My Financial and Operational Results HALF YEAR ENDED 31 DECEMBER 2014 . VECTOR FROM HELPING POWER TO LAKESIDE BARBEQUES IN A GROWING AUCKLAND WANAKA VECTOR DELIVERS VECTOR LIMITED Disclaimer This financial and operational results presentation dated 20 February 2015 provides additional comment on the market release of the same date. As such, it should be read in conjunction with, and subject to, the explanations and views of future outlook on market conditions, earnings and activities given in that release. 2 VECTOR LIMITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Simon Mackenzie GROUP CHIEF EXECUTIVE VECTOR LIMITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Agenda - Dividend - H1 Highlights - Operating Overview - Outlook - A VECTOR LIMITED Delivering sustainable increases in dividends Declared Dividend • 2015 Interim Dividend of 7.50 cps fully-imputed • Payment date: 15 April 2015 • Remain committed to sustainable dividend increases 16 Cents Per Share • Record date: 31 March 2015 20 12 7.50 7.50 7.50 6.50 6.75 7.00 7.75 7.75 7.25 7.50 8 4 7.50 Final Interim 0 2010 2011 2012 2013 2014 2015 Financial Year 5 VECTOR LIMITED H1 2015 Snapshot • Acquisition of Arc & contract for majority of Meridian’s smart meters DISCIPLINED GROWTH PEOPLE AND SAFETY CUSTOMER FOCUS • Despite regulated price cuts ~$24m, adjusted EBITDA down just $4.4m/1.4% • Continued health & safety focus, particularly safety leadership training • 28% reduction in TRIFR over period, from 13.5 to 9.7 • Extended solar programme with mass market solar solution • Major vegetation survey to prioritise work for best customer outcomes • Connection & volume growth in electricity & gas distribution OPERATIONAL EXCELLENCE REGULATORY OUTCOMES • Tough year for electricity with storms & Penrose driving likely SAIDI breach • Final electricity default price path better than draft, offset by move to P67 WACC • Significant implications for our investment in regulated networks 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Um: Eu 3 O_n_n_ 0mm VECTOR LIMITED Regulated tariff reductions weigh on performance H1 2015 Financial Performance ($m) 657.9 687.1 1H 2014 1H 2015 317.8 313.4 225.9 203.3 104.6 87.3 Revenue Adjusted EBITDA* Net profit +4.4% -1.4% -16.5% 148.3 153.6 74.7 Operating cash flow Capital expenditure -10.0% +3.6% 74.7 Interim dividend 0.0% *Adjusted EBITDA is not a GAAP measure of profit. For a reconciliation of adjusted EBITDA to EBITDA and net profit refer to page 32 of this presentation. 8 VECTOR LIMITED Unregulated operations bolster adjusted EBITDA H1 2015 Adjusted EBITDA ($m) 317.8 +3.6 313.4 ‐3.0 +4.2 ‐0.8 ‐8.4 H1 2014 Electricity Gas Transportation Gas Wholesale Technology Shared Services H1 2015 9 VECTOR LIMITED Derivative losses and borrowing costs impact profit Movement in Net Profit Before Tax ($m) Net Debt & Gearing ($m) 3,000 146.7 2,500 ‐8.7 ‐5.4 51.6% 50.7% 52.9% 50.0% 122.4 ‐5.5 40.0% 2,000 ‐4.7 30.0% 1,500 20.0% 1,000 10.0% 500 2,388 2,461 2,606 Dec 13 Jun 14 Dec 14 0.0% 0 H1 2014 Derivative movements Borrowing costs Earnings Depreciation H1 2015 Net debt Gearing • Over a third of the profit movement due to non-cash mark-to-market losses on derivatives - principally reflecting a weakening of the NZ$ against US$ • Standard & Poor’s and Moody’s recently confirmed credit rating at BBB & Baa1 respectively, both with stable outlook 10 VECTOR LIMITED Capex increase driven by Gas Transportation H1 2015 Capex by Division ($153.6m) H1 2014 Capex by Division ($148.3m) 6.1 Electricity 6.2 48.7 47.8 72.0 73.0 Gas Transportation Gas Wholesale Technology Shared Services 4.6 3.5 17.0 23.0 • Total capex up 3.6% to $153.6m • Net capex (after contributions) up 1.2% • Gas Transportation capex up 35.3% due to Auckland connection growth & transmission relocations 11 VECTOR LIMITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Simon Mackenzie GROUP CHIEF EXECUTIVE VECTOR LIMITED Technology Technology growth continues primarily by smart meter installations, offset by Arc transaction and Australian costs • Arc acquired for $20m from 1 Dec. Adds over 139,000 smart meters, 17,000 legacy meters & 47 staff • Contract to roll out smart meters to majority of Meridian customers Installed & Contracted Smart Meters  1,200  1,000 Thousands • EBITDA up 7.5% driven Vector  800 Arc  600  400  200  ‐ 2010 2011 2012 2013 2014 2015F 2016F 2017F End of Financial Year Smart Meter Contract Duration 8% 6% 2015‐2019 • Installed base of 884,000 smart meters. 85% under contract until at least 2020. Will increase to 1.1m smart meters by end of FY17 2020‐2024 32% 2025+ Uncontracted 54% 13 VECTOR LIMITED Solar programme extended • Mass market solution launched before Christmas • Designed with everyday New Zealand families in mind • Affordable solutions • Easy to use technology • Buyback rate topped up for one year to 16c / kWh • Partnered with BMW to install charging stations for BMW electric vehicles Technology 14 VECTOR LIMITED Gas Wholesale Gas Wholesale performed well in H1 • Higher production at Kapuni - field operator achieving better tight gas performance • Ongoing proceedings with Kapuni Mining Companies – price of next tranche of gas, redetermination & obligation to process Gas Wholesale EBITDA Movement ($m) 30 29 28 27 26 25 24 23 22 21 20 H1 2014 +0.6 29.3 Other H1 2015 +1.6 ‐2.3 25.1 • MBIE’s published contingent reserves suggest long potential field life +0.9 +3.4 KGTP prod. Maintenance Gas mix / margin Liquigas volume Liquigas LPG Tolling (‘000 tonnes) 180 160 • Increasing demand for Bottle Swap – construction of dedicated filling facility in Auckland H2 140 94 120 78 58 100 80 70 55 60 40 20 H1 55 72 61 73 85 100 0 FY10 FY11 FY12 FY13 FY14 FY15 15 VECTOR LIMITED Electricity Electricity network faced challenges Number of Days per Year With Winds > 70kph • Severe storms hit our network in June and July. Wind speeds higher, and sustained longer, than Vector has ever recorded • Penrose still under investigation 8 7 6 5 4 3 2 1 0 RY8 RY9 RY10 • Likely to breach Commission target for year to 31 March 2015 RY12 RY13 RY14 Regulatory Years Ending in March • Raw unadjusted SAIDI rose to 465 minutes for the 9 month regulatory period to 31 Dec 2014 RY11 RY15  (9 mths) SAIDI 500 Threshold 400 Raw SAIDI Normalised SAIDI 300 200 100 0 RY8 RY9 RY10 RY11 RY12 RY13 RY14 RY15  (9 mths) 16 VECTOR LIMITED Tariff cuts, increased maintenance & transmission costs offset volume growth Electricity EBITDA Movement ($m) • New electricity connections up 26% +12.1 205 200 • Volumes up 1.5% due to connection growth and cooler winter temperatures 195 191.3 ‐10.2 190 ‐3.3 185 • Maintenance up $4.1m due primarily to Penrose & storms +2.5 188.3 Other H1 2015 ‐4.1 180 175 • High Court decision in Wairau H1 2014 Electricity vol* Tariff cuts Transpower Maintenance Wairau Electricity Connections & Throughput 4,000 4,380 4,360 4,337 4,359 3,500 4,340 4,321 4,320 4,298 3,000 4,300 4,271 4,280 2,500 4,260 2,716 2,753 2,657 3,003 4,240 3,780 2,000 4,220 H1 2011 H1 2012 H1 2013 New Connections * Includes the impact of prior period adjustments H1 2014 H1 2015 GWh Billed 17 GWh New Connections Road case results in additional unrecoverable transmission costs of $3.3m Electricity VECTOR LIMITED Electricity Implications of regulatory action 400 Electricity Maximum Allowable Revenue ($m) 396.8  5.3  395.2  2.5  Total Expenditure (Opex + Capex) ($m) 350 Actual DPP Allowance Differential ‐ AMP vs DPP 300 4.0  390 250 ‐8.9  380 200 $m ‐4.5  150 370 100 360 50 0 350 Draft DPP (P75) P67 WACC Inputs Opex Capex Growth Final DPP RY12 RY13 RY14 RY15 RY16 RY17 RY18 RY19 RY20 • Final DPP outcome better than draft, but offset by move to P67 WACC • Regulatory parameters for electricity now set through to 31 March 2020 • 2nd DPP will result in average price increase of ~0.4% on 1 April 2015 • Electricity revenue would have been $9m pa higher under P75 WACC • Expenditure forecasts (opex + capex) that Commission used to set 2nd DPP were an average of $25m p.a. (8.3%) below our 2014 AMP forecasts 18 VECTOR LIMITED Tariff cuts again dominate the Gas Transportation result 34% transmission) imposed in Oct 13 included element of clawback • Prices increased significantly in Oct 14 (9% distribution & 20% for transmission) as clawback expired Gas Transportation EBITDA Movement ($m) 80 78.0 75 70 Other H1 2015 65 ‐13.3 60 55 50 H1 2014 Tariff Cuts Dist. Volume Gas Distribution - Connections and Throughput 2.2% on back of lower thermal generation 12,123 2,500 New Connections due to more connections and a colder winter 69.6 +2.0 • Transmission volumes down • Distribution volumes up 4.3% +2.9 12,100 2,000 12,000 11,900 1,500 1,000 12,200 11,668 11,800 11,655 11,700 11,600 500 1,710 2,039 2,112 0 11,500 11,400 H1 2013 H1 2014 New Connections H1 2015 TJ Billed 19 TJ • Tariff cuts (24% distribution & Gas Transportation VECTOR LIMITED Outlook • Finally seeing some growth in electricity and gas distribution volumes, after several periods of decline • We are benefiting from growth in Auckland, where electricity and gas connections and volumes are up • Our metering business is positioned to grow strongly: • Contracted to grow to well over one million smart meters • Focus on Australia • Emerging applications for our metering expertise • We are increasingly seeking to allocate capital into our unregulated activities. We are also reviewing how we fund network growth • We remain comfortable with our original FY15 guidance for adjusted EBITDA of $588m 20 ms? Appendices VECTOR LIMITED Regulatory history under the default price path (DPP) regime 1 Apr 2012 1 Apr 2013 1 Apr 2014 1 Apr 2015 Electricity Gas Transportation • 1st regulatory period begins (3yrs) • 1st regulatory period begins (4yrs 3mths) • 1st price reset • Vector lines charges reduced by 7.6% • Vector lines charges reduced by 4% to clawback revenue earned above the DPP allowable revenue for the year to 31 March 2013 1 Jul 2013 1 Oct 2013 1 Oct 2014 • 1st price reset • Vector network charges reduced by 34% for transmission and 24% for distribution • 15 mths revenue reduction applied over 12 mths • Vector network charges increase by 20% for transmission, and 9% for distribution • 2nd regulatory period begins (5 yrs) • Vector lines charges increase by 0.4% 23 VECTOR LIMITED Income statement SIX MONTHS ENDED 31 DECEMBER Revenue Operating expenditure 2014 $m 2013 $m CHANGE % 687.1 657.9 +4.4 (340.1) -9.9 317.8 -1.4 (373.7) Adjusted EBITDA 313.4 Depreciation and amortisation (95.9) (91.2) -5.2 Net interest costs (90.2) (84.8) -6.4 Fair value change on financial instruments Associates (share of net profit/(loss)) Tax Net profit (4.9) 3.8 NA - 1.1 NA (35.1) 87.3 (42.1) 104.6 +16.6 -16.5 24 VECTOR LIMITED Technology SIX MONTHS ENDED 31 DECEMBER 2014 $m 2013 $m CHANGE % Revenue 76.0 66.5 +14.3 (18.4) -32.1 48.1 +7.5 (23.0) -20.0 25.1 -4.0 Operating expenditure EBITDA Depreciation and amortisation (24.3) 51.7 (27.6) Segment profit 24.1 EBITDA/Revenue 68.0% Replacement capital expenditure 72.3% 5.0 4.3 +16.3 Growth capital expenditure 42.8 44.4 -3.6 Total capital expenditure 47.8 48.7 -1.8 25 VECTOR LIMITED Gas Wholesale SIX MONTHS ENDED 31 DECEMBER Revenue Operating expenditure 2014 $m 2013 $m CHANGE % 185.9 184.7 +0.6 (156.6) (159.6) +1.9 EBITDA 29.3 25.1 Depreciation and amortisation (7.7) (8.2) Segment profit 21.6 16.9 EBITDA/Revenue 15.8% 13.6% +16.7 +6.1 +27.8 Replacement capital expenditure 3.0 1.9 +57.9 Growth capital expenditure 1.6 1.6 - Total capital expenditure 4.6 3.5 +31.4 26 VECTOR LIMITED Electricity SIX MONTHS ENDED 31 DECEMBER Revenue Operating expenditure 2014 $m 2013 $m CHANGE % 350.8 326.4 +7.5 (135.1) -20.3 (162.5) EBITDA 188.3 Depreciation and amortisation (41.7) Segment profit 146.6 EBITDA/Revenue 53.7% 191.3 (41.1) 150.2 -1.6 -1.5 -2.4 58.6% Replacement capital expenditure 36.9 36.0 +2.5 Growth capital expenditure 35.1 37.0 -5.1 Total capital expenditure 72.0 73.0 -1.4 27 VECTOR LIMITED Gas Transportation SIX MONTHS ENDED 31 DECEMBER 2014 $m 2013 $m CHANGE % Revenue 96.1 105.5 -8.9 (27.5) +3.6 78.0 -10.8 (11.0) -10.0 67.0 -14.2 Operating expenditure EBITDA Depreciation and amortisation (26.5) 69.6 (12.1) Segment profit 57.5 EBITDA/Revenue 72.4% 73.9% Replacement capital expenditure 11.2 10.3 +8.7 Growth capital expenditure 11.8 6.7 +76.1 Total capital expenditure 23.0 17.0 +35.3 28 VECTOR LIMITED Corporate SIX MONTHS ENDED 31 DECEMBER Revenue Operating expenditure Adjusted EBITDA 2014 $M 0.3 2013 $M CHANGE % 0.3 - (25.8) (25.0) -3.2 (25.5) (24.7) -3.2 29 VECTOR LIMITED Cash flow SIX MONTHS ENDED 31 DECEMBER 2014 $m 2013 $m Operating cash flow 203.3 225.9 Replacement capex (67.8) (66.2) Dividends paid (79.2) (79.0) Cash available for growth and debt repayment 56.3 80.7 Growth capex (91.7) (88.0) Acquisitions (20.0) (60.1) Other investment activities (0.5) 1.6 Pre debt financing cash inflow (55.9) (65.8) Increase/(decrease) in borrowings 57.0 25.0 Other financing activities (1.3) (0.7) Increase/(decrease) in cash (0.2) (41.5) 30 VECTOR LIMITED GAAP to non-GAAP reconciliation Vector’s standard profit measure prepared under New Zealand GAAP is net profit. Vector has used non-GAAP profit measures when discussing financial performance in this document. The directors and management believe that these measures provide useful information as they are used internally to evaluate performance of business units, to establish operational goals and to allocate resources. For a more comprehensive discussion on the use of non-GAAP profit measures, please refer to the policy ‘Reporting non-GAAP profit measures’ available on our website (vector.co.nz). Non-GAAP profit measures are not prepared in accordance with NZ IFRS (New Zealand International Financial Reporting Standards) and are not uniformly defined, therefore the non-GAAP profit measures reported in this document may not be comparable with those that other companies report and should not be viewed in isolation or considered as a substitute for measures reported by Vector in accordance with NZ IFRS. Definitions GAAP TO Non-GAAP reconciliation EBITDA and Adjusted EBITDA 2014 2013 Six months ended 31 December $M $M 87.3 104.6 90.2 84.8 35.1 42.1 95.9 91.2 308.5 322.7 Reported net profit for the period (GAAP) Add back: net interest costs 1 Add back: tax (benefit)/expense 1 1 Add back: depreciation and amortisation EBITDA Adjusted for: EBITDA: Earnings before interest, taxation, depreciation and amortisation. Adjusted EBITDA: EBITDA adjusted for fair value changes, associates, impairments and significant one-off gains, losses, revenues and/or expenses. 1 Associates (share of net (profit)/loss) Fair value change on financial instruments Adjusted EBITDA 1 - (1.1) 4.9 (3.8) 313.4 317.8 1. Extracted from reviewed financial statements 32 vector.co.nz