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Edited Transcript of VCT.NZ earnings conference call or presentation 22-Aug-19 10:00pm GMT

Full Year 2019 Vector Ltd Earnings Call

Auckland Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Vector Ltd earnings conference call or presentation Thursday, August 22, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dame Alison M. Paterson

Vector Limited - Independent Non-Executive Director

* Jason Hollingworth

Vector Limited - CFO

* Simon MacKenzie

Vector Limited - Group CEO

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Conference Call Participants

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* Aaron Ibbotson

UBS Investment Bank, Research Division - Director & Research Analyst

* Andrew Rupert Pelham Harvey-Green

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Grant Swanepoel

Craigs Investment Partners Limited, Research Division - Director & Head of Research

* Nevill Gluyas

Jarden Limited, Research Division - Director of Equity Research

* Stephen Hudson

Macquarie Research - Head of Research

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Presentation

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Operator [1]

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Good morning, everybody. Welcome to Vector Limited's conference call and webcast to discuss the company's financial and operational results for the full year ended 30 June, 2019. (Operator Instructions) I must advise you that this conference call is being recorded today.

I would now like to hand you over to Vector's Chair, Dame Alison Paterson, who will take you through the call. Please go ahead, Dame Alison.

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Dame Alison M. Paterson, Vector Limited - Independent Non-Executive Director [2]

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Thank you. Good morning, everyone. Hardly necessary to say again that this is Vector's results briefing for the full year ended 30th of June 2019. Joining me on the call today is Group Chief Executive, Simon MacKenzie; and Chief Financial Officer, Jason Hollingworth.

A reminder that as in recent briefings, we're not intending to go through a detailed page-by-page recital of the investor material. Rather we want to provide insights into what we see as the key aspects of the results and allow more time for Q&A with you all.

I will begin today's presentation with the summary of the dividend for the full year and then hand over to Simon to provide an overview of the key aspects of the results. Jason will comment a little more on the numbers before Simon will close with the short statement on Vector's outlook. We will then be happy to take your questions.

I want to take this opportunity to record our pleasure with the recruitment of 3 new directors, Dame Paula Rebstock, Tony Carter and Bruce Turner who've added immeasurably to the resources that are valuable to the Board for discussion with management. And I want to thank too management for a good year in a challenging environment.

So on to dividends. The full year dividend is $0.165 per share, up [$0.25] per share on last year. The dividend is fully imputed and will be paid to shareholders on the 16th of September 2019. Vector's current policy is to increase dividends by at least $0.25 per share annually, provided the company has the financial capacity to do so.

As has been signaled previously, we will be reviewing our dividend policy once the parameters of the 2020 electricity reset have been established. The regulatory reset will determine the revenues available to our electricity network for the 5 years to the 31st of March 2025. The Commerce Commission is expected to provide final confirmation in late November this year.

I will now hand you over to Simon to provide more insights into the year.

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Simon MacKenzie, Vector Limited - Group CEO [3]

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Thank you, Alison. Operationally, Auckland's growing population has once again contributed to strong electricity and gas connection growth. We had 14,322 new electricity and gas connections over the past year, up slightly on the prior year and around 40% higher than 4 years ago.

A reasonably mild start to winter contributed to slightly lower electricity volumes, down 0.4% on last year to 8,410 gigawatt-hours. To keep pace with Auckland's growth and enhanced network integrity, this year Vector invested $260.9 million in our networks, which is an average of $5 million every week.

Metering growth continued in both New Zealand and Australia this year, with 57,000 additional meters deployed in New Zealand and 96,000 in Australia. We now have 1.56 million smart meters in our fleet. And through the year, the acquisition of Vircom in September nicely complements our New Zealand metering business, augmenting our nationwide service capability.

Natural gas faced a challenging year with multiple planned and unplanned outages of major gas fields, which had the flow-on consequence to our ability to supply customers. These outages lead to significant supply disruption for some customers as well as considerable market volatility. On the supply side, Kapuni gas field production was up 8.5%, and our South Auckland Bottle Swap plant continued to drive efficiencies. In fact, the Bottle Swap plant won Deloitte's Energy Excellence Health & Safety Award for 2018, which we're very proud of.

In terms of the rest of our business, Technology segment, our energy solutions business PowerSmart has had a successful year. For example, a successful partnership between PowerSmart and the New Zealand and Niuean governments delivered a 600-kilowatt renewable energy system for the people of Niue. For HRV, however, ongoing market challenges has led to a leadership change, restructure and repositioning of the business. The new management team and CEO are now focused on a new energy solutions approach under the Vector PowerSmart brand. Jason will talk more about the impact of these changes shortly.

In terms of other business and operational achievements, we are pleased with continued improvement in our safety KPIs, with both total recordable injury frequency rate and lost time injury frequency rate decreasing significantly. In September, we launched our Urban Forest program to improve network resilience, given the ongoing challenges we face from tree damage to the network as a result of ever-increasingly volatile weather conditions. Every time we need to remove a tree to protect power lines, we replace it with 2 native trees, which are planted in safe areas away from our network. In the past year, we've planted 31,000 native trees through this initiative.

Vector EV charging stations have provided more than 96,000 charging stations to EV drivers and saved more than 1.183 tonnes -- or 1,183 tonnes of CO2 emissions from entering the environment compared to petrol-powered vehicles. These charges are providing us with valuable insights about customer charging behavior to future network planning.

In keeping with our commitment to sustainability, we are pleased with the 17% reduction in corporate carbon intensity this year. We also convened a battery leaders group to help ensure responsible end-of-life management of large lithium ion batteries. Towards the end of last year, Vector became the first New Zealand corporate to receive the Accessibility Tick, continuing our leadership on Diversity and Inclusion initiatives.

At this point, I'd like to hand over to Jason Hollingworth, our CFO, who's recently joined us, and we great -- and it's great to have Jason on board to go through the numbers.

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Jason Hollingworth, Vector Limited - CFO [4]

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Thanks, Simon. For those of you that are following the charts, I'm about to talk about Slide 5.

So in the past year, Vector delivered a steady financial performance, reporting an adjusted EBITDA of $485.8 million. This is up $15.7 million or 3.3% on last year's result, and it hits the midpoint of the company's guidance range of $480 million to $490 million. I'll point out that the results include an uplift due to recent accounting changes If we exclude these changes, the increase to adjusted EBITDA would have been more like $4.8 million or 1% on the prior year.

Capital expenditure was $425.1 million, $43.9 million higher than last year. This reflects continued investment in infrastructure to support Auckland's growth and higher network replacement expenditure. It also reflects increasing deployments of smart meters as market demand continues to accelerate in Australia.

Group net profit after tax was $84 million, and this includes a noncash impairment charge of $46.6 million in respect of the E-Co Products Group. The prior year's net profit of $149.8 million included a one-off tax gain of $16.7 million. If we exclude these, group net profit after tax of $130.6 million was down slightly on the prior year.

The E-Co Products Group impairment was partly driven by the ongoing market challenges faced by HRV's heat pump and solar divisions . So as well as the investment made in leadership change and repositioning of the business. The business has adopted a new strategy, and we expect to return to profitability in FY '20 year.

Operating cash flow was down 10.7% to $348.1 million, which is largely due to our changed treatment of loss rentals during the period.

Just moving on to Slide 6. Comparable segment earnings were up $4.8 million or 1% to $485.8 million.

I'll now break that down by segment, starting with the Regulated Networks. Excluding accounting changes, networks underlying earnings were up more than $3.5 million due to higher residential connections from Auckland's high growth.

In Gas Trading, underlying earnings were down $4.6 million, which is largely due to the supply challenges from multiple planned and unplanned outages of major gas fields and pit in the gas market.

Underlying Technology segment earnings were up $8.4 million, largely on the back of continuing meter growth in Australia and New Zealand.

It's important to note that from the 1st of July 2018, Vector adopted new accounting standards on revenue and leasing and we changed the treatment of gains and losses on disposal of fixed assets.

I'll now hand back to Simon to go through the segments in a bit more detail and to look a little further ahead.

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Simon MacKenzie, Vector Limited - Group CEO [5]

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Thanks, Jason. As Jason noted, networks have seen an uplift in earnings. This is largely driven by ongoing connection growth and steady household consumption. It's worth noting that household consumption seems to have stabilized after a decade of consistent decline. However, we are observing an ongoing trend of wealthier consumers reducing energy at a rate of 4x that of poorer consumers. This leads on to the inevitable issues with affordability.

I'll point out that networks revenue would be higher if not for 3 key factors. Firstly, we were impacted by the Commerce Commission's settlement regarding the low fixed user charge adjustments in prior years. Secondly, regulatory incentive targets have reduced revenue by around $4 million. And lastly and importantly, since 2013, significant regulatory forecasting inaccuracies have resulted in around $270 million of lost revenue, and for this year alone, that lost revenue equates to $25 million that would have gone to profit.

Gas network volumes were down slightly, and revenue remains impacted by the full year effect of the price reset in October 2017. Total network maintenance expenditure across electricity and gas increased by $2.2 million on the prior year. This was largely due to new initiatives focused on improving electricity network reliability and SAIDI performance.

In March, Vector and the Commission agreed to recommend to the Court a penalty of $3.6 million in recognition of Vector's breaches of the electricity network quality standards in 2015, '16. We remain committed to meeting our regulatory compliance requirements in regulatory year 2020 through the challenging issues we face in Auckland with growth and changing climatic conditions contributing to these challenges.

In the past year, our regulated capital expenditure was up 6.1% to $260 million. This CapEx was spent to improve the safety, reliability and resilience of our network and also to significantly support Auckland growth. Capital contributions for the year were up 12.5% to $79 million. Another increase in subdivision activity contributed to this increase so did the 17 major asset relocation projects worked on during the year to enable large infrastructure upgrades across Auckland to proceed.

With no sign of slowdown, we are working with our regulator to ensure these infrastructure projects can be appropriately funded in the future. As at 31 March, our electricity regulated asset base totaled $3.1 billion, and our gas regulated asset base set at around $420 million. We added another 11,000 new electricity connections and 3,322 gas connections to our networks this past year.

The total connections stood at in electricity 571 -- sorry, 571,125, which is 1.4% higher than a year ago. Just further context since 2013, we've built a significant amount of network, which if stretched in a line would go from Auckland to Queenstown and the customers added to our network equate to cities of Whangarei and Tauranga also being added into our network in terms of customer numbers.

Total gas connections were up 2.2% to 111,642. Putting Auckland's growth into perspective, our network connections remain around 50% higher than they were 5 years ago and -- sorry, 40% higher, I should apologize, 40% higher than they were 5 years ago. And obviously, that creates a challenge for the team to basically cater for all that activity as well as the underlying existing network.

Looking ahead with electricity price reset, which is known as Default Price Path 3, come into effect on 1 April 2020, and it's a crucial event for Vector, because it sets our electricity network revenues for the 5 years to 31 March 2025. We will call this period DPP3. We are awaiting the Commerce Commission's final decision on our network expenditure allowance and quality targets for DPP3. This is expected in November this year.

Equally important in this process is the regulated WACC that will apply for the next 5-year regulatory period. This will be set based off the 5-year government bond rate between 1st of June and 31 August this year, a very narrow window. A key focus of Vector's engagement with the Commission throughout this reset process is how forecasting accuracy, low interest rates and asset indexation are crystallizing challenges within the existing regulatory model.

We think the case to align regulatory settings with the investment needs of today has never been stronger. We continue to engage with the Commission on this issue. Specifically, we're asking for 2 changes to the current arrangements that will allow for greater cash flow.

The first is a switch to nonindexing of assets, which has the positive impact of delivering cash flow to support investment for growth. Furthermore, nonindexing is NPV neutral, meaning customers would pay the same over the life of the assets.

The second change relates to today's current ultra-low interest rate environment and the urgent need for the Commission to amend the way it derives the cost of debt in its weighted average cost of debt or WACC calculations. Specifically, this is not relying on this very narrow, risk-free government 5-year rate for a 3-month window and rather focusing on a trailing average of the cost of debt over either a 10-year period, such as used in Australia, or a 20-year trailing average as used in regulatory practice in the U.K. to better reflect efficient debt book management. Vector is advocating for New Zealand regulation to align with international practice.

Within the broader regulatory regime, there are avenues for Vector and the Commission to work together to correct these anomalies and better align cash flow with investment needs. We remain committed to working openly and collaboratively with the Commission, both within the reset process and beyond, to explore all options to address these 2 challenges.

Moving on to Gas Trading. As mentioned already, the past year saw some challenging market conditions for our natural gas business. We have seen a drop in national -- natural gas volumes down 12%, and there has been reduced supply from a range of planned and unplanned gas field outages. This pushed up cost for us as we sought to minimize the impacts on our consumers.

Vector continues to advocate for greater transparency around upstream outages to enable better planning. In the coming year, we hope to see progress towards regulatory changes that will bring the industry more transparency and confidence in the household gas sector.

A strong performance in liquids and LPG has helped to offset the natural gas result, with gas liquid sales up 1.9%. Our Bottle Swap business' growth is slowing, with volumes up just 0.8% on the prior year; however, we are now benefiting from cost efficiencies at our new Papakura bottling plant.

Turning to our Technology segment. We had a good result in our Technology segment, predominantly due to metering growth. Our owned or managed smart meter fleet is now 1.56 million and counting. We deployed more than 96,000 meters in Australia, 57,000 in New Zealand, which is in line with expectations. Outside of metering, PowerSmart is performing well with a strong pipeline of projects across New Zealand and the Pacific.

This year, we successfully installed a major renewable energy system in Niue in partnership with the Niuean and New Zealand governments. As mentioned already, E-Co Products Group is now combined with PowerSmart to form Vector PowerSmart. Under new leadership, our strength and focus has been placed on the development delivery of technologically advanced energy solutions to meet the needs of rapidly evolving markets. We are confident that PowerSmart has the right structure, team and approach to succeed, and accordingly, we expect an improved performance in financial year '20 with the HRV business returning to profitability.

Looking ahead, we expect Auckland growth to continue, and we are targeting around 12,000 new electricity connections in financial year '20. We expect CapEx to remain elevated to meet the demands of this connection growth and associated infrastructure and maintenance. In metering, we are targeting 60,000 additional meters in New Zealand and approximately 135,000 in Australia.

In terms of guidance, following the Default Price Path 3 or DPP3 decision later this year, Vector will be able to provide guidance about future expected dividend payments in the financial year '20 adjusted EBITDA, which may be affected by the reset of our future electricity revenues.

Lastly, I'd like to thank the Board and also staff who remain committed to meeting the challenges of growth, looking at the challenges with regards to new technology and in particular focusing on consumers and shareholders results, so we have long-term sustainable business.

Alison, Jason and I are now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Grant Swanepoel from Craigs.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Research [2]

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Two questions. Just on a small point, you mentioned that household consumption has now drifted to flat from falling per pcp before that -- before -- actually before that. But you mentioned that the wealthier are now reducing usage 4x the rate of the poor. It sounds quite inflammatory. If it's just 0.2% for the poor's reduction and 0.8% for the wealthier, it's not really that much. Can you give some sort of idea of what the rate of decline is for those 2 segments?

My next question is on your dividend policy. Do we still think of FFO-to-net debt is what you guys would be tracking to stay within your current 9% to 13% range? And if the current price point of 5% to 6% probably implied by the new risk-free rate, is your p-nought -- it looks like you would stay within that range. Is the Board more inclined to set the policy with the trust in mind or with probably risk prudency and no incremental if it creeps towards the lower end of that range?

Next question on your discussion with Comm Comm on the DPP3 setting on the 2 issues that you'd like to change become a noninflationary environment, is it not too late, knowing how slowly the Comm Comm moves for this DPP period. And potentially, if you do get that in place for the next DPP period, that actually would be negative for shareholders to be moving to a risk-free rate that is trailing 5 years, particularly if you're on an upcycle? And my final question on technology. Now that the nontech businesses are doing so poorly, can I assume that most of the $142 million is meter profits?

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Simon MacKenzie, Vector Limited - Group CEO [3]

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I -- hopefully, we catch all your questions. It was quite a mixed bag there. With regards to the difference between the wealthier and the poorer consumers, we plot these on a what's called a deprivation index, and we identify consumption in these classifications. Have I -- we haven't got it specifically broken down into what it means by volume basis. But what we have observed is a mention that the rate of decline of consumption at a wealthier consumer is 4x the rate of that of a poorer consumer, which obviously over the long term that starts potentially raising the challenges about on a volumetric-based pricing methodology of potentially poorer consumers ending up picking up more of the cost allocations than the wealthier consumers. So that's something that we just have to mindfully watch. With regards to FFO-to-debt question, Jason may choose to comment.

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Jason Hollingworth, Vector Limited - CFO [4]

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I think that is obviously one of the factors that the Board will consider, but there's a range of factors in resetting that dividend. So I think that's the discussion that's yet to be had. And once they have the DPP3 set, I think that's one of the factors that will be considered, but there'd be a number of others in terms of the outlook for the business and its capital requirements going forward as well.

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Simon MacKenzie, Vector Limited - Group CEO [5]

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The other question you had about trailing average, I probably wouldn't disagree with your perspective -- I wouldn't agree with your perspective. I think this is about matching and having transparency with regards to costs, because I think at one end of the continuum, the issue is to have an efficient debt book that is structured obviously with different [tune] structure of products and interest rates. And that is the approach that's been taken in the U.K. and also the Australian markets to reflect accurately what a efficient firm would be normally doing to manage its debt portfolio as opposed to a single short observation of 3 months.

To your point, just if you turn that around and you see but a few then had a trailing average at DPP4, for example, and that moved -- and interest rates had moved up to an elevated amount and you had a trailing average that was reflecting prior cost of debt, then obviously, my view would be that the Commission would look at that potentially and say, well, now consumers are not benefiting from lower cost of debt and you're gaining on the other side of the equation. So I don't think we can sit here thinking that you're going to be on an upside when the reality is this is about trying to match what the business should be doing in an efficient time period.

With regards to your question around the Technology segment, I think we've always been pretty clear that, that largely does reflect the metering business. I would say that the contribution of the only other part in that, which has primarily been the E-Co and the PowerSmart businesses, has always been a very small proportion of that. As noted, we're not pleased with the performance in HRV E-Co. We've got a plan to turn that around, but it's all still very important from our perspective when we look forward into the future and certainly what we're seeing now with consumers demanding a wide range of new energy-related products and services to satisfy their needs.

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Operator [6]

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(Operator Instructions) Your next question comes from the line of Andrew Harvey-Green from Forsyth Barr.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [7]

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A couple of questions from me. First one, I guess, just following on, I guess, what Grant was saying. Hypothetically again, I guess, if you are unable to successfully change Commission's view around asset indexation and how you calculate the cost of debt, would you look to maybe going down the customized price paths route if the DPP isn't quite what you want? Is that -- how likely is that at the moment?

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Simon MacKenzie, Vector Limited - Group CEO [8]

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I think that's obviously one of the parts of the regime that we definitely would look at. As it stands at the moment, we can't apply for a CPP through the framework, because there's essentially a closeout period from 1 April to 1 April when there's a DPP reset year. But that's certainly one of the avenues that we would absolutely explore. I think it's also worth pointing out that the topic is around indexing and also the risk-free rate. I think you break that down into 2 parts. One is to align with regulatory practice. The other one on indexing is a recognition that we're facing significant growth capital into other parts of the regulatory environment. In New Zealand, we have seen Transpower face that significant capital expenditure for growth, and they're on a nonindex path. And through airports, they have the ability to elect whether they're on indexed or unindexed. So we would definitely see the debt side conversation and also a potential process through CPP as you mentioned.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [9]

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Okay. Next question just around HRV and the commentary, I guess, that hasn't been profitable this year. Is this at the EBITDA line or is it somewhere further down the P&L?

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Jason Hollingworth, Vector Limited - CFO [10]

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It's at both levels. It doesn't have a huge number of assets, so yes.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [11]

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Both levels. Yes. Yes, sure. And a final question from me right now is, are you able to just give us some idea around capital contributions expectations for FY '20? I mean, do we expect another small uplift from this year, given you're looking at new electricity connection growth a little bit higher than what we've just had in FY '19?

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Simon MacKenzie, Vector Limited - Group CEO [12]

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Yes. Andrew, look -- I mean, obviously, as you'd appreciate, these are pretty variable depending on activity, but we're kind of expecting around $85 million. And the dependency there -- probably the biggest volatility that we see is the kind of issues around what we'd look at as relocations with some of those kind of big one-offs as opposed to some of the other capital contributions. But that's certainly the kind of number we're looking at just by also given the virtue of going -- looking at 12,000 electricity connections.

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Operator [13]

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(Operator Instructions) Your next question comes from the line of Aaron Ibbotson from UBS.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [14]

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So I just had a follow-up question on your Technology division. And basically I'm trying to understand better what type of incremental returns we should expect from the $100 million-plus-or-so CapEx that you're spending? Again, certainly top line managed to miss my numbers by quite a bit? So how should we think about your top line having been flat when you spent another $100 million on rolling out smart meters there? So are there some big moves in the other bits on the top line? Or is anything else going on?

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Jason Hollingworth, Vector Limited - CFO [15]

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I think this year's numbers have been impacted by the HRV performance as well. So I think that's probably a factor that's making it look flat.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [16]

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So for every $100 million spent on smart meters, what should we expect on top line basically?

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Jason Hollingworth, Vector Limited - CFO [17]

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I'd have to come back to you on that. I don't want to put you (inaudible). So let me have a look at that and come back to you.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [18]

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Okay. And maybe related, but maybe you'll come back to that as well. I was just trying to understand your thinking around the incremental returns when you're deploying capital in your Technology division, not just smart meters, but overall. What type of hurdle rate are you applying? Are you applying the same as the regulated or higher?

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Simon MacKenzie, Vector Limited - Group CEO [19]

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Yes. We're definitely applying a higher return expectation for those businesses than we are with regards to the regulated business. And I would also say that a lot of those returns are also predated under existing contracts where we're rolling out meters for parties that have been contracted in prior years.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [20]

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Okay. Is there anything you can share some of that with us so that we can sort of judge your success in achieving those targets?

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Jason Hollingworth, Vector Limited - CFO [21]

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I think if you look at our goodwill note, you'll see some discount rates disclosed there in terms of valuation. But obviously, we look at any new projects going forward on the risks and the opportunities as we see them. But they're definitely higher than the regulated rates that we're seeing and particularly that are coming through in this new reset.

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Operator [22]

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Your next question comes from the line of Nevill Gluyas from Jarden.

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [23]

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Just a single follow-up from me, team. In terms of -- what's your outlook for the Australian meter growth, what kind of profile and what kind of duration do you think that could fit?

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Simon MacKenzie, Vector Limited - Group CEO [24]

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Yes. I think as we noted, we're looking at an increase of 135,000 smart meters for next year. We feel that we've got very good relationships with all the top tier retailers as well as second-tier retailers in the Australian market. The characteristics of the Australian market differ from New Zealand. We have a smart meter rollout, was essentially a total change out of what was known as the legacy meters over periods of time. Australia is characterized by what's called the new meters, so new customer and then replacement of old meters. But those old meters are just depending on when they come to end of life. So we envisaged that there's 135,000. There's still a lot of smart meters to be changed out in Australia, well over probably around 5 million to 6 million and in the markets in which we operate. And so these -- also the other impact is what occurs with the regulatory environment in Australia. We are currently focused with regards to requirements in that market to provide different datasets. So the datasets are not just [half-early] data, so going to 5-minute data. And how that plays out into the retail expectations and the ability to manage consumers could also accelerate the speed of our smart meter rollouts.

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Nevill Gluyas, Jarden Limited, Research Division - Director of Equity Research [25]

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And just a follow-up on that then. So the levels you're anticipating for year ahead, you could see that continuing or accelerating for sort of another 5 years?

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Simon MacKenzie, Vector Limited - Group CEO [26]

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Yes. That's correct. We could see that definitely at that level for 5-plus years.

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Operator [27]

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Your next question comes from the line of Stephen Hudson from Macquarie Bank.

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Stephen Hudson, Macquarie Research - Head of Research [28]

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Guys, I just wondered if you can run through what the nonindexation cash flow impact would be in DPP3 year 1 were you to get some favorable ruling. I think previously, you'd talked about an FFO-to-debt moving from around about 12% this year to a trough of 10% through DPP3. Is that still sort of realistic guidance. And then just lastly on the gas disruption, can you give us an idea of what the costs were in terms of increased customer supply?

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Simon MacKenzie, Vector Limited - Group CEO [29]

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Look, with regards to indexing, I think it'd be premature to kind of speculate on where that may roll out. I think you obviously can access Commerce Commission models that put everything there. You can just basically change the inflation to 0. But the other elements, which we have to be mindful of, is also the elements that relate to the capital profile. So that's still got to be agreed and accepted an operating cost profile. So it certainly does change the cash flow profile. And it would be obviously not a negative reset, it would be a positive, but we just don't want to kind of create any false expectations, because as we know, this is a process that we have to work through collaboratively with the Commission. Sorry, Stephen -- the other questions.

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Dame Alison M. Paterson, Vector Limited - Independent Non-Executive Director [30]

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The gas disruption.

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Simon MacKenzie, Vector Limited - Group CEO [31]

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The gas disruption.

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Stephen Hudson, Macquarie Research - Head of Research [32]

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Yes. Just the gas disruption cost if can you sort of size those broadly, but also the FFO-to-debt profile over DPP3.

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Simon MacKenzie, Vector Limited - Group CEO [33]

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Yes, sorry. So the gas disruption cost us about close to $3 million -- $2 million to $3 million. So that's where we went into the market to buy debt to meet our contractual positions, to satisfy customers. And obviously, that's one of the reasons why we are calling for more transparency in the gas market and, excuse me, the ongoing challenges of that gas market looking forward, but that was the order of magnitude. And with regards to FFO-to-debt, I think at this point in time, we've obviously simply stated that our objective is to maintain our BBB credit rating. When we understand DPP3 final settings, which is obviously the function of CapEx, OpEx, weighted average cost of capital, then I think we've been consistently articulating our absolute focus on maintaining BBB, maintaining acceptable headroom in those BBB ratings. And obviously, dividend policy will be reviewed once we understand where that all sits.

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Stephen Hudson, Macquarie Research - Head of Research [34]

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That's useful, Simon. Can you just give us a feel just on the 2 sort of requests that you've made of the Commerce Commission? How -- when those requests were sort of made and what sort of -- is the dollar relatively constructive?

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Simon MacKenzie, Vector Limited - Group CEO [35]

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Yes. I think obviously through what we call the DPP3 process the -- we've submitted extensively on these topics, amongst other things. So through that process, we've raised the issues with regards to the risk-free rate and also indexing -- the conversations have been constructive. We've had good engagement with the Commission, and that's ongoing. As I think Andrew mentioned that or Grant possibly that there is a window now, which we're in the DPP process, but post that, we'll also review whether or not a CPP process makes sense for us, and that's certainly on the cards. But we have other levers as well as we've articulated before, and that relates to capital contributions, for example.

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Operator [36]

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There are no further questions at this time. I'd now like to hand the conference back to CEO, Simon MacKenzie, for closing remarks.

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Simon MacKenzie, Vector Limited - Group CEO [37]

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Yes, look, thanks very much for your questions. And if there any other questions, then for investors to contact Jason and any media through Elissa. As noted in the apex, I'd just like to again reiterate that the -- thanks to staff for the year that's been challenging, but there's also lots of positive activity going on. As noted, we are disappointed with regards to the HRV outcome. We are committed to turning that around. We have new management in place to work on that. And we are still seeing a lot of new opportunities continually emerging, particularly in what we call the decarbonization space, which is either through electric vehicle transportation fleet requirements, the solar and battery environments, and then obviously -- and there are other nonregulated activities around meters. We're also seeing positive signs in the telecommunications market with new management in place there that are also driving great results.

So just like to thank you for your questions. And as noted, contact either Elissa or Jason. And look forward to speaking to you again in 6 months' time.