7 March 2013
Commerce Committee Financial Review for the 18 months ended 31 December 2012
Presented by:
Joan Withers Chair
Doug Heffernan Chief Executive
COMMERCE COMMITTEE
About Mighty River Power > A leading integrated New Zealand electricity company > More than 90% of generation from renewable sources – New Zealand’s only large, renewables dominated energy company with both hydro and geothermal generation (over 30% of production) > Generates 17% of New Zealand’s electricity > Supply nearly 1-in-5 homes and businesses, with retail brands Mercury, GLO-BUG, Bosco Connect and Tiny Mighty Power
> Investment track record and proven geothermal expertise > Successfully developed and commissioned 255MW of ‘premium’ renewable geothermal generation since FY2008 > Completion of 82MW Ngatamariki geothermal plant expected mid-2013 > Measured and prudent approach to international geothermal development opportunities
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COMMERCE COMMITTEE
FY2012 Financials > EBITDAF increased 4% to $461 million in line with increased guidance
> NPAT decreased to $68 million, reflecting significant non-cash changes in fair value of financial instruments
FY2011
FY2012
450 400 350 $million
> FPVV electricity sales prices and volumes to customers both increased 5% > Hydro generation down 2% reflecting lower inflows into the Waikato catchment in the last quarter, but still 294GWh above annual average
500
300 250 200 150 100
> Underlying earnings flat at $163 million reflecting increased operational earnings offset by increased depreciation and lower reported equity accounted earnings
50 0 EBITDAF
NPAT
Underlying Earnings Total declared dividend
> Declared total dividends up 9% to $120 million reflecting old dividend policy
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COMMERCE COMMITTEE
Partnerships > Long-term partnerships delivering inter-generational benefits. > financial returns by way of royalties and co-ownership in ventures > capacity development initiatives to build expertise of young people – apprenticeships through to graduate programs > Kaitiakitanga /Rangatiratanga– Landowners and Mighty River Power working together to develop their geothermal potential
> Key geothermal developments > Tauhara North No. 2 Trust (Rotokawa, Nga Awa Purua and Nga Tamariki) > Tuaropaki Trust, Mokai > Kawerau and Ngati Tuwharetoa > Okere and Ruahine Kuharua over the Taheke field for future developments
4
COMMERCE COMMITTEE
Our people & our Communities > Positive shifts in key employee engagement measures > Unlocking employee potential – leadership and development. > Enhancing technical specialist capabilities across the Company & industry; Apprentice Programme, partnering with Universities > High levels of stakeholder engagement and consultation
> Sponsorship; Starship Foundation/Star Supporters Club, Rowing NZ, Taupo Ironman, Waikato River Trails
-
5
COMMERCE COMMITTEE
Health and Safety > The health, safety and well-being of our people is an absolute priority > Better reporting supports more learnings and injury reduction > Near Miss Reported Incident Frequency Rate up 45% on pcp
> No employee Lost Time Injuries from July 2011 – February 2013 > HY2013: Total Recordable Injury Frequency Rate (TRIFR) down 46% on the pcp and down 73% on 2009 > Serious near miss drilling incident on site at Ngatamariki currently under investigation by High Hazards Unit > Contractor focus for future improvement – StayLive generation safety group TOTAL RECORDED INJURY FREQUENCY RATE 2.5
NEAR MISS REPORTED INCIDENT FREQUENCY RATE 12.0
2.0
10.0 8.0
1.5
6.0 1.0 4.0 0.5
2.0
0.0
0.0 HY2010
HY2011
HY2012
HY2013
HY2010
HY2011
HY2012
HY2013
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COMMERCE COMMITTEE
Electricity Generation > 1,597MW in operation (1,464MW by equity share), 82MW geothermal station under construction
> Diversified and flexible portfolio annual production increased by 3% to 7,068GWh in FY2012 > 61% hydro –peaking capacity with limited storage in Taupo lake; mainly rain fed (not snow fed) > 31% geothermal – high availability, low fuel cost renewable base-load – ‘premium’ renewable > 8% gas-fired – can take advantage of wholesale market opportunities and provides dry-year cover TOTAL GENERATION Biomass
Gas-fired
Hydro
Geothermal
8,000 7,000 6,000
GWh
5,000 4,000 3,000 2,000 1,000 0 2008
2009
2010
2011
2012
Financial year Note: Sold last of biomass operations in July 2010
Page 7
COMMERCE COMMITTEE
Electricity Sales > Physical sales (FPVV) volumes increased 5% to 5,021GWh, reflecting a strong increase in business volumes > Contract to move Meridian’s Christchurch pre-pay customers to GLO-BUG > More competition due to increased capacity and lower demand growth PHYSICAL AND FINANCIAL SALES Spot
CFDs
Business FPVV
Residential FPVV
12,000 10,000
GWh
8,000
6,000 4,000 2,000 0 2008
2009
2010 Financial Year
2011
2012
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COMMERCE COMMITTEE
Capital Expenditure – Update 31 Dec 2012 > Ngatamariki 82MW geothermal development > $402 million spent as at HY2013 > $318 million of which occurred in the last 18 months
> $88 million of geothermal capital expenditure relates to international geothermal in the last 18 months 400 Other new investment* Wind
350
Hydro 300
Gas-fired Geothermal (including GGE)
$million
250
Reinvestment
200 150 100 50 0 FY2008
* Includes smart meters
FY2009
FY2010
FY2011
FY2012
HY2013
Page 9
COMMERCE COMMITTEE
Market Dynamics – Demand > Electricity demand growth of 670GWh per annum from 1976 – 2007 (CAGR of 2.5%), 2012 demand back at 2008 levels due to weak economic conditions and lower demand from Tiwai Point aluminium smelter > 2012 consumption down 437GWh y-o-y reflecting a 9% fall in Tiwai point consumption (466GWh)
> Continuing decline in the industrial consumption reflecting > Efficiency gains > Electricity intensive manufacturing locating closer to customers > Decline of newsprint and global aluminium prices NEW ZEALAND ELECTRICITY CONSUMPTION GROWTH 6%
ELECTRICITY CONSUMPTION BY SECTOR – CY1999 – CY2011
5%
13,000
4% GWh
%
3% 2%
8,000
1% 0% 3,000
-1%
1999
-2% -3%
2001
2003
2005
2007
2009
2011
Industrial
1999
2001
2003
2005
2007
2009
2011
Commercial (including Transport, Agriculture, Forestry & Fishing) Aluminium
Annual Growth Rate
Annual Growth Rate (excluding Tiwai)
Residential
10
COMMERCE COMMITTEE
Market Dynamics – Supply > Hydro generation accounts for 55-60% of total electricity supply (South Island 70% of total, snowfed – negative correlation to demand; North Island 30% of total, rain-fed – correlated with demand) > Geothermal generation more than doubled in the past decade and is now third largest ‘fuel type’ – about 14% of New Zealand’s total annual electricity generation > Greater investment in geothermal and wind generation in recent years – wind now 4% of annual electricity generation > Role of gas-fired stations generally transitioning from CCGT to ‘peaking’ generation for periods of high demand and ‘firming’ generation for periods of adverse hydrology
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COMMERCE COMMITTEE
Domestic Development > 82MW Ngatamariki geothermal station > Staged commissioning of the four units beginning with first power to grid mid March
> Progressing other options ensures readiness when market conditions support investment economics
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COMMERCE COMMITTEE
International Development > Restructure of GGE relationship announced
> Mighty River Power to take direct control of: > GGE Fund’s minority interest in EnergySource > GGE’s interests in Chile, including Tolhuaca and Puchildiza development projects and operating business headquartered in Santiago
> Direct control enables us to leverage our New Zealand geothermal experience and capabilities > EnergySource has successfully developed a 49.9MW geothermal plant and is welladvanced on potential second development > Will continue to maintain a measured and prudent approach to international geothermal programme
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COMMERCE COMMITTEE
Metrix > Provides residential and commercial metering equipment, and related data and field services > Operates throughout the greater Auckland area and manages sub-contract relationships for manual meter reads for Mercury Energy nationwide > Auckland’s largest electricity meter asset owner (with over 400,000 meters as at 31 December 2012) > Deployed more than 305,000 AMI meters as at 31 December 2012 > Working with local lines company Delta, will commence deployment of smart meters for Mercury in Dunedin to meet increasing demand for services based on AMI technologies > Provides services to major electricity retailers > Continue to seek opportunities to grow asset base and deliver smart services to retailers AMI METERS 350,000 300,000 250,000 200,000 150,000 100,000
50,000 0 2008
2009
2010
2011
2012
As at 31 December
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COMMERCE COMMITTEE
GLO-BUG > GLO-BUG offer – technology innovation providing only smart meter based pre-pay electricity system in NZ
> Customers in control of their spend, avoid ‘bill shock’ > Supported by community and budgeting agencies > Have now completed transfer of approximately 5,000 of Meridian’s Christchurch-based PowerManager pre-pay customers to Mighty River Power’s GLO-BUG pre-pay system > Deloitte Energy award for ‘Innovation in Electricity’ GLO-BUG CUSTOMERS 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY2008
FY2009
FY2010
FY2011
FY2012 HY2013
15
COMMERCE COMMITTEE
Transmission Pricing Methodology Review > The Electricity Authority’s draft Transmission Pricing Methodology was issued in October for consultation
> HVDC cost allocation has been an area of long term contention across the industry and it was well signalled that HVDC cost allocation could change as a result of the Pole 3 upgrade > However, EA’s draft proposal applies to all transmission, not just the HVDC. > Application of the proposal is backward looking, resulting in a significant reallocation of sunk costs a highly unusual regulatory approach. > Extremely complex and consequently would have a high implementation risk. > Robust cost benefit analysis not been demonstrated, introducing the key risk of proposal leading to higher costs for consumers and a negative impact on retail competition > We believe best approach would be for EA to reconsider draft proposal and issue a revised approach for further consultation.
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COMMERCE COMMITTEE
HY2013 Highlights > Good operational performance > Increased market share of electricity sales to customers > Generation volumes up 1% reflecting strong hydro generation and geothermal reliability
> $140 million cash distribution but $89 million of non-cash accounting impairments
> NPAT up $58 million, reflecting increased energy margin, mixed results from our GGE investments, and lower fair value adjustments of financial instruments
> Underlying earnings up $32 million to $133 million > Declared interim dividend of $67 million reflecting the Company’s new dividend policy
250
200 $million
> Mixed results from international geothermal
HY2012 HY2013
300
150
100
50
0 EBITDAF
NPAT
Underlying Earnings
Total declared dividend
17
COMMERCE COMMITTEE
2013 To Date > Announced residential FPVV price changes effective as at April 2013 > Main factor pass through of lines company charges including transmission
> Severely reduced inflows since November saw Mighty River Power end the half-year with storage at 69% of our historical average > Storage fallen further through January and February; low rainfall impact on wider regional community > Increased use of base-load geothermal (not weather dependent) and flexible gas-fired generation
> Significant inflows into other generators’ South Island hydro lakes over summer; but South Island storage now below mean levels > Restructure of international geothermal interests giving Mighty River Power direct control and leverage of geothermal capabilities.
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7 March 2013
Commerce Committee Financial Review for the 18 months ended 31 December 2012
Presented by:
Joan Withers Chair
Doug Heffernan Chief Executive