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EDITED TRANSCRIPT MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation EVENT DATE/TIME: AUGUST 27, 2013 / 10:30PM GMT
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation
CORPORATE PARTICIPANTS Doug Heffernan Mighty River Power Limited - CEO William Meek Mighty River Power Limited - CFO
CONFERENCE CALL PARTICIPANTS Christopher Laybutt JP Morgan - Analyst Andrew Harvey-Green Forsyth Barr - Analyst
PRESENTATION
Doug Heffernan - Mighty River Power Limited - CEO Well good morning everyone. Welcome to Mighty River Power. It's a pleasure for William and I -- I'm sure everyone knows William Meek, Chief Financial Officer and I'm obviously Doug Heffernan. It's a pleasure to have you all here today for our first results presentation as a listed company. I'll do a little bit of the presentation and then hand over to William and then wrap up at the end and then we'll take some questions. I do have with me today the other members of the management team, all lined up here in the front row. I won't do the parade, I'll make sure that they introduce themselves if they haven't already and mix and mingle. So let's get into the highlights then. So results for the period ending 30 June, the Company outperformed the forecasts that were in the PFI at most of the -- all of the result line areas. As well as just slightly getting about what the consensus was for EBITDAF from analysts. Net profit and underlying earnings after tax, up NZD20 million on PFI, primarily driven by lower domestic operating expenditure. So we'll talk about that later on. The Board has declared the dividend for FY13, the final dividend, at -- and for the whole year, NZD168 million. That's a 40% increase on FY12, as projected in the prospectus. Perhaps more importantly for all of you, that represents around 78% of free cash flow as defined -- that is operating cash flow minus reinvestment CapEx. To health and safety, we're continuing to see good results on our key metrics, but there is an additional focus that we're applying to critical risk identification and I'll talk about that a little bit more in a minute. At the energy margin level, year-on-year, we held up -- we're down 1% year-on-year, but put that alongside our 350 gigawatt hours less hydro production. Put that in value terms, that's around about NZD26 million if you just do a like-for-like comparison. So we've managed to hold energy margin despite a significant, for us, lower hydro volumes. Compared to the PFI, energy margin was NZD3.1 million higher. That really reflects the larger than forecast difference between the price we earned for the generation we produced, compared to the cost of purchases to meet our customer requirements. So typically that's -- you can see that in the LWAP/GWAP ratio that many of the analyst community use. On the development side, Ngatamariki Geothermal Station, which is planned for an 82 megawatt rating, is well into its reliability program and on track for handover later this week. Again, I'll talk about that a little bit later on, as I will about the fact that we've now taken direct control of the investments in the US and in Chile. As a result of that and better information, we've now got from having direct line of sight on -- in both of those areas and particularly in the US, some non-cash accounting changes that we've made to the treatment of those two countries' investments. So they are changes that are post the treatment within the offer document. In terms of outlook, the Board remains comfortable with the PFI forecast for 2014, showing a 27% lift in EBITDAF and just to refresh your memories, that significant lift is driven by earning growth from Ngatamariki, obviously volumes coming in and driving onto the revenue line, which will occur as soon as handover is completed at the end of the reliability run and of course the absence of one-off costs that we booked in FY13. The forecast dividend for 2014 as outlined in the PFI, is an 8.3% increase year-on-year, from NZD0.12 to NZD0.13. As a percentage of cash flow, that's -- of free cash, that's 71%. So slightly lower than the payout ratio relative to free cash this year. As you will have seen, we've got lower debt at year end and we are forecasting slightly lower CapEx for FY14. They were all factors that the Board will continue to take into account in looking at capital management on an ongoing basis. To the heart graph. Largely ticks right across the field, a main thing is in that middle section, where you see the impact of lower domestic operating expenditures, really helping support EBITDAF, flowing right through to the bottom line and including on operating cash, all up relative to PFI. Relative to '12, as I mentioned, the drought was a big impact there which really started in late November and prevailed right through the period. One of the key things, though, that again William will touch on in
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation more detail, is how our business model is able to deal with what for us is a relatively large variation in hydro volumes, but in the national context, it's actually de minimis. So we have a 350 gigawatt hour lower volume year-on-year, that's less than 1% of national supply. So when we have local drought, it has relatively little impact on wholesale prices because that -- it's such a small portion of overall supply. That's why our business model's very resilient to what is a relatively big volume reduction for us. Dividend, I'll just dwell on this slide a little bit more. So the dividend will be paid on the 30th September, shareholders on record on the 11th. It is 78%, as I said before, and you can see on the right hand side in the -- in between those two bar graphs, a running tally on the percentage of free cash flow. The early part of that five year period, that's reflecting a relatively high CapEx we had as we were completing projects here in New Zealand. Then it lifts on the completion of Ngatamariki and going into a low CapEx cycle. The dividend policy which applies for FY14 going forward, as outlined in the offer document, is 90% to 110% of adjusted net profit. If you work that through, that's around 71% of the free cash flow, as we've outlined. Overview of capital management, obviously one of the things the Board and management is now continuously keeping an eye on as we work forward, is making sure we're applying a disciplined approach to the way in which we use capital within the Company. Looking at the right balance between investments that are going to drive value for shareholders, making sure we're maintaining our credit rating, which as you know is crucial for us, and also looking at returns to shareholders. So that'll be a continuous process along with normal capital management overview. The key thing is, we did end of the year with around NZD100 million less debt and we have a slightly lower capital forecast for next year -- or for the current year we're in, from NZD199 million down to a range of NZD125 million to NZD175 million. Health and safety, obviously the primary focus and responsibility that management and the Board have in regard to health and safety is ensuring zero harm to our employees and our contractors. We do see that one of the critical ways we can influence that, since the generation part of the electricity industry relies on a significant degree -- or it relies to a significant degree on outsourced service providers, many of whom are common to each of us. There's getting the standards and quality performance on health and safety amongst contractors and importantly amongst their subcontractors, up to the levels where they really need to be to deliver zero harm. We're a member of the StayLive generators group, that is a key to trying to get those pan-industry standards lifted. The Company's total recordable injury frequency rate, as you can see in the graph, has continued to reduce and across the electricity supply industry, generators on average are well below the industry average. So the generators' performance for a long period of time and continues to be very high, relative to the overall industry. You can see in the bottom graph, our lost time injury rate is slightly higher this year, it's -- the previous year was a very low and we're now down at very low levels where individual events can actually have an influence on the statistics. I think the more important thing, because both of those are actually lagging indicators. So they tell you about what has happened rather than looking forward and what are the actions you're taking to try and drive those numbers down and keep them down in the future and the real focus that the Company has got is on critical risk areas. So what are the sorts of things that could really cause harm, serious harm, and making sure there's great risk identification. As I flagged at the half year results we did have an incident at Ngatamariki with a drilling rig being operated by Iceland Drilling where there was a pipe dropped that did not cause serious injury but if it had actually hit someone it would have been extremely serious. So it was a great incident to remind people of the importance of identifying critical risks to individuals and taking the actions. In that case obviously we're a principal on the site, so the primary contractor was Iceland Drilling who is another contractor on site as well but we take the responsibility as the principal. And when we look at it in the cold light of day and look back we can see things that perhaps we should have done differently, it might have identified that risk and avoided the potential harm to an individual. So I'll hand over the next section for William to take us through market dynamics and the financials. William Meek - Mighty River Power Limited - CFO Thanks, Doug. It's good to have you all here, I'm William Meek the CFO. I'll just take us through some of the market dynamics. Demand, you can see some charts there. Again demand actually down over 2% in the last year, so nationally we're seeing the effect there of Tiwai, which is explaining about half that gap. So that's still obviously -- production there down from its normal 600 megs but we're also seeing effects in the residential and in the commercial space, so just generally demand quite staid across the industry. I think one of the good things is Mighty River Power on the back of its growth program on geothermal has actually been swimming against the tide. So we've had rising market share at a time where actually nationally the demand trend has been shrinking. So in that context it's very successful for Mighty River. Tiwai Point Aluminium Smelter, so we're all aware the contract was struck a little while ago by Meridian. So that's certainly, in terms of demand outlook, a good thing. So certainly demand there looks secure until at least 2017, whilst some commentary notes that it looks a bit like kicking the can down the road. I think that was always all -- that was going to happen in that regard but certainly the terms struck, the fact that prices are lower to the smelter does increase the likelihood that that load will
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation continue, which again is of benefit to us here and the rest of the industry. It does obviously give a longer time also for demand to pick up, hopefully on the back of a global recovery. Go forward to talk on supply. FY13 was a pretty interesting year from a hydrological perspective. It was slightly wetter on average in the South Island and slightly drier than average in the North Island, but what we do see is we see some periods there of acute dryness and acute wetness. So the beginning of this second half we saw effectively record inflows to the South Island and then we saw record dries in both the North and South Islands for that February and March period and we can see there in the chart that sudden rise in national storage and then a relatively precipitous fall over the preceding months and then corresponding with quite an elevated rise in wholesale prices through that February, March period on the back of those massive falls. Again, from a hydrology perspective those summer months are typically the wettest months in the South Island, so having a dry during your wettest months is never a good thing. Interestingly for us I think we've run about an 8% of onflow segment since November so it has been a sustained dry. If anyone has been down to Ruapehu, had a look at Whakapapa, the slopes are not too good. We're running about a 70% of inflow event so far for July and August this year, so again it's been very, very dry conditions in Taupo for the start of FY14. So we're looking about somewhere between 250/270 gigawatt hours of rain that just didn't hit the lake as you'd expect. Nevertheless in terms of outlook we're still confident in terms of those PFI numbers. I think probably a big piece is with the trends in both supply and demand. So we are seeing the ongoing crowding out of thermal capacity with the increase in geothermal both at Ngatamariki and the slightly delayed Tamehe project but that's really going to impact thermal plants. So we have seen falling capacity factors on those plants. Again, Genesis has signaled but has not committed to retirement of the second unit at Huntly. Certainly contacts announcements are encouraging regarding its treatment of TCC through the winter of next year by way of standby mode and their increasing gas flexibility they're seeing there. So certainly the ability for thermal stations to respond is increasing. We have a small station at Southdown and again reductions in gas commitments there will also see further reductions we expect in terms of output at that plant. So I mean a key to address that supply/demand balance is that we see ongoing thermal response within the industry. Moving on to wholesale prices, so there are a number of charts there. So again 2013 prices trending around the low to mid NZD70s per megawatt hour in the North Island, slightly lower in the South Island, on the back of some separation across the DC Link. Down from 2012 levels but nevertheless still a fair way above where they were through '09 and to '11. ASX prices, which are forward looking rather than backward, we can see a downward trend those on those various bars but we can see an uptick as of late. Again we should see a correction in those ASX prices on the back of some of the announcements just recently regarding thermal capacity. Just moving on to electricity sales, as noted sales were still up for the year-on-year, so up 62 gigawatt hours largely in that commercial business space, so a good trend on the back of the actual shrinking demand we saw over that period. Electricity prices also up slightly, so up 2% on FY12 levels to just over NZD117 a megawatt hour in that fixed price variable volume segment. Noted residential down just slightly by 2%. Again we are seeing lower usage per customer. Having just built a new house I can certainly attest to modern technology significantly reducing your power consumption. So I thoroughly recommend it, move out of those villas and business sales up 12% in that period. CFD levels you can see actually relatively constant from 2009 through '13 in that sort of slightly over 2000 gig space. So again for Mighty River Power we do have a relatively large portfolio of CFDs, both buys and sells and this shows sales to effectively end user consumers at around that 2200 gig range. So to move on to our Generation portfolio. Year-on-year we were down 9%, so 606 gigawatt hours, so quite a big reduction, 350 gigs of that coming out of reductions in hydro output. So last year was a slightly above average year for Generation but it still was slightly under largely driven by second half dry and we were ahead of plan at the half year. Again that was reflected in our PFI numbers. Lower wholesale prices did impact Southdown, so again with gas spreads a key there is not generating when prices are cheaper in the market, so certainly turning off that gas plant, using your gas flexibility and purchasing from the wholesale market when prices are low is certainly the way to go for energy margin and subscribes to a very good adage of buy low, sell high. So we try to get it in the prospectus but the lawyers wouldn't let me. I think it's a good strategy. Geothermal availability, again geothermal just keeps on truck on. So very high availability there, over 96% across the fleet of geothermal plants we operate. As Doug has noted Ngatamariki by the end of the week should be fully handed over and we'll lift our geothermal production to over 40% of our total generation. Just our LWAP/GWAP ratios -- so again certainly the analysts in the room are always interested in this, they take Generation quantities, multiply it by a factor to give revenue. Well in theory that's correct, the ratios are quite volatile and they are dependent on the time structure of power prices and how you're generating over the year. Certainly South Island/North Island splits so when you do have constraints across the DC you do have quite a significant impact on those ratios, not just for Mighty River but also for other generators. So a lower ratio is a good outcome. So lower LWAP/GWAP is good and you're seeing them down to about 1.01 for the year. Again
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation some good yields coming out of hydro but also seeing that split between North Island and South Island. So South Island prices being lower reduces purchase costs in the South Island over the year. We're certainly observing quite significant differences in those ratios with the NIGUP program, so the 400 KV line to Auckland and the HVDC commissioning certainly reinforcing the backbone of New Zealand's transmission system, having quite a big effect in terms of able to wield power around the country without constraints occurring. So I think that's a very important thing for the wholesale market to operate efficiently and competitively. Contracts for difference. So it's really following on from the previous slides. We can see our net CFD position, showing a short CFD book. You can see that line is slowly trending upwards, showing the net short position in CFDs is falling. ASX CFDs in terms of trading did increase, so mostly as a channel for market rather than just speculating on ASX and we have seen the introduction of FDRs very recently. So as a new product that will spur liquidity through ASX and other bilateral trades. So there's some good developments there in that financial contract market. So just dealing with net position. So again if we look at it on our portfolio basis, if you're a portfolio manager, you're looking at demand and supply in New Zealand and looking at price volatility, looking at the mix there, you'd probably say I'd prefer to have an average short book, than a long one, given where the market is currently positioned. Certainly that's our view, that's where we are. So we have a, on average, a short position, but the ability to cover that position. Prices are very high. All go long, using the flexibility afforded within our existing portfolio. So certainly, the way we run our lake, the way we operate Southdown, some of the derivatives contracts we have with other generators and the fact that the correlation between the Waikato and the South Island hydros is relatively low or plays to those strengths. Last bullet there around the drought, so again, 8% on flows for the eight months starting November to the end of the year. So you did some trading pre-emptively there to cover some of that exposure and the use of Southdown again, when prices were high. Looking at the black line again, you know, on an average basis are a pretty -- on not a very short position on an annual basis for the Company. Just moving on to the financial highlights. These are really -- these are key takeouts on these six boxes, so as Doug has noted, outperformed the 2013 PFI forecasts. The energy margin was down to NZD6 million, so again, it's a key trading metric for the firm. That's despite hydro volumes down NZD350 million, worth about NZD26 million. So again, showing the resilience of the business over FY13. OpEx. Domestic OpEx down NZD18 million, so again, that's a key driver of the NPAT performance for the Group. Net debt down NZD107 million. Operating cash flow up NZD19 million on the PFI, both impaired and underlying earnings up almost -- just over that NZD20 million for the same period and then S&P reaffirming our BBB+ credit rating back in April. So we've got less bridges this year. We're really just dealing -- we've got really two counterfactuals. In most cases, I'll compare against the PFI, but in others, I will compare against the year-on-year. Some accountants always like variances. They don't do much for me, but we'll see it through. So again, bridge NPAT from PFI through to actuals, so we did see NPAT up NZD20 million against the PFI. Again, looking at those bars, the big one that stands out is the reduction in operating costs domestically at NZD18 million, explaining almost all the gaps. So some unders and overs there. International geothermal, if you have read some of the collateral before you turned up here, there were some accounting adjustments made to those. But net effect across the income statement is a net NZD3 million gain. So relatively small, given the number of moving parts in that and in that process. So a bit more of a bridge on operating expenses. We did have some pretty significant one-off costs in FY13 and these were well signalled within the PFI, but almost -over NZD68 million of one-off costs comprising NZD37 million on the international geothermal fund restructure. NZD22 million of non-cash, FX charges are related to the NZD140 million distribution from the John L Featherstone project. Then, over NZD9 million of IPO related costs. So all those costs do not appear in the FY14 forecast, so we do see quite an uplift there between FY13 and FY14 again, although signalled in the PFI. We will run on. So doing a year-on-year bridge here on EBITDA. So it was down NZD71 million. Again, a lot of those operating costs explaining that difference, so NZD68 million of the NZD71 million relates to the one-off costs. So again, taking those out, as I've noted, energy margins just down NZD6 million despite a reduction in generation volumes of 600 gigs. We did in FY12 have some benefits from the proceeds of sale of the 10% interest in the Rotokawa joint venture and the Nga Awa Purua joint venture to the Tauhara North No 2 Trust on the back of the exercise of the options they held on those two plants. So running across, you can see generation down 120 gigs -- sorry, NZD120 million. A consequence of both price and volume. You're seeing a corresponding pickup in customer sales offsetting that and that big effect coming through in the operating expense line against FY12. I will just -- EBITDA to NPAT bridge. Impairments. Impairments of NZD85 million, you will notice the impairments have actually shrunk, so that is a consequence of a reclassification of capital expenditures in Chile to operating costs. So again, really, designed to align the policies there with the Company's accounting policies, because that really happened as a consequence of us taking control of the GGE fund and the extra visibility that it has in terms of dialogue with the parties operating in Chile and the auditors here directly.
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation The equity accounting earnings, again, hit NZD63 million. Again, remained related to the distribution out of the EnergySource project and that NZD140 million cash distribution following through as equity gain. Interest costs down to -- interest costs at NZD57 million down NZD16 million capitalised interest on a Ngatamariki project. So again, that will reset next year when that capitalised interest ends. Just touching on capital expenditure. So capital expenditure for the year was NZD252 million against a previous year of NZD362 million, so down quite a lot with PFI at NZD344 million. So again, CapEx significantly down against both those counter factuals. So just over NZD170 million spent geothermal development during the year. Again, considerably less than what the PFI levels -- largely driven by reductions in spend in international geothermal and secondly, just timing on milestone payments at Ngatamariki feeding through to FY14. So Ngatamariki, NZD166 million last year. Again, the project there, looks like handover into this week and very positive. So therefore, the revenue earned during commissioning -- so, at the moment, accounting standards require testing revenue to be capitalised, so it's specifically a negative cost. So we will see revenue flow into P&L from end of this week, after the reliability run is completed. Looking forward to FY14, so capital expenditure has been -- forecasts have been reduced by PFI levels, which were NZD199 million. So we're sitting here with a range of somewhere between NZD125 million and NZD175 million. Reinvestment CapEx, so that's CapEx invested in existing assets, pretty consist there around the NZD870 million range. So those numbers are still consistent for FY14. So quite a significant reduction in CapEx and that does feed through to Doug's earlier comments reduce of capital management and so that's something we're working through currently. Reasons, we didn't take up the EnergySource option -- Doug will touch on that again -- and we're currently in discussions with our partners there around some alternatives. Metrix. We do have a higher investments in Metrix due to deployments outside of Auckland, so Metrix currently deploy meters in Dunedin and also soon to be in counties also. So we are seeing growth in that metering space through our Metrix business. That's briefly -- on cash flow, operating cash flow, NZD90 million higher than PFI. Again, largely a consequence of that lower operating expenditure. Existing cash outflows at NZD87 million, so again the capital returns from the John L Featherstone plant feeding through is negative invested CapEx. Obviously, investing cash flow. And financing cash flows down with the retirement of debt. So net debt down NZD107 million against PFI, down around NZD88 million against last year's debt level. Summarised balance sheet. We do -- the Company does periodically revalue its generation assets, we carry those at fair value. It's a requirement of crown accounting policy. We undertook those revaluations. They're done independently. That saw a revaluation of just under NZD80 million on those assets. So while that -- inside that DCF, it did have lower prices, the impact of lower prices were offset by decreases in the discount rate and so those two are typically two of the big drivers around DCF values for infrastructure assets. So we did see revaluations of NZD80 million flow through the books. That's about 1.6% of total assets. Liabilities down again, driven by that lower CapEx program impacting debt. To the bankers in the room, just a funding profile. 2014 looks pretty bare, so yes, no need to refinance in FY14, but it doesn't mean we can't. But yes, right here, right now, that debt profile looking pretty strong. Average maturity there around five years and quite a lot of new facilities established over FY13, really putting us in a good position. So just some S&P ratios here. So again, we've touched on the credit rating at BBB+. Again, we do get that one notch uplift, which was -- which will continue, even with a -- provided we have government as majority owner, which it would need to change the law to not be, so that's on a standalone basis, BBB. Again, it's comparable to other listed peers, certainly Contact. Our rating was reaffirmed in April. And as noted, debt down on both PFI and last year's levels. Just on those ratios there again, in terms of key S&P metrics, they were actually, sort of -- they're close, they're round about close to the BBB+ levels that S&P would look to on a medium term basis for a company in our industry. Now over to Doug. Doug Heffernan - Mighty River Power Limited - CEO I guess, everyone who knows Williams reasonably knows that he's a relatively early adopter of technology, which he has applied to his home. But a bit of fatherly advice, given that he has got three teenage boys, every PC energy efficiency he has built into the home he will need. By the way, James has got a product for him, which is highlighted on the slide, that will allow him to shame his boys as they grow up and use too much electricity. So that is a photo of the GEM product, which is a key part of our retail proposition now. The AMI meters that are now widely available in the market with metering companies, including our own Company, Metrix, providing that rich data to retailers, you're now starting to see products, like Mercury's good energy monitor, being deployed out to consumers so that they can see what is going on with the electricity consumption and if they choose, use that information to take control of their costs. 6 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2013 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation
Going to churn, the graph, we can see churn levels have bounced around within the industry. We tend to have little spikes every time the electricity authority spends your good money as taxpayers; also where there's some wholesale transfers. So even the registration GLO-BUG on the exchange means that that transfer of customers from Mercury to GLO-BUG is treated as a churn within the electricity authority statistics. So it's a bit of an aberration. The more important thing probably is you look at the black line, over the last year or so Mercury's churn levels have been lower than industry average. Bad debt, that's another stand out for us and our retail businesses. Our bad debt ratio is well at the bottom of the industry at 0.3% of revenue that's an extremely low level looking over a long, long period of time. A lot of that is driven by the deployment of the technology GLO-BUG that was developed by Mercury or by Mighty River and that means it's a much better way in which customers can -- particularly income constrained customers -- can manage their electricity requirements, their costs and actually respond again to the rich information that is available to them as a consumer. That's contributing to us getting disconnection rates down and at the end of the day that's something we would prefer not to have to do. Also, at the same time managing bad debt to very low levels. So they're great results that James and his team are delivering. In Tiny Mighty, we've talked about Tiny Mighty before. It's continuing to grow and get good foothold market share in the provincial territories it has launched into. Metrix I've already touched on. It's now supplying rich metering data to three of the large retailers across New Zealand. Mercury is obviously a large consumer of services from Metrix but it is not an umbilical cord. Metrix has got over 300,000 AMI meters now deployed in Auckland. It's the largest AMI meter owner in the Auckland market and is deploying meters, AMI meters, outside of Auckland. You may have seen the announcement we made recently where we've got an arrangement -- contractual agreement with counties -- for counties to deploy AMI metering into their territory in the Papakura and wider area. Going onto geothermal development, just a little bit about Ngatamariki. It is different technology than we have used at Nga Awa Purua and Kawerau, our previous two big projects. It uses [all mat] binary cycle technology. It is the largest single site deployment of that technology anywhere in the world in a project. So it is a very large project by global standards for that technology and it is well into the reliability run. I hate saying this, because it is a 30 day continuous reliability run and the risk is I say something and it has to start again. But I'm sure Mark is confident at this stage -- as confident as he can be -- that we will complete our reliability run later this week. Once that's done, contractual handover will lead to revenues being -- sorry -- generation being counted as revenues. I think we've touched on -- its cost is coming in slightly below the PFI forecast of NZD475 million. We don't know exactly because it depends on the spot price for the electricity that it's generating because that's a negative to the capital cost of the project. So there's a bit of uncontrollable variable there. But probably the more important thing about Ngatamariki is it looks like it's going to be 3% or 4% rating above spec. So that is value that goes straight to the NPV calculation on the project. So the economics on Ngatamariki are looking very good as a result of that slightly higher spec. Compared to where we were sitting a year ago, we announced to the market then that we were concerned that we might need to drill another well that might cost another NZD18 million. Mark and the team have not had to use that requirement so we're very comfortable now with the way that project's come in above what our original business plan projections were. It will contribute around 700 gigawatts per hour to our portfolio. That will bring our total geothermal to around 40% of our total production in a normal hydro-year. So very significant change from where the company's been over the last decade; really consolidating that resilient renewable low cost base within the business. In the prospectus we did outline one fuel risk in regard to geothermal that we were dealing with. That was at Kawerau. So you will recall when we first built Kawerau it was supposed to be a 90 megawatt plant and it came in with an output rating over 100 megawatts. So we had to scrabble round to get some more fuel to keep it fully fuelled and we secured an arrangement with one of the Maori entities on the Kawerau Field, NTGA. We've applied for a consent so that we can fuel that through our own consents. We already have sufficient wells to provide the fluid to the power plant, but we're relying on NTGA's consent to do that. We've now got an arrangement with them to use their consent until the appeal against our own consent is addressed. So that fuel risk that is set out in the prospectus for FY14 has now been removed. EnergySource, as William indicated we did not exercise the option that had been written back in May 2010 when the initial investment into EnergySource was made to increase our stake from around 20% to 33%. We discussed that -- we being Mark -- discussed that with the other two shareholders in the company. We think there are better ways in which we could look to leverage our position in EnergySource for better value than that option. So those discussions continue. We continue to provide for that within our capital expenditure forecasts for 2014. There is drilling continuing by EnergySource on their second project, Hudson Ranch 2. That's underway as we speak. In Chile, we took the decision during FY13 through June to make a decision to not commit further capital in Chile until we were more comfortable with the geothermal resource and more confident about the right commercial arrangements to take investment into Chile. You recall that we had a provision in the prospectus, 'cause the
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation plan at the time we took over control of the Chilean assets was for drilling to occur -- further drilling to occur on a [Koaka] site. We have deferred that and we have deferred any further capital commitment to it until we've got more confidence around those parameters. Regulation is probably more questions for you all. Just on the hydro consents, there's no real update on that. But just to refresh your memories that within long term consents there are always options for review that the Consent Authority has. We've had two of those historically. There's been no review initiated as a result of that. The third one is coming up and we expect a decision in the next two or three months one way or the other. On our information we can't see any reason why there would be a formal review of the conditions. So it's in regard to the conditions of the consent, not the consent itself. Electricity Authority, I think they've made public statements over the last couple of months where their focus is now very much on retail competition. They are much more comfortable about the level of competition that's occurring in the various products of the wholesale market. So that's where their focus is. On Transmission Pricing, update since the prospectus is the Electricity Authority did hold conferences where they got some very strong negative feedback from right across the spectrum and they've said that they're going to release a further series of consultation papers over the next 12 months or so. On Distribution and Transmission, shall I say there's more heat than light in the market around this. So the key points I'd have is we are seeing significant increases in transmission costs being passed through ultimately to consumers that are approved by regulatory authorities. We're also seeing significant changes in distribution prices. They can be up or down or sideways depending on what location geographically you are in New Zealand and what particular area you're in. So unfortunately the regulatory process has led into quite a bounce in many cases, which is not helpful for consumers. It's retailers that actually have to manage that volatility. I can say that as a retailer, we pass through the changes in transmission and distribution charges that are imposed on us. In April of this year we chose to increase our energy prices and pass through all the transmission and distribution charges that were charged to us. But I will highlight that when a distribution company says they change their prices, that is average. Within that they often make structural changes. So for example, in the gas prices that we've announced we're passing through from Vector we announced today, some customers will get an increase in their bill because the Vector gas prices have got increased fixed charges. So if you are a small user of gas William, your bill will go up. So that's I think very confusing lines that have been put out there. The regulatory process doesn't actually help all that much I have to say. I've got nothing more to say about the last point. Turning to outlook, I guess first thing is we're very pleased to be delivering our performance to the PFI despite a number of factors that were adverse to us through that short three or four month period. Importantly the Board and Management remain comfortable with the forecasts for FY14 that are outlined in the PFI which show a significant lift in EBITDAF. So we're comfortable with that forecast. As I've said before, that reflects the additional earnings coming from Ngatamariki and the absence of significant one off costs that we booked during FY13. There will of course be a flow through of the non-cash accounting changes for international geothermal. The net effect of those, as I said earlier on, for FY13 was a NZD3 million increase in profit. So there will be a track through of applying those sound accounting changes that will affect the profit forecast for FY14, but they are non-cash. We are a couple of months into the year and of course winter months are crucial -- or a large key contributor for performance of electricity generators -- so we're only part way into the two and a half, three months of that winter phase. That's why we'll be giving guidance at the ASM in November. We are, as William said, at 250-odd gigawatt hours below the inflows that we would have expected to date. You can see that off market disclosures -- electricity market disclosures -- but we remain comfortable with the EBITDAF guidance that has been provided within the PFI. That's because, as we saw in the tail end of 2013, we've got good outcomes occurring in terms of our trading portfolio and our LWAP/GWAP ratios. We touched on the fact there's intense retail competition and what I would say is perhaps a sluggish response we're seeing from some thermal generators, in regard to the flat, falling demand which is continuing, that's putting downward pressure on the ASX futures, although it popped up a little bit in the last week or so following the Contact announcement. That of course is translating through to pricing, given that commercial contracts track relatively closely to ASX. So that's something we're very conscious of and it's certainly driving our thinking in terms of our portfolio management and our cost activity. On falling dividend as outlined in the PFI, that would be 107% of adjusted NPAT, so we have a policy running of 90 to 110 of adjusted NPAT started in '14 and 71% of free cash flow. So interestingly that's comfortable and slightly payout ratio than we had against free cash for '13. We've touched on the capital management, that's an ongoing process that the Company will be running now that we're listed, rather than having annual chats with the Treasury. Any update on that we'll be announcing probably at the ASM. 8 THOMSON REUTERS STREETEVENTS | www.streetevents.com | Contact Us Š 2013 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.
AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation
And with that, open to questions. (Inaudible).
QUESTION AND ANSWER
Unidentified Participant Just in terms of -- you mentioned earlier on that the storage that you have in the North Island is small in context of the country. But can you talk a bit about the DC link changes. In Contact's results we saw that that's benefiting them materially. This is a zero sum gain industry. Somebody must be losing in the longer term. Does this mean when it's dry South Island, wet North Island you don't get as much benefit as you did in the past? Just get an idea, the deferred maintenance cost that came down in FY13, how's that going to impact '14 or was that deferred indefinitely. Doug Heffernan - Mighty River Power Limited - CEO Okay I'll deal with the last one first. So the main contributed to the deferred maintenance was the lifecycle work on hydro. That's largely because we had some unplanned expenditures occur at the end of the year and as I've said I think in other forums it's better to fix stuff that's not working in priority to improving stuff that already is working. So, it was really just a shifting resources, there's only a certain amount of work you can do at any one time. So I think that will have knock on effects. That piece of work will get deferred into '14, or it has been deferred into '14. But we're confident as I've said that we'll -- our EBITDAF outcome will -- is still forecast to be at the FY14 level. In terms of -- I didn't say that storage is small relative to national. What I said is our variation in inflows is small, relative to national supply. So on that graph William put up, at the bottom he's got a line that you can hardly see moving relative to zero, which is plotting the variation, month on month of inflows to long term average. That's trying to score the point that that's the variation we're dealing with as an operating business and it's hardly measurable within overall national supply. So when we have variations, typically it's not influencing wholesale price. So we can compensate low hydro volumes by buying off wholesale market and not being in a price squeeze. That's different to say South Island generators. When they have variations in hydro, they move price. So that's the distinctive difference. In terms of LWAP/GWAP as William said earlier on, at a macro level, more transmission capacity is better for everyone. It's better for customers, you get more competition, but also it means you can trade your position much more freely. So the circumstances you're talking about where maybe wholesale prices have spiked in the South Island because you've got a constrained DC link and it's dry down there, it limits your ability to retail in the South Island. So if you look at our trend on LWAP/GWAP, we're now getting back to ratios that we had prior to the DC link losing one of its poles. So if you look at a long history on LWAP/GWAP, we used to be at numbers I think closer to where we were in FY13 outcome. That's where we should be. Transmission constraints were actually weakening our ability to have sustainably good LWAP/GWAP ratios. So net -- it might be a zero sum gain on any particular day, but that's now how the business runs. It's much a portfolio through time. Unidentified Participant Doug you mentioned there are a couple of issues you were looking to get confidence around, before advancing with any commitment on international GSM. Can you just talk to sort of what steps or processes you're undertaking I guess to advance that confidence or what sort of external hurdles need to be met for you to get that confidence? Doug Heffernan - Mighty River Power Limited - CEO Yes as I said in the media thing this morning, the way we've gone about a geothermal development in New Zealand is actually being very patient and very disciplined. Ngatamariki, we first acquired the rights to the land at Ngatamariki in 2000. So that's been a 13 year journey to see the way to utilise that resource for value. That's the approach we're taking offshore. It's not a desire to try and build something quickly. We've got a different incentive in place now that we've got direct control. So if you look at the ingredients, what are important for us? Got to have high confidence about the resource and we're not confident that we've got enough -- sorry we haven't got
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation enough confidence about the resource to go and commit a whole lot of capital at this point in time. So that's consistent with the way we went about every one of our geothermal developments in New Zealand. The project here in New Zealand of course, it's slightly different because you're not project financing, you're not writing PPAs. So getting more confidence about what the market is in Chile, how the market is going to evolve through time, when -- in a sense when is going to be the best time to try and secure a PPA contract. Because there are lumpy points in time, in the Chilean market as prices reset for retail PPAs, PPAs to distributors. Thirdly as I've said, way back at the -- since way back at the time of the IPO, thinking about are there strategic partners that would help take the project forward in the sense of helping de-risk the project for us as well as contribute capital. Those things are not going to spin around on dime. When we took control of Chile, the plan that we inherited had drilling commencing or continuing through '13 and '14. We've deferred that and that's why the CapEx in '13 was down. That's why the CapEx or part of the reason CapEx is reduced for '14. But we do retain a sum of money in regard to the US as again as I've outlined in regards to EnergySource. The long term play for us is finding a way in which we can ultimately consolidate earnings back into the group. That's our laser focus in the US. Unidentified Participant Just on proving up the resource or getting confidence over the resource, what does that require? What sort of timeframe? How much capital? Doug Heffernan - Mighty River Power Limited - CEO Look Mark's still and the guys in -- Mark and [Rudika] in Chile and the team here in New Zealand we're still working through what the best way to do that is. Yes, we're not in a rush. We want to do it right. Unidentified Participant Hi Doug. Just about those transmission constraints, what are we looking at actually targeting South Island residential customers? Doug Heffernan - Mighty River Power Limited - CEO Look we'll focus on customers where we see best yield, rather than be driven by territory. We don't have a geographic focus. We want customers that are actually going to give the best value. So the fact that the grid is less constrained, does create some more opportunity for us to deliver sharper pricing. Because ultimately if a grid gets constrained, then we have to have a margin over and above an unconstrained transmission in writing an offer to a customer. Unidentified Participant Just Doug look your sort of operating costs, just wondering in an era of flat demand and flat prices, do you see an opportunity to reduce controllable operating expenses in going forward? Doug Heffernan - Mighty River Power Limited - CEO I'll just point you to our results for '13, where we had NZD80 million lower domestic operating expenditure, only a fraction of which was deferrable. Unidentified Participant Any further opportunities here on in? Doug Heffernan - Mighty River Power Limited - CEO
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation It's a continuous process, that's what management's for. I think I have said again back at the IPO time, we've had quite a lot going on in the last 18 months. We had an IPO that as a very drawn out process that sucked up a lot of management time, for a much, much longer time that we would have expected. We've taken direct control of the international geothermal. So that was a major exercise requiring significant input from senior management and then bedding that down. And we've been completing a NZD475 million odd capital project. I think shareholders were really concerned if we didn't have our focus on getting those three things done well. Having got those out of the way, it now does mean that management can focus much more on the operating part of the business. We're not going to be spending or building new geothermal projects here in New Zealand for quite some time. So that does get more management time focused on what are the things that we should be doing? What are the things that we shouldn't be doing within the business. I think that's part of the reason why you've seen operating expenditures down in '13. Unidentified Participant Doug just to clarify the CapEx range that you've given for '14. The variance there is the EnergySource option alternative that you're currently discussing? Doug Heffernan - Mighty River Power Limited - CEO No it's a bucket. So what we're saying is our reinvest in CapEx is unchanged and we're saying outside of reinvestment CapEx, we expect to be working within that range of -- is it NZD[52 million], I can't remember. Yes so we haven't allocated within that [Steven]. We're not continuously forecasting individual line items. Unidentified Participant Can you give us an idea of what you've actually included in there for international geothermal? Doug Heffernan - Mighty River Power Limited - CEO No. If there's any update that will occur at the ASM. Unidentified Participant Doug, can you just comment on some information that came out from the Vector presentation, where their CEO was saying that the lines cuts that the put through in April this year weren't passed on to consumers? And then secondly they were commenting that the usage per customer falling that we've been seeing is more systemic than an international trend that they expect to continue in this country. Doug Heffernan - Mighty River Power Limited - CEO Yes, so on the first one, what he's really saying is I assumed no energy price increases would be put in place by retailers and therefore retailers should only have been dealing with My Lines charges. Well that's ridiculous. If we had -- what we could have chosen to do, which would have been really stupid for a customer, was on the 31st of March pass through all of Vector's charges, warts and all. So low consumers increase costs, high usage consumers lower costs, because we are higher fixed costs, right and then on the next day pass through the energy price. No retailer is an idiot enough to do that. We try and keep it simple for our customers so they actually know what the impact on their bill would be irrespective of what we might be doing with energy and what the Commerce Commission might be doing with lines. Sorry, what was your other question? Unidentified Participant How are we going with consumption (inaudible -- microphone inaccessible). Doug Heffernan - Mighty River Power Limited - CEO
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation
Yes, look Vector should have a better idea of that because they've got a whole of Auckland look at it but I've got a little bit of a jaundiced view about those comments and whether they are perhaps helpful for Vector and I think William was mentioning that he was having a look at some GXP data which is a very residential GXPs and year-on-year '13 to '12 he can't see any difference. So yes, look we understand globally these changes and when I first started in the industry growth rates were 6% to 7% compound annually. They've been 1% to 2% over the last decade. They're not going back to either of those numbers in my view but that's not to say you've got systemic rapid drop away as you're seeing in Europe which undoubtedly has got a number of things going for it or in Australia where you've got solar panels subsidized significantly displacing grid supply. Yes, I mean if they get subsidies for solar panels that would cause demand to adjust quickly. Housing stock, just like William's comments, doesn't turn over every year. So I don't think we're going to see the growth rates we had through the 2000s, but I'm not concerned that demand is plummeting away. And more importantly if it was, as a generator I'd rather have the portfolio of assets that Mighty River has got than any other portfolio. It's located close to demand, it's got 40% coming from base load, so it's not dependent on its fuel supply during, and the rest from hydro which can go up and down real quick. So even if Simon is right, which I doubt, we've got a great set of assets to out compete our competitors in that environment. I could be completely wrong, demand takes off and we'll have some little incremental expansions on some geothermal plants, it will be quite interesting. Phones? Is that where we're at now? Yes. Operator Thank you. (Operator instructions). Your first question today comes from Chris Laybutt from JP Morgan. Go ahead, thank you. Christopher Laybutt - JP Morgan - Analyst Good afternoon, everyone. I just have a couple of questions. On this systemic average consumption issue, has the smart meter uptake had any impact on that? Have you seen any change in load over the past couple of years as that uptake has increased? Doug Heffernan - Mighty River Power Limited - CEO I don't think there's sufficient data to show that there's actually a sustained change. So I think it will be far too early to be able to pick a sustained change from the provision of that information to consumers and to put it in a context, while retailers are starting to receive the detailed data that comes from real time metering not much of that is currently being packaged back to customers. It's not being done right across the industry. Mercury has got a product that people can select to choose to look at that and I looked at it for a day or two and then decided it was just too much, I had other things to do but on the sample one. So I think that's something we'll look at through time but again what tends to happen from most demand site management initiative you see globally is a lot of the time it's shifting the time of use and a lot of the programs around customer led energy management is to try and load their bills by consuming at lower cost times. That's not a feature in New Zealand because the differentials between peak and off peak are very low. Christopher Laybutt - JP Morgan - Analyst Just one further question just on portfolio management, your portfolio. We're seeing some weak wholesale prices at the moment but you get the benefit this year from your net short position, that's FY14. Can you tell me whether you could give us an idea of FY15, how much of that load is already hedged and when you expect to be sort of doing a lot of that hedging activity? Doug Heffernan - Mighty River Power Limited - CEO Yes, again we've outlined some of the contract tenure in the prospectus forecast, so that's probably the best robust description of that. Contracts will progressively roll off through time but we did have significant contracting that we did in 2012 that had multi-year duration but we will have commercial contracts progressively rolling off
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation through the back end of '14. So clearly recontracting rates therefore will be an influence on what '15 might look like and, you know, that's something that we will be updating in a formal way at the ASM in November. Christopher Laybutt - JP Morgan - Analyst All right, great. That sounds great. Thank you very much for your time. Doug Heffernan - Mighty River Power Limited - CEO Thank you. Operator Thank you. Your next question comes from Andrew Harvey-Green from Forsyth Barr. Go ahead, thank you. Andrew Harvey-Green - Forsyth Barr - Analyst Hi, Doug, William and the team there. Just a couple of quick questions from me. First of all, just around the dividends, there's quite a lot of focus in your presentation around free cash flow as opposed to adjusted NPAT. Is that a better way for us to think about, I guess, where you might be taking the dividends that are going forward? Doug Heffernan - Mighty River Power Limited - CEO No, that wasn't intended to suggest there was a change in the policy parameter, Andrew. It was really more a case that we know many analysts do look at, so it was just trying to provide some, I guess, transparency on that and also be clear about what we mean by free cash flow. But it is a key thing that the Company will take into account as it looks forward, forecasts forward and thinks about capital management more generally. I think the key point about '14 is the dividend security, if you like, is higher than it was in '13, given it's 71% of free cash rather than 78%. Andrew Harvey-Green - Forsyth Barr - Analyst The second question I just had was around Ngatamariki and the timing of that. The operating performance as opposed to the capital project. Are you able to just let us know what was the assumption, I guess, within the PFI forecast. The timing of that coming on and just the -Doug Heffernan - Mighty River Power Limited - CEO Yes, it is slightly conversion from capital reduction to revenue. William, can you remember the exact -- probably about a month late? Yes. Sorry, it's probably about a month late, Andrew, but as I say, going back to the helicopter, the Board and management remain comfortable with the EBITDAF forecast that's set out in the IPO offer document for '14. Andrew Harvey-Green - Forsyth Barr - Analyst Okay, thanks for that. That's all I have. Doug Heffernan - Mighty River Power Limited - CEO Thanks, Andrew.
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AUGUST 27, 2013 / 10:30PM GMT, MRP.NZ - Preliminary 2013 Mighty River Power Ltd Earnings Presentation Operator Thank you. There are no further questions at this time from the phone. Doug Heffernan - Mighty River Power Limited - CEO All right, thank you. Any other questions in the room? All right, thank you very much for your time and for your questions. Thanks.
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