Vector Annual Report 2019

energy systems to move us all forward

Life is enabled by infrastructure. Core systems that deliver everything we take for granted.

Vector is one of those systems. With a stable and robust core, our business has the flexibility to rise to the challenges of Auckland’s ever-growing energy demands.

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Meeting the needs of tomorrow takes foresight, capability and an environment that enables innovation, investment and momentum.

We are leading the way in creating intelligent and affordable energy systems with the structural integrity to empower our customers well into the future. Vector is working with customers, industry and global technology companies to ensure we tackle the challenges of a rapidly changing world, and create a new energy future together.

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About this report

This report, dated 22 August 2019, is a review of Vector’s financial, operational and environmental performance for the year ended 30 June 2019. The financial statements have been prepared in accordance with appropriate accounting standards and have been independently audited by KPMG. The financial, operational and environmental information has been compiled in line with NZX Rules and recommendations for investor reporting, as well as Vector’s commitments to the United Nations Sustainable Development Goals. Our greenhouse gas (GHG) emissions as reported on page 35 were also independently assured by KPMG in accordance with ISAE3410. This approach is also consistent with GHG protocol. 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 accounts 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.

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contents

How Vector creates value

6

Performance snapshot

8

Strong governance in a climate of change

10

Chair and Group Chief Executive report

12

Chief Financial Officer report

16

Our journey to a new energy future

18

Our material issues

20

Safety always

24

Regulated networks

26

Gas trading

29

Technology

30

Our people

32

Our environment

34

Our Board

36

Our management team

38

Governance report

40

Entrust

43

Joint ventures and investments

44

Operating statistics

45

Financial performance trends

46

Non-GAAP financial information

48

Financials

49

Statutory information

99

Financial calendar and directory

110

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Vector AR’19 ― how Vector creates value

how Vector creates value

STRONG FOUNDATION Electricity network Gas networks and products Smart meters Vector’s fibre networks 1 3 4 2

Our People

Our Environment

1

ON

OFF

Our Expertise

4

2

INPUTS

3

ON

OFF

ON

OFF

Our Finances

ON

OFF

ON

OFF

ON

OFF

Our Assets and Infrastructure

COMPANY VALUES:

OUR VISION: Creating a new energy future

Our Community and Relationships

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Consumer empowerment and choice

NEW ENERGY FUTURE

5 6 7

More customer choice and control New energy solutions Intelligent networks

Enabling positive and sustainable change to give customers more choice and control over their energy needs

Our energy networks Safe, reliable, resilient, affordable and future-ready energy networks

Energy innovation Shaping the evolving energy ecosystem through innovation, and digital and engineering know-how

5

ON

OFF

ON

OFF

OUTCOMES

7

ON

OFF

Clean energy Enabling clean energy options to support the transition to a low carbon world

ON

OFF

6

Empowered people A workplace that empowers our people to contribute positively to the business, their

families and communities

Passionate, inquisitive, resilient, here to win

Financial sustainability Enabling responsible investment to help power Auckland’s growing economy

SDGs

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Vector AR’19 ― performance snapshot

performance snapshot

Our energy networks $ 260.9 M invested 1 to lift network 2 integrity and enable Auckland growth (over $5million every week)

14,322 new electricity and gas connections added

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198 minutes

major asset relocation projects to enable significant Auckland infrastructure upgrades

system average interruption duration index (SAIDI): 198 minutes average interruption duration per customer in regulatory year 2019 3

Consumer empowerment and choice

1.56 M smart meters in New Zealand and Australia

1.9 % lift in gas liquid sales to 79,170 tonnes

improved online Outage Centre tool launched to customers

Energy innovation 400 +

600 kW

24

network connected energy resources

600 kW renewable energy system installed in Niue

Vector Lights events for the people of Auckland

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Clean energy

1,183 tonnes CO 2 emissions saved from entering the environment at Vector EV charging stations 4

17 % reduction in corporate carbon intensity this year

31,000

96,591

native trees planted through Vector’s Urban Forest Initiative over the past year

free EV charging sessions provided at Vector’s rapid charging stations

Financial sustainability $ 485.8 M Adjusted EBITDA 6 Empowered people 40 % reduction in our TRIFR 5 compared with FY18, 35% reduction in LTIFR 5

15,750 hours of learning and development provided across the Vector group this year

Vector is the first New Zealand business to gain the Accessibility Tick

$ 84.0 M Group net profit after tax

16.50 cents Per share full-year dividend

1. Gross regulated capital expenditure. 2. Vector’s regulated electricity and gas networks. 3. This figure includes SAIDI minutes resulting from Vector’s changed health and safety practices. 4. Compared with equivalent energy used by petrol powered vehicles. 5. Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Injury Frequency Rate (TRIFR). 6. Earnings before interest, tax depreciation and amortisation (EBITDA). Accounting changes are consistent with the CFO report.

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Vector AR’19 ― strong governance in a climate of change

strong governance in a climate of change

Meet our new Chair: Dame Alison Paterson

What have been the key changes to Vector’s Board this year? After a long period of stability, Vector has worked through a process of Board renewal and we are privileged to have three new business leaders join our Board this year. Tony Carter, Dame Paula Rebstock and Bruce Turner are outstanding appointments. They bring with them wide-ranging commercial and governance experience to complement the capability already in place around the Vector Board table. We look forward to their contribution as we continue towards our goal of creating a new energy future. What new skills and experience have been brought to the Board table? We followed a rigorous process to ensure we were introducing the right mix of skills and capabilities to complement those already in place. It is very important to get this combination right, given our role is to govern on behalf of shareholders.

Dame Alison Paterson started her career as an accountant before becoming a professional company director in 1976. She was the first female director of a publicly listed company and has since held senior governance roles with some of the country’s foremost organisations, including as Chair of Landcorp and Deputy Chair of the Reserve Bank. In 2018 Dame Alison was appointed Chair of Vector’s Board after serving as a director for eleven years. Her services to business were recognised in the 2014 New Year Honours in which she was made a Dame Companion of the New Zealand Order of Merit. Along with Vector, Dame Alison chairs the Boards of Kiwi Wealth, the Forestry Industry Safety Council, Te Aupouri Commercial Development and Te Aupouri Fisheries Management. She is also a member of the Health Quality and Safety Commission. In this interview, we ask Dame Alison about the key changes to Vector’s Board over the past year, and what’s next for the company.

While each new director has a wide variety of governance competencies, particular strengths are shown by Dame Paula Rebstock in regulatory policy and government relations, Bruce Turner in distribution network engineering, operations and market trading, and Tony Carter in customer experience, new technology disruption, government relations and corporate governance. As with any new team it takes time to develop a fresh dynamic, but overall everyone is working well together. What we all have in common is a passion for the energy sector and the critical role Vector will play in enabling a new energy future for Auckland and New Zealand – both now and into the future. We are developing a strong working relationship with Simon Mackenzie and his management team, many of whom are also new to the business this year. The Board is energised by the wave of fresh thinking combined with institutional knowledge. It’s a powerful balance and I am excited about where it’s leading us. How are you all developing as a team?

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What excites the Board most about Vector’s future?

We remain excited by Vector’s vision to create a new energy future, recognising the changing world, the development of new technologies and how the consumer is at the centre of new technology and behaviours. Much of this is driven by the responsibilities we have within an environment characterised by relentless growth and the increasing electrification of motor vehicles which will only accelerate as New Zealand works towards achieving its net zero carbon goals. Our ambition is to remain at the forefront of new technology solutions that deliver for our customers. Vector’s strategy has two key elements. The first is optimising our core network – the foundation of our business – by making it truly intelligent. Traditional assets will continue to play a key role but they will be integrated with digital and consumer assets. This capability will allow us to more efficiently manage loads and smooth out the demand curve. This will mean we don’t have to invest so much in continuing to build more and more infrastructure that runs the risk of future redundancy as technology drives energy efficiency and alternatives. The second element is to enable a new energy future by empowering customers to better manage and use their energy. Vector has led the way in smart metering and is now developing real traction in alternative technologies such as batteries and solar. We have engaged expertise in New Zealand and internationally, and will continue to take in these insightful global perspectives as we progress this element of our strategy. Furthermore, the Board is energised by our responsibility to have a strong voice on behalf of our customers and to represent their interests on a variety of industry issues. Some parties won’t agree with the positions we take – but at least they know where we stand! What’s keeping you awake at night? At a time of ultra-low interest rates and pressures on growth, real infrastructure investment in an economy assumes even greater importance. I worry that aspects of regulatory settings risk harming incentives to invest by not being aligned to the uncharted territory we are now in. Inflation within regulatory settings has been consistently over-forecast without correction for a decade. It cannot continue because it has the effect of significantly reducing cashflow available for critical infrastructure investment. Settings must adapt to changing times and regulation is no exception. Click here to watch an interview with Dame Alison Paterson.

DAME ALISON PATERSON, CHAIR

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Vector AR’19 ― Chair and Group Chief Executive report

Chair and Group Chief Executive report

Through investing in the expansion and intelligence of our networks and energy solutions, and by providing greater choice and control to our customers, we are enabling the accelerating change around us.”

Like the world around us, the pace of change at Vector is accelerating. As a company, our work is at the heart of two key challenges facing us – investing to support Auckland’s relentless growth, and providing energy solutions which move us all towards an affordable low-carbon world. businesses and leisure activities and, increasingly, with the new electric vehicles that they drive. They tell us that they value energy services that are safe and reliable as well as giving them greater choice and control of how, where and when they use energy. Vector’s focus is to continue leading the way in meeting these challenges. As signalled in our last two annual reports, significant investment is required to make us future-ready in our traditional energy networks, as well as digital and new energy solutions. While it is our primary responsibility to enable Auckland’s growth, we believe our new energy solutions can benefit everyone – not just Aucklanders. April 2020 marks the start of the next five-year regulatory period in which the Commerce Commission will reset limits for our electricity network revenues and network quality standards. A key focus of our ongoing engagement with the Commerce Commission is how low interest and inflation rates will crystallise challenges within the Our customers continue to adopt new technologies in their homes,

existing regulatory model. We also remain committed to meeting our regulatory compliance requirements. We strongly believe that regulatory settings should not restrict our ability to deliver Auckland growth or invest in technology to future-proof our network. Within the broader regulatory regime, there are avenues for Vector and the Commerce Commission to work together to correct these anomalies, and better align cashflows with investment needs. The Commission’s final reset decision is due on 28 November 2019. As has been signalled previously, we will be reviewing our dividend policy once we have the Commission’s decision. For the past decade, we have worked hard to build a strategic asset portfolio which provides more options for sustainable returns. Alongside our regulated electricity and gas businesses, we have continued to grow our wider businesses, particularly Vector PowerSmart, Vector Advanced Metering Services (AMS) and Vector Communications, which, along with our Gas Trading business, define our company as an energy group with a growing domestic and international footprint. We are pleased to report solid progress towards our vision of creating a new energy future. Through investing in the expansion and intelligence of our networks and energy solutions, and by providing greater choice and control to our customers, we are enabling the accelerating change around us.

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our year Steady earnings performance The group delivered a steady earnings performance for the year, with the adjusted EBITDA of $485.8 million ahead of FY18 and in the mid-point of the guidance range provided over the year. 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 expenditure to improve electricity network reliability and the underperformance of E-Co Products Group (trading as HRV). Group net profit after tax was $84.0 million and includes a non-cash impairment of $46.6 million in respect of E-Co Products Group. The prior year’s net profit of $149.8 million included a one-off tax gain of $16.7 million. If we exclude these, Group net profit after tax of $130.6 million was down slightly on the prior year. As a result of the disappointing performance of E-Co Products Group leading to impairment, we have new leadership in place and have repositioned the business with our other technology solutions, through Vector PowerSmart. More detailed information about our financial performance is provided in the Financial Review on pages 16 to 17. Dividend Our steady earnings performance enabled the Board to declare a final dividend of 8.25 cents per share, taking the full year’s dividend to 16.50 cents, up from 16.25 cents last year. Lifting our customer delivery Auckland’s relentless growth continues, with 14,322 new electricity and gas connections over the year, averaging around 275 connections each week. Combined with ever-changing customer behaviour, this growth continues to provide significant opportunities and, at the same time, challenges. Whether it be constructing new assets, adding intelligence to our networks and systems, or developing energy solutions – we have long understood that putting customers’ needs at the centre is essential.

Dame Alison Paterson CHAIR

Simon Mackenzie GROUP CHIEF EXECUTIVE

We invested a further $260.9 million – or $5 million every week – in our networks to make them smarter, more resilient and to support Auckland’s growth. Our strengthened focus on electricity network reliability is part of our commitment to meet network quality targets in the 2020 regulatory year. During the year we successfully integrated a software platform into our network which has been co-developed with technology firmmPrest. In the long-term, this platform will support our key objective of keeping energy prices affordable for consumers, while still meeting their expectations around network reliability and enabling energy choice. This exciting project milestone has been made possible by the increasing focus on digitisation of our company over recent years.

We have also continued to invest in our wider portfolio of businesses which remain central to providing the choice and control our customers demand. Further information on how our businesses have delivered for customers this year can be found on pages 26 to 31. Technology leading change Vector’s group of Technology businesses is an integral part of our vision to create a new energy future. We are pleased with the ongoing growth of our smart metering business Vector AMS, with 1.56 million meters now installed in homes and businesses across New Zealand and Australia.

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Vector AR’19 ― Chair and Group Chief Executive report (continued)

Making work an ever-safer place Both the Board and management place the highest priority on ensuring that Vector has best-practice health and safety practices. Every one of our staff and contractors must be able to come to work each morning in the knowledge that they will be going home again safely at the end of their work day. We are delighted with the progress made towards our safety goals this year. We have significantly reduced both the occurrence of injury incidents and their severity, particularly in our contracting workforce. While this progress is clearly a company-wide effort, we acknowledge the award-winning initiatives of our OnGas Bottle Swap team at their new Papakura facility. the Future of Energy is here While the challenges facing our networks – relentless urban growth and electrification of transport – are not unique to Vector, they are intensified by the size of our region and the rate of change. Timely investment is critical, both in traditional energy network infrastructure and in new technologies which give our networks the intelligence to meet these challenges. Traditional network assets will continue to form the backbone of our network for the foreseeable future. However, the integration of new technologies and digital solutions into the broader system remains critical to efficient capital spend, and to provide the flexibility needed to better manage energy flows as demand grows and changes. We are continuing to prepare our electricity business for the unabated integration of EV chargers. In light of the Government’s recently Advancement towards an intelligent electricity network

The Electricity Pricing Review process has drawn attention to the critical importance and value of consumer data across the entire energy value chain. We support the broad consensus that unlocking access to smart meter data across the sector will bring customer service innovation, greater retail competition and more efficient network investment. We are optimistic that this will occur and that these opportunities can be realised for the benefit of consumers. Our commercial energy solutions business, Vector PowerSmart, has also had a successful year, enabling customers across New Zealand and the Pacific to adopt greater energy independence with solar and battery technology. As an example, our Technology report on page 31 showcases a partnership between Vector PowerSmart and the New Zealand and Niuean governments to install an integrated renewable energy solution for the people of Niue. We are excited by the substantial changes in both our Vector PowerSmart and Vector Communications technology businesses this year. We welcomed new leadership to both businesses and have embedded new plans to drive future growth. Of course, our most visible example of new, sustainable energy technology is Vector Lights on Auckland Harbour Bridge, which celebrated its first year anniversary in January 2019. Vector Lights is part of a 10-year partnership between Vector and Auckland Council, in collaboration with the NZ Transport Agency, and already holds growing cultural significance for the people of Auckland. Since its launch, Vector Lights has generated more energy than it has used.

announced clean vehicle ‘feebate’ scheme, it is almost certain New Zealand’s 15,000-strong EV fleet – more than 40% of which is on Auckland’s roads – will expand considerably. Our 2019 – 2029 Electricity Asset Management Plan outlines how we will ensure our network has the flexibility to respond to a surge in EV uptake. This includes a digitisation programme to enable better asset management and load optimisation, supported by innovative outage management services. This network platformwill provide a strong foundation to give consumers more choice and control over their energy needs. More information on our efforts to enable the convergence of transport and energy can be found on page 26. The importance of having smarter networks will only increase over time. To this end, we will continue to work with local and central government and regulators to highlight the real value of these platforms, in terms of decarbonisation, customer choice and affordability. Funding efficient investment The ability to invest at the right level at the right time is critical. Vector’s holistic strategy to fundamentally change its energy system requires significant, ongoing investment as it supports Auckland’s growth while investing in a step-change in technology to future-proof its physical assets. As previously mentioned, a key focus of our ongoing engagement with the Commerce Commission is how low interest and inflation rates are crystallising challenges within in the existing regulatory model. Since 2013, significant regulatory forecasting inaccuracies have resulted in around $270 million of lost revenue for Vector. We believe the case to align regulatory settings with the sector’s investment requirements has never been stronger, and we are not alone in calling for change. The Electricity Pricing Review

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We are advocating the benefits of bringing forward cash flow to support investment, customer outcomes and meet market expectations regarding fair financial returns.”

our appreciation to both these former directors for their valued contribution to Vector during their respective tenures. Earlier this year we welcomed new independent directors Dame Paula Rebstock and Bruce Turner, and the return of former director Tony Carter. While all are highly experienced directors, each brings a different skillset and perspective, and they are adding real value to Vector’s governance. Further information about our new Board, is provided on pages 36 to 37. looking ahead While acknowledging the key challenges ahead of us, we remain committed to Vector’s vision to create a new energy future for New Zealanders. We remain confident in our plan to rise to the challenges of Auckland’s growth and increasing electrification of transport. We will continue to target investment as efficiently as we can by supporting traditional network assets with digital and new energy solutions for the long-term benefit of energy consumers. However, changes to regulatory settings which enable this investment will be critical. We are pleased by our ongoing success in the Australian metering market and look forward to continued growth in the coming year. Our revised approach for Vector Communications and the newly consolidated Vector PowerSmart business are already gaining traction, and we look forward to reporting on progress and improved profitability. Our Gas Trading business will continue to adapt and seek new opportunities in the challenging market conditions. Following the final Default Price Path 3 (DDP3) decision later this year, Vector will be able to provide guidance about expected future dividend payments and FY20 adjusted EBITDA, which may be affected by the reset of our future electricity revenues.

our people On behalf of the Board and management, we would like to thank the entire team at Vector for their considerable efforts and contribution as we advance towards a new energy future. Our refreshed senior management team has provided new energy and leadership across the business, too. For several years, all our employees have had ongoing access to learning and career development opportunities. This is resulting in an increased number of internal promotions, which is particularly pleasing. We are also pleased with the outcome of the year’s pay equity review, where we make role-by-role comparisons for all employees to identify any gender pay equity gaps. In the past year, the very small number of anomalies identified were addressed within the annual remuneration review process. Our goal is to continue to ensure we pay our employees fairly based on the market data for the role they hold, to ensure there is no gender bias. This year Vector became the first New Zealand company to be awarded the Accessibility Tick in recognition of our efforts to make our company more accessible and inclusive for people with disabilities. More information on how our Human Resources initiatives are delivering for our people can be found on pages 32 – 33. our Board Around the Board table we saw a significant refresh during the year. Our long-serving independent chair Michael Stiassny stood down at the November annual shareholders meeting. In addition, Entrust trustee Michael Buczkowski joined as a non-executive director, taking over from former trustee James Carmichael. We would like to express

panel’s recent analysis also highlights the issue of persistent revenue under- recovery for many electricity distributors. This calls into question two critical regulatory settings. The first is the indexation of asset values, which are heavily reliant on inflation forecasts. These have been significantly over- forecasted for a decade, resulting in major revenue impacts to electricity distributors, without correction. More fundamentally, any indexation of asset values is treated as non-cash revenue. From a timing perspective, this reduces the cashflow available to Vector to support critical infrastructure investment at times of high growth and changing consumer behaviour. In our engagement with the Commerce Commission, we are advocating a switch to non-indexing asset values. This change would be net present value (NPV) neutral in respect of what customers pay over the life of the assets, and therefore offers a strong case for regulatory indifference. This precedent already exists for other New Zealand regulated entities. Secondly, the current ultra-low interest rate environment underscores the urgent need for the Commerce Commission to amend the way it derives the cost of debt in its Weighted Average Cost of Capital (WACC) determinations. Currently this is determined from a narrow window around the time of reset. International regulatory practice typically calculates debt costs based on a 10-year trailing average to better reflect efficient debt book management. Vector is advocating for New Zealand regulation to align with international practice. We remain committed to working openly and collaboratively with the Commerce Commission – both within the current reset process and beyond – to explore all options within the regulatory framework to address these two challenges. Regulatory and policy settings must be fit for the future, with the key focus being on enabling customers to benefit from energy innovation.

Dame Alison Paterson Chair

Simon Mackenzie Group Chief Executive

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Vector AR’19 ― Chief Financial Officer report

Chief Financial Officer report

Vector delivered a steady financial performance for the year, recording adjusted earnings before interest, tax, depreciation and amortisation (adjusted EBITDA) of $485.8 million. This was up $15.7 million or 3.3% on last year’s result and in the middle of the company’s guidance range of $480 million to $490 million. The result includes an uplift due to recent accounting changes. 1 Excluding these changes, comparable adjusted EBITDA was up $4.8 million or 1.0% on the previous corresponding period. Group net profit after tax was $84.0 million and includes a non-cash impairment of $46.6 million in respect of E-Co Products Group. The prior year’s net profit of $149.8 million included a one-off tax gain of $16.7 million. If we exclude these, Group net profit after tax of $130.6 million was down slightly on the prior year. Segment adjusted EBITDA Earnings for our Regulated Networks were $367.0 million, up $8.4 million 1 (2.3%) against the prior year. Continued Auckland residential connection growth drove a $7.1 million increase in underlying electricity revenue 2 , while gas revenue was $1.7 million lower, mainly due to the full year impact of the October 2017 3 gas price reset. Total network maintenance expenditure increased by $2.2 million, largely due to new initiatives focused on improving electricity network reliability and SAIDI performance (refer pages 26 to 27). During the year, Vector and the Commerce Commission agreed to recommend to the Court a penalty of $3.6 million in recognition of Vector’s breaches of the electricity network quality standards in 2015 and 2016. Gas Trading earnings were $31.3 million, down $3.1 million 1 against the prior year total of $34.4 million, impacted by the loss of a major customer in January 2019 and continued gas constraint supply issues which drove natural gas volumes down by 12.0%. This was partly offset by increased LPG sales and improved cost efficiencies at the new OnGas Bottle Swap processing plant.

Adjusted EBITDA for Vector’s technology segment grew $11.5 million 1 (8.8%) to $142.0 million, as a result of continued growth in smart meter deployments in New Zealand and Australia. Impairment The improved performance of the metering business was offset by the underperformance of E-Co Products Group (trading as HRV). This result was partly driven by the ongoing market challenges faced by HRV’s heat pump and solar divisions, as well as the investment made in a leadership change, restructure and repositioning of the business in the second half of the year. The new management team and CEO, put in place in September 2018, have undertaken a strategic review, and will focus on a new commercial energy solutions approach under the Vector PowerSmart brand. With this new approach, we expect a return to profitability. In view of the above changes, the Vector group has recognised a non-cash impairment of $46.6 million. Capital contributions Capital contributions grew by 10.9% to $79.3 million during the year, resulting from continued connection growth and significant infrastructure development taking place across Auckland. Cash flow Operating cash flow was 10.7% lower at $348.1 million. This decrease was largely due to the payment of Loss Rental Rebate surpluses directly to electricity account holders. This payment occurred in August/September 2018 and was for Loss Rental Rebates accumulated over the course of the prior year. In addition, the accumulation of Loss Rental Rebates for FY19 have been less than the prior year.

FINANCIAL HIGHLIGHTS

$ 84.0 M Group Net Profit after tax 16.50 Full year dividend $ 485.8 M Adjusted EBITDA

CENTS PER SHARE

1. As at 1 July 2018, Vector adopted new accounting standards for revenue from contracts and leases (NZ IFRS 15 and 16) and changed the way we account for gains/losses on disposal of fixed assets. For more information and a breakdown of NZ IFRS changes by segment see notes to the financial statements. 2. Net of capital contributions, loss rental rebates and pass-throughs. 3. The gas distribution reset resulted in a 14% reduction in prices from 1 October 2017.

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Vector has delivered 13 consecutive years of dividend growth, reflecting its prudent asset management and strategy to diversify its revenue streams.”

Jason Hollingworth CHIEF FINANCIAL OFFICER

$ 425.1 M Capital expenditure $ 348.1 M Net operating cash flow $ 250 M Successful senior bond issued

Capital expenditure Capital expenditure was $425.1 million, $43.9 million (11.5%) higher than last year. This increase reflected continued investment in infrastructure to support Auckland’s continued growth, higher network replacement expenditure, and increasing deployments of smart meters as market demand continues to accelerate in Australia. Network investment projects included the installation of new grid-scale batteries in Warkworth and Snells Beach and a new substation at Hobsonville Point. Balance sheet Our balance sheet remains healthy, with gearing at 30 June 2019 at 52.2%, up from 48.8% a year earlier, and 49.6% at 31 December 2018. Reflecting our strong balance sheet, Vector continues to hold a BBB credit rating by Standard & Poor’s and successfully issued a $250 million senior bond in May this year. Dividend Despite operating in a challenging regulatory environment, Vector has delivered 13 consecutive years of dividend growth, as a result of its prudent asset management and strategy to diversify its revenue streams. This year, shareholders will receive a fully imputed final dividend of 8.25 cents per share, taking the full-year dividend to 16.50 cents per share, up from 16.25 cents per share in 2018. The final dividend will be paid to investors who are on the register at 9 September 2019 and distributed to investors on 16 September 2019.

CAPITAL EXPENDITURE $ MILLION



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FY

FY

FY

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DIVIDEND DECLARED CENTS PER SHARE











            

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Vector AR’19 ― our journey to a new energy future

our journey to a new energy future

5

And to meet New Zealand’s net zero carbon goals, we need an electrified transport system.

Auckland’s growth is unprecedented. Since 2013, Auckland’s population has grown by the size of Tauranga and Whangarei’s populations combined!

1

$1.6 BILLION for Watercare (next 3 years) $28+ BILLION Auckland Council capital plans for infrastructure (over coming decade) $82.5 BILLION Auckland Council capital expenditure (next 30 years) infrastructure projects have been announced, including: We’re not the only ones managing the challenges and opportunities of growth. In recent years, significant

AUCKLAND

4

WHANGAREI POPULATION

QUEENSTOWN

TAURANGA POPULATION

In this time, we’ve spent nearly $1.3 billion to strengthen network integrity and support Auckland’s growth, and added 59,222 new customers. We’ve also added 1,019km of network – enough to stretch in a direct line from Auckland to Queenstown!

And it’s not stopping. In the next 10 years we’ll see: ~300,000 more people – population of 2 million!

3

AUCKLAND GROWTH

117,000 new energy network connections 250,000 more vehicles on our roads (based on current ownership rates) Up to

2

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MORE THAN 40% OF EVs are on Auckland roads

Vector’s ambition is to create a new energy future by:

The approach favoured by the ICCC* to reduce emissions from the energy sector includes REPLACING ~2 MILLION VEHICLES with EVs by 2035 A FAST 1 EV CHARGER can add the equivalent demand of 8.8 houses to the grid

Making data-driven decisions to invest more cost-effectively

Empowering customers with choice to better manage their energy needs

10

Enabling Auckland growth through asset relocations and new connections

Deepening our understanding of customer needs

6

Making our network more intelligent to improve management of peak loads

Integrate digital assets and new energy solutions to benefit consumers

Growth and EV uptake puts pressure on infrastructure.

It’s a sector-wide challenge to transition New Zealand to the future of energy. We have a shared responsibility to:

New technology can shift our network peaks and keep energy affordable.

9

DELIVER ENERGY through safe, resilient and secure networks PROVIDE AFFORDABLE ENERGY IMPLEMENT NEW TECHNOLOGY to the benefit of all customers

ENABLE ACCELERATING EV UPTAKE and the electrification of public transport ENERGISE A NET ZERO CARBONWORLD EMPOWER CUSTOMERS with choice around their energy needs

7

8

Already we are:

We are trialing new things.

POWER DOWN TRIAL to see if customer incentives can reduce peak loads

MANAGING MULTI- DIRECTIONAL POWER flows with network connected energy resources and digital platforms FLATTENING PEAK DEMAND with network batteries TARGETING ASSET MANAGEMENT through better data PUTTING MORE EV CHARGERS ACROSS AUCKLAND to fuel EVs and track usage trends

VEHICLE TO HOME (V2H) TRIAL to see if V2H can control loads and boost customer independence DISTRIBUTED ENERGY RESOURCE MANAGEMENT (DERMS) ongoing platform development

NEW CUSTOMER CHANNELS (BOTS)

* Independent Climate Change Committee.

1. Vector estimates adding a 22kW ‘fast’ charger to a home equates to adding approximately 8.8 homes to the grid.

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Vector AR’19 ― our material issues

our material issues

Vector monitors the changing business landscape, using global and national trends to inform and determine key issues impacting our operating environment, and to support the identification of emerging risks and opportunities.

CORE ISSUES CONTRIBUTING ISSUES

ELECTRIFICATION OF TRANSPORT

Vegetation management

Public  demands on sustainability

New tech integration

RESILIENCE

Disruptive business  models

Security  of energy  supply

Customer service expectations

Organisational knowledge

RELIABILITY

EVOLVING  ENERGY SYSTEM

Extreme weather  events

Digital transformation

Pace of technological change

Auckland hyper growth

Cyber threats

Business  conduct and ethics

Workplace  H&S

Policy and regulatory change

Customer choice

PUBLIC & WORKER SAFETY

Social  equity

SOCIAL RESPONSIBILITY

Vulnerable customers

Energy affordability

CREATING VALUE

MAINTAINING VALUE

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Our stakeholders have told us about the matters they consider to be material to our business Customers ‒‒ Safe, reliable, resilient and affordable energy networks ‒‒ Real-time updates about outages ‒‒ Choice and control over their energy needs Employees ‒‒ Safe and rewarding workplace that gives them opportunities to grow and develop ‒‒ Stable and sustainable returns ‒‒ Confidence in Vector’s long term strategy Central government ‒‒ Safe, reliable, resilient and affordable energy networks ‒‒ Aligned approach to achieving policy objectives ‒‒ Enabling urban growth, energy affordability, safety and equality ‒‒ Enabling the transition to a low carbon economy ‒‒ Ability to sufficiently support themselves, their families and communities Shareholders

Local government ‒‒ Safe, reliable, resilient and affordable energy networks ‒‒ Informed about issues and opportunities ‒‒ Open partnerships and opportunities for joint infrastructure projects Regulators ‒‒ Delivering a safe, high-quality network for customers at a fair price Suppliers ‒‒ Opportunities to collaborate, innovate and cooperate ‒‒ Fair and constructive engagement Iwi ‒‒ Deeper understanding of Māori culture and values ‒‒ Opportunity to work together on matters of mutual interest Community ‒‒ Choice and control over their energy needs ‒‒ Safety ‒‒ Access to the benefits of an evolving intelligent energy system

Energy industry ‒‒ Fair and competitive energy system that enables positive outcomes for consumers and the environment Media ‒‒ Informed commentary on issues impacting the energy industry ‒‒ Useful and timely outage updates for their audiences

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operations, leadership and sustainable business

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Vector AR’19 ― safety always

safety always

5,070 students attended Vector’s Stay Safe Around Electricity schools programme 4801 certification maintained for New Zealand and Australian businesses, 7901 certificates continued

Supporting wellness Our focus on promoting employee wellness continued throughout this year with initiatives stemming from feedback in our annual Wellbeing 360 survey and other initiatives. Highlights included our Blue September roadshows to raise awareness of prostate and testicular cancer, and where more than 100 male workers underwent a prostate cancer screening test. To promote healthier eating, we delivered fruit trees and established vegetable gardens at our OnGas Bottle Swap plant in Papakura, providing ready access to a variety of fresh fruit and vegetables. Feedback has been encouraging, and in the coming year we intend to repeat this initiative at other Vector sites. Vector also welcomed back MINDsense founder Michael Duff, who ran a series of sessions with more than 100 employees participating each time. These sessions help our people to build a more positive self-view by exploring positive ways to direct thoughts, actions and outcomes. Safer communities Vector is committed to educating communities about the importance of keeping safe around electricity and other energy infrastructure. Our award-winning Stay Safe Around Electricity schools programme is offered free of charge to schools and links directly to the New Zealand Curriculum. The programme runs in Years 3 to 8. In the last year, we visited 28 schools and engaged with 5,070 children. Vector continues to support ‘beforeUdig’, an online service giving anyone undertaking excavation works access to information on the location of cables, pipes and other utility assets in and around any proposed dig site. This helps to protect people and valuable assets during these works. In 2018, more than 172,000 enquiries were managed through the site.

Vector is committed to safety in everything we do. The only thing we care about more than keeping the lights on is keeping our community and our people safe. Vector’s aim is to manage the risks inherent in working and living around electricity, gas and other technology systems. Improved safety at work We have made strong progress towards our safety goals this year, with a significant reduction in both the occurrence of injury incidents and their severity. Our focus on managing safety centres around the proactive steps we can take to avoid incidents. This includes training to ensure our workers have the right skills to do their jobs safely, audits and inspections to check we are delivering the right outcomes, and leadership engagement to demonstrate commitment from the highest levels of the organisation. To track how we are progressing, Vector measures its Lost Time Injury Frequency Rate (LTIFR) and Total Recordable Injury Frequency Rate (TRIFR). This year we are pleased to report a 35% improvement in our LTIFR compared with FY18, and a 40% improvement in our TRIFR compared with FY18. Both LTIFR and TRIFR include our own directly employed workforce as well as our contracting workforce. A large portion of the TRIFR improvements have come from our contracting workforce (47% improvement compared with FY18). Our severity rate (number of working days lost due to injury) has improved by 83% compared with FY18. This shows we are not only reducing both the occurrence of injury incidents but also the severity in nature of those incidents.

90 Health and safety leadership engagements undertaken

400 employees have participated in ‘fatigue awareness’ roadshows over the past two years

HEALTH & SAFETY INITIATIVE OF THE YEAR

OnGas Bottle Swap Plant won Health and Safety Initiative of the Year at the 2018 Deloitte Energy Excellence Awards

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35 % reduction in our LTIFR compared with FY18 40 % reduction in our TRIFR compared with FY18

83 % reduction in severity rate (number of working days lost due to injury) compared with FY18

6,070 HSE training hours completed

TOTAL RECORDABLE INJURY FREQUENCY RATE Number of recordable cases per million hours worked including contractors



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FY

FY

FY

FY

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 TRIFR – COMBINED

LOST-TIME INJURY FREQUENCY RATE

Number of lost time injury incidents per million hours worked including contractors

Helping our people manage fatigue We know fatigue is a key underlying contributor to many of our critical health and safety risks. With many of our people holding safety-critical roles, we want to ensure we are managing the risk of fatigue well. This year, we have adopted new technology to help. Building on our safety awareness roadshows, which included fatigue management strategies, we are trialling the effectiveness of the Readiband device. Similar to a Fitbit, the device is worn on the wrist to record sleep data, and is helping to build a fatigue risk profile so we can proactively identify and manage fatigue issues. Our OnGas business is also trialling the Guardian Seeing Eye Machine camera, which is installed in vehicles to detect eye movement, including ‘micro-sleeps’ and distractions. An alert is sent to the driver if the camera picks up any concerns. Depending on the effectiveness of this trial, we may install the cameras in the company fleet.













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FY

FY

FY

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 LTIFR – COMBINED

25 ―

Vector AR’19 ― regulated networks

regulated networks

$ 260.9 M invested in our Regulated Networks 2 400 + network connected energy resources 14,322 new electricity and gas connections

Our Regulated Networks, which include the electricity and gas distribution networks, provide the strong foundation for us to build a new energy future for Auckland. Maintaining the integrity of these networks is critical as we continue adapting to the disruptive pressures of urban growth, our changing climate, advances in new energy technology and ever-evolving customer needs. In FY19 we invested $260.9 million to improve the safety, reliability and resilience of our network and facilitate Auckland growth. Adjusted EBITDA was $367.0 million, up $8.4 million 1 on last year, largely driven by higher electricity revenue from increased connections due to consistently high residential growth in Auckland. This was partially offset by increased maintenance expenditure. Volumes and consumption trends Volumes transported across the electricity network fell 0.4% to 8,410 GWh, largely due to warmer average temperatures in May and Electricity consumption per household appears to have stabilised after more than a decade of decline. Auckland gas distribution volumes fell 0.7% to 14.4 PJ from 14.5 PJ in the prior year. Enabling urban growth In the last year, we added another 11,000 new electricity connections and 3,322 gas connections to our networks. Total electricity connections stood at 571,125, 1.4% higher than a year ago, and total gas connections were 111,642, up 2.2% from 109,229 in the prior year. Vector plays a critical role in enabling new connections and asset relocation for infrastructure development, including roads and wastewater systems, housing and public transport. June 2019 compared with the corresponding period last year.

During the year, we worked on 17 major asset relocation projects to enable major Auckland infrastructure upgrades. For example, in the City Rail Link project assets were relocated to make way for tunnelling. With no sign of a slowdown, we are working with our regulator to ensure these projects can be appropriately funded in the future. Convergence of transport and energy In the past year, we’ve seen increasing Government policy focus on the accelerated electrification of the transport sector, to help New Zealand achieve its zero carbon goals. Vector has been proactively preparing Auckland for the impacts that the rise of electric vehicles (EVs) will have on our energy systems. With some fast residential EV chargers adding the equivalent of 8.8 new houses to the electricity grid, it is imperative that we understand future network impacts. Over the past year Vector’s 29 EV charging stations installed around the city provided more than 96,000 free charging sessions and 800 MWh of electricity to EV users. The chargers are providing us with valuable insights about customer charging behaviour for future network planning. Improving reliability for our customers In recent years, we have faced a range of challenges which have resulted in the increased frequency and duration of outages on our network. We remain committed to meeting our regulatory compliance requirements, and this year we have strengthened our focus on improving electricity network reliability. An example is a changed approach to the significantly increasing travel times, which remain an ongoing challenge for our crews.

11,383

problem trees removed to protect overhead power lines and 31,000 native trees planted through our Urban Forest initiative

1. For the breakdown of NZ IFRS changes by segment, see notes to the financial statements. 2. Gross regulated capital expenditure.

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