THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPT MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation EVENT DATE/TIME: AUGUST 19, 2014 / 11:00PM GMT
1 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation
CORPORATE PARTICIPANTS Doug Heffernan Mighty River Power Limited - Chief Executive Fraser Whineray Mighty River Power Limited - Chief Executive-designate William Meek Mighty River Power Limited - CFO
CONFERENCE CALL PARTICIPANTS Andrew Harvey-Green Forsyth Barr - Analyst Nevill Gluyas First NZ Capital - Analyst
PRESENTATION
Doug Heffernan - Mighty River Power Limited - Chief Executive Good morning everyone. We've got people on the line. I'm Doug Heffernan, I'm the Chief Executive, for another couple of weeks, of Mighty River Power. With me today is Fraser Whineray, the Chief Executive-designate, and William Meek, Chief Financial Officer. Both William and Fraser will provide some of the commentary as we go along. I'll start off and talk about some of the highlights. I will draw your attention to the disclaimer and particularly the second paragraph from the bottom. We do have forward-looking statements, which includes guidance, but they are subject to material adverse events, including one-off expenses, other unforeseeable circumstances and particularly hydrological conditions. Turning to the highlights themselves, I guess phew, we got there. It was a really, really tough and challenging year but we did manage to meet the IPO forecasts and I think importantly, the way we were able to do that has positioned the Company very well for the future, and we'll talk about that a little bit later on. The market was more competitive than it has been in prior years, so the level of competition continues to ramp up, and of course we had the worst hydro sequence in the Company's 15-and-a-bit years history. The big thing was we were able to offset those adverse impacts with NZD30 million of operating expenditure reductions compared to that in the PFI. And we also made, and we signalled this at the half year, we actually made some important strategic changes in the portfolio. Again, we'll talk about that a little bit more. Our dividend you will have seen is up NZD0.05 on the NZD0.13 predicted in the forecasts, in the IPO, so a 4% lift, and that represents 72% of free cash. I mentioned the portfolio. Of the NZD30 million cost savings, NZD20 million of those are permanent and I think that's a really important thing as we took a hold of the Company in the last year and a bit and took account of the fact that demand conditions have been very flat and what we've done is I think position the Company very well for a potential of that continuing to be the trend for the future. Of course, if growth comes back to the market then we're very well-positioned to take advantage of that but we've got a business now that's much more resilient to the prevailing demand conditions. And then just finally around balance sheet, capital structure. Obviously a significant lower level of capital expenditure which has left us with NZD170 million odd less debt at year end, and importantly post balance date William and the finance team, treasury team have put in place a NZD300 mi llion capital bond with 50% equity credits. So that's important for creating some additional flexibility and optionality for the Company for the future. Guidance, I mentioned -- we all know this -- in the range NZD495 million to NZD520 million at the EBITDAF level, and of course subject to those provisos I mentioned earlier.
2 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Turning to the table on page 5. This is really a contrast of how the Company performed relative to the forecasts in the IPO, and the guidance that we gave through FY14. I guess the three I'd just draw your attention to, EBITDAF, NZD6 million up on the forecast. Underlying earnings, a significant lift on what was in the forecast but that was well-signalled through the year with a guidance range of NZD175 million to NZD185 million, so we ended up at the top end of the guidance range. And CapEx, as I mentioned, significantly lower by some NZD100 million odd. Slide 6. So it's contrasting key financial metrics versus the prior year, and I guess you could look at that and say it was a clean sweep. Capital expenditure is significantly lower. Obviously that's good from the point of view of cash within, or flexibility within the business, but it does mean we did not invest the predicted level or the same level as we did in 2013, reflecting growth coming off, growth opportunities coming off in the market. Turning to page 7, on health and safety. There was another strong improvement in performance, importantly no serious harm incidents during the year and you can see in the graph a continued year-on improvement in total recordable injury frequency rate. I think one of the important things that we're seeing is a very strong coordinated effort across the industry, so amongst all of the major generators a very open sharing of experiences, learning around things like near-misses because they're really the gems that actually help make sure you have a safe work environment. And I think those industry-wide initiatives are going to help not just the Company perform well in the health and safety area but the whole industry achieving best-in-class. Turning to dividend, obviously our dividend is fully imputed and includes the extra NZD0.05 uplift. It is just 72% of free cash flow so you can see that on the graph on the right hand side, a significant lift as we completed the big CapEx projects, but as a percentage of free cash slightly lower than the FY13 dividend. There will be an update on the FY15, or there will be guidance given on the FY15 dividend, at the ASM. And obviously you're a ll aware that during the year we completed a share buyback of around NZD50 million at an average share price of NZD2.13. We ended the year with a significantly lower debt and put in place those capital bonds which have got a 50% equity credit, and William will talk about that a little bit more. Importantly, at the ASM again there will be an update on capital management initiatives at that time. And with that, I'll turn to Fraser to run through market dynamics, Fraser largely because this covers a lot of the business that he was actually responsible for within the year, so it's a nice bridge as CE-designate. Fraser Whineray - Mighty River Power Limited - Chief Executive-designate Thanks, Doug. Morning, everyone. Turning to market dynamics, you would have seen the slides posted already in the barrage of earnings announcements from other companies; you might have got through them, you might not but I won't dwell on them, I know you can read them. Stepping back and looking at the big picture, there are obviously three vital parts to an electricity sector. That’s sustainability, reliability and cost, and so we just thought we'd kick off with a slide there which captures it relative to a global context. In renewable penetration we're up in the late 70s and that has been growing though the graph there does have some inertia given the size of our grid, but you can see the green in geothermal and the yellow in wind growing, and the hydro showing some variability. That compares with the arithmetic average for OECD countries of just under 30%. If you actually averaged all the electricity produced in the OECD it would be about 22% because some of the big countries have plenty of coal for example, and gas. In terms of reliability, Transpower publishes those statistics and after four very important major projects which have been completed now, that reliability has been enhanced and that's a critical foundation for the wholesale market and competition itself. Now, there's lots of different ways to cut data and I'm not going to suggest this is the only way but this is just a short chart showing our prices relative to the OECD. The Electricity Authority recently published an assessment for mass market pricing and the energy component, which they said went up by NZD0.05 per annum over the last three years. So that's just looking at the big three leagues of national outcomes for an electricity market, and those are the summary highlights. And you would have heard other World Energy Council positionings that we're in the top 10 for those three in combination.
3 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation We've enjoyed some good temperatures leading into the end of the financial year, though it wouldn't feel like it at the moment. And so as NIWA has -- or NIWA provided us with the data, temperatures have been higher than average and that has led to demand down a touch in the residential segment. But overall, consumption is also slightly down, some improvements in some sectors, in commercial and agricultural when you look at time series from the MBIE's 2013 Energy in New Zealand Analysis. Tiwai is interested in recontracting some more, assuming that meridian CFD drops to 400 megawatts from January 2017, and we think that marginal demand and marginal supply need to come to some view on that. In terms of supply, the national hydrology was well above average, and you would have seen that from Meridian's and Contact's announcements on Monday, and it was quite variable in weather, a dry, and another dry autumn. Waikato experienced the lowest hydro sequence we've had in this current Company and over the last two years you've also seen the addition of base load geothermal, which has displaced coal and you've seen a thermal response coming through there, principally from Genesis. We almost had mirror sequences between the North Island and South Island for that autumn period in terms of hydro and so it was quite a clear comparison to be able to see the change in market outcomes given less take-or-pay fuel requirements for gas. And I think this will continue once we see another gas year roll over in about five months' time. The short end of the ASX contracts in the bottom right chart shows there can be a little bit of volatility in there simply because of hydrological storage conditions. The longer-dated contract there, or looking at financial year 2016 shows that it lifted by just under NZD5 about a year ago and has stayed relatively flat since. Included there�s some views on with the demands coming off and thermal response holding at relatively static at this point. The amount of volume traded through the ASX market in FY14 was just a touch under 15 terawatt hours out of a total 40 terawatt hour market and that would -- that actually exceeds the annual quantity of residential sales. So there is plenty for merchant generators and merchant retailers alike, in terms of buying and selling from the ASX curve and for liquidity. Moving from the market environment now to our operations. Residential sales were done through temperature effects, which we’ve talked about, and also some easing back in the South Island market. The more significant flexibility in the portfolio has come for us through easing the business sales and industrial sales positions, which are noted there on bullet point 2 of the slide. We didn’t feel that the yields that were currently in the market at that point in time were sufficient for the risk return. As you saw, prices on the previous page, they started to rise about a year ago for the longer dated contracts. We’ll keep an eye on those. High priced business contracts taken out during the elevated commercial and industrial prices in 2011 and 2012 are starting to roll off. So that does have an impact on energy margins. We certainly enjoyed capitalising on that situation when it arose. The chart in the bottom right there, you can see how our forward ASX prices were elevated as a proxy for CNI sales yields and we actually took on quite a lot of volume in the CNI segment during that period. Despite building a large power station, generation actually came in lower than it was the year before. It was due to some fairly obvious hydrological challenges, which we’ve talked to, and a much lower thermal output, which is immaterial in the context of energy margin. Thermal got down to just 8% utilisation. We’ll talk some more about that later on in the presentation, or Doug will. We had some minor wins and losses in the geothermal fleet and they are receiving a lot of ongoing attention, because we do – they’re like an industrial process and need to keep running 24/7. Geothermal has risen to 42% of the portfolio, which as Doug said, provides a tremendous foundation for stable earnings after the commissioning of Ngatamariki. Hydro -- LWAP/GWAP can have a -- these impacts can have quite a significant impact on the portfolio. The hydro GWAP lifted to 1.12, compared to 1.07 in the prior period. That shows we were getting more value for our water this year, compared to the average power price than previous years. Load Weighted Average Pricing was relatively flat at 1.07 in both years. So the whole LWAP/GWAP ratio was slightly favourable to the prior period at just under 1. We’re expecting that to continue going forward with our current portfolio position of being close to square, which will come up on the next slide in -- but the wholesale market providing some volatility is important to achieving those GWAP outcomes, as well. In terms of net position, we move towards square as we relaxed the amount of business sales, which we highlighted on some prior slides. Some hedging was also maintained to cover the risk of dry hydro. In the chart on the right there, we show minimum hydro. That’s the amount of hydro generation you get against the minimum flow constraint at Karapiro, which is about 2600 gigawatt hours.
4 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation So you have to pass -- well, technically, for those people interested, 148 tonnes of water goes out of Karapiro every second. That’s for our resource consent. The other additional hydro we’ve shown on top of that, which this year was only about another 900 gigawatt hours, taking us to 3500 gigawatt hour. So what we’re trying to illustrate there is a couple of things, which are in grey, which are more fixed and the blue stuff, which is where some of the decisions and levers can be pulled to create value, depending on our view of risk and return. So that’s a quick look through the customer -- the generation and portfolio parts of the business, in the business environment. I’ll hand over to William to cover off the financials. William Meek - Mighty River Power Limited - CFO Thanks, Fraser and Doug. I’m William Meek, the CFO, as you know. So I’ll take us through the financials. As Doug said, we’ve knocked this off, so I’m very happy, having spent two years of my life getting that on the road. So very happy to have completed our prospectus. I’d also like to thank Simon O’Connor, the new auditor this year. He has done a sterling job, in a very diligent way as auditors do. Also, my finance team, comms and particularly Anna, for herding the cats and getting all of this wonderful collateral together for us to share with you today. So some highlights here. Again, all good news in the squares. So EBITDA above PFI numbers. OpEx done NZD30 million against both last year’s adjusted number and against PFI with NZD20 million of that banked for future years. CapEx, a record low, really, certainly for the last decade or so, at under NZD100 million, NZD93 million. Well under prospectus levels, which had, I think, NZD96 million for offshore geo and it was indicating about NZD200 million this year. Debt down too on the back of the earnings performance and that lower CapEx. Free cash flow is up at NZD257 million for the year. So up 18% on the year before. Final dividend at NZD0.135, so up NZD0.005 on the levels in the prospectus. As Fraser has noted, it was a pretty tough year, both on the geothermal and the hydro fleet. Very dry conditions persisting pretty much for that whole PFI period and continuing into FY14. 765 gigawatts less generation against PFI levels. About -- well over 500 gigawatts across geo and hydro. When we look there in the energy margin bridge, we can see generation there in blue down NZD24 million. So actually a pretty good performance there, really reflecting some of the GWAP improvements and the flexibility afforded by some of the changes in our generation portfolio over that time. Again, we can see the effects of non-renewables in both the CNI and CFD segments impacting there with reductions in both customer sales revenues and declines in CFDs. We do have a roll off there. We’ve built up our CNI and CFD business through the 2012 period, while yields were higher. That is feeding through into those numbers. Fuel costs favourable at NZD86 million, again, that reflects reduction and electricity purchase costs and reduced gas burn at Southdown. Full bridge NZD498 million and NZD504 million, up NZD6 million against PFI in pretty challenging conditions. On an NPAT bridge, we see there again green representing most -- an improvement. So below the line items generally favourable to the prospectus information. Probably the column that’s most interesting by its omission, is actually fair value movement. The un-forecastable movements in the PFI being NZD32 million on derivatives, we actually ended up at NZD32 million. I was very surprised that that actually happened, given that -- the range we’ve certainly experienced in derivative movements over time. Interest curves moving up, reducing that liability offset by some downward movements in the electricity book. We did revise our NPAT guidance at ASM to over NZD195 million. Again, that’s reflecting a fair chunk of that stuff in the box at the end. Non-cash impacts, particularly deferred tax and the forecasted loss relating to our investments in California at the John L Featherstone plant in EnergySource. So taking control there, we had clearer visibility around the accounting impacts there, which were built into the PFI and have not manifested this year. So again, against that guidance level of NZD195 million still carrying NZD212 million. So OpEx. This is a good time series chart. You can see the OpEx for 2014 below 2013 levels and below the PFI level at NZD251 million. We’re really dialling back OpEx to the levels we were back in -- below 2010. That’s with two major geothermal plants online. We had three months of operation at Nga Awa Purua and Ngatamariki was still a concept back in 2010.
5 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Again, a significant focus there across the organisation [forward and] wide around those savings with NZD20 million banked for the future. Putting us in very good stead, given the demand environment we’re suddenly experiencing at this point in time. Underlying earnings - relatively modest growth against last year, only up NZD5 million. We can see EBITDA up NZD55 million. Again, bringing on of Ngatamariki as a key contributor here as well as operating expenditures. The lower hydros, we were down over 450 plus gigawatts against 2013 levels on hydro. We if put that back in, you would actually expect EBITDA to be up more around the NZD80 million-NZD85 million range. Explaining some of this relatively small bridge across to underlying earnings. What we did see why higher depreciation on the back of Ngatamariki coming online in September. Higher interest costs, as interest was capitalised last year, so that increase in interest expense attributable to capitalisation of Ngatamariki, and higher income taxes giving us that NZD5 million increase in underlying earnings. Capital expenditure, again, as I said, NZD93 million for the period. NZD106 million and lower than the PFI, with about NZD7 million on international geothermal, with about NZD5 million in Chile and NZD2 million in the US. Looking forward to 2015, stay-in-business CapEx is slightly elevated at NZD95 million. It does include two wells. We did signal early drilling at Ngatamariki, so that rig is getting close to completion of their well. Then, we’ll move to Rotokawa to -- for a make-up production well appear later this year. For 2015, indicating around NZD50 million of committed growth CapEx and the vast majority of that is attributable to Metrix’s AMI roll-out, including the arrangements with Trustpower. Over the medium term, CapEx guidance in the NZD70 million to NZD80 million range. Our bank is in the room, so I’ll just deal with funding. Doug has touched on the completion of a capital bond in July for NZD300 million and that did see a significant restructuring of our bank lines at the same time. It has significantly extended our debt duration out to over 10 years now, with their bond theoretically expiring in 2044. We repaid NZD235 million of bank lines and our commercial paper at the moment is at nil. We’ve just recently signed into NZD300 million of new bank lines and cancelled all existing ones. Capital bond again, it is a long dated note. For S&P rating purposes, half of the principal and interest paid will be treated as equity and dividends, respectively. So again, a good debt maturity there. Not a lot of refinancing planned for the medium term. Let’s just move in to balance sheet and funding ratios. Debt just over NZD1 billion. Broadly in line with where we were in 2013. Gearing ratios are around the 24% range. Debt/EBITDAF, which is a key S&P ratio now under their revised criteria, down at 2.1 So down a lower end of a BBB+ rating or standalone BBB. We had our share buyback. NZD50 million. It’s at an average price of NZD2.13. That was completed in April of this year. As Doug has signalled around capital structure, certainly around capital management initiatives, these will be discussed at our ASM in November, but certainly the earnings for FY14, the ongoing CapEx requirements, the bond and the buyback does provide the Company some flexibility in regard to its balance sheet, some optionality. Certainly there's a focus throughout Mighty River Power on creating growth investments, so certainly we're in a good position there in regard to credit rating and dividends in that 70%, low 70% range on free cash flow, so quite a lot of headroom. Again, dividends are fully imputed at this time. I'll hand back to Doug. Doug Heffernan - Mighty River Power Limited - Chief Executive Well as you can see on this slide, those of you who are smart enough to be Mercury Energy customers and smart enough to do all your transactions with us online and on time, since May you will be receiving an additional 2% discount on your electricity prices. That's one of the products and services that we put out during the last financial year, which is helping deliver a lower churn rate for Mercury than you're seeing across the market average. Fixed price contracts, multiple year, are also contributing to that with over a third of our customers on those former contracts. Importantly, the reason why we increased that discount was we were passing through the cost savings we were getting in the business from customers taking those costs out of our business basically. When you look at the overall interaction with the Company now, 74% of customers now pay electronically and 40% of customers receive 6 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation their bills online. That's a huge shift in the last three or four years and just shows how much consumers are being much more online and the way in which the retail business is going to have to shift to keep up with those expectations; expectations that haven't always been delivered by the electricity industry. I know that with James and Fraser, they've really got their thoughts on going forward for the Company. Metrix, William referred to the capital expenditure that we've got committed to Metrix for primarily the Trustpower build up. That was a big growth initiative that Matt Olde, he now is the CEO of Metrix, secured during the year and you can see that and the impact that has on the graph at the bottom right hand corner of the screen. The early part of that period, the ramping up, was really Metrix rolling out AMI primarily for Mercury Energy and then the second part of that is the build out for Trustpower. If you revert to the graph at the top, you can see at the bottom sort of, what is it, five o'clock through to eight o'clock, is really the AMI meters that Metrix has already installed and those that will be installed as part of the Trustpower arrangement. Obviously the other major provider of AMI services in the market is AMS, so with that Trustpower arrangement, AMS and Metrix have a very, very large share of the AMI market. The Trustpower deal, as you can see, again in the bottom right hand corner, look at the EBITDAF line, you can see the growth in EBITDAF that's going to come from the Trustpower arrangement and really leveraging scale economics back into the Metrix business. Turning to value and growth, some of these things we talked about at the half year results in February and so just giving an update on those. On Southdown, marketing process that we indicated we would undertake has been run and is complete and we now have discussions still underway for a possible divestment of Southdown. During the last quarter and for most of the last quarter, a virtual peaker arrangement was in place, so around half of what Southdown produced in Q4 was under that virtual peaker arrangement; effectively tolling gas and contributing -- providing an income stream, revenue stream to Mighty River from Southdown and contributing to the overheads of Southdown. We have also worked through all the potential reconfiguration options and have formed a view on what might be appropriate should divestment not proceed, but clearly we're not going to proceed with a reconfiguration while those divestment discussions are continuing. We have very visibly disclosed the sale of a piece of land to NIWA, a 100% crown-owned entity at Marsden. They have been an owner of land at Marsden for probably about 10 years now, one of the earlier transactions we did at the Company. We realised a gain on sale of NZD4 million and that's shown very explicitly in the accounts. We have other lands we are looking to dispose of as well. Turning to international, I guess the big thing in here is really the ongoing excellent performance of the John L Featherstone plant with 96.5% availability; those numbers are a continuation of its performance since it was commissioned, when was that Mark, back in 2012? Yes. One interesting thing that's not on the slide, but management is exploring ways to actually increase the value that is generated by the John L Featherstone plant, looking at value adding initiatives including seeing whether there's ways you can get more output from the plant and ultimately looking to enhance the cash flows that are being produced by the John L Featherstone plant. Otherwise there's not really a lot to say about international geothermal interests. We are adopting a patient approach to that and no new commitments have been made. Turning to regulation, this could either be a really short slide or a really long slide. I went for the very short slide. On TPM, I think a couple of things are really quite interesting to me as I look back over 30 years of attempts to make changes in transmission pricing, nearly every one of which has been unsuccessful. It's interesting that finally the Electricity Authority is consulting on what is the problem that we're trying to solve. I think a really interesting thing, if you go back to 2006 or 2007 or 2008 when this was first promoted as something that was important to do, expectations on electricity demand growth were 1.8% compound. It was important to look at transmission pricing to make sure that future efficiency effects were reflected, so the old dynamic efficiency. With electricity demand running flat and the possibility at some time in the future, obviously at a longer term future rather than short term, of the smelter closing, I'm not sure that the assumptions that were lying behind TPM are relevant anymore. So it's really good to see them looking at problem definition. In any event, given the timetable, it's unlikely that we'll see any change to TPM until 2017 and 2018, so it's definitely getting kicked down the road. It might be into another election cycle by then, assuming there's only one. Market structure, I guess my view, again, a lot of -- a bit of looking back and as I said to media this morning, those people who have shown a propensity to fiddle with the structure need to think really carefully about the unintended consequence of making changes to a sector which has very long dated investment decisions. So far, I
7 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation haven't seen a lot of that going on. Again, if I recast back to what I saw when I first became a Chief Executive in this sector some 20-something years ago and look at what we have today, the structure of the industry is delivering significant competition. Security of supply has never been better. We have completed a major transition to renewables, wherein renewables are displacing fossil fuel, not because of subsidy but because of merit and it's being achieved through competition amongst companies and between technologies. That's a future that was not even bravely anticipated back in the last 1980s, early 1990s. And in the Ministry for Business Innovation-and-something, Environment is it? Their statistics, which we have to rely on as being authentic unlike others that are produced by some parties, show that customer energy prices are actually declining. Now that, fortunately, lines up with what our audited financial accounts are also reflecting. Our customer prices for last year were flat year on year and in the last quarter they declined. Again, as I said in the media presentation this morning, you'll see it in the media release, if you take account of the fact that customers' energy consumption was reducing through year-on-year because it was warm, our customers actually paid less for their electricity last year than they did in the year before, even after accounting for the increases from Transpower and alliance companies. So I don't know where people are making up the other data, but that just makes it really obvious that better transparency is essential to get the true story out on how well the current market structure is performing. Board of Directors, what was flagged I think probably back at the ACM or certainly during FY14 was that Joan and the Board were looking to add some additional skills to the Board with a couple of appointments that they were targeting. We're very pleased that that has gone extremely well with two excellent appointments in Patrick Strange and Andy Lark, adding really good experience, in the case of Patrick, who many of you will know and Andy, who will be really a valuable addition to the Board and to the Company to meet the challenges around retail competition as we go forward. The next section is outlook and being the sharing sort of guys that we are, we're each going to do a slide on this. William's going to take you through the guidance slide, that's simply to recognise that he is the permanent piece here, because I'm going and Fraser's coming. Fraser's going to talk about his leadership structure and give you a bit of colour around that. Then I'll come in and bring up the rear. William? William Meek - Mighty River Power Limited - CFO Thanks Doug for that tag team introduction. On to guidance. So 3900 gigawatt hours of hydro which is actually in line with last years' PFI, so down on normal hydrology given opening lake. July was dry, so again, that's continuing the trend. Around costs, cost to build on that is NZD20 million on permanent savings, so we're reflecting cost level of around NZD230 million Energy prices, as Doug also said in residential, flat to slightly negative assumed in those forecasts with Company committed to no rises until April 2015. The range, with the necessary caveats, between NZD495 million and NZD520 million, again, subject to material adverse events, significant one-off expenses or unforeseeable circumstances. Again, ASM please do all come, if you're a shareholder. We are delivering guidance around FY15 dividends and any capital management initiatives at that time. Thanks. Fraser Whineray - Mighty River Power Limited - Chief Executive-designate Look and I could have mentioned earlier, yes it will be my privilege to lead the Company from September 1 and I'll obviously in that role get to see all of you more and know you better. I'd like to acknowledge the excellent transition I've enjoyed with Doug. We've covered off a huge number of bases in the next five days, we're pretty much shoulder to shoulder covering off the last parts of that transition with our vital investors and the analyst community.
8 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation
The timing in terms of structural change is well advanced on typical CEO changes, with the structural changes probably 60 to 90 days after the appointment. That's a testament to the transition that we've been able to engage on and acknowledge the executive who got across the front row in William here, we've got James, Matt, Mark, Marlene and Tony. The blue boxes refer to sort of a more clarifying of some vertical businesses. Now that we're post the very intense and long period of the IPO and today is where we put a big permanent felt marker of that behind us, the -- we kind of can structure the firm and get our resources a bit more aligned. It also reflects a change in the -- how we're growing as well. Instead of putting licks of NZD0.5 billion to work in geothermal power projects, growth is actually in each of these four blue parts and we have to chase it in much smaller pieces, but in all of those and glued together by very capable lateral lines from finance, people and safety, corporate affairs and also a new role of strategy and communications. They are quite significant parts of the business in their own right. Geothermal and hydro each operate 10% of the country's electricity and the customer piece runs more than 20% of the residential market and the metering piece is more than a third of the metering market. So quite substantial pieces to operate for those general managers. We are looking for great roles and a couple of vacancies internally and externally. So there's my free bit of advertising for those two, to talent that's out there that's interested. That's pretty much the structure and that will go into place from September 1 in its fulsomeness. Thanks very much. Doug Heffernan - Mighty River Power Limited - Chief Executive Thanks Fraser. So just to wrap up, I guess I now know why Joan and the Board were so keen to lock me in until we deliver the results. I didn't realise how bloody hard it was going to be, but actually really, really proud of the whole team and the way that we've managed to pull that off, despite a NZD30 million plus hole in the income through the really, really poor hydro conditions. I think it's really good to have the business well set up to go forward with a much lower cost base. Wouldn't have dreamed of being able to get it back to 2010 levels, so that's [a guts] to the whole team and the people in the organisation. I think Fraser's got very much -- and is front of mind, as you would have heard in thinking about how to drive value through at the customer end and that is a big shift of focus for the Company that James is leading forward as GM customer. As William said, a lot of optionality that we've created even though we're busy trying to find ways to actually deliver the result, to also think about the future and build on that optionality. So good forward thinking. So with that, I'll leave the Company in, I think in great hands. It's been fantastic having a four month handover, a luxury of having an internal appointment in Fraser and it truly has been shoulder to shoulder. So as I step down, really looking forward to seeing the results delivered in February next year. So with that, questions.
QUESTION AND ANSWER
Unidentified Participant A couple of quick questions. Previously, you have given sort of a view on the forward curve and explained why you sort of backed off the C&I market. Any views now on where you think that will go? Doug Heffernan - Mighty River Power Limited - Chief Executive Well I think part of the reason that we made the shift was -- and you can see if you look really at history, [Wade], including things like LWAP/GWAP, you can see the fantastic lift we've had, particularly in the GWAP, from shifting the use of our if you like marginal hydro production to actually targeting highest value in the market rather than looking to cover a position at the retail end.
9 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Our view was, and largely still is, that the margins you get from making fixed price commitments are still in many cases too low to trade off against the value you can create with the flexibility we've got, given our location and given the structure and makeup of the individual clients along the river. Unidentified Participant So as more C&I contracts roll off, what will we see you doing then? Expanding that exposure or re-contracting? Doug Heffernan - Mighty River Power Limited - Chief Executive It will depend on price. Unidentified Participant Other revenue about NZD10 million higher than the PFI. Why, what was that and what was the EBITDA impact? William Meek - Mighty River Power Limited - CFO The EBITDA impact will be NZD9 million, but main things are, Marsden land sale's in there, for, you've got some additional meter income, it's a couple of million. Chop down some trees at Atiamuri, it's another million. So then you're onto dribs and drabs up to the NZD9 million. But it's only up NZD2 million on last year. Unidentified Participant Last question, just the NZD20 million of permanent cost savings, can you just provide a bit of colour on where you achieved those and what else is out there that you could do? William Meek - Mighty River Power Limited - CFO Yes, in terms of looking at FY14 as we said and we've repeatedly said this, with post IPO, you know, considered focus throughout the business on adding value and cost is one component of that. Around a lot of extra condition monitoring, reviews of asset management plans, so you have seen probably half of that number's coming out of reduced maintenance costs, given where the market's at and the requirement on those plants. So we're seeing some really, really concerted efforts there across our engineering team around assessing how [class fours] are run, how those are reviewed, whether you're replacing or repairing runners, generators, new turbines, the like. So you're seeing some changes there. So half the number's in maintenance and then after that you're into much more just everywhere. It's not a -- there's no silver bullets. Procurement's been a key focus that will be ongoing. Looking forward, yes it's -- operating efficiently and well was something that we'll continue to focus on, but we're pleased that we've dialled costs back to levels they were in 2010. Doug Heffernan - Mighty River Power Limited - Chief Executive I think just on the asset management plan, for those of you who don't know, we run really long dated asset management plans. Life cycle -- there's a big piece of thinking about that. Particularly along the hydro, when you replace old kit, it might be 40 or 60 years old. Sometimes you can get efficiency up ticks or even extra megawatts.
10 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation The value of those, at let's say NZD70, wholesale price is a lot lower than at NZD90. So you're timing on when you might choose to bring things forward rather than when you need to, gets changed. You know, the reality is the exec have not been focused on the 18 months, dealing with the merchant bankers and lawyers and an IPO, nor have they been completing off the big project at Ngatamariki. So you've actually seen a lot more senior management effort going into testing the assumptions around what are relatively large licks of expenditure around life cycle and asset management, and re-optimising -- that's been one of those key outputs. Unidentified Participant Good morning. Can I just continue on some of Wade's questioning. Just in terms of those cost savings, the NZD10 million that's not normalised, could we possibly expect that to be an extra NZD10 million in FY15 as you delayed some expenditure? So can you go into some colour on what the non-normalised part of that cost savings were? Next question was just in terms of your talking about being more transparent, the industry being more transparent on costs and revenues et cetera. Contact gives a split of mass market to commercial and industrial. Do you not think it would be worthwhile for you guys to do that too so we can see what mass market is doing at the headline level in terms of your charges more clearly? Then finally on Tiwai, you talk about Tiwai being in the market for 172 megawatts. Can you talk about how they're in the market, trying to contract that? Thank you. William Meek - Mighty River Power Limited - CFO Thanks [Grant]. I'll deal with the first question. So again, going back to asset management plans and multi-year maintenance programs, we have seen -- we are seeing some lifts, mainly in hydro around that maintenance schedule, so it's probably five of the 10. Then again, you've just got some different phasing and other cost items again. You've just got a collection of relatively small numbers adding up to that super NZD10 million. Unidentified Participant So we shouldn't see it in next year's numbers as an extra NZD10 million now coming in, in savings. William Meek - Mighty River Power Limited - CFO Yes [think the NZD20 million]. Doug Heffernan - Mighty River Power Limited - Chief Executive On the transparency actually Grant, I wasn't talking about making it easier for analysts. I was talking about removing the confusion that politicians create, but we hear what you're saying. Fraser Whineray - Mighty River Power Limited - Chief Executive-designate On Tiwai, just to run down the line, I'll take that one. Look they have -- they're in the market looking for expressions of interest and having a lot of conversations out of the staff in Brisbane with many of the participants in gas and generation in the market to start discussions basically, because they at some point they'll want to collapse those into something that they can make some decisions on their plant as they continually reinvest in pot lines and bits and pieces. So they're just looking for all manner, range of possibilities in terms of how they can contract more on the assumption that they've only got a 400 megawatt CFD from January 1, 2017, which of course is unrelated to their physical consumption but that's their financial [cover].
11 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Unidentified Participant Thanks, sorry I just have one more. If you do get rid of Southdown, can we assume going forward your hedge position relative to your average generation will reduce just to cover for that or are you finding enough liquidity in the forward markets that gives you the ability to continue to hedge at similar levels? Fraser Whineray - Mighty River Power Limited - Chief Executive-designate Yes well we're -- as I mentioned in my presentation, the liquidity in the ASX market is providing a lot of benefit between large generators, not just clearing it through the wholesale market in real time but actually being able to shift entire power stations for a year, two at a time, depending on your fuel or your plant situation. So we have comfort that you can shift something as large as Ngatamariki in the space of weeks if you wanted to by using both notes and FTRs to bridge it to where you want it to get to in terms of risk cover. So naturally though, if you don't have cover for a sales position either through, through Southdown, you've got to find other means to do that and there's a range of -- we still have a -- we've still got a Genesis [option] sitting there until 2016 or so, 2017. Then the ASX market is a great source of liquidity for covering risk yeah. Doug Heffernan - Mighty River Power Limited - Chief Executive No questions from phone? No other questions? Grant? Unidentified Participant If nobody's asking questions. Just in terms of underlying demand, Contact tried to give an indication of what they saw the residential customers performance being if you stripped out the weather impact. They commented that the residential type of customers moving at about 1.5% down year-on-year due to efficiency gains. Is that your assumption too and where do you think that's going to move over time? Fraser Whineray - Mighty River Power Limited - Chief Executive-designate I -- and James may have a view here, a GM customer in the front row. But I think yeah you are seeing increased efficiency gains at the household levels simply through appliances, insulation, lighting et cetera. So that figure that's touted isn't -- yes wouldn't be out of the ballpark. But we don't actually specifically have an assumption which says in our modelling, residential customers on average will shrink by this much per ICP. It's -- there's a tyranny in averages here and also separate backing out the weather effect can also introduce the uncertainty into that assumption. But Contact's figure, I'm going to read about that with interest. Doug Heffernan - Mighty River Power Limited - Chief Executive I think we're also interested in knowing how many more residential customers there will be year-on-year. Historically, if you go back, certainly pre-GFC, new connections were offsetting per consumption use, which was declining even pre-GFC, so it's not a new phenomenon. What's been new has been post-GFC lack of capital around that’s been building new properties. I think we're starting to see a little bit of rebound on that in Auckland. Christchurch is sort of -- well it's probably not there yet. So new connections are an important part of our overall mix. Fraser Whineray - Mighty River Power Limited - Chief Executive-designate Yeah and most immigration comes into Auckland and they need to do 13,000 houses a year according to Bill English to keep up with supply and we've got the largest market share in this region.
12 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Operator The first question from the phone comes from Andrew Harvey-Green, Forsyth Barr, please go ahead. Andrew Harvey-Green - Forsyth Barr - Analyst Oh hi guys, a couple of questions from me. First of all just around CFDs, so on the CFD gains, I think, this year you looked around about NZD28 million, NZD27 million as far as I can tell. Just given what your current book is and what current ASX prices are, are you able to give us some sort of idea of what CFD gains we can expect for this year? Secondly just a quick question around Ngatamariki, given that you are almost finished drilling that well there, timetable for getting that back to full production. William Meek - Mighty River Power Limited - CFO So this is a very detailed question on CFDs again. The CFD's very dependent on where wholesale prices outturn. I think that the big trend is the re-pricing in that CFD book on contracts we signed a number of years ago. So those are rolling off and again the ASX is a reasonable proxy for end user CFD volumes. So the actual contribution there, relatively modest against the ASX volumes if you take a 12, 24 or 36 month strip. I think the key issue for us is ASX liquidity bilateral trading between generators and the flexibility in our hydro portfolio or hydro dispatch, given those changes in our hydro portfolio enable us to take, I'd say, a more strategic view around contracting base load at ASX prices versus picking the eyes out of the spot market and ASX contracts. So that'll be an ongoing play for Mighty River. Fraser Whineray - Mighty River Power Limited - Chief Executive-designate Andrew, Fraser here, just on Ngatamariki we're expecting to have that fuel in to the plant by the end of the year, the calendar year that is. Andrew Harvey-Green - Forsyth Barr - Analyst Okay thanks. Operator Thank you. The next question comes from Nevill Gluyas with First NZ Capital, please go ahead. Nevill Gluyas - First NZ Capital - Analyst Morning guys. Just extra questions from me really regarding Metrix, I'm trying to think about that as a separate business. So you've given us kind of a forward profile of EBITDAF looking ahead a few years and you talked about the NZD50 million this year. I was just wondering if you could give me a bit of colour about what proportion of the NZD50 million relates to the Trustpower rollout and how much is related to other costs at Metrix? Maybe a view as to what proportion out to the future is on top of Trustpower, so the NZD100 million you've flagged already, and maybe what the term of the contracts are. Doug Heffernan - Mighty River Power Limited - Chief Executive I think probably the first thing to clarify Nevill is in terms of the CapEx forecast, the NZD50 million is what is committed in 2015. That's not to say that we don't expect to find some other opportunities for growth in 2015 for CapEx associated with Metrix. So that's what's currently contracted.
13 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation Nevill Gluyas - First NZ Capital - Analyst So the NZD50 million is essentially all Trustpower, the Trustpower rollout or 50% associated with the Trustpower rollout? William Meek - Mighty River Power Limited - CFO The Trustpower rollout will be in terms of actually metres on walls will be back loaded to the end of 2015. So you'll certainly have inventories come in, you'll have -Metrix has got a number of programs around three phase metering and with a number of other retailers and [line cos] that are basically deploying now. So they're really ramping up. Last month Metrix put 5000 metres on the wall across New Zealand so we're not beholden to that Trustpower contract, albeit it is circa NZD100 million over that three-year period, but it's back-loaded to the end of FY15. So Metrix is just really gearing up to implement that meter installation for Trustpower. Nevill Gluyas - First NZ Capital - Analyst What do you think is a reasonable contract lifetime or economic lifetime as for the meters? William Meek - Mighty River Power Limited - CFO Normally that's a bilateral discussion between the meter provider and the retailer but again, the shorter you make the contract period the higher the rate needs to be to recover the cost of particularly the meter. But again typically in the market we're seeing contracts anywhere between 8 and 15 years. Nevill Gluyas - First NZ Capital - Analyst Right. Thank you. Operator There are no further questions from the phone. Doug Heffernan - Mighty River Power Limited - Chief Executive All right. Are we all done on the floor? Any other questions? All right, thank you very much everyone for your attendance and farewell.
DISCLAIMER Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forwardlooking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVE NT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. © 2014 Thomson Reuters. All Rights Reserved.
14 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us © 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 19, 2014 / 11:00PM GMT, MRP.NZ - Preliminary 2014 Mighty River Power Ltd Earnings Presentation
15 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2014 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.