Vector Annual Report 2018

Business Unit Reports Regulated Networks

New electricity connections rose 21.9% to 11,135 from 9,138 on the back of continued Auckland growth. New gas connections fell 10.0% to 3,165 from 3,515. Total connections to the electricity network stood at 563,076 at year end, up 1.4% from 555,100 a year ago. Total gas connections were 109,229, up 2.4% from 106,670 a year ago. Aided by the increase in connections and the colder temperatures in the latter part of the year, volumes transported across the electricity network rose 1.3% to 8,442GWh from 8,332GWh. Auckland gas distribution network volumes were up slightly at 14.5PJ from 14.3PJ the previous year, due largely to connection growth. Adjusted EBITDA (which excludes capital contributions) fell slightly (0.7%) on the prior year to $358.6 million from $361.2 million on the back of higher maintenance costs. The rise in maintenance costs ($7.5 million) is driven by an increase in vegetation maintenance targeting the worst performing feeders and the April 2018 storm which resulted in additional costs of $4 million. Strong connection growth and an increase in replacement capex has resulted in a significant increase in regulated capex, up to $245.8 million in FY18 from $210.6 million in the prior year. Given the size of the investment required to support the ongoing anticipated growth of Auckland’s energy networks, it is of significant concern that our regulated electricity network is not earning its regulatory cost of capital. Vector’s electricity network ROI 3 for the 2018 regulatory year was only 5.49% - significantly lower than the regulatory WACC 4 of 7.19%. This is largely due to Commerce Commission forecast errors in the current regulatory parameters. Absent these errors, Vector’s electricity revenues for the 2018 regulatory year would have been almost $28 million higher. Whilst we anticipate the majority of these errors will be corrected at the next reset (April 2020), they will continue to significantly impact network returns until then. Our Regulated Asset Base (RAB) now stands at $3.4 billion. The electricity RAB amounts to $3.0 billion and the Auckland gas distribution RAB is around $405 million. Vector has been in ongoing discussions with the Commerce Commission regarding penalties for historic breaches of its regulated SAIDI performance quality targets. The challenge for Vector, and indeed all line companies, is that the current regime provides limited guidance for balancing price and quality. Lack of precedent means it is difficult to predict the potential financial impact. This makes meeting quality standards very challenging in an environment of rapid technological change, increased customer expectations, greater focus on health and safety, increased dependence on electricity, and ongoing city growth. n —— 1 Vector will pass Loss Rental Rebate surpluses directly to Electricity account holders. The accumulated Transpower receipts have been released to Other Income and a provision for payment is reflected in Other Expenses. 2 In 2014/15 the assumptions we made around customers being placed by their electricity retailer on the most suitable plan did not eventuate. As a result, we unintentionally earnt more than allowed by the Commerce Commission. 3 Return on Investment, as defined by the Commerce Commission. 4 Weighted average cost of capital.

REGULATED NETWORKS

Revenue for our Regulated Networks business increased 4.6% to $776.2 million from $741.9 million the year before. This was largely driven by the release of accumulated Loss Rental Rebates 1 and an increase in capital contributions – up 14.7% to $70.2 million – reflecting continued connection growth and significant infrastructure development taking place across Auckland. Underlying revenue (net of contributions, loss rental rebates, and pass-throughs) was flat, with growth in connections offset by declining electricity consumption and lower gas revenue following the regulatory reset of gas distribution prices from 1 October 2017 which resulted in a 14% reduction in prices. From April 2018, our electricity revenue has also been impacted by the settlement 2 with the Commerce Commission, which will see $13.9 million returned to Auckland consumers by reducing the amount of revenue we recover over two regulatory years. The impact on the FY18 result is $1 million.

New electricity connections rose 21.9% to 11,135 from 9,138 on the back of continued Auckland growth.”

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