Zealand to bring on-site energy generation and usage alive with microgrids, and contained grids that can source their energy in any number of ways. The microgrid opportunity is highlighted by recent projects that PowerSmart has completed in the Northern Cook Islands and Tuvalu, in partnership with the New Zealand Aid Programme. The project installed 12 solar and battery microgrids on 10 remote atolls, eliminating their reliance on diesel generators that ran for generally only a couple of hours each day. This has resulted in huge quality-of-life improvements for communities in the area and real economic and environmental benefits. With these high-tech systems, 12 remote Pacific Island communities now have reliable 24-hour power.

Historically, electricity has always been a closed, one-way system: power flowed from faraway generation stations through the national grid and into communities. But the integration of next- generation technology has disrupted that blueprint. Smart storage batteries are revolutionising infrastructure. Suddenly, the passive consumer is evolving into an active consumer/generator/ storer/trader of energy. Now instead of needing to rely on a dam to store energy, households can use batteries to keep the energy they make at home.

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Combine PowerSmart’s proven portfolio of commercial projects with Vector’s energy network technology, expertise, resources and strong balance sheet, and the whole paradigm for how energy is made, where it’s made and who has access to it is challenged. Charging ahead Until now, the energy generation/retail model has been based on getting power from elsewhere and consumers paying for this in a largely fixed way. Solar and battery systems rewrite that. Not only do they enable a complete rescoping of the demand curve by shaving the peaks, they will also let households and businesses become generators and, through peer-to-peer trading, one day to buy and sell solar energy on their own terms. Households will be able to generate clean electricity on-site, to store it for use at any time and/or as a backup for uninterrupted power, and to convert any surplus from waste to revenue by trading locally. Bringing the changes home so that they become more widely accepted For this to go mainstream though, we recognised that the adoption of these new options had to expand beyond commercial projects. Our biggest national market is residential and being able to introduce smarter solar solutions into that market will deliver more choice for Vector customers and enable greater growth. Solar and batteries will go mainstream as costs continue to reduce and people build or renovate. Our decision to purchase E-Co Products Group, which trades as HRV and EES, will over time enhance Vector’s capacity to deliver solar solutions. While PowerSmart increases our existing expertise and delivers us the knowledge and experience to make solar and batteries work commercially, HRV is well structured to serve the residential energy solutions market. The current HRV offering includes ventilation, heat pumps, retrofit double glazing and water filtration. In addition to the healthy home focus, we anticipate HRV will increasingly target energy-efficient home solutions, including solar, ducted and hot-water heat pumps, and residential batteries. HRV’s other products already help keep people’s homes warm and dry. So it makes sense that HRV should incorporate energy solutions like solar energy and batteries into its product mix. Making it happen As a company, we won’t hesitate to invest in innovation, either by ourselves or through critical partnerships. For example, we began installing solar and batteries on our network more than four years ago. But we’re also not afraid to acquire other like-minded businesses where doing so aligns with our strategy and where it delivers the capability, technology and reach we need to provide our customers with solutions that give them maximum flexibility. Change is killing the learning curve. We don’t have time to learn what PowerSmart already knows, nor to build the customer base and brand recognition that HRV already commands. So it makes complete sense to us that we would welcome them into our business, combine our complementary strengths and work together to realise our vision of creating a new energy future in New Zealand and beyond.

COMMERCIAL IMPERATIVES:// Consumers want to make their own decisions. We are focused on addressing that market need and providing them with viable options. For example, batteries provide benefits for those who wish to maximise their investment in solar or move to a time- of-use tariff where they charge up when prices are at the lowest rates and use the electricity when market rates are high. We must invest wisely. Every dollar we save while meeting Auckland’s growing infrastructure needs is one that consumers don’t have to fund. SOCIAL IMPERATIVES:// We are at the front end of meeting the energy infrastructure needs of Auckland’s growth. We know we must act to move the city forward. It’s about making the right choices and providing customers options to support their long-term interests and needs. We cannot burden Auckland now or into the future with traditional network investment solutions when there are potentially cheaper, smarter options available. We believe it is in the long-term interests of our customers that we invest in and bring new energy solutions to market that enable our customers to access lower costs, and have access to greater control and choice. This initiative aligns with our commitments to three United Nations Sustainable Development Goals: Good Health and Well-being; Industry Innovation and Infrastructure; and Sustainable Cities and Communities.

Focus

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mPrest Networks

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VECTOR BRINGS THE INTERNET OF ENERGY

Bringing together diverse standards and complex systems through a single platform.

that will be produced through large-scale generation and storage, micro storage and micro generation is completely changing. Partnering with mPrest allows us to manage complex systems in much more sophisticated ways through unprecedented integration of information and operational technologies. It will also help us to integrate our systems with the wholesale markets more easily to manage and coordinate customers’ energy use and assets in real time. We are confident this will also enable our customers to access potentially lower energy costs more easily, and better enable automation to optimise energy use and cost. Unprecedented awareness We see this ‘system of systems’ as the most comprehensive monitoring, analytical and control system available anywhere in the world. It will sit over our customer, market, distributed energy resources and network systems and manage their performance in real time. Through self-learning, it will be able to build ‘the story of the networks’ based on what has happened historically and to use artificial intelligence to optimise

We’re using world-leading technology to manage multiple technologies on our network in revolutionary ways. We call this the Internet of Energy. Traditionally the energy system from generation to distribution has been uni-directional, but the introduction of distributed energy resources is seeing that rapidly evolve into a multi-directional dynamic system. As consumers assume greater control and choice over the energy they have in their lives, how we all interact with the energy

This project represents a new level of software control for the power utility sector. [It] will allow Vector to progress its goal of expanding access to participative energy markets for its customers, save capex and opex in developing its digital power grid, improve services and create new offerings for customers.

— RON HALPERN, mPrest CHIEF COMMERCIAL OFFICER

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The mPrest software will also enable Vector to bring together the acquisitions and developments we are making. Instead of adding more systems to achieve a more diversified energy network, the mPrest software allows us to bring all the moving parts together in ways that we can control and coordinate. That in turn will enable Vector to play a strong and proactive role in developing the networks best suited to the changing needs of customers. We expect the system to be fully operational by the end of FY18. As a partner in the project, having acquired the Australasian and Pacific Island rights for utility-related mPrest applications, we look forward to making

COMMERCIAL IMPERATIVES:// mPrest enables unprecedented options to integrate and develop new energy solutions for customers and the management of multiple technologies on Vector’s networks. So it will enable us to fully utilise existing load management systems as well as battery solutions and other emerging technologies. It will enable us to streamline capital investment through higher equipment utilisation and non-traditional solutions, and, combined with market incentives, could lead to consumers modifying behaviour patterns. It will help us meet the expectations of our regulator, the Commerce Commission, which incentivises us to innovate with the objective of benefitting customers.

numerous objectives. Our goal is for the mPrest system to assess and predict multiple factors including loads in different parts of the network, market dynamics, storage, customer demand and capacity. Offering enhanced resilience, security and efficiency The mPrest system will allow us to control not just how energy is used but also the assets required to connect energy with people in ways that we forecast will save Auckland many millions of dollars. It challenges the traditional mindset that has seen energy companies growing their networks to accommodate

CUSTOMER IMPERATIVES:// mPrest will enable us to better service customers through faster location of network issues at fault locations and improved deployment of field crews. Our customers will feel better informed because we will be able to provide them with more detailed information, faster.

greater peaks. It also helps us defer network reinforcement costs,

the solution available to other companies in the region so that

reduce the risk of stranded assets at the very time we’re

they too can gain greater synergies

from their assets and deliver new solutions to their customers.

seeing a slow-down in electricity consumption, and promote a rapid increase in new solutions

to generate and manage energy.

SOCIAL IMPERATIVES:// This initiative aligns with our commitments to three United Nations Sustainable Development Goals: Industry Innovation and Infrastructure; Sustainable Cities and Communities; and Partnerships for the Goals.

Control

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VEHICLE TO GRID Charging

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GIVING NEW MEANING TO THE ‘ELECTRIC VEHICLE’

Finding new uses for parked vehicles changes their role.

Charging becomes two-way Our next iteration of electric vehicle chargers helps resolve that issue by time-shifting when people will charge their vehicles. Our new vehicle-to-grid (V2G) chargers operate in two ways. In another first in New Zealand, not only can they take power from the grid, they can also reverse the process; putting power back in ways that have the potential to transform electric vehicles into mobile power sources for businesses and homes. A Nissan Leaf G2 for example with a 30kWh battery could power the average household for 10 hours. If you think you don’t get that much use out of your car given what it costs, you’re right. The average vehicle is parked for the majority of the time. But the new V2G chargers transform what we will soon mean by vehicle usage. Charging vehicles when they are idle during daylight hours will enable electric vehicles to act as an additional rechargeable energy source. Connected to a V2G charger, the vehicle itself could be used to introduce extra power to buildings, as a cheaper power source during peak-hour consumption, as a way to power homes during power outages, and even to release energy back to the grid to support customer demand. And of course the new chargers could, in time, integrate with other technologies such as solar and batteries to redefine what we mean by a truly smart energy home or business.

We’re rethinking the whole concept of how consumers access

the power they need, and in doing so we’re bringing electricity to New Zealanders in ways that redefine current infrastructure. We have deployed sixteen 50kW rapid electric vehicle chargers to provide fast and effective power to Auckland’s growing fleet of electric vehicles. As we did so, we recognised there was a wider issue we would need to solve. When electric vehicle usage increases, it will only be a question of time before repowering them puts pressure on the current grid. More electric vehicles being charged at peak time could lead to a greater need for more infrastructure to meet that peak.

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V2G is proof of how quickly innovation cycles are condensing in the energy sector and elsewhere. Such change is not without its challenges. At this stage, in our view, only two vehicle models, the Nissan Leaf and Mitsubishi Outlander, can be used with the new V2G chargers. It’s also important that the Australia/ New Zealand standards for how residential batteries can be housed to be plugged into customers’ garages. We are confident that take-up will increase as manufacturers see no adverse impact on their batteries. The University of Warwick in the United Kingdom undertook research on the potential of V2G, and found that it could improve vehicle battery life by around 10% over a year. is worked through, because otherwise there’s a risk that electric vehicles will not be able

COMMERCIAL IMPERATIVES:// As New Zealand’s biggest distributor of electricity and gas, we cannot afford to wait and see how all the changes that affect us will play out before we act. V2G is one more example of the way we are taking a leadership role, transforming the way energy is managed in Auckland by incorporating lateral approaches into our network. V2G is one aspect of changing what it means to be a successful distributor. Increasingly, the assets we recognise as being energy generators are being replaced by new means that require us to rethink what it means to integrate energy into our network. The transition to V2G is a strong example of addressing a problem, only to arrive at a solution that will help redefine our business. SOCIAL IMPERATIVES:// V2G offers consumers whole new ways to use their vehicle. Charging the electric vehicle this way will change how people think about, and pay for, the energy they use as well as potentially improving the economics of vehicle ownership. This is a tangible example of technology convergence in a world focused on finding sustainable solutions to global challenges. By providing new ways for companies and individuals to think about electric vehicles, we’re encouraging electrification of corporate fleets and potentially helping businesses to reduce their carbon impacts. This initiative aligns with our commitments to three United Nations Sustainable Development Goals: Affordable and Clean Energy; Industry Innovation and Infrastructure: and Sustainable Cities Communities.

Change

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VECTOR.CO.NZ TAKING A SUSTAINED APPROACH

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A SUSTAINED APPROACH.

TAKING

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AR 2017

PERFORMANCE HIGHLIGHTS

PERFORMANCE HIGHLIGHTS

$

361.2 555,100

106,670

CONNECTIONS

CONNECTIONS

MILLION

Regulated businesses Adjusted EBITDA

Electricity network Up 0.9%

Gas network Up 2.3%

Down 2.0% on the back of flat revenue, higher maintenance costs and one-off items

159.4 $ MILLION

$

$

168.9

474.4

MILLION

MILLION

Group net profit Down 38.4% on prior year result, which was boosted by $164m gain on the sale of Vector Gas, offset by the $64m impairment to the Gas Trading division

Continuing operations Adjusted EBITDA Up 0.3%

Unregulated businesses Adjusted EBITDA Up 3.4% due to growth in the installed smart meter base

367.4 $ MILLION

47.1 %

CENTS 16.00

Balance sheet strength Up from 43.7%

Capital expenditure Up 13.9%, driven by growth in Auckland, metering and expenditure on Bottle Swap plant Regulated business $210.6m (up 4.8%) Unregulated business and corporate $156.8m (up 28.9%)

Full year dividend Up 0.25 cents, the 11th consecutive year of dividend increases

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OPERATIONAL HIGHLIGHTS

OPERATIONAL HIGHLIGHTS

Award

Goals

Installed

Integrated

Identified seven United Nations Sustainable Development Goals that we will actively pursue.

Received an Edison Electric Institute Asia-Oceania

Installed over 24,200 smart meters in Australia.

Worked with Dominion Salt to integrate a Tesla Powerpack with their 660kW wind turbine at Lake Grassmere to deliver around 75% of the site’s energy needs.

Index Award for superior and sustained financial performance.

App

Acquired

Launched Achieved

Acquired E-Co Products Group (which trades as HRV and EES) and PowerSmart as part of delivering on our vision to create a new energy future.

Achieved certification to AS/ NZS 4801 and ISO 14001.

Launched our Electric Vehicle (EV) app to make EV charging smarter by making it easy to find and get directions to EV chargers nationwide.

Updated our app to make it easier for customers to see current outages, planned and unplanned, and to report an outage to us. Some 70,000 customers have now downloaded the app.

Won

Installed

Partner

Decreased

Decreased Lost Time Injury Frequency Rate by 15%.

Entered into multimillion- dollar partnership with Auckland Council, to produce a series of Vector-funded projects, including the Energy Efficient Communities Project (with the support of Entrust) and lighting up the Auckland Harbour Bridge.

Won the Territory Generation contract for a 5MW battery in Alice Springs in the Northern Territory of Australia.

Installed a 1MW/2.3MWh Tesla Powerpack battery in Glen Innes, Auckland.

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CHAIRMAN’S Statement

THE BUSINESS CASE FOR AN ENERGY DEMOCRACY

It is pleasing to report that Vector’s performance continues to deliver the solid results necessary to support growing dividends for our shareholders.

With adjusted EBITDA of $474.4 million, Vector has delivered at the top end of our market guidance of $460 million to $475 million. Shareholders will receive a fully-imputed final dividend of 8.0 cents, taking the full year dividend to 16.00 cents per share, up from 15.75 cents in 2016. The Vector board and management team are proud to have delivered 11 consecutive years of dividend growth, noting that via our majority shareholder Entrust, these proceeds are largely distributed to the people of Auckland by way of the Entrust dividend. We encourage you to read through these pages to learn more about the innovation, initiatives and attitude that Vector has employed to deliver this result. After 11 years, you might assume that such results are to be expected: Vector provides an essential service, we have robust strategies and we are in good shape. In this vein, our focus on creating a new energy future based on disruption and sustainability could be considered a “nice to have”. I strongly urge you to rethink that assumption. Vector is a business under pressure through a combination of consumer trends, a low interest rate environment and regulatory settings. The downward movements in our regulated networks’ financial results may be small, but they are noticeable: electricity connections may be up, but throughput is down; gas volumes are up, but prices are about to be reset down. Despite net investment of over $700 million into our regulated networks over the past five years, our regulated adjusted EBITDA remains $30 million below what it was four years ago.

MICHAEL STIASSNY CHAIRMAN

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CHAIRMAN’S Statement

If we don’t provide what they want, someone else will. For Vector, there is no choice. We are already fully committed to unlocking greater value through the deployment of new technology targeted at energy production, storage, delivery, management and optimisation. We don’t underestimate the fight on our hands, given others in the sector are determined to hang on to the past. As we have seen in the past year, they will use any means at their disposal protect their revenue streams. Fortunately, the opportunities from new energy solutions are significant, and Vector is well- positioned to capitalise – by fighting for what is right and in consumers’ best interests. We are already transforming how we support Auckland’s growth, how we educate consumers to think about energy and how we future- proof our business to maximise value for shareholders. And, we have a unique and vital competitive advantage – to a great extent our customers and shareholders are one. Successfully serving one, is inextricably linked to successfully delivering to the other. This single-minded focus is powering our future. Looking forward to the 2018 financial year, we are targeting adjusted EBITDA at, or around, the FY17 result. – from regulatory lobbying to public campaigns – to

Don’t make the mistake of dismissing these as one-off anomalies; they are trends. Vector’s performance is – and will continue to be – impacted by changing energy consumption patterns. There is no room for complacency – the future is here. For example, while the fundamentals of our Auckland energy networks remain strong, the growth in Auckland’s population is not expected to translate into growth in regulated earnings for the next two to three years. That means Vector has to look to other sources to generate revenue to plug this gap. So when Vector talks about embracing disruptive technologies or our commitment to the United Nations Sustainable Development Goals, we are not merely paying lip service to lofty ideals or indulging in green washing – these are essential to our very survival. Long-term dividend growth is untenable without a radically different business paradigm. Therefore, innovative, sustainable and customer- focused initiatives are at the heart of our strategy for one reason only, they make good business sense. Historical methods of electricity generation and delivery put generators, distributors and retailers firmly in the driver’s seat, but no more: the transition from monopoly to energy democracy is well advanced and power is now shifting to the people. To reap the economic benefits of what have been described as “the four Ds of energy democracy” – distributed power, decentralisation, democracy from ownership and disruptive technology – Vector has to continue to forge a new path with customers at our heart.

Therefore, innovative, sustainable and customer-focused initiatives are at the heart of our strategy for one reason only,

they make good business sense.

Michael Stiassny Chairman

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GROUP CHIEF EXECUTIVE’S Report

THE BALANCE OF POWER IS SHIFTING

A pleasing financial result is testimony to the hard work and commitment of all the teams across the multiple businesses that make up Vector, and to our investors for their faith in our ability to continue to generate competitive returns. Winning the Edison Electric Asia-Oceania shows that we are a top performer and I wish to take this opportunity to thank everyone at Vector for all they’ve done to make this win possible. Institute (EEI) award for best performing utility in

Group net profit from continuing operations rose 186.8% to $168.9 million from $58.9 million. The uplift was due to the $64 million impairment of the Gas Trading division in the prior year; growth in capital contributions; lower interest costs; and a one-off tax gain of $15 million following the Court of Appeal ruling in Vector’s favour over the tax treatment of the sale of rights to use our Penrose to Hobson Street tunnel. Overall group net profit of $168.9 million was down 38.4% on the prior year result, which was boosted by the $164 million gain on sale of Vector Gas, offset by the impairment to Gas Trading. Vector’s balance sheet remains strong, with gearing as at 30 June 2017 at 47.1%, up from 43.7% a year ago and 43.9% at 31 December 2016. The $960 million proceeds of the sale of Vector Gas were initially applied to debt repayment, and are now being redeployed to support growth in our Auckland networks and across our unregulated portfolio. Capital expenditure (capex) rose 13.9% to $367.4 million from $322.6 million. The increase in capital expenditure was driven by growth in Auckland, metering and expenditure associated with the OnGas Bottle Swap plant in South Auckland. Capex for the regulated business rose 4.8% to $210.6 million from $201.0 million. Capex for the unregulated businesses and corporate rose 28.9% to $156.8 million from $121.6 million. This year, as we have continued to acquire new businesses and expand into new markets, we have once again shown that Vector is not a company to stand still. We are fundamentally committed to providing the best solutions we can for our customers, and we are unafraid to challenge traditional models in order to make that happen.

SIMON MACKENZIE GROUP CHIEF EXECUTIVE

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GROUP CHIEF EXECUTIVE’S Report

EDISON ELECTRIC INSTITUTE AWARDS:// Vector received an Edison Electric Institute Asia-Oceania

As a business, we are determined to put customers first and to strive to make best use of our capital over the longer term across both our regulated and unregulated businesses. The search for sustainable answers isn’t always easy, but when we get it right – and we have done that many times this year – it’s immensely satisfying.

The awards we’ve won this year are indicative of the high standards we hold ourselves to. Initiatives like working with lines that are de-energised where possible, and the ingenious solution that our OnGas team introduced to make a repetitive task safer and remove the danger of strain injuries show that we are unafraid to step up if we believe there are better and safer ways for things to be done. This year, our leadership team engaged with the All Blacks Manager for Leadership and Mental Skills, Gilbert Enoka, to help us identify frameworks to continue to move the business forward. He talked about three things that hold companies back: mindset (they’re used to thinking about themselves in particular ways); skill sets (their knowledge and capabilities are not up to the challenges that the business increasingly faces); and process issues (they find it hard to adjust to new needs operationally). current, and in streamlining our processes, one of the challenges we face is that in order to challenge existing models, we need to shift not just our own mindsets but also those of the sector and of our regulators. We’re determined to enable customers to have energy choices, and that’s not something others in the industry find easy. It also challenges regulators and policy makers because it requires rethinking parameters at the speed at which technology now moves. We have no problem with debate over ways forward, as long as the issues being raised are legitimate concerns. While we’re pleased with the progress we’re making in keeping skill sets

From the battery contract we won in Alice Springs to the successful installation of smart meters in Australia, we’ve shown that our skills and solutions are not only internationally competitive but also timely as countries grapple with the challenges of rethinking their energy mix, decarbonising their economies and finding new ways to give consumers the control they now expect. Our deliberate strategy to innovate with technology has seen us acquire businesses like PowerSmart, with its proven ability to deliver innovative and economic commercial solar/ battery solutions, and E-Co Products Group which, through its HRV and EES brands, will help us deliver healthy and energy efficient solutions direct to consumers’ homes. It’s seen us work with world- class innovators like Tesla, LG Chem, and mPrest to take the most exciting global thinking we can find and apply it, in lateral ways, to propel us forward. It’s motivated us to introduce changes, big and small, right across our business — from app improvements to our vehicle-to-grid (V2G) initiative to mobile batteries — that will improve the lives of our customers at work, at home and in between. Details of what we’ve done and how we have aligned ourselves to the United Nations Sustainable Development Goals are included in this report. I invite you to take the time to read more about what we’ve been doing and how we believe these changes and improvements are contributing to Vector being a better, more sustainable, customer-focused company.

Index Award for superior and sustained financial performance.

THE NEW ZEALAND WORKPLACE HEALTH AND SAFETY AWARDS:// Vector’s OnGas business won the WorkSafe New Zealand Best Initiative to Address a Work-Related Health Risk Award. 2017 DELOITTE ENERGY EXCELLENCE AWARDS:// Vector’s General Manager Gas Trading Brenda Talacek was a finalist in the Women in Energy category. Vector’s Kupe St collaboration with Ngāti Whātua Ōrākei was a finalist in the Community Initiative category.

Simon Mackenzie Group Chief Executive

Vector’s Line Operating Standards were a finalist in the Health and Safety Initiative category.

RESPONSIBLE INVESTOR AWARDS EUROPE:// Vector was shortlisted for a Responsible Investor Award for Innovation and Industry Leadership alongside Deutsche Börse, DS Smith, London Stock Exchange Group PLC,

ProCredit Holding, Tesla Inc., Thrive Renewables and Unilever.  

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ENTRUST

BACKED BY EXPERIENCE

PROTECTING AUCKLAND’S INVESTMENT IN VECTOR://

FROM LEFT TO RIGHT

SEATED: PAUL HUTCHISON, KAREN SHERRY, AND MICHAEL BUCZKOWSKI (DEPUTY CHAIRMAN) STANDING: WILLIAM CAIRNS (CHAIRMAN) AND JAMES CARMICHAEL.

ENTRUST IS VECTOR’S MAJORITY SHAREHOLDER. Entrust oversees the people of Auckland’s investment in Vector and is helping Vector to create a new energy future. It provides strong and consistent ownership that has allowed the company to navigate economic cycles, advances in technology and changes in customer behaviour to deliver shareholders and energy consumers the best outcomes. About Entrust Entrust, which was formerly known as the Auckland Energy Consumer Trust (AECT), was formed in 1993 as part of the corporatisation of the Auckland Electric Power Board (AEPB). Shares in the new company, which later became Vector, were transferred to Entrust to hold on behalf of residential and business consumers in the AEPB supply area. Entrust’s role Entrust’s mandate is to make sure its beneficiaries get value from the 75.1% stake it holds in Vector. There are approximately 320,000 households and businesses in the former AEPB supply area.

diversification into new sectors like energy metering, gas distribution and new technologies. Vector’s growth has allowed Entrust to distribute more than $1.2 billion to its beneficiaries. In the last year alone it distributed more than $100 million. Entrust trustees Entrust has five trustees, who are elected every three years. The trustees are: William Cairns (Chairman), Michael Buczkowski (Deputy Chairman), James Carmichael*, Paul Hutchison and Karen Sherry*.

Entrust proposes, and alongside all other shareholders, appoints directors to the Vector

board and approves all of Vector’s major transactions. Two of Vector’s directors are Entrust trustees. Entrust is actively involved in regulatory and industry issues, advocating for Auckland energy consumers, and, by implication, all electricity consumers. A particular focus in recent times has been speaking out about a proposal to increase Auckland’s transmission prices. Using a fund set up at the time Vector acquired UnitedNetworks, Entrust has also supported the undergrounding of overhead lines in the Entrust district and promoting new technologies such as solar, batteries and electric vehicle charging infrastructure. Auckland benefits Vector’s asset base, a key measure of the company’s financial performance, has grown strongly since the AEPB’s assets were first transferred to Entrust. Entrust has supported Vector to achieve this through

ENTRUST ONLINE:// www.entrustnz.co.nz www.facebook.com/entrustnz 0508 ENTRUST (0508 368 7878) PO Box 109626, Auckland 1149

* James Carmichael and Karen Sherry sit on the Vector board.

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OUR STRATEGY

FOCUSING ON CONSUMERS.

OUR STRATEGY

01.

TECHNOLOGY://

02.

CONNECTIVITY://

03.

SUSTAINABILITY://

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OUR STRATEGY Technology

01.

FINDING THE BEST TECHNOLOGY FOR NEW ZEALANDERS

By sourcing new technologies from global innovators, Vector has successfully introduced new energy choices to New Zealanders. We continue to look for new technologies to add to our portfolio that deliver the best combinations of technological performance, innovation, sustainability and commercial viability.

Accessing Silicon Valley technology

Partnering with global leaders

We have been working with Tesla since that company’s early development of stationary energy batteries. We have deployed its leading-edge battery technology at numerous sites across our network, from 395 Powerwalls in a range of residential, community and school settings to the 1 MW/2.3MWh Powerpack at the Glen Innes substation.

Tesla is one of a number of technology relationships that Vector has in place. We are also working with mPrest to streamline our systems, and with world-class technology company LG Chem to supply the battery technology for Territory Generation’s 5MW battery project in Alice Springs. This deal is a beach head for Vector into the rapidly expanding utility and commercial battery market in Australia. Together, these partnerships give us access to a global

We have also deployed a commercial solution using Tesla technology for Dominion Salt.

portfolio of products capable of catering to multiple vertical sectors.

Brian Ryan MBA (Hons), BTech GROUP GENERAL MANAGER DEVELOPMENT

Introducing new energy technologies to New Zealand is about getting four things right: technology; innovation; sustainability; and of course commerciality.

Source

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OUR STRATEGY Technology

DOMINION SALT://

INTEGRATING BATTERY STORAGE WITH WIND POWER We have worked with Dominion Salt, a world-leading manufacturer and supplier of salt products, to integrate a Tesla Powerpack with their 660kW wind turbine at Lake Grassmere to deliver around 75% of the site’s energy needs. It’s another example of Vector developing an innovative customer solution. Since 1942 Dominion Salt has been making pharmaceutical, food, agricultural and industrial grade salt for markets around the world. The company has long relied on sun and wind to evaporate water for salt production, but its long- term goal is to continue

to adopt new technologies that minimise environmental impact and enhance manufacturing efficiency. In addition to wind energy, the company also uses co- generation from process heat. The 250kW battery storage system will enable Dominion Salt to make the best use of its wind turbine and to store any excess generation. That means the company will need less peak energy and can rely on the Tesla Powerpack to smooth out the flow of energy generated and delivered by its wind turbine.

Global innovation To achieve technological performance, innovation, sustainability and commercial viability, Vector must combine bleeding edge, leading edge and proven technology in the projects we work on. Alongside our technology partnerships, we work with a number of not-for-profit innovation organisations to help us access new and exciting thinking that can change how we work. Elemental Excelerator is a non-profit organisation with offices in Palo Alto and Hawaii that help later-stage startups commercialise their technologies with funding for demonstration projects. Elemental Excelerator has a portfolio of 53 promising startups, and 28 demonstration projects deployed across Hawaii and Asia-Pacific. Vector is a part of Elemental Excelerator’s Global Advisory Board. We sit alongside some of the world’s largest energy stakeholders, including the United States Department of Energy, United States Navy, TEPCO, First Philippine Holdings, Enel Green Power, and General Electric Ventures. In addition to peer-to-peer learning opportunities within this group, we are provided access to a pipeline of vetted companies that can change the way we provide value to our customers. For example, the mobile charging units that we are now starting to use to keep households connected while we are safely undertaking repairs came through this organisation.

THE ENERGY SOLUTION WE

HAVE DEVELOPED WITH DOMINION SALT WILL DELIVER A SIGNIFICANT PROPORTION OF THE SITE’S ENERGY NEEDS AND REQUIRE LESS PEAK ENERGY.

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