Unison Networks Limited

Ownership review December 2017

Strictly Confidential

Final Report

December 2017

Strictly confidential

Final report

Strictly confidential

The Directors Unison Networks Limited 1101 Omahu Road PO Box 555 Hastings 4156

13 December 2017

Ownership review

Dear Directors,

We are pleased to provide our final report which considers the performance of Unison Networks Limited and includes a review of ownership options, to assist the Director’s to report to the Hawke’s Bay Power Consumer Trust prior to the forthcoming ownership review.

This report is provided in accordance with the terms of our engagement letter dated 6 July 2017 and is subject to the restrictions set out in Appendix A.

Our key findings are contained in the Executive Summary of the report.

If you have any queries regarding this report please do not hesitate to contact us.

Yours sincerely

Craig Rice Lynne Taylor Partner Executive Director [email protected] [email protected] 09 355 8641 09 355 8573

PricewaterhouseCoopers, 188 Quay Street, Private Bag 92162, Auckland 1142, New Zealand T: +64 9 355 8000, F: +64 9 355 8001, pwc.co.nz

Strictly confidential

Table of contents

Introduction 2 Executive summary 3 Overview 8 Unison group 9 Unison Networks Limited 14 Unison Fibre Limited 23 Unison Contracting Services Limited 24 ETEL Limited 27 Unison Insurance Limited 28 Ownership review 30 Restrictions 41 Sources of information 42 SCI targets and performance 43

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Introduction

This report has been prepared for the Directors of Unison Networks Limited (“Unison”, the “Group” or “the Company”) to support the Hawke’s Bay Power Consumer Trust’s (“the Trust’s”) forthcoming ownership review. Clause 4 of the Trust Deed, requires the Trust to request a report from the Directors of Unison prior to undertaking an ownership review. The scope of our report is to provide information and analysis which is relevant to clauses 4.1.1, 4.1.2 and 4.1.3 of the Trust Deed, as follows: 4.1.1 An analysis of the performance of the Company to the date of the report together with a summary of the advantages and disadvantages of Trust ownership and the benefits or otherwise of such ownership to Consumers 4.1.2 An analysis of other ownership options including, without limitation, share distribution to Consumers, sale of shares to the public, sale of shares to institutional investors, compared with retention of ownership by the Trust 4.1.3 A comparison of the Company’s performance with the performance of other companies engaged in energy distribution. This report has been structured into three parts: 1. Review of the Unison Group’s performance over the last six years.

2. Review of the companies and activities included within the Unison Group over the same period, including benchmarking performance with comparable companies.

3. Analysis of ownership options available to the Trust and its beneficiaries, including the current Trust ownership structure.

A summary of our findings is included in the Executive Summary, overleaf. In conducting this review, PwC has relied on financial information supplied by Unison, published information disclosure documents for electricity distribution businesses including Unison, PwC databases and interviews with members of Unison’s board, senior management team, and the Chair of the Trust.

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Executive summary

Company overview Unison Networks Limited (“Unison” or “the Company”) owns and operates the electricity distribution business (EDB) which services the Hawke’s Bay, Taupo and Rotorua districts located in central and eastern North Island. It also manages the neighbouring Centralines’ electricity distribution network located in the southern part of the Hawke’s Bay.

In addition, Unison owns a number of related businesses, which support the Company’s core business. These include Unison Fibre Limited (UFL), Unison Contracting Services Limited (UCSL), Unison Insurance Limited (UIL) and ETEL Limited (ETEL).

Unison Group performance  Since the last review, the Company has consolidated its financial position, reduced debt levels and increased dividends to shareholders.

 The electricity distribution business continues to contribute the majority of the Company’s revenue and profits, although the financial impact of the other businesses has increased since FY12.

 Continued investment in local electricity and fibre networks has contributed to a 33% increase in shareholder value between FY12 and FY17.

 During this period the Company has distributed $55m in dividends to the Trust and has committed to dividend growth at 1% above the rate of inflation for the foreseeable future.

 The Group has also continued to support its local communities by promoting children’s involvement in sport and sponsoring other local community facilities.

Unison Networks  The electricity distribution business, Unison Networks, has focussed on improving asset management and network operations practices during the review period.

 Ongoing investment in and development of smart grid capability, which includes leveraging the local fibre network developed by UFL, is increasingly improving the responsiveness of the network and reliability of power which consumers receive.

 Improved understanding of the network allows Unison Networks to further optimise the operation and utilisation of its assets. Over time this is expected to result in improved reliability, deferral of investment in replacement and upgraded assets and lower costs for consumers.

 Increased network management capability is also expected to assist Unison Networks to respond to a more dynamic role for electricity distribution networks. As emerging technologies provide new opportunities for both the demand and supply of electricity, the electricity market will evolve; new participants will enter; and existing suppliers will need to adapt.

 Unison Networks has also leveraged this network management expertise by managing the neighbouring Centralines network. This, along with the purchase of the Rotorua and Taupo networks in 2002 has enabled Unison Networks to achieve sufficient scale to support investment in improved network management capability.

Other businesses  The Company’s other businesses, while relatively small, have assisted the company to diversify into areas which are related to its core business.

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 ETEL continues to expand into offshore markets, while maintaining a strong market position in New Zealand.

 UCSL largely supports the local electricity network, but has also ventured outside of the region, with crews currently working in the South Island. The contracting company’s continued focus on improving health and safety practices has been a notable achievement over the review period.

 UFL operates a relatively small fibre network and while Unison Networks’ smart grid initiatives have leveraged the local fibre capability built by UFL, retail connection uptake is still relatively low, which currently limits the financial contribution of this business to the Group.

Comparative performance Benchmarking Unison Networks’ EDB against a peer group of similar EDBs (Aurora Energy, Northpower, Powerco, Orion NZ and WEL Networks), and industry averages indicates that Unison Networks has performed well on most measures during the FY13-FY16 period.

 The regulatory ROI has moved from first to third quartile within the peer group, and now exceeds the industry average, reflecting the additional allowances permitted by the Commerce Commission for the EDB.

 Total opex per connection has remained relatively flat over the review period and although it exceeds the peer group third quartile, it remains below the industry average.

 Total capex is within expected ranges, and has increased during the review period.

 The frequency of power outages is similar to the peer group and industry averages, but the duration of outages is well below the industry average, and similar to the first quartile of the peer group.

 Average unit prices are similar to the industry average.

Ownership considerations There are a number of different ownership options available to the Trust across a broad spectrum, from continued 100% Trust ownership at one end to full divestment to a third party investor at the other end. Third party investors may include institutional investors, industry and retail investors ie the public. For the purpose of this report we have considered the following ownership options:

 100% Trust ownership of shares in the Unison Group

 Joint venture

 Merger through equity exchange

 Long term lease of the assets of Unison Networks to a third party

 Sale or distribution of 24.9% or 49.9% of shares to beneficiaries, the public, industry or institutional investors. This option may also include issuing new equity to a third party

 Sale or distribution of 100% of shares to beneficiaries, the public, industry or institutional investors.

The advantages and disadvantages of continued Trust ownership and the alternative ownership options have been considered using the following context:  The two key objectives for the Company as set out in the SCI

o Performance excellence - striving for excellence in the management and operation of the core business

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o Value enhancement - leveraging this excellence outside of the core business in order to create value

 The capability to respond to the challenges and opportunities arising from the evolution of the electricity and telecommunications sectors.

Performance excellence The performance excellence objective can be achieved in the core business via innovation and investment.  Under the current 100% Trust ownership model access to innovation and investment comes through incremental growth opportunities which provide scale and expertise, or investments in opex and capex improvements funded through prices and sales. Unison’s performance improvements to date have been developed via this model. Community objectives are able to be fully accommodated under this option.

 A joint venture provides enhanced access to potential performance excellence. A joint venture allows the Company to step into new business opportunities which may enhance performance in existing businesses through economies of scope and scale. Under a joint venture, the Trust is able to maintain its 100% ownership of the core business, while entering into new business ventures in partnership.

 A merger provides similar opportunities for performance improvement, although under a merger with a like business it may also provide access to additional economies of scale in core business activities. The Trust may relinquish its 100% ownership of the core business under this model, and its level of control will depend on the nature of the merger. The ability to fully meet community objectives may be impacted by obligations to the wider business.

 The long term lease option may provide access to external capability which improves performance excellence. However, the Trust’s ability to influence consumer and community outcomes is diluted during the term of the lease and thus consumer interests are more reliant on regulatory oversight.  The performance excellence objectives under the distribution or sale options will depend on the ultimate shareholders, the degree of sell down or new equity issued and the ability of the Trust to continue to influence the Company’s objectives. The Trust may have some influence on the identity of the new shareholders in the short term, but this will reduce in the longer term after the initial transaction(s). Community objectives may be compromised as a result.

Shareholder value enhancement  Under the 100% Trust model, Unison has achieved considerable growth and increased shareholder value to date. It has achieved this through acquisitions, organic growth of existing and new business activities; while meeting shareholder return and dividend expectations. To some extent this has been funded through increased external borrowings. However external sources of borrowings are not unlimited. Each investment which requires external debt funding reduces the capacity of the Company to fund future investment opportunities. Alternatively, the Company could sell existing assets in order to fund new investments or divert cash flows to debt reduction in the short term. This may involve dividend deferral.

 Joint venture and merger options provide access to growth opportunities by diluting the Company’s ownership in new and possibly existing businesses. These opportunities may help the Company achieve the Trust’s dividend and value expectations, for example by increasing access to unregulated revenue streams, without causing the Company to exceed its long term prudent borrowing capacity or resorting to higher cost debt sources.

 The long term lease option is unlikely to enhance shareholder value in terms of being able to leverage Unison’s capabilities, given the Trust’s control over its core asset is significantly reduced during the term of the lease and any value created would accrue to the lease holder. As the Unison Group’s structure is significantly altered the subsidiary businesses may be sold.

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 Sale options can provide access to the capital required to fund growth, but these result in diluted or loss of control and influence over existing assets and may not provide access to additional expertise relevant to those assets. Distribution options do not directly enhance shareholder value.

Capability to respond  The 100% Trust model allows Unison to maintain focus on core business and build capability within it to respond to the emerging opportunities for electricity distributors. Acquiring additional capability is possible under this model, subject to the ability to fund it. A culture of innovation may be more difficult to establish under this model, although the Trust may choose to support investment in innovation.

 Joint ventures provide opportunity to access new capability, services and technologies without diluting control over core business.

 Mergers may not provide the same benefits if the merger is with a similar party such as another network.

 The responsibility for responding to industry changes is passed to the lease holder under the long term lease option - they bear any risks and capture any rewards during the lease period. The value of the business passed back to the Trust at the end of the lease period will be dependent on how well the lease holder responded during the period.  Sale options can provide access to the capital required to invest in new opportunities, technologies and capabilities, assuming the proceeds are retained and re-invested in new opportunities. Otherwise, the additional capability to respond to industry opportunities would depend on the nature of the investors. Distribution options provide no capability to respond to industry change.

Conclusion We consider that the Company has performed well under the Trust model to date and can be expected to continue to do so by focusing on and delivering on its strategic objectives. In the absence of a catalyst for change we consider the Trust ownership model should be retained.

Potential catalysts for change include:

 Where Unison wishes to invest in a new opportunity and has exhausted its prudent borrowing capacity.  Where the business outlook for one or more of the underlying businesses deteriorates. New opportunity Dealing first with the situation in which Unison has identified and wishes to pursue a new opportunity, we suggest that the following options could be considered.  Unison sells down its shareholding or issues new equity to a third party in its subsidiaries in order to access capital, while the Trust retains 100% ownership of the core network assets.

 Unison issues new equity to a third party in the electricity network, such that the Trust retains control of the core asset, while accessing additional capital.

 Depending on the nature of the opportunity, Unison considers a merger or joint venture arrangement as a mechanism to execute the opportunity within the capacity of the business.

We also note that in addition to the options listed above, HBPCT could simply choose not to support the Company’s new opportunity.

Business outlook deteriorates Where the outlook for one or more of the Company’s underlying businesses deteriorates such that there is an expectation that value is likely to be eroded over time, we would recommend that the Trust could:

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Subsidiary Businesses:

 Encourage Unison to sell down its shareholding in the subsidiary business, and consider investing in other opportunities.

 Encourage Unison to sell 100% of the subsidiary business, to free up capital to invest in new opportunities that have more growth potential.

Electricity Distribution Business:

 The Trust may consider a long term lease arrangement to be a viable option, however, we recommend that the merits and risks associated with this option be carefully considered.

 The Trust may elect to sell down its shareholding in Unison to reduce the Trust’s exposure and provide third party investors with exposure to all of Unison Group’s portfolio. Funds from the sale of shares could be used by the Trust to invest into new opportunities or to make a distribution to beneficiaries.

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Overview

Unison owns and operates the electricity distribution business (EDB) which services the Hawke’s Bay, Taupo and Rotorua districts located in the central and eastern North Island. It also manages the neighbouring Centralines’ electricity distribution network located in the southern part of the Hawke’s Bay.

Over the last six years, Unison has continued to invest and develop its core network business while also growing its non-network businesses.

Group structure Unison’s businesses include:

 Unison Networks Limited (Unison Networks or UNL) – Manages and operates the distribution network supplying electricity to Hawke’s Bay, Rotorua and Taupo consumers. Unison Networks also provides services to Centralines Limited, including asset management, network planning, design and network operation.

 Unison Fibre Limited (UFL) – The wholesale provider of ultra-fast broadband to commercial, industrial and residential customers located in the Hawke’s Bay, Taupo and Rotorua.

 Unison Contracting Services Limited (UCSL) – Provides specialist contracting services (including electrical, civil and vegetation services) to UNL, UFL and external customers.

 Unison Insurance Limited (UIL) – Unison’s insurance captive, providing self-insurance cover for Unison’s uninsurable assets, predominantly its non-substation electrical assets including underground cables and overhead power lines.

 ETEL Limited (ETEL) – New Zealand’s largest transformer manufacturing company, specialising in the design and manufacture of electrical distribution transformers.

Figure 1: Unison Group structure

Source: Unison

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Unison group

Financial analysis This section focuses on the performance of the Unison Group as a whole for the period from FY12-FY18. FY12-FY17 reflect actual results, and FY18 reflects Unison’s budget.

Financial performance

Over the review period Unison has demonstrated sustained growth in revenue and profit as demonstrated in the table below. Highlights include:

 Revenue growth of 36% from FY12 to FY17, representing a compound growth rate of 6.4% p.a. Notable increases were achieved in FY13 and FY15, largely as a result of higher operating revenue from UNL, reflecting the regulatory allowances resulting from the Commerce Commission’s price cap decisions.

 Unison’s EBITDA growth of 44% has exceeded revenue growth and equates to compound growth rate of 7.6% p.a.

 Net profit after tax demonstrated compound growth of 21.0% p.a. primarily due to favourable movement in the value of financial instruments in FY17.

 Revenue is budgeted to increase by 8% in FY18 primarily as a result of ETEL’s Indonesian business (Lucky Light) which was acquired in FY16. Expenses are expected to grow also, and profit (before tax) expectations for FY18 are similar to those achieved in FY17.

Table 1: Financial performance – Unison Group

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ m 2012 2013 2014 2015 2016 2017 2018B

Revenue 164.6 182.7 191.9 210.5 213.5 224.5 242.7 Expenditure 99.8 109.8 116.1 121.3 122.9 130.9 147.2 EBITDA 64.8 73.0 75.8 89.2 90.6 93.6 95.5 Depreciation 23.2 24.6 26.0 27.8 29.0 28.7 29.9 Loss (gain) on sale of PPE 0.7 0.7 2.6 3.5 1.5 1.1 0.7 EBIT 41.0 47.6 47.2 57.8 60.2 63.8 65.0 Interest 16.9 16.9 16.2 15.8 15.2 14.4 14.2 NPBT 24.0 30.7 31.0 42.0 45.0 49.4 50.7 Tax 6.2 7.8 10.4 10.7 9.3 15.9 14.2 Change in financial instruments 2.5 (1.2) (3.6) 3.8 11.2 (6.1) - NPAT 15.3 24.1 24.2 27.5 24.6 39.6 36.5

Revenue annual grow th NA 11.0% 5.0% 9.7% 1.5% 5.1% 8.1% Revenue CAGR (2012-2017) 6.4%

EBITDA annual grow th NA 12.5% 3.8% 17.7% 1.7% 3.2% 2.1% EBITDA CAGR (2012-2017) 7.6%

NPATD annual grow th NA 58.0% 0.3% 13.8% (10.7%) 61.3% (7.8%) NPAT CAGR (2012-2017) 21.0% Source: Unison’s Annual Reports FY12-FY17 and FY18 Business Plan

Financial position

 As demonstrated in the table overleaf, and consistent with the growth in financial performance noted above, Unison’s equity has increased by 33% between FY12 and FY17.

 This reflects Unison’s ongoing investments in its electricity and fibre networks and ETEL. The value of total group fixed assets has increased from $551m in FY12 to $643m in FY17, representing a compound growth of 3.2% p.a.

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Table 2: Financial position – Unison Group

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ m 2012 2013 2014 2015 2016 2017 2018B Current assets 39.6 44.8 44.5 55.9 55.2 61.3 62.9 Property, plant & equipment 551.0 562.2 575.3 593.6 620.9 643.5 652.0 Other non-current assets 52.8 51.7 52.9 71.2 85.0 79.2 69.6 Total assets 643.4 658.8 672.7 720.7 761.1 783.9 784.5 Current liabilities 20.5 25.3 59.3 28.1 27.5 34.3 33.5 Non-current liabilities 328.4 326.9 286.8 349.7 374.5 357.5 334.8 Total liabilities 348.9 352.2 346.1 377.8 402.1 391.8 368.3 Net assets 294.4 306.6 326.6 342.9 359.0 392.1 416.2

Total equity 294.4 306.6 326.6 342.9 359.0 392.1 416.2

PPE annual growth NA 2.0% 2.3% 3.2% 4.6% 3.6% 1.3% PPE CAGR (2012-2017) 3.2%

Equity annual growth NA 4.1% 6.5% 5.0% 4.7% 9.2% 6.1% Equity CAGR (2012-2017) 5.9% Source: Unison’s Annual Reports FY12-FY17 and FY18 Business Plan

Other financial metrics

 As demonstrated in the table below Unison’s debt has decreased slightly since FY12. This decrease in debt combined with the increase in the value of equity, has decreased the gearing ratio from 45% in FY12 to 36% in FY17. We note that this is well below the maximum gearing level of 53% set by the Group.

 The interest cover ratio has improved from 1.5x to 2.9x over the same period primarily reflecting lower interest rates and higher EBITDA.

 Dividends have increased from $8.0m in FY12 to $9.7m in FY17. Unison’s current dividend policy reflects an annual growth target of CPI plus 1%. We note that for FY18 Unison has agreed to increase the dividend to $200 per beneficial owner ICP.

Table 3: Other financial metrics – Unison Group

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ m 2012 2013 2014 2015 2016 2017 2018B

Loans and borrowings 240.0 234.5 239.5 240.5 237.5 235.0 236.5 Gearing ratio1 45% 43% 42% 41% 40% 37% 36% Interest cover ratio2 1.5x 2.2x 1.8x 2.5x 2.3x 2.9x 2.9x Cash from operating activities 48.5 49.8 52.5 64.1 65.2 66.8 66.4 Dividends 8.0 9.1 9.2 9.4 9.6 9.7 12.7

Borrowings growth NA (2.3%) 2.1% 0.4% (1.2%) (1.1%) 0.6% Borrowings CAGR (2012 - 2017) (0.4%)

Operating CF growth NA 2.7% 5.5% 22.1% 1.8% 2.4% (0.6%) Operating CF CAGR (2012 - 2017) 6.6%

Dividends growth NA 14.3% 0.8% 2.5% 1.1% 1.4% 31.2% Dividends CAGR (2012 - 2017) 3.9% Source: Unison’s Annual Reports FY12-FY17 and FY18 Business Plan 12

1 Gearing is defined as debt to debt plus equity. 2 Interest cover ratio is defined as EBITDA less capital expenditure to interest expense.

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Business contribution to the Group

The revenue data presented below reflects revenue reported by each business. The totals therefore exceed the total Group revenue as intercompany eliminations are not included.

 All businesses have increased revenue between FY12 and FY17, with UNL, UCSL and ETEL increasing $41m (34%), $16m (73%) and $18m (39%) respectively.

 Since FY12 non network businesses have contributed a greater proportion of revenue to the Group, which now comprise 39% of total revenue (before eliminations).

Figure 2: Revenue - by business Figure 3: FY17 revenue - by business

300 1%

250 14% 200 UNL 150 ETEL

100 24% UCSL Nominal ($m) Nominal 61% UFL 50

- FY12 FY13 FY14 FY15 FY16 FY17 FY18B

UNL ETEL UCSL UFL

Source: Unison’s management accounts Source: Unison’s management accounts  While EBITDA has increased for non-network businesses since FY12, the network business continues to contribute over 80% of EBITDA, as demonstrated below.

 The increase in network EBITDA reflects the returns able to be generated by the regulated network, on a growing asset base.

Figure 4: EBITDA - by business Figure 5: FY17 EBITDA - by business

120 1%

100 8% 8% 80 UNL 60 ETEL

40 UCSL Nominal ($m) Nominal UFL 20 83%

- FY12 FY13 FY14 FY15 FY16 FY17 FY18B

UNL ETEL UCSL UFL

Source: Unison’s management accounts Source: Unison’s management accounts

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The figures below show the capital expenditure (capex) for each business within the Group, since FY12.

 Total capex has increased 42% over the review period, largely driven by UNL’s investment in the electricity distribution network. We note this has declined from a peak in FY16 reflecting the emerging benefits of the smart grid investment UNL has made during the period.

 The figures below also demonstrate the periodic investments made in UFL, ETEL and UCSL since FY12.

Figure 6: Capex - by business Figure 7: FY17 capex - by business

60 3% 5% 5% 50

40 UNL 30 UFL ETEL Nominal ($m) Nominal 20 UCSL 10 87% - FY12 FY13 FY14 FY15 FY16 FY17 FY18B

UNL ETEL UCSL UFL

Source: Unison’s management accounts Source: Unison’s management accounts

 Total assets have increased steadily year-on-year from $724m in FY12 to $853m in FY17.

 UNL’s assets made up 89% of the total asset base in FY12, and 85% in FY17, as illustrated below.

Figure 8: Assets - by business Figure 9: FY17 assets - by business

1,000 2% 2%

800 3% 8%

600 UNL ETEL 400 UFL

Nominal ($m) Nominal UCSL 200 UIL

85% - FY12 FY13 FY14 FY15 FY16 FY17 FY18B

UNL ETEL UCSL UFL UIL

Source: Unison’s management accounts Source: Unison’s management accounts

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Performance targets Unison’s annual Statement of Corporate Intent (SCI) sets out its scope of activities and strategic aims including key performance targets.

Unison’s performance targets were adjusted in FY16 to focus on 10 key measures. These cover financial targets for the group including profitability and distributions, as well as targets for UNL and UCSL including operating costs, network reliability and health and safety.

The table below shows whether Unison met its performance targets for each year since FY12. A more detailed analysis of the targets and performance against them, and the current forecast targets is included in Appendix C.

Table 4: Unison’s SCI performance targets

FY13 FY14 FY15 FY16 FY17

Group Financial Performance Targets EBITDA as a percentage of average assets employed 3 2 3 3 3 EBIT as a percentage of average assets employed 3 2 3 3 3 Profit as a percentage of average shareholders’ funds 3 2 3 1 3 Ratio of shareholders’ funds to total assets 3 3 3 2 3 Dividend target (cents per share) 3 2 3 3

Electrical Lines Business Performance Targets 1.Operating Costs Consumer Numbers 2 2 3 System Length (km’s) 3 3 Total Lines Business Cost Per Consumer 2 2 3 3 3 Total Lines Business Cost Per km 1 3 3

2.Electricity Network Performance SAIDI - System Average Interruption Duration Index 3 3 3 3 1 SAIFI - System Average Interruption Frequency Index 3 3 3 3 2 Underground Faults Per 100km 3 3 3 Overhead Faults Per 100km 3 3 2 Total System Faults Per 100km 3 3 3

3.Health & Safety Performance Unison Injuries Per 1 Million Hours Worked 3 3 Number of Public Accidents 3 3 Medical Treatment Injuries 3 Medical Treatment Injuries in Focus Areas 2

Key: 3 Exceeds target 2 Within 10% of Target 1 Does not meet target Source: Unison’s Statement of Corporate Intent & Annual Reports FY12-FY18

Unison has exceeded or been within 10% of the performance target on most measures since FY12, as illustrated by the green and yellow dots in the table above.

The FY16 target profit as a percentage of average shareholder funds was not met due to unfavourable movements in financial derivatives.

Extreme weather events in FY17 contributed to reliability performance which did not meet the network performance targets in that year.

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Unison Networks Limited

Overview UNL manages and operates the distribution network supplying electricity to Hawke’s Bay, Rotorua and Taupo consumers and provides asset management and network operation services to neighbouring Centralines Limited.

UNL’s network is approximately 9,200km in length and serves over 111,000 connections. The network has approximately 1,120 MVA of distribution transformer capacity and in FY17 delivered over 1,580 GWh of electricity to consumers. UNL is one of the five largest electricity distribution businesses in New Zealand based on number of connections, circuit length and asset value.

Between FY12 and FY17, the number of connections and transformer capacity increased 2.4% and 3.6% respectively, whereas total energy delivered has fluctuated within the period, but has not significantly changed since FY13. This reflects an industry wide trend of declining energy intensity, partly due to improved energy efficiency in homes, businesses and industrial usage.

Table 5: UNL metrics

Metric FY12 FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F

Number of connections (ICP) 109,171 109,316 110,029 110,576 111,045 111,842 112,414 112,654 112,894 Annual growth 0.1% 0.7% 0.5% 0.4% 0.7% 0.5% 0.2% 0.2% Transformer capacity (MVA) 1,080 1,080 1,094 1,105 1,125 1,119 n/a n/a n/a Annual growth - 1.3% 1.0% 1.8% (0.5%) Energy delivered to ICPs (GWh) 1,575 1,586 1,550 1,555 1,586 1,583 1,578 1,578 1,578 Annual growth 0.7% (2.2%) 0.3% 2.0% (0.2%) (0.3%) - - Source: Unison information disclosures

Financial analysis Financial performance

As illustrated in the tables overleaf:

 UNL’s revenue increased from $119m in FY12 to $160m in FY17, representing a compound growth rate of 6.0% p.a. over the period.

 Expenses increased at a similar rate from $62m to $76m over the same period, a compound growth rate of 4.4% p.a.

 As a result, EBITDA increased by 7.7% p.a. from FY12 to FY17.

UNL’s lines business is regulated by the Commerce Commission under Part 4 of the Commerce Act. Under Part 4 price-quality regulation, UNL is subject to a weighted average price cap which allows the business to recover prudent costs and earn a WACC return on investment. In its November 2012 DPP decision, the Commission determined UNL’s expected returns were lower than WACC and allowed the lines business to increase prices by more than inflation for a period to catch up for sub-normal returns. The step changes in revenues in FY13 and FY15 illustrate the increased DPP allowances for UNL. The catch up allowances are expected to end in FY20, at the end of the current regulatory period.

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Table 6: Financial performance – Unison Networks Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ m 2012 2013 2014 2015 2016 2017 2018B

Revenue 119.3 133.6 138.1 154.0 158.5 160.0 161.5 Expenditure 61.6 68.6 72.8 78.1 77.9 76.3 80.2 EBITDA 57.7 65.0 65.3 75.9 80.6 83.7 81.3 Depreciation 20.7 21.8 22.4 23.7 24.6 24.0 24.7 Loss (gain) on sale of PPE 0.7 0.6 2.5 3.4 1.4 1.0 0.7 EBIT 36.3 42.6 40.4 48.8 54.6 58.7 55.9 Interest 14.8 15.0 14.4 14.4 14.2 13.4 13.4 NPBT 21.5 27.6 26.0 34.4 40.4 45.3 42.5 Tax 4.7 6.4 9.1 8.6 8.1 12.7 11.9 Change in financial instruments 5.2 (0.9) (3.5) 3.8 11.2 (4.4) - NPAT 11.6 22.1 20.5 22.0 21.1 37.0 30.6

Revenue annual growth NA 12.0% 3.4% 11.5% 2.9% 0.9% 0.9% Revenue CAGR (2012-2017) 6.0%

EBITDA annual growth NA 12.7% 0.5% 16.3% 6.2% 3.8% (2.9%) EBITDA CAGR (2012-2017) 7.7%

NPATD annual growth NA 90.0% (7.6%) 7.7% (4.2%) 75.4% (17.3%) NPAT CAGR (2012-2017) 26.0% Source: Unison’s management accounts

Financial position

 UNL’s total equity has increased from $294m in FY12 to $379m in FY17, an increase of 29%. This has been used to fund the network’s fixed asset base (non-current assets) which increased at a compound annual growth rate of 3.0% over the period.

Table 7: Financial position – Unison Networks Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ m 2012 2013 2014 2015 2016 2017 2018B

Current assets 17.8 19.5 18.4 23.9 22.0 21.4 21.5 Property, plant & equipment 531.7 541.0 553.5 575.9 605.6 615.4 632.7 Other non-current assets 86.7 86.1 95.9 113.7 126.3 88.5 95.8 Total assets 636.2 646.6 667.8 713.5 753.8 725.3 750.0 Current liabilities 12.8 13.9 48.3 16.8 16.2 18.8 18.4 Non-current liabilities 329.9 329.0 299.6 366.6 387.5 327.3 334.6 Total liabilities 342.7 342.9 347.9 383.4 403.7 346.1 353.0 Net assets 293.5 303.7 319.9 330.1 350.1 379.2 397.0

Total equity 293.5 303.7 319.9 330.1 350.1 379.2 397.0

PPE annual growth NA 1.7% 2.3% 4.0% 5.1% 1.6% 2.8% PPE CAGR (2012-2017) 3.0%

Equity annual growth NA 3.5% 5.3% 3.2% 6.1% 8.3% 4.7% Equity CAGR (2012-2017) 5.3% Source: Unison’s management accounts

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Benchmarking We have examined the relative performance of Unison Networks using comparable EDB data drawn from regulatory information disclosures and other network information. We have also included Unison Networks’ FY17 performance. Note, the benchmarking of Unison Networks includes only the electricity lines business.

For the purpose of this report we have grouped Unison Networks with five comparable network businesses. We have considered expenditure levels, network reliability, and profits in our assessment of performance. The commentary below focusses on key performance indicators.

It is important to note that electricity networks are complex and these complexities cannot be fully represented by the information and indicators available through the data published in accordance with the information disclosure framework. Topography, climate, growth rates (past and current), historical design practices and network configuration are all factors which can significantly impact network performance. This analysis therefore provides a high level indication of performance that should be subject to further consideration and investigation.

We have undertaken many exercises comparing the performance of EDBs using disclosure data. It is our experience that when comparing the performance of the EDBs in New Zealand, it is appropriate to group networks for the purpose of assessing relative performance, on the basis of the following indicators:

 network density (indicated by the ratio of customer connections per circuit kilometre)

 total size of the network (indicated by the total number of customer connections served).

Figure 10: Connections per km, 2016 Figure 11: Number of connections, 2016

600 40

35 500 30 400 25

300 ICP (000s) ICP 20

200 per km ICP 15

10 100 5 -

Vector

Electra

Vector

Powerco

Electra

Powerco

Westpower

Scanpower

Centralines

Top Energy Top Northpower

EA Networks EA

Westpower

Scanpower

Centralines

Top Energy Top Northpower

AlpineEnergy

Aurora Energy Aurora

EA Networks EA

WELNetworks

Alpine Energy Alpine

Counties PowerCounties

Buller Buller Electricity

Aurora Energy Aurora

Network Waitaki Network

WaipaNetworks

WELNetworks

Network Tasman Network

UnisonNetworks

NelsonElectricity

Counties Power Counties

Buller Buller Electricity

Eastland Eastland Network

Network WaitakiNetwork

WaipaNetworks

Network Tasman Network UnisonNetworks

Marlborough LinesMarlborough

NelsonElectricity

Eastland Eastland Network

OrionZealandNew

The Lines Company Lines The

MarlboroughLines

Orion New ZealandOrionNew

The PowerThe Company ElectricityInvercargill

The Lines CompanyLinesThe

ElectricityInvercargill PowerThe Company

OtagoNet JointOtagoNet Venture

MainPower New Zealand New MainPower

Wellington Electricity Electricity Wellington Lines

Horizon Energy Distribution Wellington Electricity Electricity Wellington Lines HorizonEnergy Distribution Source: PwC analysis Source: PwC analysis

Using the 2016 data above, and for the purpose of this report we have selected the following peer group for Unison Networks, which represents large EDBs servicing provincial cities and towns, extending to rural areas.

Table 8: Peer group overview, 2016

ICP/km ICP Orion New Zealand 17.2 192,857

WEL Networks 16.4 87,703 Aurora Energy 14.6 85,966 Unison Networks 12.3 111,045 Powerco 11.8 330,577 Northpower 9.6 57,247 Median 13.5 99,374 Source: PwC analysis

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We note that within the peer group both Powerco and Aurora Energy have signalled plans to increase network investment in the immediate future which, if approved by the Commerce Commission, will result in increased prices charged to their customers. Orion NZ is currently completing its post-earthquake network remediation which has required higher than normal levels of expenditure. Accordingly, the comparisons presented on the following pages reflect a snapshot of relative performance, noting that EDBs do experience high or low expenditure cycles, which influences these metrics.

Our benchmarking covers the four-year period FY13-FY16 and assesses:

 expenditure – operating and capital expenditure levels

 network performance – largely reliability

 profitability

 prices.

Operating expenditure

As illustrated in the figures below, Unison Networks’ total opex per ICP has remained relatively constant since FY14 and falls above the range of the peer group. The industry average opex is higher on an ICP basis, which is expected given Unison Networks’ peer group includes a number of the largest networks.

Figure 12: Total opex per ICP

400

300

200 $/ICP 100

- 2013 2014 2015 2016 2017 Unison Networks Industry average Peer group average Peer group first quartile Peer group third quartile

Source: PwC analysis

On a more disaggregated basis, Unison’s network and non-network opex show contrasting trends.

 Network opex, which includes planned and unplanned network maintenance and fault response, is lower for Unison Networks than its peer group, and the industry average.

 Non-network opex which includes corporate and business support and asset management planning and operations, has been consistently higher than the peer group and industry averages since FY13. The key difference is in the business support opex costs for Unison Network which are higher than its peer group on a per ICP basis.

 Unison Network’s business support opex includes UCSL management overheads ($38/ICP) and the insurance costs associated with UIL ($9/ICP), which are not reflected in the data for most other EDBs. If these costs are excluded, non-network opex per ICP would be comparable to the industry average.

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Figure 13: Network opex per ICP Figure 14: Non-network opex per ICP

300 300

200 200

$/ICP $/ICP 100 100

- - 2013 2014 2015 2016 2017 2013 2014 2015 2016 Unison Networks Industry average Unison Networks Industry average Peer group average Peer group first quartile Peer group average Peer group first quartile Peer group third quartile Peer group third quartile

Source: PwC analysis Source: PwC analysis Capital expenditure

Capital expenditure is dominated by investment in the network, with small additional investment in supporting assets and systems.

Figure 15: Total expenditure on assets per Figure 16: Total network capex per km ICP

600 8,000

500 6,000 400

300 4,000

$/km $/ICP 200 2,000 100

- - 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Unison Networks Industry average Unison Networks Industry average Peer group average Peer group first quartile Peer group average Peer group first quartile Peer group third quartile Peer group third quartile

Source: PwC analysis Source: PwC analysis

In comparison with other networks:

 Unison Networks’ capex per ICP and per km has increased over the review period, which is similar to the trends shown by the peer group, although this has flattened off for others towards the end of the period.

 In FY16, Unison’s capex was similar to the industry average, on a per ICP and per km basis, and within the peer group range.

As illustrated below, network capital expenditure which includes investment in network extensions, connections, reinforcement, reliability and renewals has increased since FY13, as has the level of investment made by the peer group and the industry overall.

 In FY13, Unison’s capex was at the first quartile of the peer group.

 By FY16 it had increased to the peer group average, and exceeded the industry average (as a proportion of the regulatory asset base).

 When combined with network opex, Unison’s expenditure on its network falls at the first percentile of the peer group, and is below the industry average, when expressed as a percentage of the asset base.

The Company has had a deliberate strategy of investing in smart grid technology and developing improved asset management practices by leveraging this technology and the information it is able to provide. This

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approach is expected to reduce network costs over the long term, and it appears to have delivered some cost benefit within the review period.

Figure 17: Network capex as a percent of Figure 18: Network capex and RAB maintenance as a percent of RAB

15% 15%

10% 10%

5% 5%

Percent (%) Percent Percent (%) Percent

Source: PwC analysis Source: PwC analysis

Reliability

The figures below show UNL’s comparable reliability performance, using the industry standard SAIDI and SAIFI measures. SAIDI measures the average duration, in minutes, of power outages on the network. SAIFI measures the average frequency of power outages on the network. This data is normalised for the impact of extreme events, which assists with comparisons between EDBs, and over time.

In FY17, Unison Networks SAIDI increased to 125 minutes which exceeded prior year results and the regulatory limit. This reflected a number a factors including:

 The Taupo snow storm in August 2016

 Increased planned outages as a result of new ‘live line’ work guidelines

 Increased restoration times for transient faults

 Increased impact of other external events such as motor vehicle accidents, vandalism and dig-ins.

Figure 19: SAIDI vs regulatory limit Figure 20: SAIFI vs regulatory limit

200 3

150 2

100

SAIDI SAIDI (minutes) 50 SAIFI SAIFI (interruptions)

- - 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

Normalised SAIDI Limit Normalised SAIFI Limit

Source: PwC analysis Source: PwC analysis

The figures above show the regulatory limits and the actual network performance, when measured on a consistent and normalised basis. The regulatory limits were adjusted in FY16 reflecting a revised methodology. Unison Networks’ reliability has not exceeded its regulatory limits in all years, except for SAIDI in FY17, as noted above.

When compared to the peer group, as illustrated overleaf:

 Normalised SAIDI has been similar to the first quartile of the peer group over the review period and is well below the industry average.

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 Normalised SAIFI is similar to the peer group average over the review period, although increased towards the third quartile, and exceeded the industry average in FY16.

 This data suggests that while the number of outages is similar to other networks, the restoration times are shorter, leading to better customer service over all.

Figure 21: Normalised SAIDI Figure 22: Normalised SAIFI

300 3

250

200 2

150

100 1 SAIDI (minutes) SAIDI

50 (interruptions) SAIFI

Source: PwC analysis Source: PwC analysis

Profitability

The most common indicator of profit within the electricity network sector is return on investment (ROI). The ‘ROI comparable to a vanilla WACC’ measure is used by the Commerce Commission when setting regulated price caps.

 As illustrated below Unison Networks’ ROI increased from 5.6% in FY13 to 7.1% in FY16 and 8.7% in FY17. The catch up allowances for prior period sub-normal returns have influenced these results.

 The regulatory benchmark for the FY16 to FY20 period is 7.2%.

 The industry average results are typically lower than this benchmark, as some networks choose to price below the regulatory target, particularly those which are exempt from price-quality regulation due to their 100% consumer ownership models.

 Unison Networks is not exempt because the consumer ownership does not include the consumers located in the Taupo and Rotorua network areas.

Figure 23: ROI – Comparable to vanilla WACC

10%

Percent (%) Percent 2%

- 2013 2014 2015 2016 2017 Unison Networks Industry average Peer group average Peer group first quartile Peer group third quartile

Source: PwC analysis Prices

Average unit revenues are a high level benchmark for comparing electricity network prices, however this cannot fully reflect the different ways networks collect their revenue or the underlying demand characteristics of a network’s customer base.

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 As illustrated below, Unison Network’s average consumption per connection is below the peer group third quartile and industry average.

 Thus, in order to recover its fixed costs, Unison Networks has higher average charges when expressed on a cents/kWh basis.

 As shown below, Unison Networks’ average unit price for electricity network services has been above the peer group third quartile and slightly above the industry average since FY14. As there is an element of prior period catch up in these revenues, this trend may not continue beyond the end of the current regulatory period.

Note that this price information reflects the prices that Unison Networks charges, via retailers, for its services, not the full cost of electricity charged to consumers. The prices also exclude the cost of transmission and avoided transmission.

Figure 24: Average consumption per ICP Figure 25: Average unit price

20 10

8 15

6 10

MWh/ICP cents/KWh 5 2

Source: PwC analysis Source: PwC analysis

For residential users, Unison Networks’ average consumption per ICP was the second lowest of the peer group in FY16. As EDB’s costs are largely fixed, low average consumption results in high unit prices as demonstrated in Figure 27 and high revenue per ICP as shown in Figure 28.

Figure 26: Average consumption per ICP, Figure 27: Average unit prices, residential residential users FY16 users FY16

14 14

12 12

10 10

8 8

6 6

MWh/ICP cents/kWh 4 4

2 2

- - Orion New Aurora Powerco Northpower Unison WEL Orion New Aurora Powerco Northpower Unison WEL Zealand Energy Networks Networks Zealand Energy Networks Networks Source: PwC analysis Source: PwC analysis

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Figure 28: Average revenue per ICP, residential users FY16

1,000

800

600

$/ICP 400

200

- Orion New Aurora Powerco Northpower Unison WEL Zealand Energy Networks Networks Source: PwC analysis

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Unison Fibre Limited

Overview Unison Fibre Limited (UFL) is a wholesale provider of ultra-fast broadband to commercial, industrial and residential users in Hawke’s Bay, Taupo and Rotorua.

UFL had 1,839 fibre connections at the end of FY17, with a network which spans over 700km and passes more than 13,000 business and residential properties. UFL has invested $13.7m on fibre assets over the past five years to grow the business.

We note that UNL is a major user of the fibre network which UFL has constructed across its region, using the capability to assist with network communications and enhancing the network’s smart grid capability.

Financial analysis Financial performance

 UFL’s revenue increased by $1.4m from FY12 to FY17, a compound growth rate of 17% p.a. This reflects the increase in customer connections, which have increased from 206 to 1,839 over the period.

 EBITDA has been positive in all years since FY13, and doubled between FY16 and FY17. However, as expected is currently insufficient to cover depreciation, resulting in negative EBIT.

 We note that core investment is made before customers are connected, and therefore the financial performance for fibre businesses in general would be expected to improve over time.

 UFL’s equity has increased from $6m in FY12 to $13m in FY17 reflecting Unison’s investment in UFL over this period.

 Fixed assets have increased from $14m to $23m over the period, partly funded by debt, which has increased from $9m to $12m.

Table 9: Financial performance – Unison Fibre Limited

- Nominal Nominal ($m)

(1)

(2) FY12 FY13 FY14 FY15 FY16 FY17 FY18B

Revenue EBITDA EBIT

Source: Unison’s management accounts

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Unison Contracting Services Limited

Overview Unison Contracting Services Limited (UCSL) provides specialist contracting services (including electrical, civil and vegetation services) predominantly in the Hawke’s Bay, Rotorua and Taupo regions. UCSL has also worked with UFL to build local fibre networks.

UCSL’s main focus is contracting services for UNL, with some additional work for external customers. Over the review period, annual revenue from external customers has fluctuated, ranging from 3% to 9% of total revenue.

UCSL is a margin based business, earning revenue from, labour, plant and equipment and sub-contracting. Major projects completed by UCSL during the review period include:

 construction of the Te Mihi 33/11kV zone substation and the reticulation of Landcorp’s Broadland farms

 construction of a 5.3 kilometre, 33kV cable from the Rotorua Grid Exit Point to a new Waipa 33/11 kV zone substation

 reticulation of the Hawke’s Bay Airport Business Park

 construction of a 16 kilometre, 33kV line connecting TrustPower’s Toronui hydro-generation project to the local grid at Tutira

 electrical works for Contact Energy’s Te Mihi Geothermal Power Station and steam field project.

In addition, UCSL has invested heavily in ensuring exceptional health and safety culture and practices across the workforce, as well as in the capability of its team. UCSL crews have won the best lines crew at industry competitions for the past two years.

Financial analysis Financial performance

As demonstrated overleaf:

 UCSL’s revenue increased from $22m in FY12 to $38m in FY17, representing a compound growth rate of 11.7% p.a. over the period.

 Expenditure increased at a slightly lower rate, with a compound annual growth rate of 10.3% p.a. resulting in EBIT increasing $3.2m between FY12 and FY17.

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Table 10: Financial performance – Unison Contracting Services Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ 000 2012 2013 2014 2015 2016 2017 2018B

Revenue 21,849 31,156 31,748 34,623 36,802 37,980 36,661 Expenditure 18,523 26,724 27,012 28,106 29,925 30,260 30,626 EBITDA 3,326 4,432 4,736 6,517 6,877 7,720 6,035 Depreciation 1,533 1,852 1,935 2,398 2,682 2,708 3,013 Loss (gain) on sale of PPE 25 81 58 128 - - (66) EBIT 1,768 2,499 2,743 3,991 4,195 5,012 3,088 Interest 103 50 - - - - - NPBT 1,665 2,449 2,743 3,991 4,195 5,012 3,088 Tax 471 728 763 1,116 1,177 1,411 865 Change in financial instruments ------NPAT 1,194 1,721 1,980 2,875 3,018 3,601 2,223

Revenue annual growth NA 42.6% 1.9% 9.1% 6.3% 3.2% (3.5%) Revenue CAGR (2012-2017) 11.7%

EBITDA annual growth NA 33.3% 6.9% 37.6% 5.5% 12.3% (21.8%) EBITDA CAGR (2012-2017) 18.3%

NPATD annual growth NA 44.1% 15.0% 45.2% 5.0% 19.3% (38.3%) NPAT CAGR (2012-2017) 24.7% Source: Unison’s management accounts

Financial position

 UCSL’s equity has doubled over the review period, increasing from $6m in FY12 to $13m in FY17.

 The increase reflects retained earnings that have been loaned back to Unison Networks Limited to fund other investment requirements. The intercompany loan is included in UCSL’s non-current assets.

Table 11: Financial position – Unison Contracting Services Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ 000 2012 2013 2014 2015 2016 2017 2018B Current assets 399 916 371 516 469 886 524 Non-current assets 14,456 10,487 13,874 16,544 13,312 16,691 18,614 Total assets 14,855 11,403 14,245 17,060 13,781 17,577 19,138 Current liabilities 8,468 3,096 3,899 3,819 4,042 4,304 3,642 Non-current liabilities 434 635 693 713 694 627 624 Total liabilities 8,902 3,731 4,592 4,532 4,736 4,931 4,266 Net assets 5,953 7,673 9,653 12,528 9,045 12,646 14,872

Total equity 5,953 7,673 9,653 12,528 9,045 12,646 14,871

NCA annual growth NA (27.5%) 32.3% 19.2% (19.5%) 25.4% 11.5% NCA CAGR (2012-2017) 2.9%

Equity annual growth NA 28.9% 25.8% 29.8% (27.8%) 39.8% 17.6% Equity CAGR (2012-2017) 16.3% Source: Unison’s management accounts

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Key metrics The table below shows key metrics for UCSL from FY12 to FY17. As illustrated:

 UCSL’s employee numbers have increased 28% over the review period, from 171 to 219. This reflects the increased investment in the electricity and fibre networks as well as expanding UCSL’s scope to include network design services.

 UCSL’s EBITDA margin has increased from 15% in FY12 to 20% in FY17.

 Lost time injuries and injuries per million person hours have fluctuated across the review period, with abnormally high injury data in FY17.

Table 12: UCSL key metrics 31 March 31 March 31 March 31 March 31 March 31 March Units 2012 2013 2014 2015 2016 2017

No. of employees # 171 176 201 210 211 219 EBITDA margin % 15% 14% 15% 19% 19% 20% Lost time injuries days 3 - 2 7 - 9 Injuries per million man hours # 0.91 - 0.79 2.85 - 4.03 Source: Unison

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ETEL Limited

Overview ETEL Limited (ETEL) is New Zealand’s largest transformer manufacturing company, specialising in the design and manufacture of electrical distribution transformers. Unison acquired ETEL in 2009.

ETEL’s head office is in Auckland with manufacturing facilities in Auckland and Indonesia, and warehouse facilities and a dedicated customer support team in Melbourne. Globally ETEL employ over 330 people. Since 2011, over 50% of ETEL’s output has been exported to Australasian, Pacific and South East Asian markets.

In July 2016, ETEL purchased a majority shareholding in PT Lucky Light Globalindo (Lucky Light), a small manufacturing company based in Jakarta, Indonesia. Lucky Light, established in 2012, specialises in the manufacturer of distribution transformers, and is a contracted supplier of distribution transformers to the Indonesian Government owned Electricity Network operator PLN (Persero).

Financial analysis Financial performance

 ETEL’s revenue grew by $17m (38%) between FY12 and FY17. This represents a compound growth rate of 6.8% p.a. over the period.

 The revenue growth fluctuated over the period, with notable increases in FY14 and FY17. The growth largely reflected increased transformer sales.

 EBITDA has also fluctuated over the period but has increased at a CAGR of 5.1%.

Table 13: Financial performance – ETEL Limited

80 70 60 50 40 30

Nominal Nominal ($m) 20 10 - FY12 FY13 FY14 FY15 FY16 FY17 FY18B

Revenue EBITDA EBIT

Source: Unison’s management accounts

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Unison Insurance Limited

Overview Unison Insurance Limited (UIL), which was established on 1 February 2010, is an insurance captive, providing self-insurance cover for Unison’s uninsurable assets, predominantly its non-substation electrical assets including underground cables and overhead power lines.

UIL assists UNL to mitigate catastrophic event risk for Unison’s electrical network and to reduce the total cost of risk.

The Transmission and Distribution Policy (T&D Policy) provides limited cover for electricity and fibre network assets not covered by Unison’s Material Damage and Business Interruption Policy (MDBI Policy). Unison’s MDBI Policy is not provided by UIL as more favourable market rates are available. As UIL grows its capital reserves, UIL will look to increase the cover provided under the T&D polices and may consider underwriting the Group’s MDBI risk.

Financial analysis Financial performance

As demonstrated in the table below, over the review period:

 Revenue, made up of underwriting revenue and investment income, more than doubled to $1.6m.

 Net profit after tax demonstrated a compound growth of 25% p.a. primarily due to increased investment income and reduced underwriting expenses.

Table 14: Financial performance – Unison Insurance Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ 000 2012 2013 2014 2015 2016 2017 2018B

Underwriting revenue 678 1,884 1,811 1,667 960 876 770 Investment income 70 131 172 592 634 721 557 Revenue 748 2,015 1,983 2,259 1,594 1,597 1,327 Underwriting expenses 179 505 853 534 - - - Administration expenses 83 757 142 165 194 174 195 NPBT 486 753 988 1,560 1,400 1,423 1,132 Tax 136 215 276 434 331 356 317 NPAT 350 538 712 1,126 1,069 1,067 815

Revenue annual growth NA 169.4% (1.6%) 13.9% (29.4%) 0.2% (16.9%) Revenue CAGR (2012-2017) 16.4%

NPATD annual growth NA 53.7% 32.3% 58.1% (5.1%) (0.2%) (23.6%) NPAT CAGR (2012-2017) 25.0% Source: Unison Insurance Limited Annual Reports FY12-FY17

Financial position

As demonstrated in the table overleaf:

 UIL’s equity has increased from $3m in FY12 to $14m in FY17.

 In FY17, UIL’s assets consisted of cash and term deposits (25%), bond and equity investments (29%) and intercompany loan (46%).

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Table 15: Financial position – Unison Insurance Limited

31 March 31 March 31 March 31 March 31 March 31 March 31 March $ 000 2012 2013 2014 2015 2016 2017 2018B

Cash 1,954 3,090 3,269 3,615 3,902 3,674 3,194 Investments 1,149 879 1,266 2,137 2,816 4,165 5,466 Intercompany loan - - 6,700 6,700 6,700 6,700 6,700 Other assets 149 251 22 41 38 5 5 Total assets 3,252 4,220 11,257 12,493 13,456 14,544 15,365 Claims reserve 325 829 - - - - - Current liabilities 285 201 57 167 62 83 87 Total liabilities 610 1,030 57 167 62 83 87 Net assets 2,642 3,190 11,200 12,326 13,394 14,461 15,278

Total equity 2,642 3,190 11,200 12,326 13,394 14,461 15,278

Assets annual growth NA 29.8% 166.8% 11.0% 7.7% 8.1% 5.6% Assets CAGR (2012-2017) 34.9%

Equity annual growth NA 20.7% 251.1% 10.1% 8.7% 8.0% 5.6% Equity CAGR (2012-2017) 40.5% Source: Unison Insurance Limited Annual Reports FY12-FY17

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Ownership review

Consistent with Section 4 of the HBPCT Trust Deed, this report includes a discussion of the advantages and disadvantages of Trust ownership and an analysis of alternative ownership options.

In addition to carrying out periodic ownership reviews, the role of the Trust is to hold shares in the Company on behalf of the consumers located in the Hawke’s Bay region, to receive dividends from the Company and to distribute them to or for the benefit of the consumer beneficiaries.

In undertaking our analysis of the ownership options available to HBPCT, we have considered each in the context of the Trust’s obligations to the consumer beneficiaries. Ownership options

There are a number of different ownerships options available to the Trust across a broad spectrum, from continued 100% Trust ownership at one end to full divestment to a third party investor at the other end. Third party investors may include institutional investors, industry and retail investors, ie the public.

Across this spectrum there are also many permutations for transaction structures. For the purpose of this report, we have therefore examined the following options, which we consider are representative of ownership options across the full range.

Table 16: Ownership options

Ownership Option Description

100% Trust ownership of shares Trust ownership is very common among New Zealand electricity in the Unison Group network businesses, with 21 of 29 companies having some trust ownership. Trusts beneficiaries may include consumers and communities. This consumer trust model applies to HBPCT’s current ownership of the shares of Unison Networks Limited.

Joint venture In order to achieve growth objectives, joint ventures are a means of entering into new business relationships with other parties for some of the business activities of an entity, while retaining some of the existing ownership structure. This can be applied to subsidiaries only, as a mechanism to fund growth of a subsidiary while full ownership of the parent company is retained.

Merger through equity Mergers with like businesses, such as other networks, are most readily exchange executed by way of equity exchange, thus in effect diluting the existing Trust ownership, but achieving an interest in a larger entity and potentially realising operational synergies and scale benefits.

Long term lease Under a long term lease, the control of Unison Networks would typically be passed over to a third party for an agreed period in return for upfront consideration paid to the Trust. At the end of the lease period the business is passed back to the Trust. The lease typically includes a condition that the service capability of the business is adequately maintained during the lease period. We note that this structure is not commonly used for electricity networks.

Sale or distribution of 24.9% or Sale or distribution of 24.9% allows the Trust to retain control over the 49.9% of shares to beneficiaries, Unison Group’s constitution, and sale or distribution of 49.9% allows

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the public, industry or the Trust to retain outright control. Shares may be listed. New equity institutional investors may also be issued to a third party within these control thresholds.

Sale or distribution of 100% of The full sale or distribution option would require the Trust to determine shares to beneficiaries, the whether to retain the proceeds of the sale to invest and manage on public, industry or institutional behalf of its existing and future beneficiaries, or to distribute the investors proceeds to the beneficiaries. Company objectives

In assessing the advantages and disadvantages of retaining 100% Trust ownership or moving to an alternative option, we have considered the SCI objectives for the Company which have been agreed with the Trust as set out below. The most recent SCI covers the period 1 April 2017 to 31 March 2020 and includes the following directives for the Company.

Table 17: SCI strategic objectives

Statement Objective

Purpose We enable communities to prosper. By providing cost-effective, reliable and safe asset management services that employs advanced technologies and great people Vision NZ’s most progressive Asset Management Company

Values Safety & Wellbeing Excellence Customer Service Integrity Teamwork Strategic Intent Continuously improving the effectiveness and efficiency of the core business by building excellence in our core competencies Create new value by nurturing and mobilising our core competencies to exploit a competitive advantage Goals Improve and then sustain network performance Spend less by doing things smarter Increase shareholder value Improve our management of risk For the purpose of assessing ownership options, we have grouped the strategic objectives for the Company, as agreed with the Trust and listed above, into the following two overarching objectives.

Table 18: Assessment criteria

Overarching objectives Assessment criteria

Performance excellence Includes excellence in: Striving for excellence in the  asset management and network performance management and operation of  safety and wellbeing the core business  customer service  efficiency and sustainability  risk management Value enhancement Capability for growth including:

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Leveraging this excellence  ability to fund outside of the core business in  acquiring and developing necessary skills order to create value  identifying opportunities and executing them  meeting shareholder expectations of returns Our assessment of the ownership options listed above includes assessment against these overarching objectives and the assessment criteria listed above, which are consistent with the guidance included in the SCI. Challenges and opportunities

In addition to assessment against the strategic objectives we have considered ownership options in the context of potential challenges and opportunities for the Company which may arise in the foreseeable future.

Electricity sector outlook There is currently more uncertainty about the role and future outlook for the electricity distribution sector than there has been for many decades. Accordingly, the role of distributors in an evolving market is becoming a focus for policymakers. For example, in its recent review of New Zealand’s energy policies, the International Energy Agency (IEA) stated:

Distributors across IEA member countries are at the forefront of a major transformation in electricity system operation and use, which is occurring as a result of the combination of liberalisation, decarbonisation policies and the rapid development and deployment of innovative distributed generation and storage technologies.

This transformation is raising a range of new challenges for maintaining power system security and reliability, with distributors increasingly being required to manage a much more complex operating environment with more dynamic and far less predictable real-time power flows.

This requires investment in adequacy, innovative system operation and regulatory clarity.

The IEA’s review also raised concerns about the ability of New Zealand’s distributors to manage and adapt to industry evolution. It recommended the government review the structure, scope and nature of regulation of the electricity distribution sector with a view to making changes such as:

 Achieving scale economies through amalgamation of distributors or the use of joint ventures and/or regional service and management agreements

 Extending economic regulation to include exempt community trust distributors

 Introducing regulatory incentives for innovation, and allowing the use of benchmarking to drive distributor uptake of innovation.

Electricity retailers have also suggested distributors are encroaching on their markets and are lobbying for structural change of the industry. In response the Commerce Commission and the Electricity Authority have been actively considering whether and how new technology can be accommodated within the electricity sector, including whether there are changes required to the regulatory framework for electricity distributors.

The new Government has also announced a retail electricity pricing review. While the terms of reference for this review have yet to be established, it is expected that the review will examine all components of retail prices, including distribution charges, and by inference the underlying costs of supply and effectiveness of the distribution sector.

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The Commerce Commission has also recently formalised its forward work programme for electricity distribution regulation, which includes particular focus on the asset management and investment practices of the sector.

Implications for electricity distributors and Unison Networks The opportunities and challenges noted above are likely to require electricity distributors, and their service providers such as UCSL and ETEL to:

 Manage more complexity and uncertainty in the provision of traditional distribution services

 Consider alternative pricing and revenue models

 Demonstrate greater collaboration and possibly standardisation of network practices to provide open access to networks

 Broaden their service offerings to customers and other market participants

 Increase focus on prudency, efficiency and innovation

 Maintain clear lines between regulated and unregulated services, with a possible reduction in the size and scope of the regulated service over time.

While the future is less certain than it has been in the past, there are real opportunities for distributors to leverage the relationships they have with their customers, to maintain and grow value by embracing the opportunities created through innovation and new technology. Having sufficient scale and capability are important factors in being able to achieve these rewards.

UNL has already demonstrated some of the capabilities which the IEA and industry regulators have highlighted. The Company’s investment in smart grid technology, collaboration with other networks, network pricing reforms and focus on efficiency and capability are consistent with the innovations highlighted by the IEA and the expectations of the Electricity Authority and Commerce Commission.

Telecommunications sector UFL operates in the telecommunications sector, which is quickly evolving in response to technological change. Traditional technologies such as fixed line copper to the home, are being replaced by fixed fibre and wireless solutions, providing different service levels for customers, including the ability to stream audio and video content and upload/download significant amounts of data. Like any fixed infrastructure, upfront investment is required before customers are connected, and with increasing technology choice there is some demand uncertainty at the time investment decisions are made. In addition, as the new technologies become more prevalent, and to the extent the assets operate as natural monopolies, new regulatory requirements will be developed to monitor, and where necessary regulate prices and service levels, in order to protect end users. Thus the telecommunications sector is characterised by technological change which brings with it investment and demand uncertainty. This is expected to continue for the foreseeable future. Our analysis of the ownership options available to HBPCT considers the outlook for these two key sectors, as we focus on the ability of the Company to respond appropriately to manage its core business and its ability to enhance value for its shareholders.

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Assessment of options

In the tables below we summarise the advantages and disadvantages of each of the ownership options considered, against the two key objectives for the Company as set out in the SCI, and the capability to respond to the challenges and opportunities arising from the evolution of the electricity and teleco sectors.

Table 19: Advantages and disadvantages of continued Trust ownership

Objective Performance excellence Value enhancement Capability to respond

Advantages Trust can influence financial and non- Able to focus on the investment in long- Maintaining focus on enhancing core financial objectives through the SCI and the term assets for the benefit of current and business capability is consistent with appointment of Directors. future generations. current sector challenges and opportunities.

Allows the Company to focus on operating Ownership and management remains The Trust may support investment in excellence initiatives rather than primarily localised, enabling a strategic focus on innovation which creates better outcomes shareholder returns thus meeting regional benefits for the wider community. and choices for consumers rather than community expectations for service quality Direct financial benefits flow to consumers focus solely on dividends. and facilitating regional development. or community.

Ownership by a single entity simplifies reporting and governance procedures, minimising compliance costs.

Disadvantages Company may find it difficult to achieve Ability to raise additional capital is Real innovation may not emerge from excellence without access to external constrained. This is relevant when within existing Group structure. influences. considering Unison Networks’ past model Trust may choose to acquire capability but of growth through acquisition. Election cycle may generate risk of existing structure may limit options instability in Trust operations which may Difficulty raising new equity means the available. impede Company performance. Trust may sacrifice dividends and immediate benefits for beneficiaries in

order for the Company to pursue growth opportunities or adopt an organic growth model. Some opportunities will not be possible to pursue due to size.

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Table 20: Evaluation of alternative ownership options against criteria

Ownership Performance excellence Value enhancement Capability to respond option

Joint venture Access to external knowledge may Provides mechanism to expand into new Provides mechanism to access new enhance performance of core business, business areas with reduced capital capabilities including technology, which while retaining local influence in objective constraints. may enhance the Company’s ability to setting. respond to future opportunities. Shares risks of new ventures and may Ownership and management of core enhance access to capital. Selection of JV partners is crucial, and the business may remain localised, to enable nature of the relationship may change over Enables diversification of revenue base. strategic focus on regional benefits. time.

Merger through As for JVs, access to external knowledge Provides mechanism to expand core or May not provide access to innovative equity exchange and economies of scale and scope may like businesses. capability or new opportunities if merger enhance performance beyond that is with like businesses (such as other Economies of scope or scale may enhance available under the Trust model. networks). shareholder returns from core business, Local objectives can be accommodated, subject to regulatory constraints. albeit shared which may compromise the Loss of strategic control due to dilution of ability to fully deliver on community assets. expectations. Requires little capital outlay.

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Long term lease Terms and conditions of lease and choice Loss of strategic control over core Trust Passes opportunities and risks associated of lease partner are critical. assets. with industry change to lease holder for the duration of the lease. Consumer interests more reliant on Possible value creation from leveraging external regulatory protection. Unison’s capabilities would accrue to the No guarantee that the value of the lease holder. business will be maintained or enhanced Access to external knowledge may over the lease period. enhance network performance, however The lease option can be a way for the Trust lease holder may also focus on maximising to release capital to fund investment into Trust loses ability to influence how the returns within regulatory allowances. new ventures, assuming the Trust retains business responds to industry change the proceeds for re-investment. during the lease period. Potential loss of consumer influence could compromise the ability to fully deliver on Funds not tied to an existing opportunity community expectations for quality of such as under a joint venture or merger. service and other objectives such as May result in divestment of subsidiary regional development and innovation. businesses due to significant change to Unison Group structure.

Sale or Trust support for performance excellence If shares are sold or new equity is issued Unlikely source of additional external distribution of likely to continue, to be balanced against then provides access to some additional skills and expertise. 24.9% or 49.9% needs of other shareholders who may have capital to fund growth, while retaining This would depend on the nature of the of shares to different objectives. control with local consumers. investors if shares are sold or new equity is beneficiaries, This may compromise the ability to fully Funds not tied to an existing opportunity issued. the public, deliver on community expectations for such as under a joint venture or merger. industry or Access to capital under the sale option quality of service and other objectives such institutional The distribution option provides no access provides opportunity to acquire capability as regional development. investors to capital. to respond to industry change. This is not available under the distribution option.

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Sale or Shareholders would need to manage Under the distribution option, access to Limited access to expertise. distribution of potential conflicts between returns and capital is limited. Additional capability to respond to 100% of shares performance excellence. The sale option raises immediate capital to industry opportunities would depend on to beneficiaries, Potential loss of consumer influence could fund growth into new businesses and the nature of the investors. the public, compromise the performance excellence therefore provides broad opportunities for industry or The sale option provides no capability to objective. growth, assuming the Trust retains the institutional respond to industry change. proceeds for re-investment. investors Community objectives may not be met.

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Summary of options assessment

Performance excellence The performance excellence objective can be achieved in the core business via innovation and investment. Under the current 100% Trust ownership model access to innovation and investment comes through incremental growth opportunities which provide scale and expertise, or investments in opex and capex improvements funded through prices and sales. Unison’s performance improvements to date have been developed via this model. This option also allows community objectives, such as for service quality and regional development to be fully accommodated. A joint venture provides enhanced access to potential performance excellence. A joint venture allows the Company to step into new business opportunities which may enhance performance in existing businesses through economies of scope and scale. Under a joint venture, the Trust is able to maintain its 100% ownership of the core business, while entering into new business ventures in partnership. A merger provides similar opportunities for performance improvement, although under a merger with a like business it may also provide access to additional economies of scale in core business activities. The Trust may relinquish its 100% ownership of the core business under this model, and its level of control will depend on the nature of the merger. Community objectives may not be able to be fully met as a result. The long term lease option may provide access to external capability which improves performance excellence. However, the Trust’s ability to influence consumer and community outcomes is diluted during the term of the lease and thus consumer interests are more reliant on regulatory oversight. The performance excellence objectives under the distribution or sale options will depend on the ultimate shareholders, the degree of sell down or additional equity issued and the ability of the Trust to continue to influence the Company’s objectives. The Trust may have some influence on the identity of the new shareholders in the short term, but this will reduce in the longer term after the initial transaction(s). The ability to influence performance outcomes is diluted, and as a result, community objectives may be compromised.

Shareholder value enhancement Under the 100% Trust model, Unison has achieved considerable growth and increased shareholder value to date. It has achieved this through acquisitions, organic growth of existing and new business activities; while meeting shareholder return and dividend expectations. To some extent this has been funded through increased external borrowings. However external sources of borrowings are not unlimited. Each investment which requires external debt funding reduces the capacity of the Company to fund future investment opportunities. Alternatively, the Company could sell existing assets in order to fund new investments or divert cash flows to debt reduction in the short term. This may involve dividend deferral. Joint venture and merger options provide access growth opportunities by diluting the Company’s ownership in new and possibly existing businesses. These opportunities may help the Company achieve the Trust’s dividend and value expectations, for example by increasing access to unregulated revenue streams, without causing the Company to exceed its long term prudent borrowing capacity or resorting to higher cost debt sources. The long term lease option is unlikely to enhance shareholder value in terms of being able to leverage Unison’s capabilities, given the Trust’s control over its core asset is significantly reduced during the term of the lease and any value created would likely accrue to the lease holder. As the Unison Group’s structure is significantly altered the subsidiary businesses may be sold. Sale options can provide access to the capital required to fund growth, but these result in diluted or loss of control and influence over existing assets and may not provide access to additional expertise relevant to those assets. Distribution options do not directly enhance shareholder value. Capability to respond The 100% Trust model allows Unison to maintain focus on core business and build capability within it to respond to the emerging opportunities for electricity distributors. Acquiring additional capability is

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possible under this model, subject to the ability to fund it. A culture of innovation may be more difficult to establish under this model, although the Trust may choose to support investment in innovation. Joint ventures provide opportunity to access new capability, services and technologies without diluting control over core business. Mergers may not provide the same benefits if the merger is with a similar party such as another network. The responsibility for responding to industry changes is passed to the lease holder under the long term lease option - they bear any risks and capture any rewards during the lease period. The value of the business passed back to the Trust at the end of the lease period will be dependent on how well the lease holder responded during the period. Sale options can provide access to the capital required to invest in new opportunities, technologies and capabilities, assuming the proceeds are retained and re-invested in new opportunities. Otherwise, the additional capability to respond to industry opportunities would depend on the nature of the investors. Distribution options provide no capability to respond to industry change. Conclusion

We consider that the Company has performed well under the Trust model to date and can be expected to continue to do so by focusing on and delivering on its strategic objectives. In the absence of a catalyst for change we consider the Trust ownership model should be retained.

Potential catalysts for change include:

 Where Unison wishes to invest in a new opportunity and has exhausted its prudent borrowing capacity  Where the business outlook for one or more of the underlying businesses deteriorates. New opportunity Dealing first with the situation in which Unison has identified and wishes to pursue a new opportunity, we suggest that the following options could be considered.  Unison sells down its shareholding or issues new equity to a third party in its subsidiaries in order to access capital, while the Trust retains 100% ownership of the core network assets.

 Unison issues new equity to a third party in the electricity network, such that the Trust retains control of the core asset, while accessing additional capital.

 Depending on the nature of the opportunity, Unison considers a merger or joint venture arrangement as a mechanism to execute the opportunity within the capacity of the business.

We also note that in addition to the options listed above, HBPCT could simply choose not to support the Company’s new opportunity.

Subsidiary Businesses:

 Encourage Unison to sell down its shareholding in the subsidiary business, and consider investing in other opportunities.

 Encourage Unison to sell 100% of the subsidiary business, to free up capital to invest in new opportunities that have more growth potential.

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Electricity Distribution Business:

 The Trust may consider a long term lease arrangement to be a viable option, however, we recommend that the merits and risks associated with this option be carefully considered.

 The Trust may elect to sell down its shareholding in Unison to reduce its exposure and provide third party investors with exposure to all of Unison Group’s portfolio. Funds from the sale of shares could be used by the Trust to invest into new opportunities or to make a distribution to beneficiaries.

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Restrictions

This report has been prepared for Unison Networks Limited to support the review of Hawke’s Bay Power Consumers Trust’s ownership of Unison. This report has been prepared solely for this purpose and should not be relied upon for any other purpose. We accept no liability to any party should it used for any purpose other than that for which it was prepared.

This report has been prepared solely for use by Unison Networks Limited and may not be copied or distributed to third parties without our prior written consent.

To the fullest extent permitted by law, PwC accepts no duty of care to any third party in connection with the provision of this report and/or any related information or explanation (together, the “Information”). Accordingly, regardless of the form of action, whether in contract, tort (including without limitation, negligence) or otherwise, and to the extent permitted by applicable law, PwC accepts no liability of any kind to any third party and disclaims all responsibility for the consequences of any third party acting or refraining to act in reliance on the Information.

We have not independently verified the accuracy of information provided to us, and have not conducted any form of audit in respect of Unison Networks Limited. Accordingly, we express no opinion on the reliability, accuracy, or completeness of the information provided to us and upon which we have relied.

The statements and opinions expressed herein have been made in good faith, and on the basis that all information relied upon is true and accurate in all material respects, and not misleading by reason of omission or otherwise.

The statements and opinions expressed in this report are based on information available as at the date of the report.

We reserve the right, but will be under no obligation, to review or amend our report, if any additional information, which was in existence on the date of this report, was not brought to our attention, or subsequently comes to light.

We have relied on forecasts and assumptions prepared by Unison Networks Limited about future events which, by their nature, are not able to be independently verified. Inevitably, some assumptions may not materialise and unanticipated events and circumstances are likely to occur. Therefore, actual results in the future will vary from the forecasts upon which we have relied. These variations may be material.

This report is issued pursuant to the terms and conditions set out in our engagement letter dated 6 July 2017.

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Sources of information

In addition to relying on discussions with Unison management, we have reviewed and relied upon the following sources of information:

 Statement of corporate intent FY18

 Business plans FY12-FY18 (Group and individual businesses)

 Annual reports FY12-FY17

 Management accounts FY12-FY17 (Group and individual businesses)

 Unison Networks Limited’s 2013-2027 information disclosures

 Unison Networks Limited’s 2016-2026 asset management plan

 Unison Networks Limited’s 2013, 2014, 2015, 2016 & 2017 compliance statements

 PwC electricity compendium database.

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SCI targets and performance

FY13 FY14 FY15 FY16 FY17 FY18B FY19B FY20B Target Actual Target Actual Target Actual Target Actual Target Actual Target Target Target

Group Financial Performance Targets EBITDA as a percentage of average assets employed 10.4% 11.2% 11.6% 11.4% 11.4% 13.0% 12.0% 12.7% 12.3% 12.6% 8.5% 8.3% 8.6% EBIT as a percentage of average assets employed 6.5% 7.3% 7.6% 7.1% 7.3% 8.4% 7.7% 8.4% 8.1% 8.8% 12.5% 12.6% 12.8% Profit as a percentage of average shareholders’ funds 5.8% 8.0% 7.8% 7.6% 7.2% 8.2% 7.8% 7.0% 8.1% 10.8% 8.3% 8.2% 8.4% Ratio of shareholders’ funds to total assets 46% 47% 48% 49% 49% 49% 50% 49.5% 51% 51.8% 53% 54% 56% Dividend target (cents per share) 14.5 14.8 15.2 14.92 15.1 15.13 15.5 19.84 19.8 20.3 20.8 Electrical Lines Business Performance Targets 1.Operating Costs Consumer Numbers 110,108 109,316 110,418 110,029 110,344 110,576 System Length (km’s) 8,083 8,897 8,115 9,083 Total Lines Business Cost Per Consumer 290 291 308 317 328 318 328 320 326 316 335 335 335 Total Lines Business Cost Per km 3,224 3,959 4,209 3,920 4,460 3,871 2.Electricity Network Performance SAIDI - System Average Interruption Duration Index 133.1 89.2 133.1 112.8 123.0 115.0 99.1 82.7 99.1 125.0 105.4 104.5 103.7 SAIFI - System Average Interruption Frequency Index 2.4 1.6 2.4 1.8 2.30 2.0 1.94 1.937 1.93 2.0 1.91 1.88 1.86 Underground Faults Per 100km 6.2 3.7 6.2 6.0 6.2 4.4 Overhead Faults Per 100km 8.6 6.3 8.6 6.4 7.6 7.7 Total System Faults Per 100km 8.0 5.9 8.0 6.2 7.4 7.2

3.Health & Safety Performance Unison Injuries Per 1 Million Hours Worked < 1.9 - < 3.2 0.8 Number of Public Accidents Nil Nil Nil Nil Nil Nil Nil Medical Treatment Injuries <14 14 Medical Treatment Injuries in Focus Areas Nil 1.0 Nil Nil Nil Note: Targets are based on targets outlined in the previous years' SCI Key: Exceeds target Within 10% of Target Does not meet target

Source: Unison’s Statement of Corporate Intent, Business plans & Annual Reports FY12-FY18

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