Vector Limited (VCT) Earnings Call Transcript & Summary

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. [Operator Instructions] 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 $523.3 million, up $13.3 million or 2.6% on last year's result. This is made up of $335.1 million from continuing operations and $188.2 million from discontinued operations. Total combined capital expenditure was $700.4 million, an increase of $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 $112.6 million, which was $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 $1.501 billion feeding into net profit from discontinued operations of $1.603 billion, and a combined net profit of $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 $0.14 per share, comprising an ordinary dividend of $0.085 and a special dividend of $0.055 in recognition of the gain from the sale of 50% of the 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 3 months. The Board expects to announce any changes to the dividend policy along with the release of our FY '24 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. [Foreign Language]. 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 $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 start-up 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 setup to accelerate growth opportunities and continue providing data services for the 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 is 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 bound of the regulatory regime set by the Commerce Commission, and so, the decisions on input methodologies is 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 the other severe weather events and it's 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 favorable 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 an industry-leading energy data platform, Diverge. In Auckland, we've taken a number of further steps to build a future electricity network where customer site 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 the dynamic operating envelope that takes account of what capacity is available on the local network for charging, and ensures charging is undertaken in most efficient way without excessive capital expenditure. I will now hand over to Jason to go through our financial results in more detail.

Thank you, Simon. I'm on Slide 7. Here is 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 results. Accounting rule changes and higher CPI increases having contributed negatively to our corporate and other component. As we've noted previously, there's a 2-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's $38 million of additional revenue that we recovered in 2 years' time. This can't be accrued into these results. Discontinued operations adjusted EBITDA is up $14.5 million on the prior year result. Slide 8, net profit from continuing operations is $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 -- movement in fair value adjustments of $16.8 million, the gain on sale on Treescape in the prior period of $7.1 million and $40 million impairment of our LPG business in the prior period, and also tax changes. Slide 9, here you can see the profit and loss from discontinued operations, which is the metering business. There's an increase in net profit after tax as this business was held for sale on Vector's accounts, from December 2022. So there has been no depreciation for these assets from the state 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 $1.51 billion. This reflects the difference between the enterprise value of the metering business agreed with QIC of $2.47 billion, and the carrying value of the net asset sold of $933 million less transaction costs. Vector received proceeds of $1.75 billion from the sale of 50% of Vector Metering, and now has a 50% interest in the JV with QIC valued at $727 million. The proceeds received by Vector have been used to reduce debt. The Metering JV has a new $1.8 billion standalone debt facility drawn to circa $1.1 billion. This is a Climate Bonds 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 $512.1 million. Growth CapEx was up 17.7% at $376.2 million, and replacement CapEx was 43.3% higher, at $324.2 million. The increase in replacement CapEx is driven by new property leases, $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 from the Metering transaction have been used to pay 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 and 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 was 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 DPP3 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 impacts of the Auckland Anniversary flood and Cyclone Gabrielle, which included $7.4 million of additional operating costs and a further $9.3 million of CapEx. Slide 14, as you've heard, we continue to see high levels of regulated capital expenditure. This was up 27.3% to $422.6 million. Capital contributions were up 24.6% to $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 $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 '23 and 25,656 meters deployed in New Zealand. The Australian meter fleet was successfully migrated to the new 5-minute segment 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 growth to continue and we're anticipating around 14,000 new electricity connections in financial year '23. There is an ongoing need for significant capital expenditure to support new connections, growth in infrastructure as well as continuing to factor in climate change. As you've seen from our CapEx, in our regulated business alone, we spend approximately $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 in other requirements. The Commerce Commission regime currently sits at 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 $350 million to $365 million in financial year '24, 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, wanted to make 3 quick -- 3 closing comments. One, to echo Simon's comments on the regulatory regime, look, New Zealand has a tendency to underspend on infrastructure until it's too late. And 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 $2.3 billion over the last 8 years for inefficient, resilient electricity network. And 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. And just -- Simon did the thank you to everyone, but I'd -- 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. And then finally on a personal note, this is my last earnings release as Chair. I've been on the Vector Board 10 years to 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.

[Operator Instructions] Our first question comes from the line of Andrew Harvey-Green with Forsyth Barr.

A few questions from me. Just, first of all, just on the dividends. I noticed that this dividend is unimputed and just wanted to confirm that's the intention going forward or would 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. 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 you might have an update for us here at this result, but you pushed that back to last -- the input methodology conclusion. And I guess just wanted to get a sense of what sort of things that you're looking at within that input methodology decision that might therefore impact the dividend policy?

Okay. I'm going to start just with a general comment and Simon or Jason you can talk about specific items on 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 within input methodology that we're looking at?

Yes. Look, obviously, Andrew, as you appreciate critical as 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 on 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 these headroom for unexpected events if -- because we can't get insurance for major climatic events.

In fact, just 1 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 cyclone. So again, we need to take account of any updates to our 10-year plan as part of thinking about that future cash flow profile.

That's useful. So just to follow-up on that, Jason, because I think there was quite a big step up in the asset management plan that you put forward for this year. So, I think that you're looking at -- we could be seeing another increase for increased resilience?

Yes. 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've probably heard Transpower saying that the Commission is 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 not really sure whether it will come through in the inputs methodology. But as you may be aware that the government has talked about, our resilience fund and so forth. So how that all dovetails to give will absolutely be a factor in those considerations.

And then a couple of questions just looking forward. First of all, really straightforward one and I think I asked pretty much every year. FY '24 capital contributions, what sort of number should we be thinking about there?

Obviously it's activity driven, and we expect those contributions that continue to grow. So sort of 10% plus growth is possible. It's activity-based though. So we're not in full control.

Yes, that 10% driven by underlying inflation costs obviously as well. Yes.

Yes. Yes, indeed. Which I think then -- sort of segues nicely into the next question in terms of OpEx expectations for next year. I think we're seeing quite a few of the infrastructure businesses talk about or put through have quite big OpEx increases in their FY '23 results, which I can see that you've had as well. But also guiding to sort of 9% to 10% plus type increases for next year. What sort of increase, assuming there was an increase, should we be thinking about for Vector? What are you sort of building into your guidance here?

Well, I think you've got the guidance number, which is the net number. So, I guess you've got that. Yes, I would have thought sub-10%. But, yes.

Yes. Okay. Great. And lastly from me, just in terms of information on the metering business going forward. I appreciate it's going to be an associate. But are you going to give us, I guess, operational performance, and how the metering business is tracking just from a valuation perspective will be quite important to give that information, as opposed to just the sort of the dividends, and future of it, so the metering business will be paying back?

It's a good question, Andrew. Obviously, it's a private business that we are now investing in as a shareholder, so we need to agree that with QIC in terms of what we can disclose. Obviously, you will 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 will be less than what we have been disclosing in these results.

Our next question comes from the line of Grant Lowe with Jarden.

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 obviously some higher costs than they originally called out. How much of -- what are you sort of thinking in terms of the guidance? What have you affected, and therefore the performance of the corporate segment in those various businesses? Is it pretty much sort of a continuation of the performance that we're seeing in the current year or is it rather a variance there?

There's a small improvement, Grant, but it's in the scheme of the results, and it's not that material to be honest. So all of those businesses are expected to be improving their performance in FY '24, but the material advantage 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 a new model. As I mentioned the $38 million this year is a big number, right, and that's still 2 years away.

Yes. So we gave the…

But that's it for the [indiscernible]?

The -- which is now -- without metering this, the bulk of our adjusted EBITDA number going forward, right? Look, it's not -- it doesn't impact gas, because gas we're able to price for CPI each year. It's the electricity business where it's lagged.

Yes. Okay. Right. Yes so you break other thing. Yes, okay. But -- yes, so in terms of the corporate segment though itself, yes, there's some modest improvement, but still likely to see some cost pressures there?

Correct. CPI pressures offset by some improvement in the underlying performance of the 3, 4 businesses -- 4 businesses certainly, yes.

Yes. Yes. Got it. And in terms of…

Could I just chip in something to just emphasize Jason's comments and this is a sort of a CFO talking is, some 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've repaid. And so, there's just going to be a little bit of changes that -- our balance sheet you can clearly see is better. But actually, our cash flow is also much more solid with the transaction. So don't only look in any financial statement, 1 measure always has its weaknesses. And so, I wouldn't just look at EBITDA going forward, for instance, not that you do but…

Ensuring the EBITDA was $198 million and the CapEx was $197 million, right, so just on our finance.

We lose the CapEx out -- of our cash flow statement as well. Very good point.

Yes. And I follow -- the meter businesses is clearly stating without the accounting effect. Hopefully, those numbers are right, but -- and I'll say that's all understood. Just in terms of the meters business going forward, you've already answered a couple of my questions I had on my list. But in terms of the [indiscernible] business has. Is that business likely to be self-funding going forward or is it sort of drag from you as equity providers to that business?

In fact, it's bigger than that [ Andrew ]. It's self-funding and we expect to get a dividend stream out of that business.

And then just any update on the regulatory side of things in Australia. Obviously, there's some -- the regulators, what they were looking to enable the kind of latest type yes -- what's the latest on that from what you see from your side?

Yes. I guess, we see there's still the continuation of an expectation of a smart meter rollout to be completed largely by 2030. So yes, I guess, that's the pretty consistent theme that we see coming out of Australia.

Our next question comes from the line of Phil Campbell with UBS.

Just a couple of questions from me, just following up on the metering one. Is it -- do we have a new timeline from AEMC, just in terms of when a decision will be made in terms of 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 whether there is a defined time, yes.

And to your ability, you're able to -- can you give us a bit of color around some of the governance arrangements within the metering JV? And I think at the time when you announced the sale, you talked about your strategic alliance with Yurika and the stuff like that which obviously I'm assuming would allow you to possibly get some more market share in Queensland. So would 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 Yurika may be going?

Yes. Look, we're going to have -- we'll have a JV Board of 7. We have about 2/3 of that set. We'll have a couple of announcements coming over the next week with QIC and Vector both appointing 3 with an independent share being the seventh member. And we've done a great skill set so that -- the Board has depth of knowledge on Australia 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 by -- key important decisions, not operational decisions. So, they have to be approved by both the Vector and the QIC Board. Neil Williams, our former Head of Metering is going to be -- Williams, Neil Williams is the new CEO of the [indiscernible], and so he has a lot of experience in that area.

Also and Jonathan, just to add on, we also have really strong team with Neil. So we recruited in Australia for CFO, customer end markets, CDO, Chief Digital Officer, to supplement the already strong team in New Zealand so.

Yes. Chief Digital, it's a sort of New Zealand Australia team, some of New Zealand. Neil is in New Zealand. Yes. So, I mean we're really positioning it. There is still of course powerful value with our position in New Zealand. But as you see from the installed, 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. And so, that would be the big thing. Could I just mention something on smart meters and hopefully I'm not going off script here. Feel free to correct me guys, is you need smart meters. Australia is going from like 60% to 70% fossil fuels to a goal of 80% to 85% renewables by 2030, and there's big skepticism in the market that you would have read 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 it be like an independent valuation on the metering JV every year or obviously the impairment testing on it?

Yes, there will be an impairment test. So, we'll have to test the carrying value of that investment. I don't intend to say that's publishing an independent valuation, we don't need to do that. I don't know if we'll be doing that. But I think we will be impairment testing that carrying value every year.

Yes. Got you. And then I suppose just a last 1 from me. I suppose, just to follow up on the metering. We didn't really mention anything about Yurika strategic alliance. Is there any update on that? Or is it too early?

No. No, there is no update on that.

Okay. And then just 1 on the regulated networks in terms of the CapEx. Like, should we be using the latest aim for kind of CapEx for that or -- obviously, it's going to be updated, but is that the best because there's no CapEx guidance sort of I think is 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 honing in on future growth, and also just the impact of inflation on costs to actually install assets.

Yes. Great. Awesome. All right. 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, and I also assumed that 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 -- we're holding our powder dry to look at the input methodology. But we do think about the shareholders. We just had a $1.7 billion transaction. So it is possible that the special pathway becomes more of a regular dividend pathway, but gosh, we need to first review input methodology, of which there's a lot of uncertainty over what the cash flow will be with that.

Would you -- just on that, would you be able to just kind of maybe -- because obviously, the draft came out and it's obviously quite complex. Would you just remind us kind of what issues you have with that? Or what you kind of be looking forward, what would be a good outcome from ComCom with regards to that?

Sure. Simon?

Yes. Look, I guess first and foremost there needs to be a financeability test that's, unlike in other markets, where there is a comprehensive financeability test like in the U.K. Ofgem has a very complex, and material test that that's non-existent. And as -- then that leads to 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 infrastructure growth, and decarbonization, as Jonathan mentioned. And there's no point having generational transmission if you haven't got the network to deliver to the customers. So, the other key inputs with regards to probably 2 other key factors is the indexation or non-indexation, because that has a material impact on how it backends cash flows. And if you have the back-ended cash flow and as we sit -- as it currently sits, we get 2.58% cash return on our assets. And that's pretty hard to settle when you've got interest rates sitting where they are and then also to be able to 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 areas around forecasts about inflation rates. And in fact, expert analysis shows that what's being used couldn't be called a forecast just using midpoint Reserve Bank. And the fact that as the Reserve Bank gets to update that on a frequent basis, but in our case, it gets set for 5 years, and we get stuck in a world of challenges with that. And the other aspect is just basically price caps. So, we also have an issue with price caps and whether that includes transfer 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 areas, and then on top of that a 10% price cap we end up with a cash flow challenge, which means that when we did the analysis for the large 5 -- 6, I should say, EDBs in New Zealand, you end up with what's known as a wash-up account of circa $1.6 billion after 5 years of unrecovered cash, which fundamentally is not sustainable. And to echoing what Jonathan has said, we're at a point with the biggest CapEx expenditure required for decades with the worst financing plan, so that's fundamentally why we have defined a pathway through it, because it just becomes too challenging and it's not what we believe to be in the long-term interest of consumers.

I mean some of the ComCom's comments was EDBs can just go raise equity. It's hard to raise equity. You have to have the right market. You have to…

Cash flows.

When you say financeability, most of this has to sort of be debt financeable.

Yes, that's right.

And we look over the landscape and Australia got into some bad cases where no one was willing to finance, and needed infrastructure project in electricity transmission. So, we really -- we want to avoid that, but we don't overlook. This is a hard area, because there is 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 that the trade-offs being owned by the beneficiaries. But we need a pathway to have that electricity ready for you when you need it and that's why we're holding fire.

And I think to add to Jonathan, the other issue is affordability challenge and what that price path looks like because it's not the sole domain of EDBs. It's an industry-wide issue. And so, to be frank, we take a bit of exception to people suggesting it should all be taken by EDBs.

I mean just -- I mean, I think the last 2 resets, we went down 17%, went down 27%. So, we've had price decreases, not increases.

Yes, that's right.

Sorry about the ramp, we could probably get more than you expect.

[Operator Instructions] Our next question comes from the line of Stephen Hudson with Macquarie Securities.

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, I am that you now are longing 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 $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 counsel ownership of EDBs sort of hamper that investment do you think?

Can I hit the last question, and then I'm going to turn it over to Jason and Simon for the first 2, is a 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 2 questions, Steve I'm going to turn it over to Simon and Jason. Jason first.

Yes. So just on the joint venture, Stephen, so we intentionally haven't provided any forecast for the new joint venture. Now there's a new Board in place, but there's an expectation from the shareholders to be receiving a dividend every year, and if not, twice a year, potentially. So, just given the stage of metering, and its formation that may not be received by our half year, but will certainly be received for a 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.

Yes. As soon as that's announced, we'll announce it to the market.

Absolutely. Yes, yes.

Stephen, with regards to the draft volumes, yes, you're correct that the draft decisions 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-index methodology. And that's -- I think it's important to say that we believe it's important that this absolute consistency between whether it's a transmission or distribution that 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 these 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 is EDBs doing a huge amount of investment that would otherwise not have occurred in some of the 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 raise the capital or so forth, but from a capability, I think also it needs to be looked at that there is a lot more collaboration, and positive outcomes, and communities than is often quoted by some that don't like the current model.

Yes. So I'd just add one other thing, and because -- with this spend, there's also always the worry that sort of gold plate to spend. But with the Symphony strategy, the future spend for expansion of electricity capacity versus the past, there's about a 1/3 to 1/2 drop in cost because we're going to 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.

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 is your point person. For media, please contact Matt Britton or call our usual media phone number. And so, in closing, [Foreign Language]. Thank you, everyone, for joining us.