CREATING A NEW ENERGY FUTURE ANNUAL REPORT 2015 VECTOR LIMITED 02 Highlights 18 Gas Wholesale 32 Management Team 04 Chairman’s Report 20 Regulation 34 Corporate Governance 06 Group Chief Executive’s Report 22 People 38 Non-GAAP Profit Measures 08 Strategy Overview 24 Health, Safety and the Environment 39 Financial Statements 10 Technology 26 Vector’s Operations 86 Financial Calendar and Directory 14 Electricity 28 Financial Performance Trends 16 Gas Transportation 30 Board of Directors Thank you to Auckland City BMW for providing the BMW i8 for the front cover photograph. WE ARE New technology is transforming energy distribution networks. We are developing new options that allow us to control our future. CREATING Customers are gaining greater choice over the source of energy they use, who supplies it, when and how they consume it and the price they pay. A NEW We are focused on meeting customers’ ever-rising expectations and growing sustainably while setting standards for health, safety and environmental leadership. ENERGY We are leveraging our heritage as New Zealand’s largest electricity and gas distributor, our broad portfolio of operations and the pivotal role we play in the country’s economic development. FUTURE. Vector is leading change. HIGHLIGHTS Revenue $1,294.0 m REVENUE RISES 2.8% SOLAR TAKES OFF Installed more than 1 Adjusted EBITDA 400 solar systems $596.9m GROWTH IN AUCKLAND, ENERGY VOLUMES AND TECHNOLOGY OFFSET REGULATED PRICE CUTS. RELATIONSHIP WITH TESLA ENERGY Vector has a new relationship with Silicon Valley pioneer Tesla Energy through which it expects to bring commercial and residential 1. Adjusted EBITDA is a non-GAAP profit measure. For a comprehensive definition and reconciliation of this measure to the GAAP measure of net profit, refer to page 38 of this report. batteries to New Zealand. ABOUT VECTOR Vector is focused on meeting New Zealand’s largest distributor of Vector has a strong record of health, the energy needs of more than electricity and gas. safety and environmental leadership. 700,000 customers across the Electricity and gas distribution networks More than $100 million distributed span the Auckland region. annually to the beneficiaries of the country. We keep the lights on, Around 40 towns and cities in the Auckland Energy Consumer Trust. the gas flowing, and provide North Island served by Vector’s gas We are one of the largest New Zealand many other essential services regional network. companies on the NZX, we deliver consistent crucial to New Zealand’s economic Nearly 800 OnGas bottle swap outlets returns to shareholders and we are advocates success. We are also leading across New Zealand. for an effective infrastructure sector. We are committed to being the country’s leading LPG depots spread from Invercargill a revolution in infrastructure infrastructure company. to Whangarei. management technology. Nearly $160 million in revenue is generated by technology products and services. For more, visit: www.vector.co.nz 874 staff and more than 1,000 contractors employed. 02 VECTOR LIMITED ANNUAL REPORT 2015 Dividend 15.50C THIS HAS BEEN THE NINTH YEAR OF FULL-YEAR DIVIDEND INCREASES METERING IN AUSTRALIA Reduction in TRIFR2 Well positioned to support a 42.5% smart meter roll out VECTOR CONTINUES TO IMPROVE SAFETY Electricity customer numbers 544,513 ARC INNOVATIONS AUCKLAND UNDERPINS LONG-TERM GROWTH POTENTIAL Acquired Arc Innovations from Meridian Energy 2. Total recordable injury frequency rate: number of recordable injuries per million hours worked, including contractors. PROUDLY LOCALLY OWNED Vector is a majority New Zealand-owned AECT acts in the interests of its beneficiaries, acting as majority shareholder company. Our majority shareholder is the beneficiaries, around 318,000 households in Vector, monitoring regulatory issues and Auckland Energy Consumer Trust (AECT). and businesses in Auckland, Manukau and taking a proactive role in ensuring energy The remainder of our shares are held parts of Papakura that were historically supply security. by investors. Our shares are traded on the customers of the old Auckland Electric AECT’s trustees: William Cairns (Chairman); NZX Limited’s Main Board under the ticker Power Board (AEPB). Warren Kyd (Deputy Chairman); Michael code VCT. It is one of 22 similar trusts that operate Buczkowski; James Carmichael* and The AECT is a private trust established throughout New Zealand. Karen Sherry* in 1993 under a Trust Deed that runs Since its formation, it has returned more until 2073. This means the AECT has an than $1.0 billion to its beneficiaries in For more visit: www.aect.co.nz enduring commitment to its investment annual distributions. Every three years, and is therefore able to provide strong, beneficiaries elect five trustees. These stable, local ownership of Vector over trustees are responsible for managing the long term. This allows Vector to AECT’s assets, administering the largest look through economic cycles and make dividend distribution in New Zealand, investments that deliver sustainable acting as trustees on behalf of trust and growing returns across generations. * Also sit on the Vector Board as Directors. 03 CHAIRMAN’S REPORT Transforming our business Vector has accelerated the Adjusted EBITDA rose 2.8% to $596.9 million transformation of its business from the $580.7 million posted in the same period last year, ahead of guidance of around in line with its vision to create $588 million. Adjusted EBITDA, excluding a new energy future, which is capital contributions, rose $3.4 million to entirely aligned with the needs $540.4 million from $537.0 million. and wants of our customers. Net profit fell 12.8% to $149.4 million from $171.3 million. A non-cash $11.0 million Also, it has delivered a strong result, despite mark-to-market loss on derivatives, significant and well-signalled regulator- principally reflecting a weakening of the imposed price cuts on our energy networks New Zealand dollar, and higher borrowing and falling natural gas volumes and weaker costs, diluted the gains in adjusted EBITDA. prices at the gas wholesale business. We benefited from strong growth in Auckland, a return to cooler temperatures “We are leading in line with historical averages and ongoing the adoption of growth in our technology operations. Meanwhile, we have continued to prepare technology that will the company for a future that is significantly transform the electricity different from the past. industry worldwide and We are leading the adoption of technology that will transform the electricity industry we are creating new worldwide and we are creating new opportunities for the company. opportunities for In particular, Vector has a new, ground the company.” breaking relationship with Silicon Valley pioneer Tesla Energy, through which we expect to bring commercial and residential batteries to New Zealand. Our metering business continues to grow. We are well positioned to leverage our New Zealand credentials to support a smart meter roll out that is beginning to gain momentum in Australia. Our metering business has also been bolstered by the $20 million acquisition of Arc Innovations. In addition, we commenced a strategic review of our gas transmission assets and our gas distribution assets outside Auckland. Annual revenue rose 2.8% to $1,294.0 million from $1,258.9 million. Increases in Transpower charges, rates and levies and other costs that are passed directly through to customers lifted revenue by around $28 million. Vector is one of Auckland’s largest ratepayers and these increases are reducing the benefits of the significant price reductions we have delivered to Auckland consumers over the past few years. 04 VECTOR LIMITED ANNUAL REPORT 2015 The Board has declared a fully imputed final we welcome its focus on customer adoption dividend of 8.0 cents per share, taking total of new technology and the impact of this dividends for the year to 15.5 cents per on network infrastructure investment. share, up 0.25 cents per share on the prior We are firmly of the view that the regulatory year’s 15.25 cents per share. environment needs to recognise that It is the ninth year running that Vector has Auckland is a special case. The region is delivered an increase in dividends to growing strongly, it has the highest demands shareholders. The dividend represents a for capital and it drives the growth of the pay-out of 69% of free cash flows1 and is national economy. Vector, with its investment ahead of our policy to target a pay-out of requirements, is at the sharp end of this issue. 60%. This compensates for below-target We believe infrastructure providers should pay-outs in the four years prior to the last be able to reach binding, long-term ‘special financial year. undertakings’ that enable investment in the Our balance sheet is strong with gearing2 face of these challenges. at 53.6% compared to 52.5% in the prior We, meanwhile, continue to invest to year and we retain an investment-grade open new markets and create new options credit rating. Vector continues to benefit for growth with investments in new from its position as a provider of essential technologies such as solar panels, residential infrastructure to Auckland, the country’s and commercial batteries, electric vehicle DIVIDENDS DECLARED economic powerhouse. CENTS PER SHARE charging infrastructure and home energy In the coming ten years, Vector forecasts management services. around $1.8 billion of capital investment will Looking ahead to the 2016 financial year, 15 be required for its Auckland energy Auckland continues to grow and this will networks. Were this investment ring-fenced underpin the expansion of our Auckland into a stand-alone company it would create 12 energy distribution networks as well as the country’s second largest energy in the company’s investments into new distribution company after Vector. This level areas of growth.