Good morning everybody and welcome to Vector Limited's conference call and webcast to discuss the company's financial and operational results for the full year ended June 30, 2023. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask the question during the session, you will need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I must advise you that this conference call is being recorded today. I would now like to hand the conference over to Vector's Chair, Jonathan Mason, who will take you through the call. Sir, you may begin.
[Foreign Language] Good morning to you all. Welcome to this event. My name is Jonathan Mason, and I am Vector's Chair. Today, we are going through Vector's results briefing for the financial year ending 30 June 2023. Joining me on the call is Group Chief Executive, Simon Mackenzie and Chief Financial Officer, Jason Hollingworth. Our aim for these calls is to provide some detail and context to complement our published material. As always, you'll have an opportunity to ask us questions about anything we haven't covered at the end of the presentation. So to give you a little preview, I'll start the presentation with an overview of our financial performance at a group level and cover the dividend.
Simon will talk about some of the strategic highlights and achievements of the year, and then Jason will present more detail on the group financial results and business segment performance, with Simon and myself finishing the presentation with brief comments, including the outlook. We'll then be happy to take your questions. Before I begin, I want to say a few quick words about how Vector is placed in the wider context of the global energy transition and the urgent need for decarbonization, which is both the biggest challenge and opportunity for the Vector group. With the successful conclusion of the Vector Metering transaction, Vector is positioned well for the future to support the decarbonization of the economy, including the electrification of transport and to ensure resilience and reliability against the impacts of climate change that we, of course, are already seeing in Auckland with our storms.
However, regulatory settings must be changed to enable the level of investment required. Vector is responding to this through its Symphony Strategy, which is to deliver an affordable, electrified future where renewable energy is delivered efficiently, networks are optimized to reduce the need for large upgrades, and where ultimately, consumers will have more energy choices. Now, with that, on to the performance for the year. Given the sale of Vector Metering, we're presenting the results here as continuing, discontinued, and combined operations. So you can see what the picture looks like with and without the Vector Metering component. We've seen a strong performance across the portfolio, with combined Adjusted EBITDA of NZD 523.3 million, up NZD 13.3 million, or 2.6% on last year's result.
This is made up of NZD 335.1 million from continuing operations and NZD 188.2 million from discontinued operations. Total combined capital expenditure was NZD 700.4 million, an increase of NZD 154.5 million, or 28.3% on the prior period. You can see there was an increase in both continuing and discontinued operations, with ongoing investment in infrastructure to support Auckland's growth, driving the continuing operations figure, while for discontinued operations, the investment is in the ongoing rollout of meters in Australia and 4G modem upgrades in New Zealand. Group net profit from continuing operations was NZD 112.6 million, which was NZD 10.1 million, or 9.9% higher than the prior year.
You can see here the impact of the Vector Metering transaction, which resulted in a one-off gain on sale of NZD 1.501 billion, feeding into net profit from discontinued operations of NZD 1.603 billion and a combined net profit of NZD 1.716 billion. Some big numbers and a big gain. Now, on to the dividend. The board has determined that shareholders will receive an unimputed final dividend of NZD 0.1400 per share, comprising an ordinary dividend of NZD 0.085 and a special dividend of NZD 0.055, in recognition of the gain from the sale of 50% of the re-metering business that I just talked about.
As we indicated at the interim results earlier this year, now that the metering transaction has concluded, the board will review Vector's future dividend policy. The board will do this after the release of the Commerce Commission's Input Methodologies Review, which is due in December, in three months. The board expects to announce any changes to the dividend policy, along with the release of our FY 2024 interim results in February next year. Now, Simon will take you through some of the strategic highlights and activities of the year.
Thank you, Jonathan. Morning. A major highlight is, of course, the successful sale of a 50% interest in Vector Metering to QIC. The partnership with QIC positions Vector Metering strongly to accelerate future growth opportunities in a significant market, underpinning the transition of the energy sector. This has resulted in the Vector group receiving net proceeds of NZD 1.75 billion, which has allowed us to repay debt, with gearing falling to 33.1% from 58.2% at 30 June. We are proud of the growth of the metering business from startup over 14 years ago and believe it to be one of New Zealand's business success stories. The QIC transaction is now the latest example of Vector choosing to grow or partner with an external organization of high caliber, as we've done with other partners, such as Amazon Web Services and Google X.
Backed by Vector and QIC, Vector Metering is well set up to accelerate growth opportunities and continue providing data services for their customers to deliver innovative energy solutions. Vector Technology Solutions has contracted to a number of parties for the provisions of services, including Vector Metering, for meter data services and others for cybersecurity. You'll see in our results that we're continuing to invest at historically high levels in the electricity network. This reflects the trend of year-on-year increases continuing as we ramp up investment in infrastructure to support Auckland's growth at levels we believe are at or near the highest of any single entity involved in the energy sector. It's a critical time to make this investment in the energy sector, with demand for electricity set to grow strongly with electrification and as we've faced with increasing demands for resilience in the face of climate change.
However, we can only invest within the bounds of the regulatory regime set by the Commerce Commission, and so their decisions on Input Methodologies are hugely important. In the period leading to the final Input Methodology decision, we continue to strongly advocate for improved financeability, creating a sustainable investment pathway to enable decarbonization. Electricity network performance was performing within the regulatory quality measures up until January, when we saw the 1-in-250-year flood event on Auckland anniversary weekend, and followed soon after by Cyclone Gabrielle, which was an even bigger event than historically Cyclone Bola. After those severe weather events, one of our regulatory measures was breached, which was unplanned System Average Interruption Duration Index, known as SAIDI, and measures how long customers are without power.
However, our analysis shows the majority of the SAIDI impact during Cyclone Gabrielle was caused by vegetation, and a significant amount of this was from trees outside the designated growth limit zone. Had the regulations been addressed, as we've been calling on for years now, we believe the impact on customers from these weather events would have been materially less. This is in line with our other severe weather events and is now urgent to update tree regulations. Other electricity distribution businesses who were also impacted by Cyclone Gabrielle have been similarly affected, and we're in discussion with the Commerce Commission over appropriate consideration of the impacts of these weather events. Other highlights from the year include our third year of publishing a TCFD report. We've had external feedback that our report compares highly favorably with other companies from New Zealand and is in the upper quartile globally.
We're continuing to work with our strategic alliance partner, AWS, and on our industry-leading energy data platform, Diverge. In Auckland, we've taken a number of further steps to build a future electricity network, where customer-side services and innovations play a much larger role in efficiently managing increasing demand. One example of this is the first smart electric bus charging depot in Auckland, which delivers charging in line with a dynamic operating envelope that takes account of what capacity is available on the local network for charging and ensures charging is undertaken in the most efficient way without excessive capital expenditure. I'll now hand over to Jason to go through our financial results in more detail.
Thank you, Simon. I'm on slide seven. Here's a breakdown of Adjusted EBITDA. For continuing operations, you can see the performance Simon has spoken about, with regulated networks and gas trading both contributing positively to the result. Accounting rule changes and higher CPI increases have contributed negatively to our corporate and other component. As we've noted previously, there is a two-year lag in our ability to recover actual CPI and prices that we charge our customers, so these results reflect the impact of high CPI on our costs, but not the additional revenue we can earn. There is NZD 38 million of additional revenue that we will recover in two years' time. This can't be accrued into these results. Discontinued operations Adjusted EBITDA is up NZD 14.5 million on the prior year result. Slide eight.
Net profit from continuing operations is NZD 112.6 million. Contributors to this result include higher capital contributions, higher interest costs, and within the other bar on the chart is a negative fair value movement in fair value adjustments of NZD 16.8 million, with a gain on sale on Treescape in the prior period of NZD 7.1 million and a NZD 40 million impairment of our LPG business in the prior period, and also tax changes. Slide nine. Here you can see the profit and loss from discontinued operations, which is the metering business. There was an increase in net profit after tax, as this business was held for sale in Vector's accounts from December 2022, so there has been no depreciation of these assets from this date through to 30 June, when the business was sold.
There's also no debt or interest allocated to the metering business in this analysis. The result includes a gain on sale of NZD 1.51 billion. This reflects the difference between the enterprise value of the metering business, agreed with QIC, of NZD 2.47 billion, and the carrying value of the net assets sold of NZD 933 million, less transaction costs. Vector received proceeds of NZD 1.75 billion from the sale of 50% of Vector Metering and now has a 50% interest in a JV with QIC, valued at NZD 727 million. The proceeds received by Vector have been used to reduce debt. The metering JV has a new NZD 1.8 billion dollar standalone debt facility, drawn to circa NZD 1.1 billion.
This is a climate bond-certified green loan and is the largest loan globally in its class. Going forward, Vector's interest in the metering joint venture will be accounted for as an investment in an associate, with net earnings reflected below EBITDA. From a cash flow perspective, we will no longer recognize the operating cash flows and the offsetting capital expenditure of metering. Instead, we will recognize Vector's share of dividends from the joint venture, and we will benefit from the lower interest costs associated with the reduction in Vector's debt. This will be something for analysts to pick up in their valuation models. Slide 10. This slide shows the combined capital expenditure broken down by segment, including the metering segment. Net CapEx, after deducting capital contributions, was up 29.9% to NZD 512.1 million.
Growth CapEx was up 17.7% at NZD 376.2 million, and replacement CapEx was 43.3% higher at NZD 324.2 million. The increase in replacement CapEx is driven by new property leases, NZD 9.2 million of CapEx incurred from damage associated with Cyclone Gabrielle, and other network replacement CapEx to improve the reliability and resilience of the network. Slide 11 looks at debt. The proceeds for the metering transaction have been used to repay debt, with gearing falling to 33.1%. Some of the proceeds have been retained to repay wholesale bonds on maturity in March 2024 and other debt. Standard & Poor's has upgraded their credit rating for Vector to BBB+, with a positive outlook. I'll now cover segment performance. Slide 12 is a high-level business overview.
I won't go into the detail here, because I'll cover this in the following slides. Slide 13, looking at network earnings. Electricity revenue is higher as a result of higher net connections and an increase in recovery of pass-through and recoverable costs, including the impact of higher inflation. Gas revenue increased due to the DPP 3 reset in October that included the recovery of accelerated depreciation and prices. The 4.4% increase in adjusted EBITDA is pleasing, given the lag in recovering the increases in CPI I mentioned earlier. Maintenance is higher due to the impacts of the Auckland anniversary flood and Cyclone Gabrielle, which included NZD 7.4 million of additional operating costs and a further NZD 9.2 million of CapEx. Slide 14. As you've heard, we continue to see high levels of regulated capital expenditure.
This is up 27.3% to NZD 422.6 million. Capital contributions were up 24.6% to NZD 187.3 million, driven by Auckland's infrastructure development, increased residential subdivision activity, and continued connection growth. Slide 15. Earnings for the gas trading segment are up 23% on the prior year, with increased margins on LPG and natural gas. LPG volumes were down, while natural gas volumes were up 1.9%. Slide 16 looks at the discontinued operations of metering. Adjusted EBITDA from the metering business was up 8.3% to NZD 188.2 million, with Australia and New Zealand smart meter deployment programs both contributing positively.
The advanced meter fleet now stands at 2.09 million, with 88,822 additional advanced meters deployed in Australia in FY 2023, and 25,656 meters deployed in New Zealand. The Australian meter fleet was successfully migrated to the new five-minute settlement market, in line with regulatory timelines, onto the new VTS Diverge platform. I'll now hand back to Simon for the outlook.
Thanks, Jason. We expect Auckland's growth to continue, and we're anticipating around 14,000 new electricity connections in financial year 2023. There is an ongoing need for significant capital expenditure to support new connections, growth, and infrastructure, as well as continuing to factor in climate change. As you have seen from our CapEx, in our regulated business alone, we spend approximately NZD 8 million a week on infrastructure, and as I've said, this is greater than others in the sector on an annual basis, and driven by customer growth as well as resilience and other requirements. The Commerce Commission regime currently sets a cash return on assets of approximately 2.58%. And as we've said before, we're in a critical decision-making period for the commission and how they evolve regulatory settings to meet the resilience and decarbonization challenges.
Our guidance is for Adjusted EBITDA of NZD 350 million-NZD 365 million in financial year 2024, which excludes Vector Metering. Finally, and most importantly, I'd like to thank all our staff and field service providers for their huge efforts this year, not just in responding to the extreme weather events in the early part of 2023, but also for their work every day to deliver for our customers. I'd also like to recognize all the work that's gone into the Vector Metering deal to make it so successful, and to all our people and partners for continuing to progress our Symphony Strategy. Thank you, and I'll pass back now to Jonathan.
Great. Thank you, Simon. Before opening up for questions, I wanted to make three quick, three, closing comments. One, to echo Simon Mackenzie's comments on the regulatory regime. Look, New Zealand has a tendency to underspend on infrastructure until it's too late. For those of us living in Auckland, we see multiple examples in public transport, bridge transport, roads, weekly. Vector, with its Auckland network, has been an exception to this tendency. We've spent NZD 2.3 billion over the last eight years for an efficient, resilient electricity network. Going forward, we need a system with good incentives for reinvestment to meet just not a resilient network, but the whole decarbonization challenge on top of that.
Simon did the thank you to everyone, but I look, I'd like to also thank Simon and his team, executive team, everyone else at Vector for their work throughout the year. It's been a big year for us, and we're proud of what we achieved. Finally, on a personal note, this is my last earnings release as chair. Been on the Vector board 10-11 years, and I'd like to thank shareholders, the investment community, and our leading shareholder and trust for their constructive challenge and support over the past 10 years. Simon, Jason, and I are now happy to take any questions.
Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Andrew Harvey-Green with Forsyth Barr. Your line is open.
Good morning, Jonathan, Simon, and Jason. A few questions from me. Just first of all, just on the dividends noticed that this dividend is unimputed, and just wanted to confirm that's the intention going forward or will that be part of the dividend policy review?
It is unimputed. We will, of course, impute dividends in the future as we're paying cash tax, but we have a little bit of a buffer right now, so for efficiency, unimputed.
Okay, thanks. And then secondly, I just wanted to... if you're able to give any sense of color in terms of the things you're thinking about within the dividend policy review, just conscious, I think you sort of previously signaled, y ou might have an update for us here at this result, but you've pushed that back to the Input Methodology conclusion. And I guess, just wanted to get a sense of, you know, what sort of things are you looking at within that Input Methodology decision that might therefore impact the dividend policy?
Okay, I'm gonna start just with a general comment, and Simon or Jason, you can talk about specific items in the input methodology that we're focused on. The general comment is, the decarbonization challenge is so big, and the cash flow implications of input methodologies and subsequent reset, but right now, input methodologies are so material that we have to wait and see how that comes out before determining sort of a dividend pathway. So that would be the general comment. Now, Simon, the specific issues with an input methodology that we're looking at?
Yeah, look, I, obviously, Andrew, as you appreciate, critical is the outcomes of the Input Methodologies, but at a high level, the areas that we'll obviously be considering is our gearing range. Where do we want to sit in the gearing range? How does our FFO to Debt and the other metrics line up with our credit rating perspective, sustainability of dividend and ensuring that that's appropriate. And I guess the other side that we have to take into account is the fact that obviously we can't get insurance for the majority of our assets, so to what degree do we need to make sure there's headroom for unexpected events if... Because we can't get insurance for major climatic events.
And perhaps just one more from me, Andrew, is we are due to submit an updated asset management plan to the Commerce Commission by December this year. There is a review going on at the moment within Vector of our resilience spend following the floods and cyclone. So again, we need to take account of any updates to our ten-year plan as part of thinking about that future cash flow profile.
That's, yeah, that's useful. So just to follow up on that, Jason, 'cause I think there was quite a big step up in the asset management plan that you put forward for this year. So you're effectively looking at where we could be seeing another increase for increased resilience.
Yeah, I think, Andrew, that's possible. I think the reality is there's a wider conversation, obviously, with the government and so forth. And as you probably heard Transpower saying that the commission's not really mindful or thinking about resilience expenditure. It's more kind of reliability expenditure. So I think that's an issue that will have to be worked through, and I'm not really that sure whether it'll come through in the Input Methodologies. But you know, as you may be aware, the government's talked about a resilience fund and so forth. So how that all dovetails together will absolutely be a factor in those considerations.
Great, thanks. And then a couple of questions, just looking forward. First of all, a really straightforward one I think I ask pretty much every year. FY 2024 capital contributions, what sort of number should we be thinking about there?
Obviously, it's activity driven and we expect those contributions are gonna continue to grow. So, you know, sort of 10%+ growth is possible. It's activity-based, though, so we're not in full control.
Yeah, that 10% driven by underlying inflation costs, obviously as well. Yeah.
Yeah. Yeah, indeed. Which actually then sort of, sort of segues nicely into the next question in terms of, OpEx expectations for next year. I think we've seen quite a few of the infrastructure businesses, talk about or put through, have quite big, OpEx increases in, in their FY 2023 results, which, I can see that, you've had as well, but also guiding to sort of 9%-10% + type increases, for next year. What sort of increase, assuming there is an increase, should we be thinking about for Vector? Or what are you sort of building into your guidance, I guess?
Well, I think you've got the guidance number, which is the net number. So I guess you've got that. Yeah, I would have thought sort of sub 10%, but yeah.
Yeah. Okay, great. And lastly from me, just in terms of information on the metering business going forward, you know, I appreciate it's going to be an associate, but are you going to give us, I guess, operational performance and how the business is tracking? I just from a valuation perspective, it'll be quite important to get that information, as opposed to just the sort of the dividends, et cetera, that, so the metering business will be paying back.
That's a good question, Andrew. Obviously, it's a private business that we're now investing in as a shareholder, so we need to agree that with QIC in terms of what we can disclose. Obviously, you'll see the financial metrics that will hit our accounts, and we'll hopefully be able to give you some color around that. I expect it'll be less than what we've been disclosing in these results.
Okay, that's all for me. Thanks.
Thank you. Please stand by for our next question. Our next question comes from the line of Grant Lowe with Jarden. Your line is open.
Oh, hi, team. Can you hear me okay?
Yep.
Great. So just looking at the guidance range that you've provided, I mean, that looks a bit light relative to my numbers. I see in the announcement that you put out, the narrative that there was some softness in some of the other businesses in the corporate segment and, and obviously some, you know, higher costs in there, which you've called out. How much of—what, what are you sort of thinking in terms of the guidance? What have, what have you factored in there for the performance of that corporate segment in those various businesses? Is it, is it pretty much sort of a continuation of the performance that we've seen in the current year or is it some other variance there?
There's a small improvement, Grant, but it's in the scheme of the results that it's not that material, to be honest. So all of those businesses are expected to be improving their performance in FY 2024, but the material out of that-
Yeah.
is relatively low. I think one of the issues is this ongoing challenge with high inflation and lagging our ability to recover that in pricing. So that's possibly something that may not be running in your model. As I mentioned, the NZD 38 million this year is a big number, right? And that's still two years away.
Yeah, so we get the-
That is for the EDB, though, right?
They... which is now the, you know, without metering, that's the bulk of our Adjusted EBITDA number going forward, right? Look-
Yeah.
It's not d oesn't impact gas, because gas we're able to price for CPI each year. It's the electricity business where it's lagged.
Yeah, okay. Right. Yeah, so you, yeah, yeah, you're making that distinction. Yeah, okay. But, yeah, so in terms of the corporate segment, though, itself, yeah, it's perhaps a modest improvement, but still, likely to see some cost pressures-
Correct.
-and, um-
Correct. CPI pressures offset by some improvement in the underlying performance of the three or four businesses, four businesses that sit in there, yeah.
Transition.
Yeah. Yeah, got it.
Yeah.
In terms of,
Could I, could I just chip in something to just emphasize Jason's comments, and this is a sort of a CFO talking, is things sort of I mean, our EBITDA looks a lot weaker, but we'll have a metering contribution on dividends coming through the cash flow statement. We'll have lower interest expense from all the debt we repaid. And so there's just gonna be a little bit of changes. That our, our, our balance sheet you can clearly see is better but actually, our cash flow is also much more solid with the, with the transaction. So don't only look. In any financial statement, one measure always has its weaknesses, and so I, I wouldn't just look at EBITDA going forward for it.
The first thing is-
Not that you do, but-
metering, the EBITDA is NZD 188, NZD 188 million. The CapEx is NZD 187 million, right?
Yeah.
Just in our financials-
We lose the CapEx out of our-
As well as-
cash flow statement as well.
That's right.
Very good point.
Yeah. And I've modeled the meters businesses, separate entity with the equity accounting.
Yeah.
So hopefully we've got those numbers right, but, yeah, so that's all understood. Just in terms of the meters business for you, you've already answered a couple of my questions I had on my list. But in terms of the you called out the debt facility that that business has. Is that business likely to be self-funding going forward, or is there-
Yes
... any potential sort of drag from, you know, you, you as equity providers to that business?
It's in fact better than that, Andrew. It's self-funding, and we expect to get a dividend stream out of that business.
Yes. Okay, great. And then just any update on the regulatory side of things in Australia? Obviously, there are some, you know, the regulators would be looking to enable customer meters take up. What's the latest on that from what you see from your side?
Yeah, I guess we see still the continuation of an expectation of a smart meter rollout to be completed largely by 2030. So yeah, I guess that's the pretty consistent theme that we see coming out of Australia.
Okay. That's everything for me. Thank you very much.
Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Phil Campbell with UBS. Your line is open.
Yeah, good morning, guys. Just a couple of questions from me, just following up on the metering one. Do we have a new timeline from the AEMC, just in terms of, you know, when a decision will be made in terms of, you know, accelerating that smart metering to 2030?
Apologies, I can't recall off the top of my head, but we can check that and get back to you, Phil. But sorry, I don't recall-
Yep, great.
-whether there's a defined time. Yeah. Yeah.
To the extent you're able to, can you give us a bit of color around some of the governance arrangements within the metering JV? And, you know, I think at the time when you announced the sale, you talked about your strategic alliance with QIC and the stuff like that, which obviously I'm assuming would allow you to possibly get some more market share in Queensland. So just be interested to kind of get some color on how the JV will actually run on a day-to-day basis and kind of what rights you have and how that relationship with QIC may be going.
Yeah. Look, we're gonna have a JV board of seven. We have about two-thirds of that set. We'll have a couple announcements coming out over the next week. We have QIC and Vector, both appointing three, with an independent chair being the seventh member. And we've done a great skill set so that the board has depth of knowledge on Australian energy, depth of knowledge on New Zealand energy, and we've positioned it with its balance sheet and debt facility to be able to grow profitably and aggressively. They'll report back, of course, to QIC and Vector. Important decisions will have to be approved. Key important decisions, not operational decisions, they have to be approved by both the Vector and the QIC board.
Neil Williams, our former head of metering, is the new CEO of the Meter Co. And so he has a lot of experience in that area.
Also mention, Jonathan, just to add in there, that we also have really strong team with Neil.
Yeah.
So we've recruited in Australia for CFO, Head of Customer and Markets, CDO, Chief Digital Officer, to supplement the already strong team in New Zealand, so-
Yeah. Chief Digital. It's a sort of New Zealand, Australia team.
Oh, excellent.
Some in New Zealand.
Yeah.
Neil is in New Zealand.
Yeah.
Yeah, so, I mean, we're really positioning it. There's still, of course, powerful value with our position in New Zealand, but as you see from the install, that the bigger growth is occurring in Australia. So we've really beefed up, both from a governance standpoint and an executive team standpoint, our knowledge of the Australian market. So that would be the big thing.
Yeah.
Could I just mention something on smart meters? And hopefully, I'm not going off script here. Feel free to correct me, guys. You need smart meters. Australia is going from, like, 60%-70% fossil fuels to a goal of 80%-85% renewables by 2030, and there's big skepticism in the market that you would have read about, about their ability to do it. But by golly, they're committed to making a big shift, and you can't do distributed energy without smart meters. It's just very challenging. So while the exact timing of decisions that you're referring to may be up in the air, we don't see a pathway of doing that without smart meters, because of the way it allows you to buy and sell and get data from the network, much more nimbly, so.
From an accounting perspective, Jason, will there be like a, you know, an independent valuation on the metering JV every year? Or, obviously, there'll be impairment testing, I imagine but-
Yeah, well, yeah, there'll be an impairment test, so, you know, we will have to test the carrying value of that investment. I don't intend to see us publishing an independent valuation. We don't need to do that, so I don't know if we'll be doing that, but I think we will be impairment testing that carrying value every year.
Yeah, gotcha. And then I suppose just the last one from me. I suppose, just to follow up on the metering, we didn't really mention anything about Yurika, strategic alliance there. Is there any update on that or is it too early?
No, no, there's no update on that. No.
Okay. And then just one on the regulated networks in terms of the CapEx. Like, should we be using the latest AMP for kind of CapEx for that? Or obviously, it's going to be updated, but is that the best? Because there's no CapEx guide, so I don't think it's there, so.
No, at this point in time, best to use the latest, but as noted, there will be an uplift on that, the function of, you know, honing in on future growth and also the, just the impact of inflation on costs to actually install assets.
Yep. Great. Awesome. All righty. And I suppose just to follow on from one of the questions on the dividend. So, I suppose in my model, I didn't assume a special dividend, I just assumed a kind of gradual increase in the ordinary dividend, which I'm assuming is probably imputed. What was the rationale for paying a special that's unimputed?
We're just holding our powder dry to look at the Input Methodology, but we do think about the shareholders. You know, we just had a NZD 1.7 billion dollar transaction. So, you know, it is possible that the special pathway becomes more of a regular dividend pathway. But gosh, we'd need, we need to first review Input Methodology, of which there's a lot of uncertainty over...
Mm-hmm
... what the cash flow will be with that.
Just on that, would you be able to just kind of maybe 'cause obviously, the draft came out, it's obviously quite complex. Would you just remind us, kind of, you know, what issues you have with that? Or, you know, what you're gonna be looking for, what would be a good outcome from ComCom.
Sure
In regard to that?
So, yeah, look, I guess, first and foremost, there needs to be a financeability test. That's, you know, unlike in other markets where there's a comprehensive financeability test, like in the UK, Ofgem has a very complex and material test that's non-existent in ours. And that leads to, you know, at a point in time, not only for us, but all other EDBs, there's an extensive amount of capital expenditure required to meet the, you know, infrastructure growth and decarbonization, as Jonathan mentioned, and there's no point having generation or transmission if you haven't got the network to deliver to the customers. So the other key inputs are, with regards to probably two other key factors, is the indexation or non-indexation, because that has a material impact on how it backends cash flows.
If you have the back-ended cash flow, and as we said, you know, as it currently sits we get 2.58% cash return on our assets. And that's, you know, pretty hard to sit in when you've got interest rates sitting where they are, and then also to be able to find, finance a step change in capital expenditure. So the question about indexation needs to be addressed, in our view. It's been riddled in the past with far too many errors around forecasts about inflation rates, and in fact, you know, expert analysis shows that, you know, what's being used couldn't be called a forecast. They're just using midpoint Reserve Bank and, you know, the-...
The fact is, the Reserve Bank gets to update that on a frequent basis, but in our case, it gets set for five years, and we get stuck in a world of challenges with that. The other aspect is just basically price caps. We also have an issue with price caps and whether that includes Transpower or not. We recognize the positive step forward for it, not including transmission charges and other pass-throughs.
But irrespective of that, with back-ended cash flows, indexing errors and then on top of that, a 10% or, or, you know, price cap, we end up with a cash flow challenge, which means that, you know, when we did the analysis for the large five, six, I should say, EDBs in New Zealand, you end up with what's known as a wash-up account of circa NZD 1.6 billion after five years of unrecovered cash, which fundamentally is not sustainable. And to, coin what Jonathan has said, we're at a point with the, the biggest CapEx expenditure required for decades, with the worst financing plan. So that's, fundamentally why y ou know, we have to find a pathway through it because it just becomes, you know, too, too challenging, and it's not what we believe to be in the long-term interest of consumers.
And I mean, some of the Commerce Commission's comments was, EDBs can just go raise equity. You know, it's, it's hard to raise equity. You have to have the right market.
The cash flow is not there to-
Yeah
to fund your debt for a start.
When we say financeability, most of this has to sort of be debt financeable.
Yeah, that's right.
You know, we look over the landscape, and Australia got into some bad cases where no one was willing to finance a needed infrastructure project in electricity transmission. So we really want to avoid that, but we don't overlook. This is a hard area because there's a dilemma between affordability, and we need a resilient, effective network for decarbonization. So it's not that there's not trade-offs here. We are very sensitive to trade-offs being owned by the beneficiaries.
Yeah.
But we need a, we need a pathway to, to have that electricity ready for you when you need it, and that's, that's why we're holding fire.
I think, to add to Jonathan, the other issue is the affordability challenge and what that price path looks like is not the sole domain of EDBs.
Oh, absolutely.
It's an industry-wide issue.
Yeah.
And so, you know, to be frank, we take a bit of exception to people-
Oh
suggesting it should all be taken by EDBs.
But I mean, just a little... I mean, I think the last two resets, we went down 17%-
Yeah
... went down 27%.
Yeah.
We've had price decreases-
Yeah
... not increases.
That's right.
Yeah.
Great. Thank you.
Sorry about the rant. We've probably got more than you expected.
You had about there, so it's all right.
Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. Please stand by for our next question. Our next question comes from the line of Stephen Hudson with Macquarie Securities. Your line is open.
Hi, guys. Just a couple of quick ones from me. Just firstly, when do you expect the JV to start paying a dividend, and what sort of level? Secondly, is your interpretation of the draft IM that you now no longer need to share the 10% price cap, price change cap with Transpower? And then thirdly, maybe just a little bit of a broader question on ownership of EDBs. I think BCG are kind of penciling in NZD 22 billion or something like that of investment over the next 10 years, or about half of the electrification budget for the country. Does this sort of community trust and council ownership of EDBs sort of hamper that investment, do you think?
Can I hit the last question, and then I'm gonna turn it over to Jason and Simon for the first two? Community trust ownership, of course, creates challenges on an equity raise. But if you look at how we've positioned ourselves with the sale of Vector Metering, speaking just on behalf of Vector, with the appropriate investment incentives, we are well-positioned to finance decarbonization in Auckland. So we've set ourselves up to support Auckland in that effort, with no change in our community trust ownership. In fact, in collaboration and consultation with our biggest shareholder. So then, for your other two questions, Stephen, I'm gonna turn it over to Simon and Jason. Jason first.
Yeah. So just on the joint venture, Stephen, so we, you know, intentionally haven't provided any forecasts for the new joint venture. You know, there's a new board in place, but there is an expectation from the shareholders to be receiving a dividend, yeah, every year, and if not, twice a year, potentially. So just given the stage of metering and its formation, it may not be received by our half year, but will certainly be received for our full year. So and once that starts to flow, and again, depending on the growth of that business, you'll get a sense of just what that might be. But we're not prepared to provide any forecasting on that at the moment.
Yeah. As soon as it's announced-
Yeah
... we'll announce it to the market.
Absolutely. Yeah, yeah.
... Stephen, with regards to the draft IMs, yeah, you're correct that the draft decisions is identified that the 10% cap wouldn't include transmission charges, and they also identified that Transpower would be moving to an indexation methodology as opposed to a non-indexed methodology. And that's, I think it's important to say that it-- we believe it's important that there's absolute consistency between whether it's a transmission or distribution, that, you know, everyone's fundamentally facing capital expenditure. It comes down to financeability, and the right financeability framework has to be in place, whether it's for Transpower or EDBs. And then just touching back on ownership of EDBs. I think obviously that across the country there's multiple EDBs.
I think it's a bit of a well-trodden path by some around criticizing a number of EDBs, but it's often forgotten that there's a lot of EDBs doing a huge amount of investment that would otherwise not have occurred in some of their communities. We just have to look at the likes of Northpower with investing in fiber for the whole Northland community, Top Energy, with regards to what they've done up in Northland with geothermal generation, and lots of other examples across the country. So one of the other things which we're doing and working closely with a number of EDBs is collaboration on providing services, particularly in technology space and through the likes of cyber services. There's a lot of collaboration going on.
We wouldn't want to speak on the ability for some of the EDBs to, you know, raise the capital or so forth, but from a capability, I think also needs to be looked at, that there's a, there's a lot more collaboration and positive outcomes in communities than is often quoted by some that don't like the current model.
Yeah. Can I just add one other thing in? Because, with this spend, there's also the, always the worry that we sort of gold plate the spend. But with the Symphony Strategy, the future spend for expansion of electricity capacity versus, the past, there's about a one-third to one-half drop in cost because we're gonna do it more smartly, backed by sophisticated software. I mean, software that we've helped develop and are continuing to develop with our partners, including, Google X.
Those are really helpful responses. Thanks, and all the best, Jonathan. Thanks for your contribution.
Thank you, Stephen.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over for closing remarks.
Thank you. Look, as always, there may be questions that come up, and if you have any further questions, Jason's your point person. For media, please contact Matt Britton or call our usual media phone number. And so in closing note, [Foreign Language] . Thank you, everyone, for joining us.