2 October 2013
Mighty River Power Capital Markets Day
CAPITAL MARKETS DAY
Disclaimer The information in this presentation has been prepared by Mighty River Power Limited with due care and attention. However, neither the company nor any of its directors, employees, shareholders nor any other person shall have any liability whatsoever to any person for any loss (including, without limitation, arising from any fault or negligence) arising from this presentation or any information supplied in connection with it. This presentation may contain projections or forward looking statements regarding a variety of items. Such projections or forward looking statements are based on current expectations, estimates and assumptions and are subject to a number of risks, uncertainties and assumptions. There is no assurance that results contemplated in any projections and forward looking statements in this presentation will be realised. Actual results may differ materially from those projected in this presentation. No person is under any obligation to update this presentation at any time after its release to you or to provide you with further information about Mighty River Power Limited. A number of non-GAAP financial measures are used in this presentation. You should not consider any of these in isolation from, or as a substitute for, the information provided in the audited consolidated financial statements which are available at www.mightyriver.co.nz. The information in this presentation is of a general nature and does not constitute financial product advice, investment advice or any recommendation. Nothing in this presentation constitutes legal, financial, tax or other advice.
CAPITAL MARKETS DAY
Agenda 1.00pm
Introduction and Health & Safety
1.15pm
Operations
2.15pm
Retail
3.00pm
Afternoon tea break
3.30pm
Metrix
3.45pm
Development
4.30pm
Capital Management
5.00pm
Q&A
CAPITAL MARKETS DAY
Our company and the environment we operate in > Operate in a competitive and well-functioning market that has led to world-best outcomes > >
for security, level of renewables and resilience to future fuel shocks Consumer benefits now occurring from major investments
> Our portfolio well positioned for demand-supply dynamics > >
current excess capacity, reflecting flat demand and increased renewable generation potential for reduction in excess capacity, as more flexible take-or-pay requirements lead to further response from fossil fuel generators
> Inherent portfolio advantages mean greater earnings surety under most market conditions, including weak Waikato hydro conditions > Multi-brand retail strategy delivers a tailored customer experience through innovation in an intensely-competitive market > Metrix, our technology business with unique multiple technology platforms, provides opportunity for earnings-accretive growth > Development business continues to position for weak domestic outlook and medium term economically-viable growth options offshore > Focus on sustainable earnings and capital management underway and ongoing
CAPITAL MARKETS DAY
Health & Safety > Health & Safety focus on ‘zero harm’ is an absolute priority > Critical industry opportunity with common contractors and sub-contractors - StayLive generators’ group > Company (and other generators) TRIFR well below electricity sector averages > our TRIFR shows 17% improvement y-o-y; and 59% improvement over past five years > Ngatamariki project TRIFR (involving 1 million person-hours) of 0.98 vs 3.54 for last major project (Nga Awa Purua) > LTIFR at similar levels for the last 5 years > Significant and on-going effort into Health & Safety processes, specific focus to improve critical risk identification, including systems and culture > Sentenced for ‘near-miss’ incident in September 2013 > $32,000 for drilling contractor; $16,000 for Mighty River Power as principal for failing to take all practicable steps > Judge referenced one-off nature of incident and Company’s good safety record and robust safety processes > early guilty plea from the Company; focus on capturing learnings and implementing improvements in future risk identification
TOTAL RECORDED INJURY FREQUENCY RATE 2.5 2.0 1.5 1.0 0.5 0.0 FY2009
FY2010
FY2011
FY2012
FY2013
LOST TIME INJURY FREQUENCY RATE (EMPLOYEES AND ON-SITE CONTRACTORS) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 FY2009
FY2010
FY2011
FY2012
FY2013
Operations Capital Markets Day
Presented by: Fraser Whineray General Manager Operations
Phil Gibson Wholesale Markets Manager
OPERATIONS
Operations Operations is responsible for: > Managing the generation of electricity to be sold on the wholesale market and to certain large commercial customers > Managing wholesale electricity value and risk position through a range of levers > Operation and maintenance of power stations and upstream fuels
OPERATIONS
Market Structure
OPERATIONS
Wholesale/portfolio decisions and governance Governance – Management/Board
SHORT‐TERM
MEDIUM‐TERM
LONG ‐TERM
Cover risk and achieve best value for fuel
Optimise sales book and fuel choices
Future earnings growth and asset management
Pricing
Pricing
Pricing
Competitors
Competitors
Competitors
Portfolio net position
Portfolio net position
Outage Planning
Asset Management
Transmission
Plant Mode
New Plant
Fuel
Fuel
Fuel
Dispatch Optimisation Fuel Value Outage scheduling
Decisions made in conjunction with retail
Decisions made by Operations
Decisions made in conjunction with Development
OPERATIONS
Demand and supply > Excluding industrial, demand flat over last six years > deindustrialisation trend seen since 2003
> Meridian Tiwai negotiations more positive than expected > 170MW step down in Meridian contract volume in 2015 > provides clear signal and time for thermal response, including others contracting with Tiwai
> Thermal units in New Zealand are large relative to the total market > 170MW step-down equivalent to a 15% reduction by the three CCGTs NATIONAL CONSUMPTION 45,000 Thermal Generation for FY2013
35,000 30,000
National Consumption Rolling 12 months National Consumption Excl. Tiwai Rolling 12 months National Consumption Excl. all Direct Connect Rolling 12 months
03 2013
09 2012
03 2012
09 2011
03 2011
09 2010
03 2010
09 2009
03 2009
09 2008
03 2008
09 2007
03 2007
09 2006
03 2006
09 2005
03 2005
09 2004
03 2004
09 2003
03 2003
09 2002
03 2002
09 2001
03 2001
09 2000
03 2000
09 1999
03 1999
20,000
09 1998
25,000 03 1998
GWh
40,000
OPERATIONS
Thermal utilisation reducing > Record level of thermal surplus due to combination of: > long lead time generation build pipelines > sustained period of flat to declining demand growth
> Introduction of non-discretionary renewables (geothermal and wind) has led to displacement of base-load thermals > Thermal generators’ response constrained by fuel commitments
100%
25,000
80%
20,000
60%
15,000
40%
10,000
20%
5,000 ‐
0% 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Diesel Capacity
Coal Capacity
Gas Capacity
Geothermal Capacity
Southdown
Otahuhu
TCC
Huntly Main
Huntly 6
Whirinaki
e3p
Note: in the above graph thermal capacity is stacked and the geothermal capacity is overlaid
Thermal and Geothermal Capacities (GWh)
Utilisation
THERMAL UTILISATION AND CAPACITY, AND GEOTHERMAL CAPACITY
OPERATIONS
Thermal response underway > Contact > Investment in Ahuroa gas storage facility allows reduced take-or-pay quantities and converts gas supply from base load to peaking/firming > Signal to mothball Taranaki CCGT (TCC) from start of 2014 to defer maintenance capex > Considering disconnection of OTA steam turbine and conversion to OCGT
> Genesis > Recently announced the second of its units going into storage before the end of 2013 > Only two Huntly 250MW units available from 2014 – expect very low utilisation
> Mighty River Power > Converted Southdown from base-load to peaking mode from 2003 > Gas supply arrangements reducing during 2014. No gas contracted from 2016 > Earnings from ACOT over winter – offset gas transmission costs WINTER SECURITY MARGIN ASSESSMENT
Basecase
Energy Security Margin
40%
No new thermal + decommissioning of one CCGT High Demand
30% 20% 10%
Source: System Operator, Transpower
2020
2019
2018
2017
2016
2015
2014
2013
2012
0%
OPERATIONS
What does it all mean for wholesale prices? > > > > >
Future wholesale market price outcomes heavily dependent on key drivers of supply and demand Futures curves and independent forecasts consistently low for some time Market expects some increase over time to wholesale and futures prices Current commercial prices would not cover fuel and variable operating cost of thermals ASX CAL14 saw $3 lift in response to Contact TCC announcement in August 2013
THIRD PARTY WHOLESALE ELECTRICITY PRICE FORECASTS
ASX FUTURES SETTLEMENT PRICE (OTA)
110
80
100
70
90
60
80
50 $/ MWh
90
70 60
40 30
Credit Suisse Goldman Sachs
Deutsche Bank Macquarie
FNZC UBS
FY20
FY19
FY18
10
FY17
40 FY16
20 FY15
50 FY14
Nominal Price ($/MWh)
120
0 FY2014
FY2015
As at 30 June 2012
As at 5 April 2013 (date of PFI)
As at 30 June 2013
As at 26 September 2013
OPERATIONS
Mighty River Power portfolio dynamics AVERAGE WHOLESALE PRICE (WKM)
> Traditionally run ‘short’ on an annual energy basis
90 80
> mean Waikato hydrology and Southdown at circa 30% load $/MWh
> Portfolio risk assessed by internal VaR model against risk appetite > Actual short position has range driven by high/low inflow scenarios to Waikato Hydro and wholesale prices > Mixture of sales channels to residential, commercial and industrial customers nationwide - spreads exposure to location risk and portfolio decay/price risk > Current commercial contracts market clearing at low/negative margins for risk
60 50 40 30 20 10 0 FY2009
FY2010
FY2011
FY2012
FY2013
SALES PORTFOLIO
Industrial
Commercial
Residential
8,000 7,000 6,000 GWh
> risk managed with additional thermal utilisation and contracts
70
5,000 4,000 3,000 2,000 1,000 0 FY2009
FY2010
FY2011
FY2012
FY2013
OPERATIONS
CFD and ASX INDUSTRIAL CFD SALES
> Industrial Sales CFDs
Kawerau Contract
> 30% of total sales and 75% of net CFDs
GWh
> Fixed Price Fixed Volume contract, typical in Industrial sales channel > buyer takes some volume risk compared to FPVV contracts, CFDs normally priced accordingly
2,500 2,000 1,500 1,000 500 0
> Inter-generator CFDs
> ASX futures market > exchange traded market for quarterly futures contracts
FY2010
FY2011
FY2012
FY2013
3,000 2,000 GWh
> 15% of net CFDs
FY2009
NET INTER-GENERATOR CFD*
> generators use CFDs to manage fuel, plant and transmission outages > ASX and broker markets provide useful reference for OTC markets
Other Industrial Sales
1,000 0 -1,000 -2,000
FY2009
ASX CFD
> Mighty River Power participates as a Market Maker
FY2010
Buy CFD
FY2011
FY2012
FY2013
Sell CFDs
600 400
> 10% of net CFDs
200
GWh
> useful alternative for hedging inter-island risk
Location Hedging
0 -200
*Includes VAS on both buy and sell side CFDs
-400
FY2009
FY2010
FY2011
FY2012
FY2013
OPERATIONS
How is our portfolio placed to respond to short-term market conditions? > Base-load geothermal and all-year -round rain-fed Waikato hydro delivers reliable generation compared to other renewable portfolios > South Island hydrology is negatively correlated to wholesale price. Taupo inflows are typically not correlated which limits downside variability but has the opportunity for upside > Flexible gas generation delivers peaking capacity and hydro firming for dry year risk mitigation (~1000GWh of potential Southdown) > All generation located in the central North Island in close proximately to growing parts of the economy – less basis risk TAUPO AND SI STORAGE PERCENTAGES AND MEANS 100%
80% 70% 60% 50% 40%
North/South # of QTRs Wet/Wet 11 Wet/Dry 4 Dry/Wet 5 Dry/Dry 1
30% 20% 10%
Dry/Dry
Taupo storage %
SI Storage %
Mean Taupo Storage %
Mean SI Storage %
80% Mean SI Storage %
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
0%
Jul-08
Storage Percentage of Average
90%
OPERATIONS
Risk Management Processes Risk Assurance and Audit Committee Executive Risk Management Committee BACK OFFICE Administration of transactions/cash flows
FRONT OFFICE Customer and competitor facing transactions
MIDDLE OFFICE Position, Credit and Exposure Control
External relationships
Transaction Confirmation
Reconciliation
Competitor Insight
Counterparty Credit
Settlement
Market Insight
Accessed Credit Exposure
Debt Management
Offer and Acceptance
Policy Compliance
EA Notification
Market and Credit Risk Management Policy
Board
MARKET DYNAMICS
Market regulation > Energy prices for end consumers set by deregulated, competitive market forces > Deregulated wholesale market based on supply and demand established in 1990s, with full retail competition from 1998 > Transmission and distribution considered monopoly assets – ownership separation from generation or retailing businesses and separately regulated
> Independent Regulatory Agencies > Commerce Commission – competition law and determination of returns for regulated asset base > Electricity Authority (EA) is primary regulator of electricity markets - promotes competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers
> Framework has been settled since 1999 after a period of significant reform in mid to late 1990s
OPERATIONS
A well functioning market > Current market structure has led to highly competitive market which has resulted in world-leading outcomes: > 1,200MW renewable investment over last 10 years displacing fossil fuel > best generation projects brought to market first > security of supply highest for two decades > retail churn around 20% (second only to Victoria, Australia)
> Initiatives have seen further improvements in wholesale markets > transmission investment approvals/commisioning > increased liquidity and price certainty
> Retail markets can benefit from investment in wholesale market > Electricity Authority survey (February 2013) stated “prices in [this] market reflect the outcomes expected in a workable market� EA MARKET PERCEPTIONS SURVEY Retail
OTC
Futures
Spot
Instantaneous reserves
Frequency keeping
2013
2011 Source: UMR research
negative
positive
OPERATIONS
Transmission Pricing Review > The EA announced a new Transmission Pricing Mechanism (TPM) in October 2012 for consultation with proposed implementation in 2015 > The proposal was extremely complex, applied to all transmission (not just HVDC) and was retrospective in nature > Initial consultation attracted strong negative feedback by wide-cross section of submitters > EA has delayed proposed implementation date by one year and intends to release a further series of consultation papers on key elements of the proposal in FY2014 > Ability to recover generator charges key to any new proposal > Any decrease in Tiwai demand would change reallocation/beneficiaries
OPERATIONS
Transmission Pricing Review
OPERATIONS
Transmission
> lower opportunity for price separation between North and South Islands > increases South Island generators’ ability to compete in wholesale and end-user markets in the North Island > reduces risk of retailers competing against South Island generators in the South Island
Location factor
5
Bi-pole outages
4
HVDC Commissioned
3 2 1 Sep
Aug
Jul
Jun
May
Apr
Feb Mar
Jan
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
0
RELATIVE WHOLESALE PRICE – OTAHUHU TO WHAKAMARU 1.18 1.16 1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00
NIGUP Commissioned
01 Oct 06 Oct 11 Oct 16 Oct 21 Oct 26 Oct 31 Oct 05 Nov 10 Nov 15 Nov 20 Nov 25 Nov 30 Nov 05 Dec 10 Dec 15 Dec 20 Dec 25 Dec 30 Dec 04 Jan 09 Jan 14 Jan 19 Jan 24 Jan 29 Jan
> HVDC Pole 2 control systems commissioning underway
RELATIVE WHOLESALE PRICE – OTAHUHU TO BENMORE
Location factor
> Core infrastructure for electricity markets > Underpin national competition for customers Transmission upgrades > Transpower $3.5 billion programme expected to complete in March 2014 > North Island Grid Upgrade Programme (NIGUP) providing improved security of supply commissioned in October > Wairakei Ring providing increased transfer through central North Island > High Voltage Direct Current (HVDC) Pole 3
OPERATIONS
Reinvestment capital expenditure > $72 million of reinvestment capital expenditure for FY2014 > two wells at Kawerau and on-going hydro lifecycle work
> Higher than average reinvestment capital expenditure for the rest of the decade given the hydro lifecycle programme > Arapuni generators - three complete; all four competed end of 2013 > Ohakuri runners - two complete and all four expected to be complete at the end of FY2014 > Next phase of programme will focus on Whakamaru rehabilitation
> Geothermal reinvestment capital expenditure is lumpy as the sustainable resource is managed > dynamic system in which we manage around 200 wells > On-going requirement for make-up wells > released drilling rig in September on completion of Kawerau wells > completion of almost ten years of continuous drilling
OPERATIONS
Market Dynamics > Operate in a highly competitive and well-functioning market that has led to world-best outcomes > for security, level of renewables and resilience to future fuel shocks
> Our portfolio well positioned for demand-supply dynamics > current excess capacity, reflecting flat demand and increased renewable generation > potential for future reductions in excess capacity, as more flexible take-or-pay requirements lead to further response from fossil fuel generators
> Inherent portfolio advantages means greater earnings surety under most market conditions, including weak hydro conditions > Centralised management of wholesale price risk and optimising value across integrated portfolio
Retail Capital Markets Day
Presented by: Matthew Olde Acting General Manager Retail
Bryan Dobson Sales, Marketing and Service Manager
Luke Blincoe GM Bosco Connect and GLO-BUG
RETAIL
Retail > Retail responsible for: > Marketing and selling electricity to residential and business customers through Mighty River Power’s consumer brands (Mercury Energy, GLO-BUG, Bosco Connect and Tiny Mighty Power) > Managing customer segmentation and mix to maximise value
RETAIL
Retail FPVV BUSINESS AND RESIDENTIAL SALES 6,000
MIGHTY RIVER POWER RETAIL ELECTRICITY CUSTOMERS BY BRAND (FY13)
5,000
GWh
4,000 3,000 2,000 1,000
Other 44,504
FY09
FY10 FY11 FY12 Business Residential
FY13
FY14 PFI
MARKET SHARE OF NATIONAL DEMAND (EXCL TIWAI) 40,000
GWh
Mercury Energy 349,833
GLO‐BUG Tiny Mighty 16,956 Power 16,567 Bosco Connect 10,981
30,000
18%
19%
21%
21%
21%
22%
FY08
FY09
FY10
FY11
FY12
FY13
20,000 10,000
(note: excludes gas customers)
Rest of Market excl Tiwai
MRP Sales volumes
Source – Transpower information exchange, MRP data
RETAIL
Competitive Landscape > Retail competition a key focus for the Electricity Authority (EA): > What’s My Number campaign impact > increased liquidity in hedge markets, reduction of basis risk through transmission investment allowing more flexibility in retailer portfolio mix, and model use of systems agreements > EA currently reviewing options to reduce participant prudential requirements and further increase consumers’ propensity to compare and switch retailers
> High security margins drive elevated competition levels
% of annual customer churn
CUSTOMER ELECTRICITY SWITCHING RATES BY MARKET 30% 25% 20% 15% 10% 5% 0%
2010
Source – VaasaETT
2011
2012
RETAIL
Competitive Landscape > Mass market switching activity approaching the 2011 peak, especially in Auckland > Despite being over-represented in Auckland (68% of Mighty River Power customers Auckland-based), retail book churning below market average > Grew mass market volume since FY08 ahead of increase in retail competition backed by additional generation capacity MIGHTY RIVER POWER ICPS & SHARE OF CONSUMPTION 450
25%
24%
400
ICP's (000's)
20%
15%
10%
350
22%
300
20%
250
18%
200
16%
150 14%
100 5%
12%
50 -
10% FY08 FY09 FY10 FY11 FY12 FY13
AKL Market Churn
NZ Market Churn
Mercury AKL Churn
Mercury NZ Churn
Source: Electricity Authority
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
0%
Non Auckland Auckland Share of NZ Consumption (excl. Tiwai)
MRP Market Share %
RESIDENTIAL CUSTOMER SWITCHING IN AUCKLAND & NZ
RETAIL
Mass Market Pricing > Headwinds in mass market pricing due to the supply / demand balance and increased competition > Headline prices not reflective of offers and discounts offered in the market > Lines and transmission charges typically make up 40% of end prices AVERAGE DOMESTIC ENERGY PRICE BY RETAILER FOR NZ: 2006 - 2013 18
PROPORTION OF MERCURY CUSTOMERS ON HEADLINE PRICING 2009 3%
17 16 c/kWh
15 14
97%
13 2013
12 11 10
39%
May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Contact Energy Mercury Energy TrustPower TrustPower Friends Extra
Genesis Energy Meridian Energy Contact Energy Online OnTime
61%
Source: Ministry of Business, Innovation & Employment & MRP Analysis
Non Standard Pricing
Headline Pricing
RETAIL
Contract Market > Increased market activity evident in the commercial contract and CFD markets > Successful in increasing commercial book in 2012 before ASX markets fell. Average contract tenure 2.8 years > Successfully contracted volume ahead of Ngatamariki commissioning > Recent market pricing not aligned with Company view of return for risk COMMERCIAL FPVV SALES VOLUMES & PRICING 10.5
800
10.0
700
9.5
c / kWh
9.0
500
8.5 400 8.0 300
7.5
200
7.0 6.5
100
6.0
0 Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
MRP FPVV Commercial Sales Volumes Source – Energy Link, ASX, MRP data
Mar-12
Jun-12
Sep-12
Energy Link FPVV Index
Dec-12
Mar-13
ASX OTA
Jun-13
Gwh per quarter
600
RETAIL
Cost Management > Whilst acquisition costs correlate to the level of switching activity, underlying OPEX continues to be actively managed, partially mitigating the cost of increased churn > Reductions in underlying costs reflect process efficiencies in billing, credit and service functions RETAIL OPERATING COSTS 25%
100%
20%
80% 70%
15%
60% 50% 40%
10%
30% 20%
5%
10% 0% FY09
0% FY10 Acquistion Costs
FY11 Servicing Costs
FY12 Mercury Churn %
FY13
% Churn
% of FY09 Operating & Direct Cost Base
90%
RETAIL
> A sustained focus on credit assessment, collection efficacy and leveraging prepay is resulting in lower bad debt write-offs than industry > Guiding principles for debt management focus on early intervention and appropriate payment solutions > Mercury disconnection rates are falling
Average write-off per ICP
Debt Management and Disconnections WRITE-OFF COST PER ICP (2012) 80 60 40 20 0
CREDIT PERFORMANCE 0.40%
0.70%
0.35%
0.60%
0.30%
0.50%
0.25%
0.40%
0.20%
0.30%
0.15%
0.20%
0.10%
0.10%
0.05% FY09
FY10
Net debt write-offs as a % of revenue Arrears disconnection rate - Industry Source – Electricity Authority, MRP data
FY11
0.00% FY12
FY13
Arrears disconnection rate - Mighty River
Disconnection rate
Net debt write off rate
Source – Veda, Electricity Authority
RETAIL
Consumer Brands > A multi-brand strategy enables a tailored customer experience and cost efficiency
Brand
Established
Customers
Description
Service Experience
1993
350,000
• Mass market, multi‐ segment • Scale operation
• • • •
2006
10,000
• CBD apartments • Low cost operating model for low consumption, high turnover segment
• Concentrates on low‐cost service channels • Delivers better value to both customer and retailer as a result
2008
17,000
• Smart meter prepay product • Pay‐as‐you‐go budget management service
• Online and app‐based self‐service, pay‐service call centre available • Uses technology including in‐home display and smartphones to deliver more control to the customer • Eliminates credit management cost
2009
17,000
• Regional towns • Local presence, community engagement
• Full‐service decentralised call centre • Regional, personalised service proposition
Full‐service call centre Comprehensive online service suite Multiple communication channels Increased use of online and email channels for both marketing and service
RETAIL
GLO-BUG > GLO-BUG is a smart meter and cloud hosted prepay solution that provides a range of tools (IHD, smart phone apps, web) to help customers manage their energy account more easily > Delivers a socially responsible solution by reducing the total cost of energy for most credit distressed customers through avoided fees associated with late payment behaviour > on average a customer migrating from Mercury to GLO-BUG reduces their total cost of energy by around $300 on average
> GLO-BUG well positioned to benefit from wider use of credit checking; Meridian and Mercury refer credit distressed and credit check fail customers to GLO-BUG > Recognised industry solution > transfer of Meridian prepay customer base > won the Innovation Award at the Deloitte Energy Excellence Awards in 2012 GLO-BUG CUSTOMERS 20,000 16,000 ICPs
12,000 8,000
Includes transfer of Meridian prepay customers
4,000 Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
RETAIL
Tiny Mighty Power > Distributed contact centre in selected towns enables lower operating costs and more effective engagement through community presence (e.g. Schools programme) > Sustained local presence enables higher market penetration (in the towns) than could be achieved with the traditional retail approach of one-off acquisition campaign Area (Market Entry) Marlborough (Sep 10) Whakatane (Jul 12) Waipa (Nov 09) Wairarapa (Aug 10) Thames Valley (Sep 10) Rotorua (Jan 13) Taupo (Jan 13)
TINY MIGHTY ICPS 18,000 16,000 14,000 12,000
8,000 6,000 4,000 2,000
Source: Electricity Authority
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
ICPs
10,000
Market Share % 15.7% 14.6% 13.4% 10.7% 3.3% 1.2% 1.0%
RETAIL
Innovation > Focused on strengthening customer relationship beyond basic electricity supply: > 43k dual fuel customers (since April 2002) > 35k Star Supporter Club members donating $850k p.a. to Starship via monthly bill (since May 2004) > 36k Mercury Perks members receive entertainment, travel, food and wine discounts (since April 2010) > 95k residential customers on fixed price contracts (since November 2010) > 65k GEM users to date, incl. >60% repeat users (since March 2013)
MERCURY ENERGY RESIDENTIAL PRODUCT PENETRATION 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun-09 Electricity only
* Products include: Dual Fuel, Fixed Price Contracts, Mercury Perks, Star Supporters Club, Active GEM users
Jun-10
Jun-11
2 products
Jun-12
3 products
Jun-13 4+ products *
RETAIL
Innovation > The Good Energy Monitor (GEM) is delivering increased customer engagement > Active GEM users display higher level of satisfaction and lower likelihood to switch CUSTOMER PERCEPTIONS SINCE LAUNCH OF GEM
% of Mercury customers that agree
60%
50%
40%
30%
20%
10%
0% Innovative and Progressive
Save energy Leading the way Comes up with and money new ideas
Feb-13 Source: Colmar Brunton
Jun-13
Offers something different
Appeals to you Takes away the more hassle
RETAIL
Demo of GEM live $#
Metrix Capital Markets Day
Presented by Matthew Olde GM Business Strategy & Solutions
Tim O’Halloran GM Metrix
METRIX
Introduction > Technology Business > Advanced Metering Infrastructure (AMI) and Services
METRIX
Business model > Three key components underpin a flexible business model > buy and deploy AMI or leverage third party AMI > operate AMI control systems and manage rich information > deliver AMI services and field services for retailers or their agents
AMI TECHNOLOGY
METRIX SYSTEMS
CUSTOMERS
P2P AMI Retailers Retailers Service Integration
Distribution networks
Collector Field Services Mesh AMI
METRIX
Client base > Increased electricity retailer ICP churn provides opportunities for increased deployment
CLIENT BASE JUNE 2013
Contact 13% Meridian 7% Glo-Bug 7%
Other 11%
Mercury 61%
Powershop 4%
Genesis 3%
Other 3% Bosco 1%
METRIX
Enabling retailer propositions > AMI propositions are now coming to life > Mercury - Good Energy Monitor > GLO-BUG Prepay/GLO-BUG and IPHONE > Powershop > Contact Energy
METRIX
The AMI market in Auckland > > > >
Metrix has a long heritage in New Zealand’s biggest retail/residential market Now 85% deployed with AMI Metrix holds 70% market share Ongoing deployment programme in Auckland
AUCKLAND AMI METERING MARKETS JUNE 2013
Metrix AMI AMS AMI Legacy
METRIX
AMI market nationally Market structure > Rollout of AMI is driving market consolidation in electricity metering > Three AMI providers now deployed 50% AMI > Retailer-led model > Beginning to see maturity in service interoperability among the three AMI providers
JUNE 2013
Metrix AMI, 329 Legacy upgrade assigned, 577 Other, 1043 AMS AMI , 505 Legacy upgrade uncommitted , 466 Arc AMI , 135
METRIX
The AMI market nationally Operating environment > Expect stabilisation following recent, extensive changes to the electricity metering regulations > Significant investment in systems interface with the Electricity Registry completed > Compliance deadline of 1 April 2015 rapidly approaching for Category 1 metering installations > all metering installations up to 3-phase 100 Amps require full certification
> Elevated levels of Electricity ICP churn
METRIX
Operating statistics > $101m of capital expenditure over the last five financial years > EBITDA doubled from FY2009 to FY2013
Year ended 30 June
FY2013
FY2012
FY2011
FY2010
FY2009
8.4
16.6
33.0
25.8
17.1
314,586
281,340
240,586
120,877
35,104
Legacy Meters
58,663
84,405
121,726
192,213
279,119
Legacy Meters – 3 phase
23,908
25,673
33,005
33,296
32,542
Load Control (hot water)
270,332
268,163
252,380
227,504
226,239
13,586
14,679
15,198
14,765
12,095
681,075
674,260
662,895
588,655
585,099
Capital Expenditure ($m) AMI
Pre‐pay Total Assets
METRIX
Growth opportunity Expansion activity > Deploying AMI into new regions for Mighty River Power consumer brands > Providing exclusive AMI services on the Counties Power network > Further AMI opportunities available in the market
Capital investment > Future capex spend depending on growth opportunities around $20m - $40m p.a. > PFI FY14 forecast was $12.8m
> Revenues flow immediately following deployment
Development Capital Markets Day
Presenters: Mark Trigg GM Development
Samuel Moore Manager Strategy & Planning
Dennis Radich Generation Development Manager
DEVELOPMENT
A significant role in both of the Company’s core business strategies > Maximising the value of the existing business > Technical Resources Team (Rotorua) provides specialist technical services to Operations through Geoscience; Reservoir Engineering; Asset Management; Well Services; Chemistry
> Securing economically attractive development options > Business Development Team (Auckland based) > Chilean operations and development team (Santiago based)
DEVELOPMENT
The trend in the domestic market required an adjustment to strategy > Reset the level of domestic activity > maintain a small number of long-dated options with sufficient diversity of scale, fuel type and technology > align the resourcing to match the reduced activity levels > consider the optimal configuration of existing gas generation
> Increase our focus on existing investments in offshore jurisdictions > removed the intermediary between the Company and its offshore investments in Chile and California, enabling significantly greater direct management involvement > fully controlled entity in Chile > Board representation, management and technical collaboration in EnergySource (California)
DEVELOPMENT
Domestic activity curtailed consistent with demand requirements > Small focused number of opportunities being maintained > wind and geothermal preferred
> Other lesser opportunities abandoned > Lower touch/lower cost approach as we await market recovery > Significant reductions in resourcing undertaken or planned > headcount peaked at circa 150 (inclusive of Chile) during Ngatamariki construction > trending towards 90 > 2/3 in technical resources
DEVELOPMENT
A strong position in wind has been created > Two very high quality, consented Class 1 (high wind speed) sites South East of Palmerston North > Fully consented 220kV transmission line route to link projects to the Transpower grid > Transmission line consent large enough to accommodate all four wind projects in the area (note Waitahora & Castle Hill consented without transmission) > Staged execution options to meet market opportunities > Also a third (earlier stage) Class 1 site, Cape Campbell, in Marlborough with long-term development rights
DEVELOPMENT Offshore an opportunity to leverage niche capabilities and create a new growth channel > The Company has, during the 10 year period of domestic development, built up institutional knowledge in > geothermal risk assessment > development capability > technical resource capability > geothermal operations
> The small size of the global geothermal market created opportunity to leverage that strategic advantage not held in any other fuel sources > Additional risks in new jurisdictions offset by diversifying existing risks > soft domestic market with increased regulatory uncertainty > long term domestic contract price uncertainty
> Route to maintain institutional knowledge in absence of new domestic opportunity > Consider the programme as a continuous one, not bounded by geography per se > US-based John L Featherstone plant (HR1) in commercial operation prior to completion of Ngatamariki, first evidence of that transition > further Salton Sea (US) development seen as next most likely project
DEVELOPMENT
After five years we have created a platform from which we can control future direction > Created the opportunity to consider a number of development options via GeoGlobal Energy (GGE) that would have been inaccessible otherwise > Have direct control of those investment opportunities we elected to pursue > direct investment in EnergySource with a preferred position in John L Featherstone plant > direct ownership of Chilean entity and resource rights > financial interest in German assets currently under management control of GGE, but including a repurchase option (nominal cost) should certain financial criteria not be met by GGE
> Transformed the structure of original investment (designed to meet SOE constraints) to enable direct management and control > absorbed the management of the assets / investments into our own development structure with significantly reduced cost > closer alignment of incentives between partners > leverage of existing resources and systems that successfully delivered the domestic programme over the past decade > apply patient approach to development as required with full control over capital allocation decisions
DEVELOPMENT
Investment in John L Featherstone has already paid dividends > Initial USD92m investment > 20% holding in EnergySource > preferred equity interest in John L Featherstone Plant > post construction refinancing led to lump sum distribution of USD118m
> Post tax cash flow returns influenced by “flip” dates > circa USD1m until tax equity flip forecast in late 2017 > circa USD4.5m from then until MRP “preferred” return completed in 2021 > circa USD2m thereafter
> Resourcing > EnergySource has operational and development teams based in San Diego and Salton Sea > hold one (of three) board seats > interaction at management and technical levels giving direct access to information
> Hudson Ranch II > EnergySource has PPA for a further project > has additional land
DEVELOPMENT
Salton Sea represents a significant opportunity > Field > Cal Energy has operated 10 plants with 327MWe net (340MWe gross) since 2000 > no make-up wells required to support pressure decline (small number due to well condition)
> State > ongoing significant retirements of gas plant due to restrictions on ‘Once Through Cooling’ > San Onofre (2200MW nuclear) closure > geothermal baseload characteristics / benefits are starting to be recognised in context of large amount of intermittent renewables
> But we are mindful of > Californian utilities near the 20% Renewable Portfolio Standards requirements but some way to go to reach 33% requirement by 2020 > longevity of federal tax incentives always uncertain
US GEOTHERMAL FIELD BY RUNNING CAPACITY Geysers Salton Sea Coso
Running capacity
Heber Steamboat East Mesa
Additional resource potential
Dixie Valley Blue Mountain Roosvelt Puna
0
500
1,000
1,500
MW Source:
Running Capacity: International Geothermal Assn Database Additional resource potential: Western Governors' Association Geothermal Task Force Report, Jan 2006
> Future > Mighty River Power elected not to exercise its option to increase its stake to 33% - value based decision > discussions are ongoing with partners about alternative mechanisms by which we may increase our participation > access to greater acreage of development land would enable participation in huge potential of field
DEVELOPMENT
Chile overview PUCHULDIZA
Geothermal potential > Large number of geothermal fields throughout Chile > Mighty River Power has direct ownership of two of the top concessions: > Tolhuaca (central Chile) > Puchuldiza (northern Chile)
Market potential > > > > > >
Strong growth economy (resources driven) Strong electricity demand growth Recognized electricity supply challenges Politically stable Good regulatory regime and established institutions Deep and sophisticated capital markets for infrastructure investment > Long term attractive outlook
SANTIAGO
TOLHUACA
DEVELOPMENT
Chile is a strong demand growth market 70,000 60,000 40,000 30,000 20,000 10,000 0
> Regulated client (distributor/retailers) tender market
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Source:
Chilean Ministry for Energy
TOTAL SIC NETWORK GENERATION 60,000 50,000 40,000 GWh
> “Free client” market for bilateral contracts with large end users >2MW
1990‐2011 CAGR: 6.4%
50,000 GWh
> Average historical electricity demand growth rate of >6% p.a. > Demand driven both by commodity export sector and increasingly by domestic demand (middle class expansion from 1990) > Two contracting markets for generators to sell into:
TOTAL ELECTRICITY DEMAND
30,000 20,000 10,000 0
Source:
Hydro CDEC‐SIC
Thermal
Other
DEVELOPMENT
Supply challenges driving favourable price outlook SIC SPOT PRICES
US$/MWh
> Chile imports about 75% of its total primary energy supply > Beginning in 2004, Argentina curtailed exports of natural gas to Chile > Base load generation historically dominated by coal and hydro > Energy price outlook reflects likely dependence on imported LNG for new (CCGT) capacity
400 350 300 250 200 150 100 50 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
> growing opposition to new coal & hydro > some gas-fired plants converted to liquid fuels
Source:
REGULATED CLIENT DEMAND 50,000
> LNG import capacity constrained
40,000 GWh
> Renewables targets increasing* from 10% to 20% by 2025 > Non-conventional renewable energy credits available for geothermal generation > Generators are paid a firm capacity charge for being available
Spot price at Temuco 220kV node CDEC‐SIC
30,000 20,000 10,000 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Contracted volume * Passed by Senate; now back with Congress
Source:
CNE
Regulated client demand
DEVELOPMENT
World geothermal players are active in Chile > Large number of exploration concessions have been granted > Some of world’s largest geothermal companies are present
> All attempting to solve similar issues of bridging geothermal potential with market opportunity > Starting to see consolidation and exit over time of more speculative resource holders > Potential for further consolidation of industry as experienced developers optimise portfolios and speculators exit > Mighty River Power’s current focus > de-risking project execution through commercial partnerships > revenue security (e.g. PPA) > deepening understanding of resource position > sizing the local platform to near term activity levels
DEVELOPMENT
Successful geothermal development requires recognition that > Patience is necessary > Successful partnerships require alignment of incentives and preferably > complementary strategic capabilities > robust financial capacity of each partner
> Scale becomes valuable to spread technical platform costs > Risk diversification is valuable > through multiple fields for resource diversity > different jurisdictions enable regulatory and pricing risk diversity
> A detailed understanding of market dynamics is important > a core strength in our home market > a key strategic capability sought in partners for other jurisdictions
> Staged development is a rational response to long-term resource uncertainty > Overheads need to be managed through the development cycle
2 October 2013
Capital Management Capital Markets Day
Presented by: William Meek Chief Financial Officer
Tim Thompson Treasury Manager
CAPITAL MANAGEMENT
Capital Structure Disciplined approach to capital allocation > Balance sheet consistent with a stand alone credit profile of ‘bbb’ by S&P (or equivalent)1 > Dividend policy targets dividend yield attractive to shareholders while cognisant of a sustainable financial structure > working capital requirements > the medium term asset investment programme > short to medium term risks on earnings
> Focus on maintaining an appropriate portfolio of high quality investment opportunities > evaluate against all competing uses for cash
> Capital management is addressed on an ongoing basis by management and the Board
1.
2.
Mighty River Power’s BBB+ corporate credit rating reflects S&P’s view that in the event of financial distress there is a “moderate” likelihood of the New Zealand Capital management as normal business sovereign providing extraordinary support to ensure the company’s financial obligations are met in a timely manner. practice Free Cash Flow defined as Operating Cash Flow after interest paid and tax less reinvestment capex
CAPITAL MANAGEMENT
Capital Allocation > FY2014 forecasts reflect full year cash flow contribution from Ngatamariki > FY2014 Capex forecast reduced relative to PFI to be in the range of $125m to $175m > FY14 PFI forecasts dividend of $182m (13 cents per share) > forecast Payout 107% of adjusted Net Profit and 71% of Free Cash Flow > gross yield circa 8% (fully imputed)
> Modest deleveraging forecast if capex at low end of forecast range > On-going focus on sustainable earnings looking forward driven by: > normalisation of generation output (average hydro, full year of Ngatamariki) > improvements in business wide effectiveness and efficiency
* Other cash flows from investing and financing activities as disclosed in Mighty River Powers FY2013 financial results and prospectus
CAPITAL MANAGEMENT
Balance sheet management > Mix of short and long term funding > weighted average maturity exceeding 5 years
DEBT MATURITY PROFILE AS AT 30 JUNE 350
> $300m of new facilities arranged in FY2013 ($200m of bank and $100m of domestic wholesale bonds)
300
> no maturing facilities in FY2014 (excluding CP)
250
> option to convert RCAF into longer term debt > $475m of committed but unutilised bank facilities > $100m of commercial paper outstanding
> Cost of Funds
150 100 50 0 2026
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
> cost of funds likely to remain at current levels until 2018 due to long term hedging undertaken in 2008 prior to ramp in capex/debt to support geothermal development programme
200 $m
> Liquidity
Financial Years Drawn Undrawn1 375
100 125
550
260
Facility Type ($m) 1. $100m of outstanding commercial paper deducted from undrawn debt 2. USD proceeds fully swapped to NZD via cross currency swaps
RCAF - Undrawn RCAF - Drawn US Private Placement22
RCAF - Undrawn: CP Cover Wholesale Bonds
CAPITAL MANAGEMENT
Balance sheet management INTEREST RATE HEDGING 1400
8.0%
7.0%
1200
> reduce funding and liquidity risk and provide cash flow certainty in the medium term
6.0%
1000
> most swaps not hedge accounted currently so fair value movements recognised through P&L
> The significant fall in interest rates in NZ (and globally) post 2008 has resulted in these hedges being out of the money
$m
> to reduce P&L volatility accounting policy now requires all new hedges to be hedge accounted
5.0% 800 4.0% 600 3.0% 400
2.0%
> FY2013 fair value benefit of $25.6 million
1.0%
0
Debt
FY2013
FY2012
FY2011
FY2010
0.0% FY2009
> Debt re-financing has negligible impact on cost of funds excepting credit spread which is largely driven by debt market and term > Cost of funds will be higher than benchmark funding rates until hedges expire in 2018
200
FY2008
> FY2012 fair value cost of $92.8 million
10yr IRS (Annual Average)
Swap Rate (%)
Cost of Funds > Term funding and interest rate hedging (swaps) undertaken prior to undertaking geothermal development programme
CAPITAL MANAGEMENT
Capital expenditure > $1.4b invested in geothermal domestically since 2006
CAPITAL EXPENDITURE 450
> cumulative revaluations of new geothermal assets exceed $0.5b at 30 June 2013
280
200
274 173
225 119
100
66
57
26
74
69
72 FY2014F
53
50 0
50
FY2013
150
44
FY2012
> contingent provision capex largely relates to offshore geothermal, discussing alternatives at Energy Source
10
FY2011
> other capex includes AMI
38 250
FY2010
> $13m for Ngatamariki carried forward from FY2013
14
300
FY2009
> Reinvestment capex $72m (2 new wells at Kawerau and on-going hydro lifecycle refurbishment)
42
350
$m
> Lower capital expenditure forecast on a go forward basis reflecting no large scale domestic generation development programme > FY2014F capital expenditure reduced to $125m - $175m (PFI: $199.1m)
400
Potential other new investment
Other new investment
Geothermal
Reinvestment
CAPITAL MANAGEMENT
Capital Structure > Mighty River Power Board is committed to maintaining a ‘bbb’ stand alone credit profile > S&P favour the use of cash flow metrics to assess the financial risk profile of the company > key comparative measures for Mighty River Power and it’s peers are Funds from Operations (FFO) coverage and leverage metrics FFO / DEBT*
FFO INTEREST COVERAGE* 7.0
45%
6.5 FFO Interest Coverage (x)
50%
35% 30% 25% 20% 15% 10%
6.0 5.5 5.0 4.5 4.0 3.5
Financial Years Mighty River Power
Contact
2014
2013
2012
2011
2010
2009
2014
2013
2012
2011
2010
2009
2008
3.0 2008
FFO / debt (%)
40%
Financial Years Meridian
Genesis
Mighty River Power
Contact
Meridian
Genesis
> Mighty River Power metrics presently tighter than competitors > Key credit metrics expected to improve in FY14 due to lift in earnings from removal of oneoff costs and commissioning of Ngatamariki *Calculated using S&P existing criteria and metric definitions Source: S&P Credit Reports and Mighty River Power calculations based on publicly available information
CAPITAL MANAGEMENT
Credit criteria > S&P is currently reviewing the criteria for rating corporate industrial companies and utilities > stated rationale being to make the ratings process more transparent and comparable across industries and jurisdictions
> Criteria for intermediate risk, standard volatility unchanged from 2009 core ratios but S&P specifics to NZ generators historically lower than published ratio bands > FFO/debt: 30-45%, Debt/EBITDA: 2-3x > we believe S&P are potentially seeking to pre-empt impacts on ratios when interest rates rise given currently record low rates globally
> S&P have indicated that the new criteria will likely be in place from the start of calendar year 2014 > consultation was concluded in September 2013
> S&P have indicated that 10% of credits will likely be affected . > the likelihood of upgrades and downgrades across all S&P credits has been assessed as equal by S&P
CAPITAL MANAGEMENT
Sustainable earnings focus > Weak demand and supply conditions means the company has moved from growth phase to consolidation phase > potential for demand/supply surprises particularly on supply side reflecting thermal response > FY2014 EBITDAF guidance confirmed at PFI levels > generation down over 260GWh against expected levels in Q1 FY2014 > Ngatamariki commissioned and handed over. Generation over Q1FY2014 similar to forecast but income recognition two months later than expected > improved LWAP/GWAP ratio due to peakier hydro profile and NIGUP improving location factor between generation and Auckland. > FY2014 PFI operating expenditure of $250.5 million > FY2013 operating expenditure at $318.7 million included $68.7 million one-off IPO and international geothermal related costs - $250.0 million > FY2012 operating expenditure of $264.4 million included $10.0 million one off costs - $254.4 million > Capital markets insights coupled with review processes have identified focus areas to drive sustainable earnings > in Q4 FY2013 saw $18.4 million savings –two thirds of which are permanent savings > Group-wide efficiency and effectiveness programme underway to deliver sustainable benefits through time > rationalisation of suppliers, centre led procurement > right sizing business for current market environment and activity levels > consolidation of support services
CAPITAL MARKETS DAY
Capital management considerations > Sustained level of elevated reinvestment capital planned – c$10m p.a over rest of the decade > A lower requirement for domestic growth capex exists but capital required over medium term to advance international geothermal > Clarity required around new S&P credit criteria connected to sustainable financial structure > A number of capital management options exist in absence of growth investments > change to ordinary dividend: Policy needs to be sustainable and cognisant of rating, working capital requirements, the medium term asset investment programme and earnings volatility > special dividend: one-off return of excess capital but cognisant of the above, unimputed if large > share buy-back: would need to be in the best interests of the company and shareholders
> Dividend policy > policy expressed as 90% - 110% of adjusted profits cognisant of a sustainable financial structure, working capital requirements, the medium term asset investment programme and short to medium term risks on earnings > FY2014F dividend declared of 13 cents/share. Forecast to be fully imputed –a further 3 cents worth of imputation credits available as at the end of FY2014 > 71% of free cash flow (FY2013 pay-out was 78% of FCF)
> Capital management outcomes will be announced at ASM (7 November 2013)