Vector Interim Report 2020 ― Chair and Group Chief Executive report
Regulatory settings confirmed The six-month period has provided Vector’s electricity business with long-awaited certainty regarding the next five-year regulatory period, commencing April 1, 2020. With this decision now finalised, the Commerce Commission has confirmed the maximum allowable revenue for Vector’s electricity business, as well as set limits for network quality standards. As we explained in our most recent Annual Report and Annual General Meeting, it is our firm view that current regulatory settings have failed to consider the negative impact that today’s unprecedented low interest rates and continual forecast inaccuracies are having on our ability to invest to keep pace with Auckland’s growth. For the regulatory period 2013-19, Vector’s under- recovery of actual revenue relative to allowable revenue was approximately $270 million. While we acknowledge the 2020-25 regulatory settings have corrected growth forecast inaccuracies, it is disappointing that exposure to ongoing inflation forecast inaccuracies remains. Moreover, the default price-quality path (DPP3) reset has created a further $189 million funding gap as the Commission has restricted the capital expenditure available to Vector over the next five years at a time when the need to maintain and upgrade Auckland’s electricity network is at an all-time high. Although this outcome will impede our ability to invest in Auckland to the level we believe is necessary over the next five years, we have increased total capital and operational expenditure and are committed to upgrading, extending and maintaining Auckland’s electricity network to the best of our ability. In tandem, we continue to work openly and collaboratively with the Commission and other stakeholders to explore all options to address the investment short fall.
Group-wide earnings performance The Group delivered a steady earnings performance for the HY 2020 period, with adjusted EBITDA of $264.5 million which was in line with last year’s comparative result. Group net profit after tax was $80.5 million, down $2.8 million (or 3.4%) on the prior year’s result. This result was largely driven by higher depreciation and amortisation, partially offset by higher capital contributions and lower interest costs. While our revenues continued to benefit from strong connection growth across our networks and the further expansion of the metering business in New Zealand and Australia, these gains were partially offset by increased maintenance to improve electricity network reliability. We have also invested significant capital expenditure to improve asset reliability, support growth in Auckland, as well as investment to support increasing deployment of advanced meters. Reflecting these priorities, total capital expenditure in the first six months has been $240.0 million, an increase of $38.9 million or 19.3% on the prior period. Capital contributions grew by $3.9m to $45.1 million from $41.2 million a year earlier, reflecting continued connection growth and significant infrastructure development taking place across Auckland. With recent changes to Vector’s regulatory settings further restricting our cashflow – which is now below the level of investment required each year to keep pace with Auckland’s rapid population and infrastructure growth – we have changed some business policies to align capital expenditure.
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