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EDITED TRANSCRIPT MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation EVENT DATE/TIME: FEBRUARY 22, 2016 / 10:00PM GMT
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation
CORPORATE PARTICIPANTS Fraser Whineray Mighty River Power Limited - CEO William Meek Mighty River Power - CFO
CONFERENCE CALL PARTICIPANTS Grant Swanepoel Craigs Investment Partners - Analyst Andrew Harvey-Green Forsyth Barr - Analyst Nevill Gluyas First NZ Capital - Analyst Stephen Hudson Macquarie Group - Analyst
PRESENTATION
Operator Thank you for standing by, and welcome to the Mighty River Power interim results analysts' briefing. (Operator instructions) I would now like to hand the conference over to your first speaker today, Mr Fraser Whineray, CEO. Please go ahead. Fraser Whineray - Mighty River Power Limited - CEO Thank you. (Spoken in Maori) Welcome, everybody, to this investor conference call for the first half results for FY16. Thank you for joining us on the line. I'm accompanied here by William Meek, the Chief Financial Officer, and Tim Thompson, covering investor relations, and my colleagues from the executive. Given the background you have on the Company -- the information we've already sent out and the guidance throughout the period -- I intend to move fairly swiftly through the deck before we get into Q&A, since it's fairly well outlined in what's now become a well-honed presentation and set of materials. So turning straight to slide 4, on the highlights, I'll just cover those off. Firstly, on the top left, on safety, we're making positive steps on this journey. We've had no serious harm through the half year, although we had one lost time injury, actually caused in an office through a slip on a wet bathroom floor. Given the extent of the operations which involves diving behind dams to look at headgates 50 metres below the surface of lakes, and also all of the other various hazards that our business entails, we're pleased with where we're progressing in this area; not only within Mighty River Power, but engagement across other likeminded generators as well. For the customer, on the bottom left, for those that attended the capital markets day, you should be familiar with our focus on loyalty in a market construct which typically just rewards disloyalty. So the Good Energy Days, which are a recent introduction, and will now be on TV commercials, which you'll see starting to roll now, lifting us ahead of our major peers on customer satisfaction, churn remains below the market at mid-17%. ASX -- it's come off slightly in recent days with a little bit of rainfall. Why the FY17 and FY18 shifts because of rainfall at this point still eludes me in this industry after seven and a half years, but the dynamic overall on half year on half year is positive, and you can see that reflected in the forward curves. We, as at New Year's Eve just gone, moved to 100% renewable generation with our 40% base load geothermal and the balance being hydro, which is also the largest peaker in the North Island. We've also gone further than that with our solar acquisition, What Power Crisis, to bring that technical capability into our firm and enhance customer offerings. The EBITDAF, overall, was flat year-on-year, or down NZD1 million, at NZD257 million, underpinned by some strong operating performance coming through, particularly from our geothermal business. We had stronger hydro inflows, though a lot of that arrived in Q1, when wholesale prices were subdued.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation The ordinary dividend is paying per expectation at NZD0.057 per share. That's up 2% on last year. Full year guidance for dividend remains NZD0.143, and EBITDAF adjusted for the hydrological assumption is down to a range of NZD480 million to NZD500 million, which I'm sure you would appreciate is fairly transparent in the way hydrology rolls in the business, and relatively small against the context of a NZD0.5 billion circa EBITDAF. So slide 5, on safety, we'll talk to a couple of the highlights. You can see the reduction there coming through in the half year 2016. I think it is still low probability, high severity events that are most important. And because there are so few of them, it's very hard to get consistent trends by looking just at accidents; what you have to do is look at a lot of near misses. We now all have app-based near miss or hazard reporting on our phones so we can very quickly identify hazards and make sure that they are tracked because that gives us a better picture of the safety environment, as opposed to simply looking at things that have gone wrong after the fact. Not in the data are off-site contracted meter readers, so we have a meter reading company doing some meter reading. As you'd appreciate, a lot of electricity meters are smart, but gas meters aren't, and require someone to go to the premises. Going on to someone's premises can entail safety hazards, which are rare, though are concerning when it comes to significant situations like dogs. So we are still very much focused -- even though they are off-site contracted staff -- on improving their safety performance as well, particularly through our Metrix business. In terms of financial highlights, a pretty clear explanation there of what's been going on. I'll cover this off. Energy margin is up slightly. OpEx phasing means flat EBITDAF relative to PCP. And we have given assumptions on guidance for the full year related to OpEx, so -- in terms of being flat year-on-year for the full year forecast. And so we should all be reasonably focused on the full year outcome than necessarily phasing half year on half year, which can be a bit loomed in given we're a long dated business. We had more water, lower generation price, which was pushing up into the top end of the Lake Taupo level, and that came at low wholesale prices, lower yields. We have talked extensively in the past about our multi-year approach to commercial and industrial contracting, with our intent being to sell more when prices are high and sell less when prices are low, and we continue to maintain that. Even though that can produce some volatility into year results, it's still maximising value for the shareholder. In terms of NPAT, it's up substantially because the prior period entailed a large number of write downs following the December 2014 decision to exit international geothermal. Free cash flow was up slightly. Capital expenditure was down, and that related to wells, as is noted on slide 6. Turning to slide 7, we've restated our dividend policy, so you don't need to go and look it up again, but ordinary dividend guidance, as I said, reaffirmed at NZD0.143 per share, up two percentage points on FY15's NZD0.14 per share. The buyback documentation has expired that we put in place about a year ago, and no shares were purchased. In terms of market dynamics, slide 9, I can't think of any really in New Zealand that has a significant industrial sector as competitive as generating and retailing electricity. If you just focus on larger generator retailers, or larger retailing, this market is subscale. I read recently that we have about 0.9 million of population per large generator retailer, and Australia has 7.5 million per large generator retailer. And that gives you some context for the small scale we're dealing with, and gives you some context for the very deft approach that's required for innovation that will actually achieve a niche that can justify the investment. Loyalty, through our Good Energy Days, I've already touched on. Our analysis on customer satisfaction -- which for 8 to 10 on are you satisfied has listed more than five points half on half, and so we're pleased with that, and Good Energy Days are a part of that. In fact, satisfaction goes up for people that are offered a Good Energy Day but don't even take it. We've bought What Power Crisis. This is fundamentally a customer proposition. The scale of solar in New Zealand isn't such that it's something that it's going to displace geothermal or hydro. It's simply about making sure customers have a good choice and a great service and a great product. And we're excited at the experience and the talent that What Power Crisis brings to this Company. Dave Keppel, as you'll be aware, was named outstanding leader by the Sustainable Energy Association of New Zealand, which is a collection of largely distributed generation parties, at their annual awards. And Dave Keppel will continue to manage the What Power Crisis business for us. In terms of market dynamics, demand was -- on slide 10 -- at a record high for the country. And if you certainly, like we do, go overseas and talk to other energy investors, that does compare very favourably to dynamics in other parts of the world, so that's something, to be pleased about.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation And what we're doing is just putting some facts there around how much is irrigation, how much is rural, how much is travel -- sorry, Tiwai et cetera, so we can actually zoom on where that demand growth is coming from. So that's six consecutive quarters, and we'd expect to see that continue in positive territory, although perhaps not as strongly, going forward. In terms of supply, we've been through a lot of supply changes. At the full year result we were talking to those because a lot happened in July and August last year. In terms of national hydrology, it seemed to be a wettish first quarter followed by a dry second quarter, and some of that could have been driven by El Nino, though that is reducing in intensity. And, if you look at farms on the east coast of the North Island, they are flush with feed, as opposed to bone dry. So there hasn't been the traditional El Nino that everyone might have thought. We kicked off the second half -- January 1 -- just above mean hydrology, and we're still slightly above average now. And we'll be looking for some more value from that water under the right market conditions, if they manifest. Of course, the bigger picture on supply has been on slide 12, which we've talked to extensively. The amount of compulsory fuel that's contracted, or energy, and also the generation capacity, and you're all more than familiar with these dynamics. And they have led to a tightening, and that has supported an increase in the ASX pricing underpinning the market. On slide 13, we do like to put fresh perspectives into the discussion each half and this time we're focusing on the dynamics of the change in supply and demand and gigawatt hours, on the right hand axis of that chart on slide 13, through to the impact on potential wholesale price volatility. You can see there that when there was much higher supply on the green line, prices did come down a bit on average for wholesale, but that's also impacted fundamentally by the amount of water that arise in the country in a given year and there's been a pretty strong run in the South Island for the last couple of years. But you can see the volatility also shrunk. So now you can see where the green line's going and that could indicate a return to higher price volatility, we think that's beneficial to Mighty River's hydro system in the North Island. In terms of wholesale prices themselves on page 14, the ASX, as I mentioned, it's down slightly at February but you can see the overall trends half on half which have lifted across the curve and we've got a forward-sloping curve there. FY19 is also of interest because it's a market view, just one market view of what is going to happen with the Tiwai Huntly pairing and based on where those prices are at in 2019 that tends to indicate that the Tiwai smelter and the Rankine units continue in a similar form to what they are today. That's not necessarily our view, but that's actually what the 2019 ASX price indicates. We think it's a positive outlook for wholesale prices and ASX prices and indeed we're starting to see that flow through in commercial industrial renewals as well. Of course a familiar chart from those that attended the capital markets day and it was also repeated in some analysts' research on slide 15, the simple sort of two-by-two on Huntly Rankine units going or staying or the Tiwai aluminium smelter going or staying. We've been through this before; we just highlighted a few bullet points there on the right hand side, including from the CEO of Rio Tinto from December 2015 and also another view there on the bottom right, Tiwai's uncertainty is possibly worse than the certainty that they're gone and certainly worse than the certainty of them staying. So that's important, I think, for the local economy down here in the South Island and all of those employees and subcontractors and it's also important to produce the right long term investment signals. So yes, I would say whether Tiwai stays or goes, I think is less the point. I think it is linked with Huntly and it's the uncertainty that it could go is one of the challenges in the market at the moment. We look forward to watching some of those discussions play out with interest. As we've said previously, we have a 40% base load geothermal rain-fed hydro system in the North Island and we think that sets up our portfolio pretty well. If you have an uncorrelated fuel input, which is the South Island snow-driven hydro system, then typically you will need thermal or some sort of contract to manage your portfolio. Indeed, two of the three South Island generators have thermal plant as part of their portfolio and one of them doesn't. I'll now hand over to William to cover off the operational update and also some of the financials before I come back and talk to some guidance and strategy. Thanks William.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation William Meek - Mighty River Power - CFO Thanks Fraser. Fraser started with health and safety; so why? This happy chap we see here, this is Peter [Marden], he works at our Nga Awa Purua geothermal site. You can see him there leaning on some pipes. This is wellhead valve and see he, in terms of our health and safety culture, we're very, very proud of what he's done here in terms of improving safety for our people with his hydraulic valve opener, which definitely removes the risk of valves effectively swinging open very quickly without the hydraulic pressure. Very, very pleased to see that innovation across our team. Just moving through to the next slide, starting with the retail business, as Fraser said, retail sales across the period was steady, you can certainly see that in the top histogram. Very similar levels between this half year and the previous half year. Across the certainly business and industrial CFD sales portfolio, we were down just over 250 gigawatt hours, again reflecting the strategy Fraser has outlined around reducing sales under low prices and increasing under higher prices. We can see in the bottom chart the grey line lifting from a low in 2014 to low NZD80 levels in the ASX over that half year 2016. We are seeing greater success in terms of renewals and new business in the CNI/CFD customer segment. So that's pleasing. Of course those sales, in terms of the impacts on results, lag as those contracts are renewed in. Overall, across the physical volumes, fixed price variable volume prices down 1.5% against the previous half year, just under NZD116 a megawatt hour, again in line with the NB sales price data. Moving to slide 18, switching tack to our generation business, again generation volumes up significantly, so across the portfolio 374 gigawatt hours higher than the previous period. Very pleased with the performance in the geothermal fleet; the replacement of the new turbine at Nga Awa Purua, that's been running very, very well since we did that earlier this financial year. But we saw the highest production for geothermal ever, again you see a rising trend there across that 2011 to 2016 time series for geothermal output. Hydro generation, in terms of despite effectively inflows being close to normal, casting our minds back, we started at the lake about 150 gigawatt hours higher at July 1 than we would normally be. Inflows over that period have been poor, we're back down to an outlook of 4000 gigawatt hours for the financial year, but generation for the first half was slightly above average and well above the PCP at 460 gigawatt hours higher. Fraser has touched on pricing, wholesale price outcome's lower and I will talk shortly about GWAP impacts also. We're 100% renewable generation from January 1, Southdown has generated its last megawatt, pushed out almost 150 gigawatts over that six month period. Moving to slide 19, LWAP/GWAP, that's low weighted average price, it's effectively the average cost of energy purchased versus our generation weighted average price, i.e. what we've sold our generation. Seeing GWAP unfavourably impacted over that year, you can see that in the right hand chart, the black line really showing GWAP versus the time weighted average price falling away, so at the lowest levels we've seen since 2011. Probably the more interesting impact, when we look at the movements, again in the operating stance, we see hydro GWAP moving between periods from NZD76 last year to NZD61 this year, so a doubter of about NZD14 a megawatt hour, contrasting that against particularly our purchase LWAP moving from NZD73 to NZD63, a doubter of NZD10. Effectively on the hydro generation side, you've got a NZD4 movement more than on the purchase side, that's an adverse impact. For the half year giving you a financial impact of circa NZD8 million against the PCP. Against our peers, we still show a higher GWAP than our peers and, that distribution that Fraser talked to earlier, in terms of half hourly standard deviation which saw the price shift from I think NZD27 in 2015 to NZD20 in this half year, so that's again lower price volatility does not play to the strengths of our generation portfolio. Just moving through to a few slides on financials, great aerial shot there of the Waikato River and Nga Awa Purua in the background; I think you can see Lake Taupo even further away, very good to see a whole lot of our assets in that shot. Financial highlights, really quickly because I'll delve into these in more detail, EBITDA largely flat against the previous year, certainly a different make up: high generation volumes but lower prices through both generation and in user yields. NPAT up significantly to NZD74 million from NZD8 million in the prior period, mostly due to that significant reduction in impairments. Free cash flow, again up NZD8 million, largely assisted by a lower stay in business CapEx in this period given our no drilling campaign in FY16. We've touched on our ordinary dividend for interims at NZD0.057 and S&P reaffirmed our credit rating at BBB+ just before Christmas.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation The bridge for EBITDAF laid out pretty clearly. The movements relatively slight across that energy margin box in the four categories there. As you'd expect, lower -higher generation volumes showing uplift in generation energy margin, but pulled back by lower wholesale prices. Electricity purchase definitely down on the back of NZD10 reduction on wholesale costs. Customer sales again also up and CFDs broadly neutral at just NZD1 million positive movement for the period. Other income up NZD3 million, again largely on the back of increased metering revenue, I think it's NZD2 million of the NZD3 million and then OpEx, again up NZD7 million, largely due to phasing across both marketing and maintenance spend. In terms of guidance, we're still expecting OpEx to trend out in line with last year's levels of NZD217 million. So that bridge is effectively NZD258 million to NZD257, relatively flat EBITDAF over that half year period. Underlying earnings, again relatively small movements. Depreciation up NZD5 million on the back of a NZD500 million asset re-val last year. Again, relatively small movements across equity accounting earnings and net interest; income tax down NZD5 million on the previous period. Underlying earnings bridging NZD90 million to NZD89 million for this interim period, so again, relatively small movements across that period. Just touch on international geothermal and particularly Chile. As flagged at the [ACM], we were running a sales process that has been unsuccessful. The Company has commenced a remediation program in Chile that relates to two geothermal fields, the main one in Tolhuaca and the other one at Puchuldiza. We are mobilising equipment to site now. That has resulted in effectively an increased provision of NZD18 million to take the total cost to NZD22 million, to effectively seal and clear the sites there at Puchuldiza and Tolhuaca. Southdown, the sales process there is well advanced and we are expecting that sale to be concluded very, very shortly. Touching on CapEx. CapEx certainly again you can see in the chart at the lowest level it has been in that six-year stretch. This is an outlook for end of year, total CapEx sitting at NZD74 million, NZD60 being stay-in-business and that will put you in line with 2014. A growth CapEx of NZD14 million, the vast majority of that is related to deployment of meters at Metrix. We do flag there we will be commencing a drilling campaign at effectively Rotokawa and at Kawerau in FY17, we can expect a lift in CapEx on the back of that four full-well program scheduled for next year. Moving to funding. A relatively spread-out funding profile for the Group. We do have NZD120 million capital bond maturing in October of this year. That's a wholesale note. We have NZD300 million of undrawn bank facilities at this time and no CP on issue. You can certainly see the NZD300 million capital bond issued last year maturing in 2045, relatively staggered and spread debt maturity profile there. Gearing ratio sitting around the 25% range and debt really not moving between the full year and the half year now. Finally just talking on capital allocation. You can see in the chart the BBB range, ranging from 2 times to 2.8 times debt/EBITDAF, we're at the good end of the range, and you can see that peaking in 2013 where debt built up on the back of commissioning Ngatamariki. We still hold 23 million treasury shares from the buyback in 2014. Touching on competing uses for capital. Certainly growth opportunities, we are assessing those and they would need to be value-accretive and return at least cost of capital on an expectations basis, capital management is under review and it's an ongoing consideration for the firm. I'll hand back to Fraser for outlook. Fraser Whineray - Mighty River Power Limited - CEO Thanks very much, William. The guidance and outlook I've already touched on some of this. I'll just highlight a couple of points. We've maintained a strong cash flow and that supports the FY16 dividend guidance of NZD0.143 per share, up 2% on the prior year, and most of our 95,000 shareholders will be very focused on that, particularly in this global environment, and we're pleased to be able to reaffirm that guidance for them. The reduction in hydrology is transparently outlined. 4000 gigawatt hours is the average we expect for the hydro scheme. We kicked off guidance with 4150 gigawatt hours, and that was because Lake Taupo had 150 gigawatt hours or about 35 centimetres -- it's about 4 gigawatt hours per centimetre in the lake -- more storage as at 1 July than average position. That's why that was initially went out with guidance on 4150 gigawatt hours, and now after a slightly dry particularly second quarter, we're back to 4000 gigawatt hours assuming average through to the finish of the year.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation Not on plugging the wells, this relates to Chile and the last bullets points, but it's on ultimate sale or liquidation of the Chilean development assets. We will release a NZD10 million FX translation reserve. That is above the EBITDAF line, and as we've previously communicated it to the market, it's non-cash and we don't expect those events -- the ultimate sale or liquidation of the development assets -- to occur this financial year. We'll continue to provide clear guidance with clear assumptions, and based on the feedback we've received from the market in that regard that is helpful to you, and we'll also continue to focus on the long-term creation of value, because it's a long-term business. In terms of the outlook, again, our themes are consistently what's in it for the customer, the Company, and the country across operate, which is more near-term build, and grow. I'll touch on operate. Look, the bulk of the Company is engaged in this. That's what they do. This is very important. It is the piece that drives our value and risk parameters and where you can get most gains on increases to efficiency and productivity and safety, so we're still on our goal for zero harm, focused on that, and through an internal campaign Together Safe and external generators and trans power through Stay Live. We've also got the upcoming changes in legislation under the new Work Safe Act. Our portfolio optimisation continues, and Southdown's removal was part of optimising that portfolio. Also, as I've said earlier, is multi-year optimisation of CNI sales and the Southdown decision also flows through to cost efficiency, where we've reduced OpEx by having Southdown come out and reinvesting that elsewhere, as well as taking efficiencies elsewhere in the firm. Costs are down over NZD30 million from their peak, which annually was over NZD250 million historically. Capital productivity, again, taking assets out that we don't need and putting them into things that we do. I think we've been making very clear decisions which have been well-received by the market around international geothermal development, Southdown and also land sales which are surplus to requirements, and Metrix continues to focus very much on service delivery, and that's going well. In the build, as William has already touched on, some thoughts around developments on the right-hand side, but development and value-accretive M&As, since they would attract the biggest uses of capital, but fundamentally we're going to continue with putting customers at the front and dealing with loyalty- and service-based experience for them on non-price attributes to enrich that experience, or in some cases they just simply don't like to be bothered at all, but it's certainly satisfying customers for their multitude of different needs in an efficient way. On grow, November 2014 we did talk about water. We talked about electric vehicles and we talked about solar, and we have led out on electric vehicles and you've seen so much more publicity around that over the last 12 months, the role of renewable energy into New Zealand's opportunity for reducing emissions and suiting this country, because of its 80% renewable generation, right through the Paris talks. I think that has led to a significant lift in the recognition of the whole sector as an opportunity for the country, rather than something to be a derided monthly bill, and I think that is very, very important, given if you go back to September 2014 the election sale passed a fairly close risk to the business in the form of a previously put up NZ power proposal. Electric vehicles is going very well, and customers, more than 1000 now. Yes, it's small, but boy, there's a lot of talk out there, and a lot of businesses are committing. Air New Zealand has come in, also following us, to commit its whole fleet, and I'm aware of other businesses that will commit their whole fleets shortly alongside us. Solar, we talked about What Power Crisis, we said we were going to get involved in it and we are, and that will be in the sense of a customer proposition and not something we see necessarily as fungible with large-scale Group-connected developments, and you're aware of our options there, particularly around wind in the Manawatu. That covers off the grow aspects. Water, there's shortly going to be some fresh water strategy launched in the Waikato, and that's very much focusing on non-pointsource pollutions and the importance of a whole range of aspects related to water quality, which we support for the long-term operation of the Waikato hydro scheme. Just lastly on outlook, I wanted to come back where we zoom out from the detail of a half year result and think about what makes Mighty River Power different in terms of an attractive investment compared to some other opportunities that are available. We do have a strong market share in Auckland, and it's the largest, fastest-growing city. We have 100% renewable generation with two complementary low-cost fuel sources. They are base-load geothermal and peaking hydro. That hydro is fed by rain, not snow, and that means that we get in-flows that, on average, correlate with an 7 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2016 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 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation increase in demand in the market, which is much better for balancing our fuel requirements, even though we do have some storage in Lake Taupo, but it's not, obviously, infinite. We're focused on customer innovation, particularly that has built on the back of smart meter technology, and so it's not just to avoid people getting dog bites. It actually has been leveraged through good energy days, a good energy monitor, glow bug and other aspects. I saw an article recently in the NBR which said that the smart meters hadn't been that well-leveraged, and I'll just point out to you, as analysts and investors, well in fact, they are, and we're just making clear that a lot of the innovation that you're seeing isn't necessarily advertised on TV because it's going directly to our customers, which is a low-cost way to reach them and elicit their loyalty, and that goes through to tune. Lastly, we're in long-term commercial partnerships with Maori and other key stakeholders. We've been here for 90 years. We've got at least another century to run, and we take those long-term aspects and the long game very seriously, and we really do enjoy the support with our commercial partners. You can see, too, Aroha Campbell and Rangimarie standing in front of the Nga Awa Purua turbine that's about to go in, which has already been installed at Nga Awa Purua. It's a new turbine and that plant in of itself does slightly over 2.5% of New Zealand's total electricity through the blades behind two of our commercial partners there. So thank you very much for all of your time. Happy to open up for questions, and also appreciate we'll be catching up with many of you over the next few days. So now we'll throw it open to questions. Thank you.
QUESTION AND ANSWER
Operator (Operator instructions) Grant Swanepoel, Craigs Investment Partners. Grant Swanepoel - Craigs Investment Partners - Analyst Morning, team. Can you hear me? Fraser Whineray - Mighty River Power Limited - CEO Morning, Grant. Grant Swanepoel - Craigs Investment Partners - Analyst Morning. Oh, fabulous. A couple of questions. Just on the retail front, you indicate that the MBIE at net retail price is down 4.2%. Can you give some colour on what your residential decline was? Then in terms of costs to serve, your OpEx is up NZD7 million. How much of that is cost to serve? Your flat outlook, is that your reduction in generation OpEx offsetting an increase in residential cost to serve? Then on CNI, can we assume that you'll get back to an average CNI load over this year, considering your comments on how the CNI market has eased up? Thank you. Fraser Whineray - Mighty River Power Limited - CEO I'll just cover those off, Grant, and split them between William and I. Your first one was on the retail pricing, correct? What we've put up in our result bundles all retail -- retail FPVV sales in terms of pricing in our quarterly operating stats, and that's the level of disclosure we go to.
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation We are currently in the market -- there's a very modest price rise going through for residential customers that started back in mid-January and is phasing through in terms of notifications to individual customers through to the end of February, and the phasing is very important to manage logistics and call centre flows and customer experience, so that's going out. That's on average circa -- I think in the order of 1.8% on energy, and any lines, increases or decrease, are simply getting passed through. So you can see our trend over the period for the bundle of commercial and residential, and as you know, we signed up a lot of very well-priced contracts in FY11 and FY12 in commercial, which are now flowing off, so that is a significant part of the reduction in energy outcomes. But no, we don't disclose our residential mass market pricing separately. In terms of OpEx, yes, it is a fair bit about phasing of activity, just as drilling geothermal wells can be lumpy, and the context in which we're all zooming in on the numbers here, yes, a few million here or there in terms of phasing, particularly when you compare them with prior comparable periods, can look like it's a significant increase. Now, we have increased spend in particular areas, particularly around loyalty, but some of that's investment and some of that is ongoing spend, so when you're setting up systems or communicating with customers, there's a one-off to set them up under a new arrangement. You do have to spend some money. But I can tell you that's certainly cheaper to keep a customer that you've got than it is to go and acquire a new one, and that's what our focus is. So as we've issued in our full year, it's guidance suspected OpEx to be flat year-on-year, and yes, that can involve some phasing between what happens in various other parts of the business as well. And bearing in mind the bulk of the OpEx is not in mass markets, out of NZD215 odd million. CNI load, well we are lifting our sales in that area as yields have come up, and those yields still aren't as high as the yields that we have enjoyed from 2011 and 2012, but they are higher than the low point where we were saying well we're not going to necessarily renew as much at those prices and let the CNI bit roll off. So I don't think we put any particular timeframe Grant as to say when we want to be at average, and average is never going to apply for us. Either we're going to say we like selling to this market, or we like -- or we don't like selling into this market. And so we'll probably never be at average because we're going to keep on working length and shortness against whatever the prevailing market conditions are. But we are lifting sales and CNI. Grant Swanepoel - Craigs Investment Partners - Analyst Thanks Fraser. So can you at least give some sort of idea of whether you were better than the MBIE average or worse? With particular reference to your stronghold in Auckland which seems to be under a lot of attack from all competitors. Fraser Whineray - Mighty River Power Limited - CEO So better or worse on what metric sorry? Grant Swanepoel - Craigs Investment Partners - Analyst The MBIE, you indicated in one of your slides, on the residential side, is down 4.2% at the net level. Fraser Whineray - Mighty River Power Limited - CEO So you're looking to know whether or not we -- residential is better or worse than that average, yes? Grant Swanepoel - Craigs Investment Partners - Analyst Yes. Fraser Whineray - Mighty River Power Limited - CEO
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation I'd say it's better. It's better than that. So commercial is on the other side of that. Grant Swanepoel - Craigs Investment Partners - Analyst Thank you. Operator (Operator instructions) Andrew Harvey-Green with Forsyth Barr. Andrew Harvey-Green - Forsyth Barr - Analyst Oh hi guys. I'm following on from Grant's question around the OpEx, and apologies I guess we're getting into a little bit of the detail here. It's just around -- so what you're guiding to for the second half does feel like quite a reasonable drop relative to what we've seen in the past, and it sounds like it's coming mainly from a maintenance cost and timing of that. So I think at FY14 and FY15 you did maintenance OpEx of about NZD54 million. So it looks like you're guiding -- it looks like something a little bit below NZD50 million going forward for FY16. Just so that I can get thinking about maybe FY17 onwards, should we be thinking sort of mid NZD50 millions or perhaps the low NZD50 million going forward? William Meek - Mighty River Power - CFO Yes so Andrew, the guidance is for full year, similar to last year. In terms of outlook we're still expecting OpEx to be tracking, we're still revising our cost structures. There's an efficiency program occurring across the organization. I mean how it splits, you definitely have some lumpiness across your maintenance program depending on what's being maintained and how that program works through, particularly when you're running class 4s which are you know, major multi-year programs. But again, we're expecting to see that envelope being reflective of a sort of medium term prac. Andrew Harvey-Green - Forsyth Barr - Analyst Okay. And the second couple of -- next couple of questions I had were more around phasing as much as anything else. The FY17 CapEx you're talking about the geothermal costs and the drilling taking place. So are you able to give us a rough feel, are we looking at getting up to sort of NZD70 million to NZD80 million of the maintenance Capex following that program? Is that the right level we should be thinking about? Fraser Whineray - Mighty River Power Limited - CEO The stay in business CapEx on average is expected to be around the NZD80 million, and it'll be higher in drilling years and should be lower in non-drilling years, but on average around NZD80 million. William Meek - Mighty River Power - CFO And for the moment, the guidance you have here for full year (inaudible) stay in business CapEx is circa NZD60 million, so you're actually NZD20 million under your number. You will get a rebound next year when you run that drilling program through. We count new wells as effectively replacement. So it's not growth, it's the same business. Andrew Harvey-Green - Forsyth Barr - Analyst
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation And final question was just around the release of that provision against the Chile remediation work. So presume most of that will take place in the second half or will some of that -- how much of it I guess will fall through into the FY17? William Meek - Mighty River Power - CFO So distinction -- from a provision perspective, it's all hitting this year and then from a cash flow basis, the bulk of that -- the vast majority of that will be in this year, given that it's connected to effectively procurement of drilling activity. Effectively we're mobilizing rigs to the site to effectively abandon wells. Fraser Whineray - Mighty River Power Limited - CEO We're doing that now. William Meek - Mighty River Power - CFO We're doing that now. Andrew Harvey-Green - Forsyth Barr - Analyst Yes. Great, that was -- that's all from me thanks. Fraser Whineray - Mighty River Power Limited - CEO Thanks Andrew. Operator Nevill Gluyas, First NZ Capital. Nevill Gluyas - First NZ Capital - Analyst Morning guys. Fraser Whineray - Mighty River Power Limited - CEO Morning Nevill. Nevill Gluyas - First NZ Capital - Analyst Question for you, just get a little bit more colour about what's happening in retail land. Good to hear you're lifting your energy prices, but are we seeing -- rather than the headline energy price with discounts, are we starting to see higher retention costs, higher acquisition costs in the market? It's starting to seem like a theme. I was just wondering if you wanted to offer any colour or thoughts about the wider retail market there. And if you could just clarify a little bit about the land sales include in EBITDAF, the size of that in this period, for the remainder of the year in the guidance, and for next year. Fraser Whineray - Mighty River Power Limited - CEO
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation
Yes sure. Churn remains high, so that's a driver of the expenditure on acquiring new customers. Or if you want to stay flat on an ICP basis, which isn't our target by the way, but because ICPs are not necessarily a significant proxy for value, which I'm sure you'd all appreciate. I think the thematic is it's reasonably steady. I wouldn't say it's necessarily getting hugely worse. It has gone up a lot over probably the preceding five years, if you look at the cost of acquisition, because of the costs of actually doing things like door knocking and the success rates on that. It's still a successful channel, but it is expensive to acquire customers through. I wouldn't necessarily say outlook is getting any worse, but I think what we're trying to do is turn that -- instead of just letting customers go and acquiring new ones -which 17% churn over 380,000 customers is quite a lot to spend -- it's actually about how do we get greater loyalty out of our existing customers through non-price attributes, and therefore not have to go out and acquire as many. We'd rather put our investment behind loyalty and you know, there's certain segments of society that'll flip suppliers for a dollar, and there's certain others that won't. And it's about making sure you're focused on your customer needs and differentiating for them. I don't think it's particularly thematic of getting worse, but it is -- it's just driving different people to do different ways of saving or keeping customers. And I would point out that typically your cost of acquiring a new customer, you won't recover that based on profitability in retail of a new customer for several years. And if that customer flips in that timeframe, then you're going backwards on that acquisition decision. So you're simply bringing customers in the door isn't good enough. You've got to bring in customers in the door and make sure that they're coming in the door for the right reasons and that they'll stay with you. On the land sales? William Meek - Mighty River Power - CFO Yes, just on the land sales, I mean the -- our original FY16 guidance singled out land sales as a bridge difference between the two years. So we indicated that was a circa NZD10 million decrease in terms of gains on sales from land between last year and this year. Nevill Gluyas - First NZ Capital - Analyst Okay, thank you. Operator Stephen Hudson, Macquarie Group. Stephen Hudson - Macquarie Group - Analyst Hi guys. Sorry the line's pretty bad, so some of these questions may have already been asked. But just a couple of accounting ones, did I hear you guys when you said that the FX release was included in the EBITDAF range? I think that's what you said, but the slides -- the slide pack sort of is a little bit ambiguous on that point. And then just on accounting for acquisition costs, I just wondered if you could just remind us what your accounting is for those acquisition costs. Do you amortise over the life of the customer or do you expense up front or -- just a little bit of colour on that would be useful. And then sorry, well just to go back on Nevill's question on the gain on the sale of property, can you give us the -- whether or not there was any gain in this half. Thanks. Fraser Whineray - Mighty River Power Limited - CEO So --
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FEBRUARY 22, 2016 / 10:00PM GMT, MRP.NZ - Interim 2016 Mighty River Power Ltd Earnings Presentation William Meek - Mighty River Power - CFO
On the foreign currency translation reserve, it's excluded from -- that's excluded from guidance. It's highly improbable that we will have exited and liquidated the entities in Chile by the end of this financial year. So it's you've either got to sell them or close the companies down for that to be -- to particularly realise to P&L. IFRS is very specific about how that is done and it will hit effectively -- it will be a non-cash expense to OpEx. We expect that to fall in the period beyond FY16 and it is excluded from any guidance. It's been singled out multiple times in terms of our guidance statements. On acquisition costs for customers, no we just expense it in the period that it's incurred, there's no amortization of that cost across the customer life. That is different from some of our competitors. We expense that up front. And the gain on sales, so we're looking at about this -- in this reporting period, there's about NZD3 million, so it's in line with last year, but the second half of last year, we had a significant land sale realised there. Full year we're expecting about NZD8 million to NZD10 million delta between the two periods on land sales. Fraser Whineray - Mighty River Power Limited - CEO The adverse delta. Stephen Hudson - Macquarie Group - Analyst That's great, thanks guys. Operator Thank you. We are showing no further questions at this time. Fraser Whineray - Mighty River Power Limited - CEO Look thank you all very much for joining us for this conference call. Looking forward to seeing many of you over the coming week or so and engaging further on both the sector and Mighty River Power's performance within that. Thank you.
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