Slide1: 2006 annual result Michael Stiassny, Chairman Mark Franklin, Chief Executive Officer Peter Fredricson, Chief Financial Officer Simon Mackenzie, Group General Manager Strategy, Regulation & Performance 14 August 2006


Health chartYear ended 30 June: Earnings ($m) Gas throughput (PJ) Electricity distributed (GWh) Greater Auckland Wellington SAIDI Minutes SAIDI Health chart Year ended 30 June 85.5 10,400 10,308 39.9 118.1 82.5 22.9 Extreme Normal 22.8 23.6 94.2 105.3 RY = regulatory year ended 31 March Q1 = 3 months ended 30 June 870.9 1,132.9 578.6 466.1 104.3 143.7


Slide3: Financial Results Peter Fredricson Chief Financial Officer


Slide4: Results summary Year ended 30 June


Financial results Year ended 30 June: Financial results Year ended 30 June 2005 2006 104.3 870.9 578.6 404.8 554.3 466.1 362.7 40.8 45.1 307.2 1,132.9 143.7 $ millions


Financial highlights Year ended 30 June 2006: Financial highlights Year ended 30 June 2006 % Prospectus Actual 51.1 32.0 50.3 3.2 31.1 4.0 12.7 11.7


Dividends : 12.0 7.1 11.5 All dividends shown are fully imputed FY 2005 based on 751 million shares FY 2006 based on 1 billion shares Dividends CPS FY 2006 FY 2006 Prospectus FY 2005 Actual


Slide8: Divisional results Year ended 30 June


Slide9: Electricity - $146.3 million, comprising Capital expenditure ($225.2million) Year ended 30 June 2006 Gas – $44.2 million ($27.7m growth; $16.5m maintenance/improvement) Technology - $26.9 million Other - $7.8 million


Slide10: Capital expenditure ($225.2milion) Year ended 30 June 2006 Capital expenditure – by business Capital expenditure – by type


Capital structure: *net debt Prospectus as at 30 June 2006 Includes PIPES $354 million as debt under NZ GAAP $m % % X times Asset Backing and Capital Structure 2006 2005 3,147.6(2) 3,067.8 21.6 67.9 28.0 1.6 Prospectus (1) 1,783.9 30.8 65.4 1.6 Net Debt Equity/Total assets Debt*/Debt*+Equity Interest (net) cover 2004 3,081.1 61.5 33.7 1.6 1.6 Capital structure 75.1


Slide12: Vector to adopt New Zealand International Financial Reporting Standards (NZ IFRS) from 1 July 2007 Good access to debt markets Treasury policies – transparent Capital bonds first election date 15 December 2006 $200 million MTNs due for repayment 7 April 2007 Looking ahead


Slide13: Commerce Commission Intention to Declare Price Control


Regulatory - background: Regulatory - background 2001 - 04 CC process to develop thresholds regulatory regime for lines companies under Part 4A of the Commerce Act 1986 Vector fully engaged in process Price and Quality thresholds regime put in place Price regime: CPI – X (not a rate of return) Tax methodology: NZGAAP – accounting tax Still the methodology that lines businesses have to comply with under CC’s Information Disclosure regime This regime did NOT require lines businesses to rebalance


Regulatory – background: Regulatory – background 2004 disclosure reveals minor technical breaches of thresholds set by CC: price breach of $76,000 on $477m of revenue (0.016%) due to difference in budgeted vs actual Transpower transmission costs quality threshold breach due to severe storms CC accepts that price path breach outside Vector’s reasonable control Note – in August 2004 CC cleared six lines businesses for the same beach. One involved a $1m breach on revenues of $44m


Rebalancing - background: Rebalancing - background Vector acquired UnitedNetworks inheriting different pricing structures and ROIs CC introduced interim thresholds for all lines businesses in 2003/04 pending finalisation of current thresholds Vector identified under investment by previous owner posed asset and public safety risk Investment programme initiated to address risk ROI imbalances recognised Vector voluntarily commenced a four-year rebalancing programme in 2005 in the interests of consumers


Rebalancing - background: Lines companies were advised via energy conference on July 17 that rebalancing was necessary and should be completed by 2009 (ie: when CC resets price thresholds) There is no CC methodology or regime on rebalancing There has been no formal guidance on the process Rebalancing - background


Rebalancing – action taken: Rebalancing – action taken Vector moved quickly to address rebalancing once thresholds regime implemented Vector’s rebalancing programme aimed at: level playing field - consistent/equalised return structure across Vector’s seven customer categories in three regional networks fewer tariff levels smooth transition to avoid bill shock All customers impacted by price increase or reduction. AECT region customers facing some of largest increases Half way through four year programme due to complete in 2009


Rebalancing – CC involvement: Rebalancing – CC involvement CC requested an update on rebalancing progress in October 2005 In June 2006 CC suggested administrative settlement formalising rest of rebalancing to clear 2003/04 breaches Vector put forward a draft offer in July 2006


Rebalancing – CC involvement: Rebalancing – CC involvement Draft offer by Vector not accepted In response the CC raised concerns about overall returns from electricity networks for first time in July 2006 CC initiates post-breach inquiry in July 2006 (Vector informs market) Vector provides extensive information to CC under s98 CC announced its intention to control on 9 August after it initiated post breach inquiry less than one month earlier


Government’s policy statement released: Government’s policy statement released One week ago today Focus on infrastructure investment and security of supply Statement requires: regulatory transparency, consistency realistic commercial returns to encourage investment no cross regulation in other investments CC must “have regard” to statement under s26 of the Commerce Act Vector encouraged and starts to consider investment in more certain environment


Intention to declare control: Intention to declare control CC advises of intention to declare control – Wednesday 9 August Implication is Vector’s pricing strategy is to cross subsidise customer groups Fact is Vector strategy is to voluntarily correct historical customer anomalies Note: CC tax methodology to assess ROI differs from that used in disclosure and when setting the thresholds


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Rebalancing – illustration of issues


Rebalancing – illustration of issues: Moving from average prices and more aggregated groups (eg: from Commercial to Small, Medium and Large), coupled with attempting to find a fair allocation methodology has given rise to these issues. This is NOT a deliberate pricing strategy. Rebalancing – illustration of issues


The claims and the facts: The claims and the facts Claim Vector is abusing its monopoly power by overcharging/undercharging customers. Fact Untrue. Vector is aware of the need to rebalance and commenced a voluntary four-year programme two years ago to address imbalances. The CC is aware of rebalancing progress to date and has information showing it can be achieved: within the timeframe within the CC price path thresholds with a net revenue neutral effect


The claims and the facts: The claims and the facts Claim Vector is not making sufficient progress to redress the imbalances Fact Untrue: We have made good progress. CC was fully aware of our plans and commitment to rebalance. Only last month the CC indicated that lines companies have until 2009 to correct price differentials.


The claims and the facts: The claims and the facts Claim Vector is focussed on the short term interests of customers who are also AECT beneficiaries. Response Untrue. Vector’s pricing strategy is to have balanced returns across its customer tariff groups and geographic networks. Auckland residential users have already sustained the biggest price increases from the rebalancing. The four-year programme is aimed at smoothing the necessary price adjustment and avoiding a severe price impact of implementing too quickly. Price decreases have occurred in other regions.


The claims and the facts: The claims and the facts Claim Vector is earning excess revenues. Vector will earn $13m-$75m in excess revenue per year over the next few years. Price reductions of 2%-11% per year are needed to bring returns to a “normal” level. Facts Untrue. Vector is operating within the CC thresholds and deliberately earns less than allowed to ensure compliance. Since 1 April 2004, Vector has foregone over $8m in revenue. Vector’s overall rate of return to 31 March 2007 is estimated to be 8.2%. The “excess” reflects the CC’s assumptions about cost of capital and changes in tax treatment. This goes to heart of the new Government Policy Statements.


The claims and the facts: The claims and the facts Note: This is not a revenue/profit thresholds regime


Vector’s response to CC’s move: Vector’s response to CC’s move CC has not held industry consultation on rebalancing despite calling for it to be done by 2009. Nor is there a methodology. Vector criticised by CC for rebalancing process, yet vacuum of CC guidance CC did not consult with Vector on effect of the Government policy statement with regard to infrastructure investment. Little account taken of Vector’s voluntary measures to rebalance, or of future pricing proposals We question transparency and consistency


Vector’s response: Inconsistent with previous CC decisions in similar cases: CC recognised 2004 price breach minor and beyond Vector’s control in 2004 cleared six other lines businesses for similar or greater breaches with no evidence of investigating pricing and return imbalances Indicates Vector singled out for special treatment Vector’s response


Where to now: Vector will provide submissions and follow process Vector will seek to continue administrative settlement discussions with CC Legal action under consideration – no firm decision made We have suspended plans to resurrect or accelerate investment projects Where to now


Other regulatory issues: Other significant regulatory developments: CC proposal for Final Authorisation for controls over Vector’s Auckland gas networks 8 July CC decision not to amend the Provisional Authorisation nominal price freeze will remain until the Final Authorisation submissions closed on 7 August; conference 5-6 September Telecommunications legislation to increase competition and incentivise investment may open opportunities Telecommunications Amendment Bill introduced on 29 June Government intends to have it passed by year end Ministerial review of regulatory frameworks Vector sees priority for review of Part 4 and 5 of the Commerce Act, with potential for changes to be carried over to Part 4A; and expanded merit appeal process to improve transparency and confidence Other regulatory issues


Slide39: Continue to manage core business beyond integration All large and new investments suspended depending on resolution of regulatory issue Existing capital expenditure plans on electricity and gas networks (and corresponding operations) being reviewed Where we’re headed – future strategy


Slide40: Questions?