Vector Limited (VCT) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Vector Limited conference call and webcast to discuss the company's financial and operational results for the half year ended 31st of December 2022. [Operator Instructions] I must advise you that this conference call is being recorded today. I will not like to have the conference over to Vector's Chair, Jonathan Mason, who will take you through the call. Please go ahead, Jonathan.

[Foreign Language] Good morning to you all. My name is Jonathan Mason and I am Vector's Chair, and today we are going through Vector's results briefing for the half year ended 31 December 2022. 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 noted earlier, we have time for Q&A at the end of the presentation and that will give you an opportunity to ask us questions about anything we haven't covered or anything that you would like clarified. We will talk more about our strategic review of the metering business. However, the deal is not closed. So there'll be a limit on the information that we can provide, not surprisingly. I'll start the presentation with some short comments on our overall performance and a brief update on the metering deal. Then, I'll move to a slide on the interim dividend. Simon will then talk about some of the business activities in the past 6 months and some insights into the wider context. Then Jason will go over the financial results at a group level, with Simon then finishing the presentation with business segment performance and guidance for the full year results. And then we'll be happy to take your questions. Before we discuss our operational results, we have to pause and consider the challenges that the last month has brought our customers, field service providers and employees. Firstly, the wet start to January, extreme floods later that month, then cyclone Gabrielle. Since last Tuesday, we've worked down our estimated households without power from a peak of 45,000 at any one point in time, to an estimate this morning of around 1,600. This number excludes approximately 150 customers in the West Coast beaches of Kerikeri, Paihia, Bethel, and Murray, as in some cases there are a significant damage that will take considerable time to repair. We've responded to a request from Auckland Emergency Management to provide power wherever possible in these areas and will continue to make repairs if feasible. However, much of the remaining work is extremely complex and challenging. Our response is the result of around 1000 of our people working around the clock as safety allowed since the start of the cyclone. But we can't overlook how difficult and tragic this has been for the families impacted in the Auckland area and beyond, and the fact that we're not done yet and that the challenges will continue. Later Simon will talk about how we're gonna make the network even more resilient in the future to mitigate the impact of future weather disasters that may become more common with our warming oceans. And now for the results, or the highlights of the results, that Jason and Simon will go into more detail on. Vector delivered a solid operational result for the 6 months with adjusted EBITDA of $274 million, growing by $10.4 million or 3.9% over the same period in 2021. However, our Group net profit after tax of $100.3 million fell by $15.2 million or 13.2% on the prior year, largely due to the prior period's $7.1 million gain on the 50% sale of Treescape, and then in this year, higher depreciation and interest costs and a $14 million negative fair value non cash movement on financial instruments. That was quite a handful, and Jason can answer questions on that if you have. This was partially offset -- the net profit -- by higher earnings driven by higher capital contributions. Moving to capital expenditure. Total CapEx in the first 6 months was $316.8 million, an increase of $46.4 million or 17.2% on the prior period, underlining our commitment to Auckland growth and network resilience as well as a continued increase in our Australian metering business. Now let me talk about the conditional transaction for Vector and metering. In December 2022, we announced that QIC had been selected as the preferred partner for the sale of 50% of our metering operations in New Zealand and Australia. The sale is conditional on regulatory approvals, and finalization of funding for QIC. The terms of the deal imply an enterprise value of approximately $2.51 billion against a book value of $0.85 billion. And conclusion of the deal is expected to realize gross transaction proceeds of approximately $1.74 billion to Vector. While the deal is still conditional, we're excited about the opportunities for the Vector Group, which will come from its investment in the new metering joint venture. We believe that QIC and Vector together bring complementary skills to the business that will help it both financially and strategically. Now, on to the dividend. The board has determined that the interim dividend is $0.0825 per share. This is consistent with the previous year. The dividend is partially imputed at 10.5% and will be paid to shareholders who are on the register at 28 March 2023, with the payment made on 6th of April 2023. In regard to any impact on the dividend from the metering deal, we're committed -- once we get the proceeds committed to reducing overall debt, and then reviewing the dividend policy, again, assuming successful completion of the transaction which I emphasize is still conditional. Simon will now take you through some highlights of the half year. Simon?

Thanks, Jonathan. So before I get started, I'd personally like to recognize our customers and particularly those who have had prolonged outages. And to reiterate Jonathan's comments that our thoughts are with everyone that's been impacted by cyclone Gabrielle and the floods, not only in Auckland, but across the country. Rest assured that we are continuing to do everything we can to get customers restored. And it is a long term challenge too in some areas. I'd like to commend our teams and field service partners for their work over the unprecedented weather events we have seen, not just this summer but through the last year. In the current regulatory year, we've had 5 weather events which -- classified as major events -- which recognises the impact on electricity networks. These events including not just 2 storms in early January, but also the 27th of January 1 and 250-year flooding event, and then Cyclone Gabrielle can clearly be seen as unprecedented weather events. Our teams have worked extremely hard to very challenging conditions to restore the network safely and noting that in many circumstances, in the middle of these events, it's just too dangerous to actually be out on the network. We hear comparisons to Cyclone Bola being made, but I would point out, firstly, that Cyclone Bola didn't have a 1 and 250-year flood event a week or so prior. And talking to a number of our long term field guys, the devastation is an order of magnitude greater than Bola was. In some areas, for example, we still can't re-stand poles due to saturated soil. Through the restoration process, our teams were and are still confronting significant conditions such as excess ground conditions, and through the storm, cyclonic weather for 60 hours. In previous major events, the weather events have lasted around 12 hours, and we have been able to immediately bring in crews from other parts of the North Island to boost our capability to complete the repair work. This time, however, due to the widespread nature of damage across the North Island that's taken until this week that we've been able to bring in some crews from other areas -- less impacted -- to supplement our crews out in the field to further advance the restoration. Through this time, we also have to manage fatigue levels for our crews, which is critical from a health and safety perspective. So I'd like to thank everyone for their efforts, and extending our thoughts to those Aucklanders, severely impacted by this extreme weather. It's important for our customers to know that our response to Cyclone Gabrielle is no way driven by any financial considerations. Simply, we are doing everything we can to get customers back on as quickly and as safely as we can and will continue to put all the resources we need to into this response. Our SAIDI and SAIFI results for the period 1 April 2022 to 31 December 2022, we're tracking within our regulatory limits. With regards to these major weather events, SAIDI and SAIFI numbers will be determined in due course, however, noting that there are specific provisions around dealing with these types of events in the regulatory settings. So I'll now cover some of the other activities from the half year across the group. I'm not going to repeat the details of the conditional QIC deal that Jonathan has outlined, but would reiterate Jonathan's points on how this will make our metering business an even more powerful entity for our customers. We've seen several milestones reached in our work with Auckland Transport to provide for the electrification of the region's bus fleet. This is including providing smart charging capabilities that will have a significant impact in reducing the cost of electrification. And early last month, we opened Auckland's first electric bus depot in Mt. Wellington. With climate change emissions reduction goals and now the rising cost of living, it's even more critical that the sector and our regulators understand the criticality of our energy infrastructure and the challenges ahead of us to manage both the growth of energy and the rapid electrification of transport and industry in an affordable way. In addition, the extreme weather we've all seen this year makes it clear that funding for climate resilience needs urgent attention in the upcoming resetting of regulatory expenditures, and expenditure settings must support both climate resilience, cyber and the critical transition of the whole industry of which distribution businesses are essential. It has been estimated that New Zealand electrical distribution businesses will need to spend $22 billion in infrastructure aligned to manage the impacts of climate change and the growth in demand for electricity, including the rapid electrification of transport and industry. I would suggest now that that number is out of date given recent events. The need to fund such levels of investment has previously been recognized by the Commerce Commission in changing Transpower's regulatory settings to better align cash flows with high levels of investment. Distributors also now need better alignment of cash flows and a key decision facing the Commerce Commission will be to allow for regulatory asset basis not to be linked to inflation. Now on to business performance, starting with the regulated networks. We saw 9,203 new electricity and gas connections. This was up 10.4% over the prior period. Investment continues at historically high levels with gross CapEx of $197.4 million for the half year. Electricity volumes were up overall by 1.4% at 4,374 gigawatt hours. I've already spoken around the regulatory context and a key part of this being the input methodology review, which we expect the final decision on in around December this year. Another factor in these results has been the gas default price path reset, which set new prices from October '22. The need for a managed gas transition is critical, and we're looking forward to the publication of a report by the gas industry company [indiscernible] on this matter later this year. I'd also like to note that gas has paid a critical part and resilience for many communities through these challenging times recently. In Gas trading, we've continued to see higher input costs for LPG, and this has affected margins. We saw a 13% decrease in 9 kg bottle swaps due to the loss of Mobil as a large customer. LPG volumes were down 10.7%, and natural gas sales down 3.4%, while Liquigas tolling was up 4.4%. For metering, we deployed 38,000 advanced meters in Australia and an additional 12,000 in New Zealand. Our advanced meter fleet now sits at 2.03 million across New Zealand and Australia with more than 528,000 meters now installed in Australia. We successfully migrated our Australian metering fleet to the 5-minute market platform in line with the regulatory time frames and requirements. This is on a much larger scale than anything else that's being done in the New Zealand context. We're continuing to roll out 4G modem replacements in New Zealand with around 390,000 completed to date. And in the wider context for metering, we see lots of continued opportunities for growth in Australia with the Australian Energy Market Commission's draft report indicating an acceleration uptake of advanced meters in Australia out to 2030. We continue to receive great orders from Tier-1 retailers seeking deployment of advanced metering from us. And I'll now hand over to Jason to talk about what to expect for how we'll report metering operations going forward and then go over some of the group financial results in more detail.

Thanks, Simon. Jonathan has already given you an update on the terms of the deal. So I'll talk about what the deal means for our results we're presenting today and what to expect in the future. The metering business will operate as a standalone business and will no longer be controlled by Vector. Contributions to Vector's Group results from the standalone business will be reported as an associate. We will recognize a 30% share of the measuring impact in our profit/loss, and any dividends received from the joint venture will be recognized as part of Vector Group's operating cash flow. For the rest of this presentation, you'll hear us refer to the metering results as discontinued operations. This is because they've been classified as held for sale. We'll still have an interest in these operations post the transaction as a 50% shareholder. The Group's adjusted earnings before interest and tax, depreciation and amortization was $274 million, which was up $10.4 million or 3.9% on the prior year. This includes $179.4 million from our continuing operations and $94.6 million from our discontinued operations. Total capital expenditure in the first 6 months was $316.8 million, an increase of $46.4 million or 17.2% on the prior year. This includes $91.7 million in relation to the metering operations. This reflects continued investment in infrastructure to support Auckland's growth, and the rollout of 4G modem upgrades across the New Zealand advanced meter base. We've spoken about overall adjusted EBITDA. But in terms of the change in the prior period, our regulated networks contributed $11.5 million and our gas trading contributed an additional $0.5 million. Underpinning the $10.5 million increase in corporate and other costs is continued investment in Vector Technology Solutions, lower earnings from HRV, higher computer costs, which reflect the impact of inflation, and an increase in digital projects that are expensed rather than capitalized as cloud integration costs are now expensed under the [indiscernible]. Earnings from our discontinued operations, which is metering, were up $8.6 million. As you heard from Jonathan, our group net profit was $100.3 million, down $15.2 million or 13.2%. The reduction in earnings was largely due to the prior period's $7.1 million gain on the sale of 50% share of Treescape and the $40 million non cash reduction in the fair value of financial instruments. This financial instrument reflects the contract we entered into with Todd Group on the sale of the Kapuni Gas Treatment plant. The value of this contract reflects forecast of the future productions from the Kapuni field, future gas prices and the current discount rates we apply to those future cash flows. Net profit also includes a $2.5 million increase in the profits from the metering business. For CapEx, the slide shows the split by business segments. Net CapEx, which includes capital contributions, was up 11.2% to $220.1 million. Growth CapEx was up 20.6% to $190.8 million, with replacement CapEx up 12.3% to $126 million. This next slide shows group net economic debt and gearing alongside our debt maturity profile. Economic gearing at 31 December 2022 was 59%. Our credit rating is also shown on the slide. And relevant here is that when the metering transaction is concluded, proceeds will be used to reduce debt. The rating agencies can be expected to review Vector's rating following completion of the transaction. I'll hand back to Simon.

Thanks, Jason. Network earnings have improved from higher revenue. In electricity, the higher revenue is due to an increase in net connections and an increase in recovery of pass-through costs and recoverable costs. And gas volume was up and prices have increased in accordance with the gas default price path reset in October as set out by the Commerce Commission. Gas connections also continue to grow. Capital contributions were up 34.2% to $96.5 million, and this follows our change to require 100% customer funding for the cost of new connections and a development charge that supports overall network growth. Net connections continue to grow, both electricity and gas. Lower Ongas earnings were partially offset by improved natural gas margins. The factors that are contributing to higher input costs for LPG include the ETS, Saudi Aramco price and a stronger U.S. dollar. The other points shown on the slide, I've covered earlier, but they are included here again for context. Adjusted EBITDA from metering was $94.6 million, up 10% on the prior period. The majority of movement comprises an additional $5.3 million from advanced meters in Australia and $3 million from advanced meters in New Zealand. CapEx was up 13.3% to $91.7 million, driven by advanced meter deployment in Australia and New Zealand and the 4G modem replacement program. Looking ahead, Auckland growth is expected to continue with continued growth in new electricity connections and infrastructure activity remaining elevated. While the metering deal is being finalized, work on separating the business from the Vector Group has begun. Our full year guidance for adjusted EBITDA is between $515 million and $525 million based on business as usual results, excluding the change in treatment that would follow finalization of the metering deal and including an estimate of the costs for the recent flooding and cyclone activity. Lastly, I would again like to thank all our people for these huge efforts over the last 6 weeks and continued focus on customers. I hand over to Jonathan.

Thank you, Simon. In closing, I'd like to thank Simon and his executive team and everyone else at Vector, including our field service providers for their continued hard work as we continue to deliver the energy sector transformation that's needed for our customers, while enabling us to meet our emissions reduction goals in an affordable way. As noted earlier, our thoughts go out to the individuals and families impacted by Cyclone Gabrielle, and the Vector team will continue to work tirelessly to get the power on to every last household as soon as practicable. Simon, Jason and I are now happy to take any questions that you might have.

[Operator Instructions] And our first question will come from the line of Stephen Hudson from Macquarie.

Just a couple of quick ones for me. Just, firstly, on the metering sale. I just wondered if you could give us some idea of whether or not your expectations are that the credit rating agency FFO to debt ratio will fall back down to 0.9% on the basis that your non-regulated revenue streams have fallen? I think that was the trigger for the lift back in 2021. Just, secondly, on metering. Are you expecting the gross proceeds to be clear of any tax liability? And then just one perhaps for Simon, just if you can give us some idea where you think replacement CapEx across the network business is sort of going to go from here and whether or not the asset management plan is still a good guide.

Thanks, Stephen. Jason, can you handle the first 2 questions, and then we'll go to Simon on replacement CapEx.

Hi, Stephen. Look, we will have to wait and see how the rating agencies react to the transaction, but I would expect whether the decline in the amount of unregulated earnings that you would get a potential adjustment on that FFO to debt ratio, but we will find out clearest stead in the business as well. So I think the agencies, once we've got the transaction closed, we will be providing them with updated forecast for the business, and they will respond to that.

Just to add to that, though, I think what you were saying was will it go from 11% to 9%. And it might do so. I think there's a number of other factors that, obviously, the regulators -- sorry, the rating agencies look at that they've introduced ESG measures as well and other factors. But given the proportion of -- to Jason's point -- of regulated versus unregulated, we think that there would be some movement down there, but that's still to be determined by the likes of Standard & Poor's and Moody's.

And we can't overlook that that will change if the deal goes through. So that ratio will change both in the numerator and denominator.

You had a question then, Stephen, about are there any tax impacts on those proceeds. There are some reasonably small tax impacts that we'll be able to update you on when the transaction is closed, but they're not material. There are some assets that are being transferred, some small amounts of depreciation recovered, but nothing material in the context of the size of those proceeds.

Stephen, just with regards to your question around the replacement CapEx. Look, certainly, it would be fair to say that everyone we're talking to across the country at the moment, see that their asset management plans now need to be updated for recognizing the impact of these types of events. There's always been upgrades for resilience and so forth in these. But given the magnitude of some of the challenges faces everyone recognizes more expenditure be required. So I would say that in replacement CapEx, setting aside the customer CapEx and the growth CapEx, there will be an increase in what we call the resilience CapEx, and that could go up. We'll obviously update in due course, but we're probably talking about something in the order of, I don't know, a 20% increase. It's also going to be very dependent on the regulatory settings, which by that, I mean, not only what kind of solutions that we can actually develop because there's a lot more focus now on resilience right across the country in saying that upgrading a line may not be the best solution for some of the more remote communities that may be better to put in solar and batteries to provide that resilience than upgrading a cable. And so enabling those through the regulatory settings or how they can be facilitated to customers from an affordability aspect of the other really key ingredients.

Stephen, does that answer your questions? You're okay on those?

It does. Thanks, Jonathan and Simon and Jason.

And our next question will come from the line of Grant Lowe from Jarden.

Can you hear me okay?

Yes.

So a couple of questions for me. First one, just around the guidance, that was somewhat lower than I had expected. You've called out a number of things. Obviously, could you give us -- first of all, does that guidance include the transaction costs associated with the metering sale? And roughly what might those be?

It doesn't, Grant, because they're on our balance sheet and they get released during the transaction close. So it doesn't include the guidance that will be part of that gain on sale calculation when the transaction closes.

Okay. So no impact on to the P&L?

Probably the other -- Just one of the other factor we have had an estimate on in that guidance is the cost of these storms. So that's something that probably wasn't in anyone's forecast. And obviously, we have to fund that and that's reflected in that number.

Are you able to give us a sense of what that might be? I'm trying to sort of understand the balance between the IT costs up and corporate and what might be in that allowance for storms.

Less than $10 million, Grant.

So that doesn't mean $1 million.

Yes. Okay. In terms of the use of funds -- I appreciate that you've called out that, that will be initially used to repay debt. So there's 2 things there. I guess most of your debt stack is bonds. What sort of tranches of it will you be looking to repay initially? And then when it comes to the balance sheet capacity that creates the types of things that you're considering -- obviously, there's EDV CapEx forefront deliver on mines, but just how you're going to balance the types of things that you're considering for you sort of that balance sheet capacity?

Jason?

Yes. So in terms of the debt repayment stack, as you call it, Grant, is that -- so we have a sort of circa $1 billion of bank debt that we can repay and redraw without any importations. We've got a wholesale bond that matures within 12 months that we'll be able to retire with those proceeds. And there's also a U.S. private placement that we intend to repay. And the good news on that is the most recent updated valuation I had on that is it doesn't have a large negative cost of exiting just given where market rates are at, unlike some other recent transactions. So those 3 things together we'll use up our proceeds with.

You had a question with...

Sorry, carry on. You read between the lines with my comment around which tranches are going. So just in terms of how you look at the use of that balance sheet capacity now, how you're thinking about debt balance?

Look, we haven't finished our analysis of this. And I do want to emphasize that the transaction is still conditional. So when we get into details of what we're going to do when we get the money -- I always say, well, we should not count our chickens before they hatch. But as a Board, we would sit with management and look what they need to fund our regulated network business, to a lesser extent, VTS. And then we also can't ignore that from time to time, there could be equity requirements back into the metering joint venture. And once we look and assure ourselves as a Board that the cash flow and capital spend from the business can be supported by our balance sheet, we would also naturally look for opportunities to return money to the shareholders. So we're very conscious of the different stakeholders that we have. But making Vector a healthy business for the future is paramount for us. Is that -- does that, sort of, ...

That's great. Yes. Last one for me, just around metering, and I appreciate the transaction needs to go through. But just in terms of -- and obviously, we've had a draft report from the Australian regulators. But 2030 is a long way off. Can you give us a sense of how you're seeing the market at the moment for meters contracts coming to tender? [indiscernible] recently. Can you give us a sense of how that's shaping up over the near term?

Simon?

Yes, sure. As I mentioned in the update, we're still getting meters from Tier-1 retailers. We -- what we're seeing in the market, as we've seen from time to time, other retailers go out with RFPs for tranches of contracts. So I would say it's still very much in line with what we've seen over the last year or so. That's likely to continue as people roll off tranches of meters that they've deployed. So we've got some large retailers that will be coming off meter contracts. Not just us, but where they're contracted with other parties in the next 2 years. And then other customers that want to accelerate the velocity of their metering deployments into the market due to those kind of signals that are being sent by AEMC. So I think it's a very competitive landscape over the last 4 to 5 months, I guess. What we have noticed, there's been a little slowing down and some meter volumes coming out, but we're seeing that now increase and probably a lot of those meter volumes were driven by what was going on in the Australian market and quite a few challenges over and there with costs and so forth. But definitely, now with AEMC, we certainly see that those volumes over the next kind of 7 years will pick up. And just to deploy that meter volume is -- for the remaining smart metering base in Australia -- is a significant opportunity that we're well positioned to basically participate in.

And our next question will come from the line of Phil Campbell from UBS.

Just the first question just on metering. Obviously, with the AEMC reports, they're looking at 2030 completion of the smart metering. Just wanted to get your sense of -- it probably won't start probably until 2025. So I just want to see if there's enough capacity in the market in Australia to be able to complete those 3 states by that time.

Simon?

Look, I think the reality is that I don't think anyone would underestimate that that's a big rollout, and that's a big plan to roll out that many meters. Obviously, there's a reasonable amount of velocity out there at the moment, but that needs to improve. So I think that's really just about ensuring that we have got those good contracting parties. We've got a good pool of resources. Obviously, with QIC, they have reached into a lot of other networks of customers and -- or a better word -- relationships they have. But I don't think -- I think anyone would be crazy to think that it's not a challenge with the resources and there were the other infrastructure builds, but that's something that we're certainly really focused on. And we've proved the ability to roll out large-scale metering deployments in New Zealand. Our process has largely remained the same. So we're well positioned to take that, coupled with our technology overlays, and we're picking up customers now with new product solutions. So it's not only just a matter of about rolling out the meters, but it's also the deployment of new products simultaneously at the same time for them.

Just going to say that the tech that we've got in New Zealand, we've obviously used to deploying at scale. So I think we do have a good position to be able to take that to Australia, which we've done. So I think we're quite well set up from that perspective.

And just following up on that, is obviously the guidance implies quite a big step-up in the deployment rate. So I think you might have just answered that previously, but just can you give us a bit more color on what's happened in the first half and second half? It's quite a big increase.

Yes. So I mentioned the first half was slightly slower. I think there were lots of issues in the energy markets in Australia, and we have had some recent contracts awarded to us to sort of support that second half number. So that's -- so we're expecting a better second half based on some recent contracts we've been awarded.

And then just the last one on metering. Just in the Australian press a few days ago, there was a story about one of your competitors raising quite a lot of debt. And supposedly, one of the reasons was targeting the New Zealand market was a number of upcoming metering contracts. So just wondering if you can make any comment on what's happening in the New Zealand market.

Look, we have contracts with customers still here. They still have a reasonable period of time to run. We've actually retained customers in recent years such as Genesis where we recontracted with them. I think it wouldn't be lost on anyone that our competitors like to use the media for some kind of signaling. And at the end of the day, it's competitive, and we will respond and retain customers where it makes economic sense and is viable. So we don't take too much notice of some of the Australian media commentary because it seems to have a different characteristic to what we find here.

Our next question comes from the line of Andrew Harvey-Green from Forsyth Barr.

A couple of questions from me. First of all, just looking at the OpEx situation and as a reasonable step up, I guess, in the first half [indiscernible] last year, and I think you sort of outlined some of the reasons for that. Just wanted to make sure that there wasn't any sort of significant one-off things in there? Are we -- should we look at that going forward as effectively a step up in OpEx?

I think the 2 changes probably, Andrew -- we are investing some more capital into VTS, which expensive at the moment. It's not material, but it's one of the impacts of having that and our computer costs are higher. So in our results, you see the full impact of CPI. You don't see in our revenues because of the lag with the regulatory model. So you're sort of seeing the cost impacts coming through, but you're not seeing the revenue uplift that we do get. So that will come out in sort of 2 years' time. So it'd be great to able to accrue that revenue because we know it's coming, and we can even calculate how much it is, but we're not allowed to book it. I've worked out $10 million for this half, if we've been able to accrue what we're entitled to.

Yes. And the other question is just in terms of looking at that CapEx situation and asset management plans. I think the next one is due at in sort of 6 weeks or thereabouts. I presume it will sort of factor in the inflation environment that we've had, but maybe not some of the resilience issues. Is that fair? Or we're going to have to wait until next year for, I guess, additional resilience expected CapEx to sort of feature in that plan?

Andrew, look at the all factor in there. Inflation and we're currently looking at is a number of other EDBs across the country, just engagement with the Commerce Commission around wanting to provide a meaningful asset management plan update. And as everyone says, they're pretty much all out of date now because of the events. We were already factoring in an increase for resilience as discussed. But once we see the full impact of this event and also start looking at other ways to improve resilience, we'll include those and update there. But I think it would be fair to say that you'll kind of get probably a 70%, 80% kind of view when we put out the asset management plan this year, and the full view would probably be more realistic to be in the next asset management plan, which will be then used for the regulatory reset. So that's just the reality on just bringing together all the impacts. But we have been doing quite a lot of resilience investment to date. So for example, we're building a sub-transmission network from Wellsford down to Warkworth, which is about $50-odd million. That's already in our plans. That's already -- it's already in flight now as we speak.

Underground.

Underground. So that's good, but underground is not the solution to everything as we've seen Phillips prove. But outside of that, there's also been a huge amount of work done with switching and automation, which makes a big difference of [indiscernible] the network to get as many customers back on as possible. So there's a huge amount of work. We've just finished some recent modeling on flood analysis, just updating that. And the irony of that is that it overlaid -- it came out pretty much just around the same time as the flood set in. The overlay of the areas in the 1, 250-year versus where we saw that impact was pretty accurate. So that causes another kind of turn on the handle just to check any exposed areas such as substations. In some substations already being looked at to -- and discussions will advance about where to move them to higher ground or other solutions such as increasing the height of switchgear. So yes, I guess, long way around, Andrew. But definitely, I'd say that there will be a clear shift in resilience expenditure, but the final numbers, I think, would probably, to be realistic, more accurate. And they may move up and down from that number just based on what solutions are identified. And for us, one of the big issues is probably more on the OpEx side where if we can get some final decisions or some decisions made about vegetation, which would have made a significant difference through this event instead of being only able to cut 0.5 meter wood from a line. And we look into Australia, we see corridors cleared, 30 meters each side of the back of fire events. Those kind of things would probably sit more in the OpEx side. So it's not just all CapEx.

And last question for me, I guess, just a general one around sort of the regulatory interactions you've been having. And I guess, I think we can all see the extra CapEx and those sorts of issues that are coming forward. Confidence, I guess, around the radiator and actually providing settings for you to be able to invest as necessary.

Look, I think one of the things that we have done it's really good working with all the other large electricity distribution businesses. We put on what was called Spring series, which we invited guests from overseas, other regulators, economists, network operators, customer advocates to basically have conversations about some of these challenges, such as electrification, decarbonization, resilience. And so a common theme in other jurisdictions is just the criticality to relook at the kind of cash flow adequacy of investing and what's required to meet those investments, the kind of wider range of looking for wider solutions than what you call just the traditional ones, which is something that we've been advocating for a long time, how that overlays into things such as digital platforms, for things such as EV charging so you get much more efficient utilization of assets and still deliver customer benefits. So I think by and large, that those series have been really good. I think recent times, the engagement with the Commission where we're seeing some new commissioners come in, that's been some really good engagement with them and their kind of focus on how do we jointly solve these problems. So I'd say that's pretty positive. I think to the points earlier raised, we see probably the big issue for a lot of us is that funding and that cash flow adequacy and what we are seeing there is the debate saying, well, Transpower got a change of the funding profile for the North Island grid upgrades, which is $700 million, but we spend that every couple of years. So that's like Transpower predicting $11 million, we're predicting $22 billion -- sorry, $11 billion, $22 billion across EDB. So the bigger issue at the moment, from a funding perspective, we'd say is EDB's cash flow, adequacy given that level of investment. So that's a big topic, but equally so is the topics around how do we actually also recognize the affordability because it's not just our sector, it's also transmission. And then we're also seeing generation, obviously. So a key point for us is we don't want to be the tailwind that's basically used to be the balancing item for affordability. It has to be a focus across the whole sector from a whole system cost.

[Operator Instructions] our next question comes from the line of Shane Solly from Harbour Asset.

Just building on the last question from Andrew. Just to clarify, is the existing, which is the regulated asset bases linked to CPI, does that not provide sufficient cash flow, Simon? Is that -- can I take that as a red if it stays it is, it doesn't work?

Well, I think what we'd say is that we think it creates challenges because it's actually a function of the magnitude of CapEx. And we see asset management plans, I think this really came out and some recent work showing that when you see a significant increase in CapEx, it's fundamentally the back ending of cash flow. So whilst you might say, well, we get, let's say, at the moment of 4.2%. The non -- there's a noncash amount of that, which is basically the index rate regulated asset value. So in cash terms, you're only probably seeing 2.5%. And so that doesn't start getting up into a 4.5%, 4% return until you get out to about 14 years. And if we look at that against the kind of context of what do the rating agencies look at in the forecast, that's like a 5-year window. So it's kind of a big disconnect, and that's the same issue that is being identified in Australia or U.K. That's why Transpower had their kind of cash flow funding change to an indexing. So in some regards, you get that return over the life of the assets. But it's actually when you have a big lift in CapEx to fund that period of time for that big lift in CapEx, that cash flow profile works in a very static historic environment. But when you enter into a large-scale reinvestment or a large-scale investment requirement to decarbonize, that's where the pressure really starts pushing in.

Understood. And to just change your text slightly, in terms of the ongoing capital contributions in terms of what influences that. Can you just expand a little bit on that? And do you expect those ongoing capital contributions to remain at similar levels to this period?

Look, certainly, from our perspective, it starts with, I guess, first and foremost in the equity issue. And I think that's very much around if we go to even electricity authority principles that suppose that cause the cost should pay for them. So it's very much orientated around that. We take that really seriously because we don't want to basically say fund a large-scale development, let's say, a property development where the developers are obviously -- that's a commercial entity. It may require a large-scale network upgrade, and that's because that entity has actually caused that upgrade. But then those costs go in the regulated asset base and gets socialized across the rest of our customers that many of whom, from an affordability perspective, don't want that burden. So first and foremost, I guess, that customer contribution with regards to the dedicated specific assets will very much likely stay around that kind of level. That's obviously dependent on the level of activity from a growth perspective. So the variability will go up and down with that. With regards to system growth charge, that's where when a large-scale development may go in or data center or, for example, a large infrastructure for electric charging, then that causes what we call upgrades further up the network and the system growth. You could pretty much largely track how those play out. It's very similar to what happens in roading and water where their contribution to that growth does occur. I think it would be fair to say that looking forward, the amount of investment or recovery from that charge will vary. And that's as much to do with what happens with regulatory funding and the regulatory reset as anything.

Another issue that we're engaging with the regulator on is as we decarbonize, we will look at the pattern of decarbonization. So you can imagine that a big wave of EVs occur in our richest suburbs, and as a result, we need to make CapEx to support that should the poor suburbs pay for the richer suburbs to get EVs. So we don't have all this sorted within the regulatory framework, but we're certainly looking at it and engaging with the regulators on it.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Jonathan for any closing remarks.

So with no further questions, we'll now end the teleconference and webcast. If analysts or investors come up with further questions or follow-ups, please contact Jason. Media -- for the media, please contact Matt Brittin or call our usual media phone number. [Foreign Language] Thank you, everyone, for joining us.

This concludes today's conference call. Thank you for participating. You may disconnect. Everyone, have a great day.