Vector Annual Report 2019

Vector AR’19

― Independent Auditor’s Report (continued)

The key audit matter

How the matter was addressed in our audit

100 years, resulting from the diversity of property, plant and equipment across a portfolio of businesses. There is also judgment when estimating asset lives due to the uncertainty of the impact of technological change.

2. Impairment assessment of a) the Gas Trading segment b) the Regulated Networks segment and c) the E- Co Products cash generating unit (inclusive of $1,234 million of goodwill). Refer to Note 13 of the financial statements

We considered the impairment assessment of the Gas Trading segment, including $157 million of goodwill, to be a key audit matter due to the decreasing margin trading environment. We considered the impairment assessment of the Regulated Networks segment to be a key audit matter due to the significance of goodwill of $1,050 million to the financial position of the group and the significant judgment used to estimate future pricing of the regulated revenue streams beyond the We considered the impairment assessment of the E-Co Products cash generating unit, including goodwill, to be a key audit matter due to the poor performance in FY19 and underperformance against expectations since its acquisition in FY17. timeframe of the current Commerce Commission regulatory price paths.

The procedures we performed to evaluate the impairment assessments included: — assessing whether the methodology adopted in the discounted cash flow models was consistent with accepted valuation approaches of NZ IAS 36 Impairment of Assets and within the energy industry; — evaluating the significant future cash flow assumptions by comparing to historical trends, customer contracts and supplier agreements, Asset Management Plans, regulatory pricing models and budgets; — comparing the discount rates applied to the estimated future cash flows and the terminal growth rates to relevant benchmarks using our own valuation specialists; — challenging the above assumptions and judgements by performing sensitivity analysis, considering a range of likely outcomes based on various scenarios; — considering actual and possible gas M&A activity in New Zealand and how that informs the carrying value and classification of the Gas Trading segment assets (including goodwill); — specifically in connection with the E-Co Products impairment charge of $46.6 million recognised in FY19, evaluating a number of scenarios of expected performance in the 5 year forecast period of the DCF analysis; and — comparing the group’s total net assets as at 30 June 2019 of $2,349 million to its market capitalisation of $3,780 million at 30 June 2019 which implied total headroom of $1,431 million. For each segment we found the methodology to be consistent with industry norms. We found: — the discount and terminal growth rates were in an acceptable industry range; — future cash flow assumptions were supported by comparison to the sources we considered above; and

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