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EDITED TRANSCRIPT MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation EVENT DATE/TIME: FEBRUARY 23, 2015 / 10:00PM GMT
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation CORPORATE PARTICIPANTS Fraser Whineray Mighty River Power Limited - CEO William Meek Mighty River Power Limited - CFO
CONFERENCE CALL PARTICIPANTS Matt Henry Goldman Sachs - Analyst Grant Swanepoel Craigs Investment Partners - Analyst Andrew Harvey-Green Forsyth Barr - Analyst
PRESENTATION
Fraser Whineray - Mighty River Power Limited - CEO Good morning everyone and thank you very much for coming to Mighty River Power's Albert Street office for the investor presentation for the interim results through to December 31, 2014. I'm pleased to present this first session of the reporting season as Chief Executive, alongside William Meek, who is very familiar to you all. I'll also just take a moment to introduce Toni Laming, who's recently started with us. Toni is the General Manager of Strategy and Communications, and came to us from Orica in Melbourne. Also Phil Gibson, who was appointed to the GM Hydro/Wholesale role. Phil was previously the Head of Wholesale Markets in the operations team. Tony Nagel is familiar to you. He's been with the Company for also more than a decade and is now the GM Corporate Affairs, having previously been the Company's general counsel, which was particularly intensive through the listing process. I'll touch on the market dynamics, or highlights of market dynamics. William will take us through the operational and financial update, and I'll come back up here to talk about the business strategy and outlook to finish. And then we'll have some Q&A, which may include some attending by way of phone. I'll take the deck as read, and we'll seek to add some colour to the notes therein. In terms of highlights, in short, aside from the accounting implications on international geothermal, on a material level everything else is fairly steady. The reset in EBITDAF guidance is less than the lower hydrology impact due to some operating cost savings and some property sales. Rain will come and go and doesn't really affect the value of the Company over the long term. Dividend guidance is unchanged for the full year, at NZD0.14 per share, and I'm sure our shareholders will be pleased to hear that. Also very pleased with the progress on the front end of the business, and you've seen a number of announcements related to that. On the top left corner is GLOBUG. There's also some collateral out there, and we've started some mass market advertising on the GLOBUG category as well, which are some very, very entertaining and fun advertisements. But after six months in the job, which I started on September 1, after a very extensive transition with Doug, which lasted some four months, I remain absolutely convinced in the strategic value of -- and positioning of our assets. That is the largest renewables portfolio in the North Island, the largest peaking plant in the North Island in the form of the Waikato hydro scheme, the only generator to own metering equipment -- or metering services -- in New Zealand, and now a consolidated metering market. And we had the largest market share of the largest growing city, which is very close to our generation assets. And those features will be particularly valuable to some uncertainties that may play out over time in the electricity market. Safety, as always, is a focus, not just for the Company, but also as we're trying to work with others in the industry to lift the entire standard, particularly when we use similar contractors from time to time.
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation There has been a small number of low severity incidents. The performance for the December 2014 is lower than the half year to December 2013, so the trailing 12 month figures are above where we finished the financial year on June 30, 2014. That makes up the December 2014 results, and includes eight incidents - four of them employees, four of them contractors, three of them in the office and five of them on sites. And it's some of these office ones which are particularly frustrating. They've all been low severity, though we need to do better on that front and get that down to what we'd like to see as zero harm. On the numbers -- this is a quick summary of the numbers, which William will cover in more detail and, hopefully, just lays it out in a way that's very easy for you to see some of the variances relative to the PCP. But, in short, we're down on EBITDAF for low hydrology and also not renewing commercial contracts in a low yield environment, which is recovering slightly. And NPAT has an impairment for international geothermal, which stands out there quite clearly. And the dividend is up 8% to NZD0.056 per share, or about NZD80 million. In terms of the dividend we note that our new dividend policy -- which we announced in our capital management announcements back at the annual shareholders' meeting in November – making us the first company in the sector to do so. Capital management always continues to be reviewed. We've paid a special dividend leading in to December, and we have the optionality for undertaking a share buyback if we believe that would prove beneficial for shareholders. And that was announced at the annual shareholders' meeting in November as well. On the supply side you can see quite clearly the blue line is the percentage of average for Lake Taupo for the last couple of years. And then the green line is the percentage of average for national storage, or hydro storage. And you can see we have actually had a dry spell for a couple of years, and that has also meant that our lake position has been slightly lower than average, only getting above average for a couple of small periods. The national hydrology has been relatively steady, close to average over, certainly, the last 12 months. The South Island's had some pretty happy times, but hydrology is what it is. Our job is to manage the impacts of that, and certainly maximise the opportunity with the water that we have available to us, and that is the secondary risk of our net position against the wholesale market. But geothermal now makes up 40% of our portfolio, as you're well aware. That provides steady weather independent earnings for us. In terms of demand and supply balance, demand is showing some promise. You might have seen in the Vector results -- half year results released -- their per ICP consumption was up 0.6%. We're also seeing migration and housing. Well, migration's certainly up a lot, and the housing needs to come up a lot to satisfy that. And we expect Tiwai will continue. If it doesn't, I wouldn't want to hold a position -- a long position -- in the South island. And I certainly wouldn't want to hold that if the transition pricing goes to beneficiary pays because that DC will be running hot to the north. In fact, I don't even think it would run south again. And that's an interesting combination for you all to consider. In terms of demand and supply -- what we see here is the January pricing versus the average storage in the country, the average hydro storage in the country, for the year since the market has been operating. And you can see 2015, the January we've just had, is quite an outlier to the top. It's had record wholesale market pricing since the market was formed, and national storage was only just a touch below average. As we've said -- is due to greater thermal discretion, by not being forced to run thermal plant through compulsory fuel contracts, whether they be gas or coal. That has actually also lifted, in our view, ASX pricing across the curve. And prices wouldn't lift in outer years due to hydrology because the maximum hydro storage you can have in New Zealand at any point in time is just four terawatt hours out a 40 terawatt hour market. And so the storage position now couldn't possibly have an effect on FY16 or FY17. So we see that as positive, with the ASX futures starting to move northwards in response to addressing some of the energy oversupply. There's still a lot of thermal capacity there, which we've already taken some decisions on at the ACM. As we announced, we had closed the steam part of the Southdown turbine and reduced capacity from 175 megawatts to 140 megawatts. I'll now hand over to William for the operational update, and I'll be back shortly. William Meek - Mighty River Power Limited - CFO 3 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2015 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.
FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
Thank you, Fraser. Good morning, everyone. I'm William Meeks, CFO for Mighty River Power. It's great to see so many familiar faces here again. Thank you for attending our FY2015 interim results presentation. I'll quickly take you through our operating and financial highlights for the period, and then hand back to Fraser, who'll talk about our business and strategy and our future outlook. Most of you will have seen our quarterly operating statistic releases, and these will have painted a picture of contrasting weather conditions between the North and South Islands and a competitive landscape across retail energy markets. I will address customer electricity sales first. Residential sales were up 26 gigawatt hours, or 2% on prior period, halting the trend of falling customer numbers and reflective of the increase in demand we are observing nationally and at the ICP level, which Fraser has already touched on. We're encouraged by this trend and the improvement in demand growth across the country. Business and industrial sales, however, were down almost 470 gigawatt hours, driven by maturing contracts and the decision not to renew or sign up new C&I volumes at the prevailing prices because our prices over the period were comparable to price levels in the C&I renewal market supporting this decision. Across the fixed price variable volume customer sales portfolio energy prices were stable at NZD117 a megawatt hour, which also is an encouraging trend, given observations from some of our peers. On the generation side of the energy portfolio hydro inflows were well below average, and almost 100 gigawatt hours lower than the PCP. Fraser has noted that the two year inflow segments is the worst on record. Records go back to 1927, so we're not talking about Might River's history. We're talking about the historical record for the Taupo/Waikato catchment. However, despite poor inflow conditions for Taupo the lake level was close to average for this time of year, driven by our strategy to conserve water for release during periods of higher wholesale prices and we have timed this run well. The geothermal output reached an all-time record for the period, while Southdown operated close to 50% capacity factor due to committed gas obligations and the tolling arrangements in place. Analysts love to track LWAP/GWAP ratios, which indicate the relative difference in price between purchase cost and generation revenue. A lower ratio was better, so when we say higher on the slide we actually mean better. As you can see, our line for Mighty River Power is lower than the market peers. We've seen a tighter relationship between South Island and North Island wholesale prices over the half year, indicative of far fewer and less severe HVDC constraints. Given the interim period last year was particularly wet in the South Island, that has lifted LWAP ratio, which then, obviously, lifts the LWAP/GWAP ratio also. Financial contracts. EGR CFDs or the VAS contract with Meridian is not captured in this ratio as this ratio is based on physical sales or generation to the market. However, what ultimately matters is the absolute price differential rather than the relative one. So we do have a natural hedge in the VAS in regard to South Island purchases, which you will not see in this ratio. Moving to financial highlights. We've got six squares here, particularly encourage the CFO to see cost savings of NZD10 million banked across the period. Some further detail on those cost savings. We had a rephasing in class 4 maintenance and associated works at Arapuni Station. That's really following a further asset management and condition monitoring review at the plant. The reconfiguration at Southdown led to savings of circa NZD2 million there, so again, very pleased with that progress there at Southdown; the expected increase in sales and marketing in the face of retail competition and the release of new products we had provided additional spend there. We saved NZD4 million against our plans as these proved unnecessary given the retail cut through, and we saw savings across wages and salaries, including [temps] of circa NZD2 million in the period. Dry weather did weigh on energy margin and flow through to lower EBIT debt for the period, seeing that fall NZD12 million, partially offset by these costs savings. As signalled in December, following the announcement of an exit from international geothermal development, we've finalised the accounting applications as signalled at this time and these are culminated of collective impairment of NZD83 million, seriously impacting NPAT for the period, reducing that to NZD8 million.
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation Operating cash flow however was strong and up against the prior period, on the back of lower cash taxes. We had a very larger P3 payment last year in July and we did see positive effects from the changes to the Vector lines agreement, which has seen positive cash flows for us leading to that positive movement against interims. Fraser has signalled ordinary dividend guidance for 2015 on the back of the strong cash flows of NZD0.14. That is maintained with the fully imputed dividend paid -Special Dividend paid in December of NZD0.5 and an interim declared of NZD0.56, up 8% on PCP, to be paid at the end of March. I'll quickly run though some bridges before I hand back to Fraser, so again, the EBITDAF bridge for the period and energy margin down NZD19 million. Obviously hydro weighing heavily there, 94GWh, almost 100GWh less than the prior period, which was also dry. I think this time last year we were reporting surprise at the dryness and that has continued for another year. Slightly higher fuel costs across the thermal portfolio, as that generation level almost reaching 300GB for the period. Again, we are encouraged to see liquidity through the ASX market, through that period. Certainly, the ASX is a valuable mechanism for us to both sell and hedge exposures in the wholesale market. Minor NZD3 million there in other income, reflecting the increased contribution from metering, - so the metering business is hanging meters. They are on target for 50,000 meters by the end of the year and again, that was driving through other income. I've touched on some of the movements in operating expenditure. Last year we did signal that the ACM NZD20 million of permanent cost savings. The guidance assumed OpEx of circa NZD230 million for the full year. We're very encouraged to see the progress there against both PCP and over the period against the guidance levels. International geothermal exit thereof, which was in play. That will reduce costs to the -- those activities. We saw those down NZD1 million on the PCP. We've got a comment here around insurance. We renewed our insurance policies for our generation assets, both property and business interruption every November. We have seen a significant reduction on the annualised basis insurance premium savings amounting to NZD3 million per annum, have flowed through. Some of that related to a reduction in the insurance limit from NZD2 billion to NZD1 billion, which we have deemed a more appropriate level, given our review of the risks on the hydro scheme. We have seen additional savings flowing through, through professional fees and the contractor line, given the lower levels of activity. We now expect operating costs to be in line with last year's level at circa to NZD20 million. Underlying earnings and NPAT bridging, all on the same again. The bars look very -- relatively small between periods, ultimately bridging NZD15 million between underlying earnings last year at NZD105 million and this year at NZ90 million. Again, lower results in terms of EBITDAF, again impacted by hydrology, higher depreciation on the back of a full year of depreciation at Ngatamariki finally commissioning last year in September. Again, NPAT seriously impacted by NZD83 million in impairments. I'll touch on those shortly and last year's positive fair value movement of NZD20 million. This year we are tracking just one, given a much lower interest rate curve at the back end of this year. Our international geothermal development exit. Again, whilst that was signalled in December, before that time, we undertook a rigorous review that culminated in a decision to exit the development interests. We signalled at that time we were reviewing the accounting treatment. Those deliberations have completed, resulting in NZD83 million. We have broken them down across the three jurisdictions respectively. Full impairments in both Chile and Germany, NZD56 million and NZD13 million respectively. We have also reviewed our US interests. So those are split across effectively to two entities. Energy source, which is the development entity, of which we hold a 20% economic interest. It's currently on the books for nil value. We have signalled no material development capital to that entity. Then the John L. Featherstone plant currently held with Hudson Ranch Holdings. Those values are supported through a very complex discounted cash flow model, looking out into the future. The tax equity structure with Chevron obviously plays a key part. A review of that model and the operating [assumptions] of the plant has resulted in impairment of NZD14 million, taking the carrying value of that asset back to NZD12 million as at December 31. Some nice (inaudible) accounting at the bottom. So we do have a foreign currency translation reserve account which tracks the movements in the foreign assets overseas through time. That currently holds a negative reserve of NZD10 million that would be released on disposal of the Chilean assets. That is just signalling that potential non cash outcome. On cash flow, again I've talked to higher cash flows from operating activities. Probably key other statement here, investing cash flows in line with the CapEx numbers and to the chagrin of the bankers in the room, we entered the period with NZD33 million in the bank, meaning that other than our bonds, no bank facility was drawn at that period. Finally, capital expenditure, NZD56 million for the period, just up slightly on the prior period. New investment NZD14 million, mostly in metering, stay-in-business at NZD42 million, again, a fair chunk of that related to two wells, one at Ngatamariki and one at Rotokawa, again, both those wells performing well. We have seen some 5 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2015 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.
FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation rephasing into 2016, so that has affected guidance. We're down NZD10 million for stay-in-business CapEx for FY15 at NZD85 million and committed growth CapEx at NZD35 million, previously NZD50 million, as largely affected by a rephasing of the Trustpower deployment in FY15. In the issues in Nga Awa Purua on the steam turbine have been well signalled in terms of the turbine replacement. Our share of those costs is now -- will now be treated as CapEx and will amount to NZD7 million in FY16. Thank you. I'll hand back to Fraser. Fraser Whineray - Mighty River Power Limited - CEO Thanks William. Right, so just on business strategy update. I'm very pleased with the progress that we're making, as I mentioned earlier, with the opportunities in retail. It is a very competitive market that we see we've some niches that we can exploit and some platforms which we can leverage. The retail headline pricing, we made that announcement that we'd hold that flat for the third year in a row at April 1, 2015. On the industry disconnections we have been the leader at reducing that and still stay well ahead of the pack, given our approach to both debt management processes and also our GLOBUG technology. On the technology side, GLOBUG has got us and a lot of budgeting agencies and agencies which deal with people that are struggling to pay any bills very excited. I'll touch more on that later. But our churn is 2% below the market average of 19%. Customers (satisfaction) sat at 60%. That's reasonably solid amongst the big generator retailers and we are always looking to push that up higher. In terms of driving efficiencies, as announced at the annual shareholders meeting, we mentioned two projects there. One was the Whakamaru reinvestment as part of the larger hydro scheme refurbishment and also the closure of the steam, 35MW steam generator at Southdown. So the Whakamaru one is underway and a lot of that involves planning and procurement with international supply lines, from offshore manufacturers for key parts of the plant. In terms of Southdown, we have executed those changes in the first half to remove that capacity from the market, reduce costs and increase the flexibility of that power station. That has gone very well. We continue a program to exit surplus property where we deem it unnecessary or not strategic for the portfolio and a lot of that has focussed around Marsden, to the north, where we used to have some power stations. It's now a cleared site. As William mentioned, we still have a very large insurance line related to the Waikato hydro scheme, which sets the high water mark for our insurance requirements, although we have reduced this from NZD2 billion to NZD1 billion for the cover, because we felt the risk return on the extra NZD1 billion was sub-optimal. In terms of the geothermal development exit from the jurisdictions noted, William has gone through that and the consequences on the NPAT for the half year. The rationale for that was announced in December following a rigorous review, which we noted was well underway at the time of the annual shareholders meeting in November last year. Germany is now gone and the sales process for Chile is underway, to the extent we conclude a successful sale and have positive proceeds, then that would go back against the impairment level, which we have written it down to in these half year accounts. Turning now to the funding of the business, GLOBUG, as I mentioned, it's a very exciting thing. We've got some mass media, which has now launched as of, I understand, yesterday and we've got some collateral out there as well, where you can see some of the re-branding. But it also involved some revised technology and the culmination of years of relationships and understanding with the budgeting agencies and this sector of the market, through the GLOBUG customers that we have now, which number some 19,000. We are the leader in prepaid technology in New Zealand and this relaunch has seen us focussed on households with Community Services cards. We felt this was an appropriate part of the market to target for this and some of the advertisements will be played at off-peak times of the day and that suits the market we are trying to target. So if you don't see the advertisement, I'm sure we will have it available on the GLOBUG Facebook page or website, as it is fun to watch. So we look forward to that producing some steady growth in prepay customers for that segment that needs it. All of those 19,000 customers did get the benefit of that price discount when we relaunched the product. In terms of metrics, the absolute focus here is on the Trustpower partnership and now we've been through a lot of the pre-rollout work and phasing work required to assess when we will rollout these meters. We are in full swing in terms of that partnership arrangement and the joint project management with Trustpower. So full deployment will start in mid-2015. We look forward to that getting up the momentum with the teams, as we roll those meters out. 6 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2015 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.
FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
In terms of long term opportunities to yield value over time, at the annual shareholders' meeting we talked about water or storage, electric vehicles and photovoltaics, so just an update on two of those here. In the half year, so December 31 we signed the 52 year operating easement regulated to water storage with a Tuwharetoa Maori Trust Board and here we are in the top right hand photo with Sir Tumu Te Heuheu, the Paramount -- Paramount Chief, sorry, of Tuwharetoa, John Bishara who is the Chair of the Tuwharetoa Maori Trust Board and alongside him is Topia Rameka who is the Chief Executive. Separately, on electric vehicles, we've been advancing partnerships on charging infrastructure and car manufacturers which have brought their electric vehicles to New Zealand, which has gone up a lot in calendar 2014 compared with calendar 2013. Product is vital at the right price point for this market to expand. We're well under way with our fleet conversion, which we said, as our leases rolled off, we would replace where possible with plug in or plug in hybrid vehicles - we expect to have 20 by the end of 2015. I'm pleased to report in Nissan Leaf, which is our pure electric vehicle so there's no backup on the battery, is now successfully driven and is part of our core car fleet between Auckland and Hamilton or Rotorua and Hamilton. So for all those with range anxiety, there is -- even that car, which is about the size of a small hatch, is going very well and is enjoyed by our staff. We see a positive contribution from electric vehicles in terms of the market overall, environmental impact, fuel bills, balance of payments and since the annual shareholders' meeting announcement, we've had many companies contact us because they were simply at the starting point in terms of how do you convert your fleet and how do you charging infrastructure. We're the most EV ready country in the world. We have the second highest rate of off street parking in the world and therefore we've got 1.7 million charging stations already in place, and yes it does charge from a three pin plug. In terms of some regulatory and legal matters, the transmission pricing methodology continues to flow. I think there's announcements out today which relate to that it'll be early 2016 before I think we've landed where that will get to. Like Tiwai, I think these things just produce uncertainty and stop the sector becoming more efficient for the benefit of consumers, so we'd like to see those things resolved. We do support Transpower's operational review. We think it's pragmatic, but we also note it may eliminate the theoretical benefit from more significant changes to the transmission pricing methodology. In terms of some other matters which have been in the media historically, New Zealand Carbon Farming case, we're expecting a the decision on that in February or March, and the Serious Fraud Office case regarding fraud from a former employee of the Southdown power station and his partner. That is scheduled for a year away in February 2016. So we'll watch those with interest. In terms of outlook, we have maintained strong cash flow and that supported our dividend guidance of NZD0.14 per share to be maintained. At the ASM we said our guidance would be at the lower end of the NZD495 million to NZD520 million range for EBITDAF and our new EBITDAF guidance overlaps with that at NZD480 million to NZD500 million, which is a relatively minor shift in the context of a NZD0.5 billion EBITDAF line. We've explained there and several times today already why the EBITDAF guidance reset hasn't been a straight pass-through of what lower hydrology would result in. It is some offsetting factors. We also note the assumptions taking us through to the yearend guidance as well. In terms of outlook, lastly, at the ASM we talked about our operate, build and grow strategy and that through the lens of customers, the Company and the country. This is just a summary here of some of the announcements made in the last six months against that strategy. So as you can see, there's a substantial amount on. Even as we are still finalising a few appointments in the senior management, we've made a number of internal appointments to senior management. So I'm talking sort of the 40-odd senior managers in the firm, and we also made a number of external appointments in that as well. I'm delighted with the way that group is coming together. In terms of the first six months on the job, the intent at the start was to have strong continuity and fresh alignment against our strategy, and I'm very pleased with the way that has been coming together following the lengthy transition and comprehensive transition with Doug. So the executive is coming together very well as a team and we're all here in the front row and they're doing tremendously well. We're well supported by an excellent Board and people throughout the business who are not only very passionate about the Company, but also the customers they serve and aspects like GLOBUG and the Tuwaretoa arrangements enthuse them greatly. They are also very passionate about their contribution to the business. So we've made some early decisions and we refer to the annual shareholders' meeting where we made four announcements which were quite clear there. It is an extremely competitive market. We do have several growth opportunities. We have to work very hard for that growth and -- but at the core, it is a very strong business and I'm certainly enjoying things at the six month mark as Chief Executive. So, now we're happy to take questions.
QUESTION AND ANSWER
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
Unidentified Audience Member Morning Fraser, morning William. Fraser Whineray - Mighty River Power Limited - CEO Morning. Unidentified Audience Member Just had a question on the, you know, what do you expect in terms of prices, your FPVV prices for C&I and residential customers as well as retail margins going forward, given that you're seeing firmer prices on the ASX? Also on the flipside, you're seeing, you know, Trustpower trying to acquire customers in Auckland which is your largest market. So some colour on that would be useful. Fraser Whineray - Mighty River Power Limited - CEO Yes sure. So there are a number of things there, let me just make sure I get them all. So it was FPVV and Auckland share, largely, and C&I. Yes well the ASX market is that, less, we will also expect C&I pricing and time of use pricing to lift as well. So that's a pleasing move because at the end of 2012, that came off quite quickly from the levels it was at and that's why we decided not to go down a renewal path on a lot of those contracts because we felt that it wasn't a worthwhile trade off against the risk of covering those -- that sales position. On FPVV, it's dominated I guess by our mass market sales. We've announced flat headline pricing there again and we -- our share has actually -- well our number of customers has gone up even despite Trustpower's foray into Auckland. So yes, there's been some churn away to their product. I think they might be up 20,000 customers year-on-year and they've invested heavily to achieve that, But we've been successful in the range of parts of the country where we see value and James who leads the customer team continually looks to optimise where we will hunt out the best value customers for the sales portfolio. Unidentified Audience Member So can we sort of expect sort of flat FPVV for the next 12 to 18 months? Fraser Whineray - Mighty River Power Limited - CEO Well we don't make mass market pricing announcements that far in advance. We've certainly made our position for April 1, which typically is for the subsequent 12 months at flat headline for those customers on those products. Some of our customers or a third of our customers I think it's shown in the deck are actually on fixed term contracts already. So their prices are fixed irrespective. Unidentified Audience Member The other question was on operating expenses. You're saying operating expenses for the whole year will be flat, that's NZD220 million. You did NZD101 million in the first half, so NZD119-odd million in the second half. What's driving sort of operating expenses in the second half? Fraser Whineray - Mighty River Power Limited - CEO Yes, can you talk to that?
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
William Meek - Mighty River Power Limited - CFO Yes the phasing of OpEx tends to be back loaded to the six months, so that is the way it traditionally works. So there will be a catch up, particularly across some of the major maintenance categories as well as sales and marketing spend particularly associated with, say, the launch of the GLOBUG initiative which will drive some additional expenditure there. So there is some recovery, but again, yes we're very pleased to be NZD4 million under the PCP right here today. We're forecasting we'll be at similar levels to last year. Unidentified Audience Member Just lastly on the metering CapEx, is that basically just timing? So you're not expecting an overall reduction on metering CapEx over the next two to three years? William Meek - Mighty River Power Limited - CFO No, the scope of the Trustpower arrangement remains the same, so it is phasing. It’s predominantly around hanging meters on walls on houses. So it's just you've had a - obviously they're getting the year -- that contract had only just been entered into, the detailed planning with Trustpower hadn't taken place and particularly, that's been finalised now which has resulted in a different phasing of deployment. Unidentified Audience Member One question around metering. Do you see that -- does management view that as the domestic business or are they considering growth opportunities across the Tasman? Fraser Whineray - Mighty River Power Limited - CEO Yes we've previously made public comment that we do consider some of the things that we do in metering could have international opportunity. We certainly know the Australians look strongly across to New Zealand, who have rolled it out without regulation and without much fuss and are trying to work out, how do the Kiwis do that. So they're interested in learning from New Zealand firms, of which now that market is consolidated to basically -- well three. Now I think we've got one from the phone? Operator Thank you. Your first question comes from Matt Henry with Goldman Sachs. Please go ahead. Matt Henry - Goldman Sachs - Analyst Good morning Fraser and William. Look a couple of them are just follow ups on the first question. Regarding your commercial contract book, can you just give us any sense of colour about what the roll-off impact may be over the next six to 18 months, i.e. how much of that book is on sort of historic higher legacy prices? Then secondly just on OpEx savings, at the full year you indicated that NZD10 million of the savings in 2014 weren't permanent. Have the savings you've achieved this year, do you think they will be permanent or do you think you'll see a step up or a normalisation in some of those cost lines going into next year? Then just lastly, you make a comment around share buyback, if you deem it's beneficial to shareholders. Are you able to give us any sort of colour on I guess the considerations that you would make to determine whether a buyback may be beneficial? Fraser Whineray - Mighty River Power Limited - CEO
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation Rightio. Well William and I will work through those three. I'll refer to William on the commercial roll offs, contracts and also the permanence of OpEx and happy to add some colour on the share buyback. William Meek - Mighty River Power Limited - CFO Yes, there's a slide in the deck where you can see C&I volumes versus essentially ASX forward price. You see, you can see a build-up through 2012. Those contracts were typically two to three years in duration, so they will roll through this year, so you'd see most of those rolling off. You do have an additional effect in that at the same time, we've got bought contracts, so -- and they were also rolling off. In terms of net impact, those two are offsetting influences. So we'd expect the roll offs of those contracts sold when yields were higher back in 2012 will be largely complete in this financial year. Obviously again, watching brief on ASX price movements and a point to re-enter the market. I think right here, right now CNI pricing is probably lagging ASX so it hasn't responded as quickly. That's expected. Again, so we will keep a review in regard to at what point we'd like to re-sign. That being said, very happy with the flexibility afforded by a lower retail book into our particularly hydro generation assets. So we're able to move those and take a much more structured position through ASX type hedging. On OpEx, the big the lumpy spend is in maintenance. We've got some well repairs which will happen over the next few years. Those repairs can cost anywhere between NZD5 million to NZD7 million each. Those do cause some movements in maintenance. That being said, you know the business is on a journey of efficiency and effectiveness. That journey continues. We're very, very pleased with the results to date and so that lower cost structure I think, as far as we're concerned, is permanent unless you're talking about new and different activities. So for the business as usual activities, the things we're currently performing, we see no reason why those costs -putting aside some of the bounces that can occur in maintenance -- are not sustained through time. On the buyback, again the requirements are disclosed why the buyback is happening. The Company again signalled capital management initiatives back in the ASM in November and again that is a placeholder. We've got 12 months to execute them and the Company will take a decision about the share price and relative value and whether it will require shares through that buyback mechanism. Again, that is not unusual vis-a-vis a number of other [NZX] participants. Fraser Whineray - Mighty River Power Limited - CEO The VWAP on the last buyback was at NZD2.13. Matt Henry - Goldman Sachs - Analyst Okay, thanks and clearly it's a higher than NZD2.13 now. I guess -- I presume you can't give us any colour on where you see-Fraser Whineray - Mighty River Power Limited - CEO Value? No, we can't. Sorry Matt. William Meek - Mighty River Power Limited - CFO Just watch the Exchange disclosures. Obviously buybacks have to be disclosed relatively sooner -- on a daily basis after transactions. So again, just watch the MRP ticker and the consequent disclosures and all will be revealed. Matt Henry - Goldman Sachs - Analyst Thanks, that's helpful and (inaudible - technical difficulty). Operator Grant Swanepoel, Craigs Investment Partners. 10 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2015 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.
FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
Grant Swanepoel - Craigs Investment Partners - Analyst Good morning team. William Meek - Mighty River Power Limited - CFO Good morning Grant. Grant Swanepoel - Craigs Investment Partners - Analyst The first question is just on demand growth. You indicate that you think things are starting to develop on that front. That's linked to other positives with ASX hedge curve rising but you're sticking to keeping residential prices flat through to April, June this year. Do you have an outlook or a view on where residential places might head over the medium term, particularly post-Meridian's results? They were hesitant to say that they were going to keep prices flat post-June this year. Could we see some uptake if we continue to see an improvement in the CNI pricing? The second question is on the excitement around Contact's offshore venture. Obviously that's tongue in cheek. Have you guys jumped on the opportunity to repackage your assets offshore and try and flog them to Contact? That's it. William Meek - Mighty River Power Limited - CFO Okay, I'll cover these off. Look it is -- those three points there -- demand longer term pricing outlook and also the offshore stuff and Contact. On demand, look I think it is early days Grant to say that there's some sustained recovery in demand. It was very pleasing to see it. There's some underlying factors when you look at particular segments as to why there should be some increase in demand and we touched on those. I think -- you know in ASX futures I think lifting is more of a supply side -- actually more of a supply side response than a demand side response at this point simply because of the roll-off of thermal commitments that we mentioned earlier in gas and coal. So in terms of the residential pricing outlook, as I mentioned earlier we don't give views further out and it is a highly competitive market and it simply depends on where we see value and relativities to CNI pricing and residential pricing and netting all of those back. But if the market continues to tighten but in a nice reliable -- you know, as long as reliability is maintained for the electricity system overall, that could lead to some increases in yield. Similarly, there are other market events which could see decreases in yield. So I think we still have a few uncertainties in front of us. Some of those I touched on, Grant, around TPM and TY plus of course competitors' supply response with their thermal plant. So I guess there's a broad range of outcomes and it'll just depend on what the market circumstances are at the time. I know that's non-committal but there's certainly some uncertainties in front of us. In terms of Contact looking at our assets, look the core thing is at the start of an auction process, as you know if you've ever sold houses, you just want as many people in the room at the front end of that as possible and a good tense horse race. So well, you know, if they're interested in them then we're certainly not going to exclude them from the process but they'll have to answer their questions as to what their plans are in international geothermal as I'm sure you've been asking them Grant. William Meek - Mighty River Power Limited - CFO Grant, can I just add something to that. So on the demand, I mean we're -- I think we're pretty optimistic about demand. We're seeing net migration tracking above 50,000. We're seeing housing starts in Auckland, you know, approaching 15,000. We're seeing the effects across each rebuild. Vector is signalling ICP growth across its -- across the Auckland market which again breaks a five year trend of declining demand and the industrialisation we've seen over the last decade looks, at this point, to be abating. Obviously TY remains a key risk given its 14% of demand. We can talk about that later.
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FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation And again, on the supply side that thermal -- the thermal flexibility now we're seeing and the discipline between Contact -- probably Contact and somewhat Genesis is also encouraging in terms of lower fuel commitments or take or pay obligations. So you put all that into the mix and we see a market environment that's far more positive than say we were two years ago. And on international geothermal again yes, I'm responsible for that. We will run a tight and contested process and you shouldn't forget that Origin also hold some international geothermal interests, so that's also interesting. Grant Swanepoel - Craigs Investment Partners - Analyst Thanks. Look, I don't know if you guys can hear me? Fraser Whineray - Mighty River Power Limited - CEO Yes we can. Grant Swanepoel - Craigs Investment Partners - Analyst Just -- my question is really around if Contact needs a few more months to firm down whether they're going to go offshore or not, would you guys consider holding off on your sale process to try and get an extra person in the room? Fraser Whineray - Mighty River Power Limited - CEO Well, we can have those discussions directly with parties that express interest but we'll cover that off. We'll cover it off actually with each of the parties that want to participate in the process as to whether or not we'd modify any process, yes. Grant Swanepoel - Craigs Investment Partners - Analyst Thanks very much. Fraser Whineray - Mighty River Power Limited - CEO Thank you. Operator Thank you. (Operator Instructions) Your next question comes from Andrew Harvey-Green with Forsyth Barr. Please go ahead. Andrew Harvey-Green - Forsyth Barr - Analyst Morning, guys. Just a couple of questions from me. First of all, just around GLOBUG and what sort of targets in terms of customer numbers are you looking at for that business going forward? Fraser Whineray - Mighty River Power Limited - CEO Yes. We believe that the uptick in GLOBUG customers is something that we would see being relatively smooth and steady over time as opposed to a step change. And that's because of the nature of the acquisition channel is by a lot of referral through budgeting agencies and people who have clients which would strongly benefit from this product, and word of mouth as well. 12 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2015 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.
FEBRUARY 23, 2015 / 10:00PM GMT, MRP.NZ - Interim 2015 Mighty River Power Ltd Earnings Presentation
But we'd like to see GLOBUG doing multiples of its current customer base actually over time. We've discounted the price to those community services cardholders and the existing ones, and with a view to grabbing additional volume through that channel, and that's the commercial decision we're taking. So we'd like to see that pay off. Andrew Harvey-Green - Forsyth Barr - Analyst Okay. And my second question was around international geothermal as well and just to -- just understand, particularly around the Chilean assets, what's the key driver for deciding to leave that? Was it the investment timeframe in terms of getting a return that's too long, return uncertainty or below-ground issues or what was the key driver for deciding to leave it? Fraser Whineray - Mighty River Power Limited - CEO I think, Andrew, there are multiple issues in that and we did talk to that on December the 16th last year in our rationale. But it didn't meet our investment criteria. And if you go back to 2008 the world, including Chile and a range of things, whether it was fracking technology and the impact that's had on global energy markets, remembering that Chile is an LNG importer for the purposes of electricity generation after Argentina cut off the gas in 2004. So there's a whole range of regulatory frameworks, distances to grid, field dynamics, which you all put together and decide is that going to be a race, do we have the time and or the capital and the comfort in the regulatory environment that that will yield a successful result for our shareholders. So I don't think you could put it down to any one thing. But I do know if you're doing international geothermal you need a lot of money, you need a lot of time, you need favourable market circumstances and it's in the renewable space you need comfort that those rules aren't going to change in the jurisdictions in which you're operating. And of course it's just got to be competitive against other fuel systems. I know I can't give you a single one-line answer for that, Andrew, but -- and that's because there isn't a single one-line answer for the decision. But that might give you some colour as to some of the considerations that were made in arriving at the decision that it didn't meet our investment criteria. Andrew Harvey-Green - Forsyth Barr - Analyst Okay. No, that's all good. Thanks for that. Fraser Whineray - Mighty River Power Limited - CEO Thanks, Andrew. Operator Thank you. At this time we are showing no further questions over the phone. I'll now hand back to Mr Whineray for closing remarks. Fraser Whineray - Mighty River Power Limited - CEO Okay. Well, thank you all very much for coming. My team here have all got name badges on and are happy to engage with you all over a cup a tea afterwards to the extent you have time and don't have to rush off to the next piece of the reporting season, which is no doubt busy for you all. So thank you very much for attending the half-year results and to William for co-presenting those with me and look forward to chatting with you all over a cup of tea. Cheers.
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