U.S. Markets open in 4 hrs 13 mins

Edited Transcript of MEL.NZ earnings conference call or presentation 25-Aug-19 9:30pm GMT

Full Year 2019 Meridian Energy Ltd Earnings Call

Wellington Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Meridian Energy Ltd earnings conference call or presentation Sunday, August 25, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mike Roan

Meridian Energy Limited - CFO and GM of Finance & Strategy

* Neal Barclay

Meridian Energy Limited - CEO

================================================================================

Conference Call Participants

================================================================================

* Aaron Ibbotson

UBS Investment Bank, Research Division - Director & Research Analyst

* Andrew Rupert Pelham Harvey-Green

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Grant Swanepoel

Craigs Investment Partners Limited, Research Division - Director & Head of Research

* Stephen Hudson

Macquarie Research - Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [1]

--------------------------------------------------------------------------------

Good morning. I'm Neal Barclay, Chief Executive of Meridian Energy, and I have with me, Mike Roan, our CFO, and welcome to Meridian's Annual Results Presentation for the Year Ended June 2019. In short, the annual results have been extraordinary. There have been several significant factors outside of our control that have contributed strongly to Meridian's share price appreciation and our total shareholder return of 59%. Wholesale market prices have also worked in our favor, supporting EBITDAF growth of 26%. However, I do believe the result is underpinned by very strong execution and progress against our strategy, and these things are within our control. I'll talk to most of these key highlights as we go through this presentation.

But in summary, we reported double-digit Australasian customer growth, which reflects our leadership in sustainability, the strength of our brands and the quality of our customer care. We produced record New Zealand hydro generation of only slightly above average inflows. With the Ohau A refurbishment in full swing, we relied on strong portfolio execution to capture high wholesale prices throughout the year.

The people are key to our success. We intend to continue to build a more diverse, more inclusive and more engaged workforce. At June, the balance of pay parity, diversity and inclusion measures all continue to move in the right direction. Shifting the dial on these does take time and perseverance, and the Board and management are fully committed to continue to drive the positive change.

Now there is a lot of change going on at the executive team level, but that, I think, creates opportunities and chances for renewal and new thinking. Jacqui Cleland, Paul Chambers, Julian Smith, Ed McManus and Ari Sargent have all made personal decisions to move on to their next career steps. We've introduced Tania Palmer, Nic Kennedy from outside the company, Mike has obviously changed roles, and on Friday, we announced Chris Ewers is stepping into the GM Wholesale role.

We're progressing with further new appointments for our Chief Customer Officer, an Australian CEO, and we're looking at both internal and external candidates for both of those roles.

The makeup of Meridian's Board is also changing, with several directors, including the Chairman, Chris Moller, retiring. Mark Verbiest will chair the Board from October, and we recently announced 3 new woman directors.

Now certainly, the most sovereign aspect of our performance in the last year has been in relation to safety. Our lost time injury rate spiked in FY '19 and 2 of those resulted in serious hand injuries. Now while I remain confident that our safety culture and processes are strong, we can't take that for granted. So we've sought specialist external advice to help us ensure our work site environments and the safety behavior of our people remain at the highest levels.

Meridian's strategy is relatively simple, and whilst our approach to delivering against that strategy is always evolving, the strategy itself has been a constant for some time. The slides that follow provide context and performance against these strategic initiatives.

Sustainability. That's a broad church. And so we focus on areas that we can make a real difference. We remain committed to the 2 key sustainable goals relating to climate action and affordable clean energy. We are determined to walk the talk and remain committed to only generating electricity from wind, water and sun, and we've made good progress in several areas during the last year. We're supporting our customers with clearer, fairer pricing and more payment support options. I think the position we took on PPD is a good example of this.

The Meridian Group became net Zero Carbon, and we've also adopted a target to halve our gross emissions by 2030.

And we recently became the first New Zealand company to disclose the risks climate change pose through our business. While headline demand growth for the year was modestly positive, a relatively low irrigation season masked what we believe is more substantial underlying growth. Consequently, Meridian and others are making noises about new builds.

In the medium to long term, there are a range of views on demand growth and energy efficiency opportunities. But if New Zealand is to get anywhere near its goal of Zero Carbon by 2050, then a significant uplift in new renewable electricity is required. Even partial decarbonization from nontechnology sources suggest at least a 50% increase in current demand over the next 30 years.

We will need more positive consenting framework and a population that supports wind farms, even in their back yard. But I think, providing future governments remain committed broadly to the well-functioning open-market structures we have today, the investors and generation in storage capacity will have the right incentives to efficiently meet that demand. The short-term supply position was dominated by the gas system issues that I'm sure you're all familiar with. Hydro inflows were not particularly unusual but the 2 significant dry periods during spring and autumn did coincide with both Pohokura outages. The longer-term supply look is -- outlook is interesting. The timing of the end-of-life profile shown here won't be exact, but it does highlight that within the next 20 years, around 30% of New Zealand's current generation capacity will either face replacement or repairing investment decisions. This, coupled with the potential demand pull from decarbonization I talked to on the previous slide, suggests the industry sits on the verge of a significant investment cycle, albeit with some uncertainty around timing.

We remain hopeful that the interdecadal process to reform transmission pricing will be implemented. The EA published the latest discussion document in July. The EA proposes to replace the current regime with a benefit-based charge and a residual charge.

Now most importantly, this means that the HVDC charges, currently levered on South Island generators as a form of tax, will be abolished. Meridian is the largest South Island generator bears the bulk of these costs today. Implementation could be as far away as 2024, but the good news is, Transpower's RCP3 process will deliver a significant portion of the savings to Meridian commencing in April of next year.

On the electricity pricing review, we have publicly been very clear that Meridian is supportive of the drafts suite of initiatives put forward by the review panel as a package. We await the government response on panels -- on the panel's final report, which we understand is expected now and sometime in September.

Now my view, the big ticket policy regulatory reform in New Zealand relates to climate change. New Zealand has a unique opportunity to transform our economy, and renewable electricity is the solution to much of the country's emissions. In May 2019, the government introduced the climate change response Zero Carbon Amendment Bill. Once passed, it is intended that bill will set greenhouse gas and methane emissions reduction targets and a series of emissions budgets take the stepping stones towards this long-term target. It establishes a new independent climate change commission to provide expert advice in monitoring to help keep successive governments on track. The Interim Climate Change Committee report was released in July and brought a dose of pragmatism to the goal of 100% electricity grid.

More importantly, the report recommends that the government should provide for the development of wind generation at scale through strong direction under the Resource Management Act and ensure the value of existing hydro generation to New Zealand's climate change objectives is given enough weight when decisions about freshwater are made. Clearly, we at Meridian, are strong supporters of the bill, the ICCC report and ETS reform.

And I'm delighted with how our New Zealand retail brands are performing. When we normalize for variable irrigation demand, the growth in customer numbers and sales volumes in all of our segments was strong. Price dynamics have been interesting. The competitive acquisition pressures in residential and small business have seen average prices fall, while the higher wholesale prices observed in the ASX futures market have flowed into corporate, industrial and spot exposed pricing. I'd also call out our growing commercial solar book. We have completed significant new solar builds for both Kiwi Property and Mainfreight during last year, and the pipeline for new developments is expanding rapidly.

Beyond the volume and price, the underlying drivers of retail value are trending well. Powershop leads the industry and Meridian leads the large retailers in Net Promoter Scores. Both brands were recognized as finalists as the Retailer of The Year at the Deloitte Energy Awards last Thursday evening and Powershop took it out. We're quite proud of that. Customer retention rates are improving and our cost to serve on a peer customer base have declined by 6%. Progress on our Meridian customer migration to the Flux platform is slightly slower than expected but cost remain under control and risks of anything are diminishing.

The team have invested time upfront, developing what we describe as our migration engine, and the number of customers unlocked for migration is building nicely. We have 22,000 customers migrated today, and I'm expecting we will hit 50,000 by December. What we've learned through this process is the higher level of variability in our current offers has created a legacy system and data set that is truly unworldly, and a traditional big bang mass migration sometime next year, which would have been the way I've seen most of these projects approach this challenge in the past, would invariably have created massive customer disruption as most customer migration projects to do.

By adopting a more iterative agile approach, we are making sure the customer experience is seamless, and we're also adapting our core operations to operate in an agile way, even though we don't call it that.

I'm particularly proud of the performance of our wholesale and generation teams this year. Sure, wholesale prices spiked significantly, but in the context of fairly average hydro inflows and some significant planned plant outages, the teams delivered a record amount of generation to take advantage of the higher wholesale prices.

Looking forward, our work on the refurbishment of the Ohau assets will cost us more than we originally planned, but that additional spend allows us to defer significantly more spend in relation to the generator refurbishments by close to a decade.

And while we look forward to better wind farm availability in 2020, we must never go to significant HVDC outage in the first quarter of next year. The grid owner is undertaking a 3-month HVDC reconductoring project between January and April next year, challenge -- effectively reducing HVDC capacity by 1/3 to 1/2. And that presents challenges for us as we manage constrained generation where we have historically seen lakes spill 45% of the time. And none of this is insurmountable, and we're building our huge position accordingly. But it's also fair to say that FY '20 will likely be more operationally challenging than this last year.

Firming wholesale prices mean several new renewable developments appear to be well in the money. We are working through our consent variations for our Hawkes Bay Wind options, and we have gone to the market with an expression of interest to support the civil and electric components of that work. Longer term, our objective is to maintain our market share of the generation market. And whilst we have more than 2,500 gigawatt hours of development pipeline, a lot of that work is needed to get those options consented or reconsented.

As I mentioned earlier, it seems likely that the RMA frameworks for renewable projects will become more balanced. Our Waitaki water consents must also be renewed by 2025. We may opt to progress this earlier, as again, the regulatory framework and support of that scheme is moving in a positive fashion. And just to come back to the near-term conditions, ASX curves currently look like they reflect ongoing tightness in the gas domestic market.

Australia. Well, it's -- it remains hard to get a lead on what any sort of enduring energy policy in Australia could look like. The coalition government does not have a renewable energy policy beyond 2020. That said, renewables continue to dominate new generation builds. Opt-in default market offers are now in place and that seems to have had the effect of compressing retail prices into a tighter band. Powershop, with its differentiated product offering, could do well in this environment, we believe.

Wholesale market prices remain reasonably volatile. Black prices zoomed during this last year but the green LGC prices fell significantly, and it's hard to see them recovering.

And several issues are hurting renewable developers, causing project delays that could positively impact calendar '20 and '21 process. That said, again, this price volatility is the issue of an aging Australian coal-generation fleet, with more than 60% of existing capacity past the end of the economic life in the next 20 years.

So what we have concluded is a well-hedged, vertically integrated business model is essential for making money and not losing our share, and that's exactly the approach we're taking.

As I explained last year, the addition of the Green State assets and 2 wind farm power purchase agreements have allowed us to reduce retail hedge costs and renew our efforts to profitably grow the Powershop customer base. The headline success story has been a 36% lift in customer accounts during the year. We've also significantly recruited contention rates, developed high brand awareness, and we have an NPS that's miles ahead of the industry average.

We've expanded electricity in South Australia, and we will launch our second white label offer under the Kogan Energy brand next month. Now Kogan has around 1.6 million active customers. And whilst they don't expect they'll all sign up to Kogan Energy, that does give you a sense of the size of their online presence.

The story of note for our generation portfolio remains in New South Wales drill. Hydro volumes were significantly down on the last 5 years of historical performance, and that is why diversification is key.

Mount Millar availability could be an issue for the next year or 2 as the age of the wind farm suggests we're likely to see an increase in major component failures, but I don't expect this will be material. And overall, while we generated less than we hoped, we also cleared better average prices than last year and the improved portfolio flexibility meant we landed significant gains during the high price events in Victoria during January. All our power Australian business achieved our planned earnings growth for the year.

And finally for me, Powershop U.K. across all brands Powershop, Wigan, Wasps, nPower, Select and most recently, Sainsburys grew 50,000 customers during FY '19 from 25,000 to 75,000. Now this was behind the expectations but it's fair to say the market conditions in the U.K. were very challenging, leading into the introduction of retail price caps.

But this was a very low-cost growth option for us, and Flux continues to explore new opportunities in both the U.K. and Europe. So I'll now hand over to Mike, and he'll go through this year's financial performance in a bit more detail.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [2]

--------------------------------------------------------------------------------

Thanks, Neal. As the result demonstrates, we had a cracker last year. Lift in EBITDAF from 26% -- an impact of 26% and 69%, respectively, from what our record numbers already in fin year '18, is superb by anyone's calculations. However, and as always, many of the variables that drove those outcomes were outside of our control and the result does mask a few things that we have to work on.

I'll explain some of these in the next few slides, but before I do, I wanted to reinforce something that Neal had mentioned, which is the incredibly pleasing thing about fin year '19, was the elements within our control were executed very well by our operating teams.

So what does the result mean for our shareholders? Today, we're announcing a final ordinary dividend of $0.1072 a share and a final special dividend of $0.244 per share as a result of the capital management program. This lifts the full year ordinary dividend to $0.1642, the special dividend, $0.488 and the total dividend to $0.213 per share. This total payment is 11% up on fin year '18 and reflects the outstanding year that we've just had. The dividend also represents payment of 75% of free cash flows after considering stay-in-business CapEx. We settled on this level of dividend after considering sustainability of its level in fin year '20 and beyond, and the opportunities we increasingly see ahead of us to redeploy cash within our business.

In an environment where interest rates feel like they're likely to stay low, these opportunities, should they play out, exceed shareholders' value creation benchmarks in our view. Of course, we also need to manage our balance sheet through and beyond the remainder of the capital management program. As you know, our result was really powered by buoyant wholesaler trusty markets in New Zealand, with energy margin here lifting by $164 million or 17% over financial year '18. It was superb.

So what worked in our favor? Well, first off, our financial book, with the buy-side hedges, insurance products and derivative sales, provided flexibility to manage our way through the various challenges while adding $74 million to energy margin. Second, our wholesale and retail teams worked incredibly well to target high-value opportunities within the C&I market. And you would have seen the lift in C&I volumes and prices earlier in this presentation, up 8% and 7%, respectively on fin year '18 as part of the result.

We haven't seen average C&I prices at this level for a number of years. And in saying this, we realize there are real Kiwi businesses paying more for their energy as a result of the increase in underlying gas price. So we are working with them on energy efficiency measures, where we can, to help offset their increases. At the same time, our Powershop New Zealand and Meridian customer teams lifted ICP levels by 11,000. We know how competitive and challenging retail markets are so we put most of this growth down to building service and product offerings that can be realized by the Meridian energy center in Christchurch, the Powershop call center in Marcellin or through the Flux product set directly.

Now there are always a few things you wish you could do again, and we probably held on to acquisition rates for longer than it was useful in the early part of the year, which ultimately weighed on our average residential price. But as we all know, you don't get to do things again in life, so you have to learn from them. And we've done just that as we enter fin year '20.

As for the things outside our control, inflows were a little late in coming last year. They didn't really get going until March. But we had adequate storage in the first half of the year, and we were really able to capture opportunities in the second where they did arrive. And while the gas market upheavals were entirely unexpected, the storage position and ongoing inflows helped the wholesale team deliver outstanding results with record production volumes and the resulting spot links sold into higher-than-expected spot prices.

Interestingly, or not, inflows over the year were only 104% of average. But all our physical book added $91 million to energy margin. At the same time, we had a good year in Australia. In Australia, energy margin was $32 million higher than the previous year, driven by a full year of Green State production, a reasonable lift in sales to electricity and gas customers and a well-executed derivative position.

And while I'm on the topic of derivatives, I want to talk about LGCs quickly. These added $27 million to energy margin last year. Now you right -- might remember that LGCs trade on a calendar year basis, so each financial year represents a weighted blend of 2 calendar years. And we expect that fin year '20-blended LGC price will be 30% to 40% lower than that seen in fin year '19. However, we run a pretty conservative hedging program, and we have forward sold a substantial number of calendar year '19 LGCs, which will settle in February 2020, at prices significantly above this level. As a result, we expect our LGC revenue in fin year '20 will be in the low $30 million range.

So the Australian results were pleasing, but we'd have loved it to rain a little more over there. The lucky, or in this case, unlucky country, is in the midst of a multiyear drought. And while we allowed for this when we purchased the Green State assets, the lack of rain meant generation from those assets was only around 85% of expected levels. And while the Southern Oscillation Index has recently returned to neutral, we haven't seen torrents of rain into the Hume, Keepit or Burrinjuck catchments as yet. In saying this, we think that the fin year '20 production levels from those assets will only marginally be lower than fin year '19 if the rain stays away.

So moving on to costs. Total costs lift by $23 million over fin year '18, driven by our growing business and refurbishment of the Ohau chain that will continue through the next 3 years. And that increase can be broken down further into $4 million in additional customer servicing costs in New Zealand, a $7 million lift in spend in a New Zealand asset business and a $12 million lift in spend in Australia due to growing customer volumes and a year of Green State asset OpEx.

Now I want to pause here for a sec, and the reason for this is that as the slide suggests, we're forecasting OpEx for fin year '20 for the first time as part of this presentation. As a management team, we should be able to tell you what we expect to spend so that's what we're doing. For fin year '20, we expect an OpEx profile of between $280 million and $286 million. Now that is after adjusting for the change in treatment for operating leases, which flow from the adoption of IFRS 16 and fin year '20, and it's a comparable lift on fin year '19 of between $4 million and $10 million, with the change being driven by expected ongoing growth in customer numbers in New Zealand and Australia and the ongoing multiyear Ohau refurbishment program.

Of course, the combination of energy margin on one hand and cost from the other produce EBITDAF, and EBITDAF was $838 million. This was a lift of $172 million on fin year '18 supported by New Zealand EBITDAF of $757 million and Australian EBITDAF of $64 million. Flux, while materially servicing the Meridian Group, did extend its business in the U.K. and provided the remainder.

For the accountants among us, impact also increased by 69% to 2 -- to $339 million. The reason for this was simple. Cash delivered by the operating businesses grew faster than depreciation, and while treasury hedges got smashed as the world's monitoring policy masters facilitated a reduction in borrowing costs, the lift in fair value of electricity hedges didn't hurt a bit. Now we did adopt IFRS 9 during the year to ensure our accounting of derivatives aligns with that standard, and in fin year '20, we'll adopt IFRS 16 and eliminate the concept of operating leases. They affect to both the capture and the notes to the statements.

The final elements I'll focus on in this slide are the group asset valuation lift of $1 billion, a small impairment to Mount Millar and a lift in the Green State asset value.

Hopefully, the large valuation lift doesn't surprise as the market's view of Meridian's value has lifted materially over the year but the small impairment to Mount Millar might. This is not the first impairment for Millar, and the reason for it is simple: you can now build wind farms in Australia for levelized cost of energy below $60 a megawatt hour. And while Millar and Mercer's value are holding up as a result of a fall in cost of capital, Millar was purchased at a levelized cost of energy of approximately $85. So that's possible that they'll face valuation challenges as we move forward.

However, the lift in Green State value from our purchase price of $168 million to $223 million affirms our decision to purchase these assets that support our aspirations in that jurisdiction even in the midst of a drought.

I won't take too much time on the capital slide not because it isn't interesting but because it's straightforward. And again, just like OpEx, for the first time, we're forecasting CapEx for the coming period. For fin year '20, we're expecting CapEx in the order of $70 million, $80 million. That is made up of $50 million to $55 million of stay-in-business CapEx, a little above what we did last year, and investment CapEx of between $20 million and $25 million, reflecting work on our generation development pipeline and ongoing investment in the Flux platform, which leaves us only with balance sheet funding.

As you can see, funding is reasonably well diversified, both by tenure and by source, and net debt is lower than we expected this time last year. But as I alluded to earlier, we and many others wish we didn't hedge the majority of our interest rate exposures, given the falls experienced in those markets over the past 9 or so months. That said, we're here to make electricity and returns for our shareholders, not trade our balance sheet. And all up, it was a superb year financially that will be hard to beat by any stretch. Neal, back to you.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [3]

--------------------------------------------------------------------------------

Okay. I'll just sum up by saying, whilst we're obviously pleased with the results for the year, as Mike was just alluding to, it would be unrealistic to expect the same kind of financial outcome for FY '20. We won't issue earnings guidance, however, we have given you a sense of where we expect controllable costs for FY '20 to land, and we are providing comprehensive monthly operating results.

The tight gas market, upcoming field outages and the planned HVDC outage program are potentially significant events for the new financial year. In the meantime, our July operating results show that we have continued with our strong retail and generation performance. Most importantly, in the medium term, the potential for sustained growth in New Zealand looks very good. In Australia, positioning our challenger brand as the country's only 100% electricity generator means that our potential for growth remains significant there as well. And that's pretty well us.

We can now take some questions, and I think we'll go to the floor first. Let's just explain, we've got a microphone here that should do the business. (Operator Instructions) Any questions?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [1]

--------------------------------------------------------------------------------

Neal and Mike, I'm Andrew Harvey-Green from Forsyth Barr, for those who don't recognize the voice. Couple of questions for me. First one, I guess, just around the dividend, and obviously, reading of the payout ratio in FY '19. And I think [there are still some issues] on the mets. But assuming there is a bit of a drop next year, would Meridian choose to pay step of a 90% of the top -- out of the payout ratio or would you actually look to drop dividend if earnings weren't falling much?

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [2]

--------------------------------------------------------------------------------

Andrew, good question. We are unlikely to change our policy range 75% to 90% as part of the dividend policy as we look to fin year '20 or beyond. We think it gives us flexibility given the way our balance sheet is set up and the cash flows that we expect through the next 12 months.

--------------------------------------------------------------------------------

Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [3]

--------------------------------------------------------------------------------

Next question I just said was around OpEx, and we recognize there is a small lift on FY '19, but if we actually go back to the sort of FY '18, you talk about a $30 million increase in FY '20 versus FY '18. You obviously -- I guess a bit more color, and I think you've done a reasonable amount, but maybe a little more color just around the amount of one-offs versus, sort of, underlying growth in OpEx as we have a different, I guess, compared to what we've seen from some of the other gentailers who are, sort of, keeping their healthy expense reasonably flat.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [4]

--------------------------------------------------------------------------------

Yes. Andrew again, good question. So we have grown -- we've got growing businesses and -- both in New Zealand and Australia. And so you see -- so that's the first part of your question. There's no real one-off nature for the underlying increase in costs you experience in your retail business, they're related to customer growth. So we've seen that in both Australia and in New Zealand. I think we talked about the Ohau program and the lift in OpEx as a result of that, and we expect that to play out over the next 3 years. And then the other piece that I did mention specifically was the other element that we've added to our Australian business is a lift in OpEx as a result of full year of Green State assets. So we are -- to the extent, we have an ongoing -- growing business, we'd expect cost to lift through the next year in the same way as I've presented.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [5]

--------------------------------------------------------------------------------

I'll just add that we're midway through our project momentum, which is moving the Meridian customers onto the Flux platform. We do expect to see some reasonable operating efficiencies come at the end of that program. So that will start to flow through in calendar year '21. And also the Ohau is start winding up around '22, '23, so you'll start to see some of that cost come out of the base as well.

--------------------------------------------------------------------------------

Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [6]

--------------------------------------------------------------------------------

So that there's -- I think you mentioned, maybe you'll start seeing costs come down a little bit?

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [7]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [9]

--------------------------------------------------------------------------------

Next question was just around the Hawkes Bay Wind Farm, I know you already gave us, I guess, some time line around decisions, and I think in the past, you talked about potentially undertaking construction during the summer months on some of this. So where does that -- the current proposal, I guess, coming into the current summer or?

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [10]

--------------------------------------------------------------------------------

Yes. Well, we're doing preparatory work or we've done some preparatory work, plus we're looking at some aspects of the tender. We're working through a consent change right now. If that were to come through, then we could be in a position to go -- to have a go/no-go decision on that late this year, which would potentially leave us in a position where we could start some -- start work, serious work, sort of, this summer, probably the other side of Christmas. But we haven't made that decision, and the Board -- that's a Board-level decision, but that's what we're aiming to give ourselves the option to do.

--------------------------------------------------------------------------------

Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [11]

--------------------------------------------------------------------------------

Okay. And last question for me was, can you really give us a bit of an update, I guess, on progress around the structural replacement (inaudible) parties sort of thinking about [in grid] not to use coal going forward? I assume that's still the case.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [12]

--------------------------------------------------------------------------------

That's absolutely still the case. We've got a process that's live at the moment. We can't talk about it openly because it's a confidential process but it's tracking well.

Okay. If there's no more questions from the floor, we'll go to the phones. (Operator Instructions)

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Grant Swanepoel from Craigs Investment Partners.

--------------------------------------------------------------------------------

Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Research [14]

--------------------------------------------------------------------------------

First question, just on pricing. You did indicate that you would like to restructure early discount, I mean, discounts on acquisition earlier than you did. It would appear that most of your competitors are trying to understand why this retail competition has continued. Do you think you've played quite a big role in keeping those prices down in this rising forward hedge curve period? Question one.

Question two, you mentioned that Powershop transition of your IT system is going well and we should expect by calendar '21. Are you still looking at $5 million to $10 million of cost out from that in its full effect?

Third question on HVDC. You mentioned that Q1 calendar year '20 is going to have quite a bit of an impact on that front. You've also got per quarter or month outage. Why haven't you lobbied or -- is that not possible to have the HVDC outage moved away from the per quarter outage? And then in terms of -- question four on growth projections. You guys are coming across slightly more bullish than the others, probably more realistic with the work you guys do behind the scenes. But in terms of your competitors, most of them are talking about building into holes that are developing. So Contact saying they will build in and take [PCCR] potentially. While you guys are still talking to -- trying to hold on to your market share in terms of build. Do you still see your first wind option as, let's build that one and then let's wait and see how demand develops? Or do you want to aggressively pursue your market share over time? And those are my questions.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [15]

--------------------------------------------------------------------------------

Do you want me to take the first one?

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [16]

--------------------------------------------------------------------------------

You take the first one and I'll take second one.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [17]

--------------------------------------------------------------------------------

Yes. Grant, if I heard the first one, it was pricing in residential markets and the role that we played. I don't think we're any bigger factor than anybody else in that space. It's a competitive market, there are something like 35 brands that are out there. We've been able to grow our presence in that space, I think primarily as a result of the product and service offerings that are out there and our ability to get our teams and our energy centers out talking to customers. We're obviously presenting ourselves a little differently than we have in the past through our brand, which has also had a positive impact on our performance. But no, my answer would simply be that those are competitive markets. Everybody's engaged in those markets. And from time to time, consumers do, and should, benefit from those levels of competition.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [18]

--------------------------------------------------------------------------------

Yes, I'll just add to that, that a lot of the, particularly the residential growth that we've had in the last year, came through Powershop. And the Powershop, as you may be aware, doesn't have a differentiated pricing proposition. So it's not the cheapest in the market by any stretch of the imagination, unless you take advantage of the, sort of, discount and shopper model that we make available. So no, I don't think we're the price leaders or have probably been the price leaders through that period.

Second question, our cost out around project momentum. So that's our Flux migration. Yes, we're still on track to deliver savings of that order. Now just to put a bit more color around that, Grant, that's savings in terms of order capital plus operating savings. But when we look forward and model out the business, we think we'll take off about $10 million in cash costs per annum, sort of starting in the back end of next year, next calendar year.

HVDC outages and Pohokura and our ability to lobby. You can have a go at that one.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [19]

--------------------------------------------------------------------------------

Yes. So yes. Look, Neal set out that there is a reasonably long but well planned -- it's been in planning for 4 years, outage of the HVDC length from January through April 2020. And we, like others in the market, have picked up that there's an outage of Pohokura in March as well. It's -- it would always be nice if outages of that significance could be scheduled separately as opposed to on top of each other but probably signals what we saw last year, that the gas industry and the electricity industry haven't got to the point where scheduling of key outages would support what we're trying to do.

Generally, there's some more work to do there. Getting outages of that magnitude change though is very, very tricky. Probably best talking to Transpower or the owners of Pohokura to see what they might be able to do, Grant. We would love them to be able to shift them. We do know that Transpower has changed some of the outage profile for the bipole outages to try and cater for that. But it does make March a little trickier. As I said, the industry has had 4 years to plan for the HVDC outage, so it has been in Transpower's plan for some time. And while it will be tricky and things will be unexpected, we've been working on our position for a long time recognizing the impact it has on our business.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [20]

--------------------------------------------------------------------------------

Yes. And the short answer is, yes, we do work very closely with the grid operator and point out where we think they could improve the outage program. But at the end of the day, we're just one interested party. And building -- in terms of the potential to build into holes, I guess, the way we look at it, but first of all, we look at our own portfolio position and what we project that to look like in the next few years. So we are giving ourselves the option to put more generation on the ground because we think we're going to have a retail load. We've already got one that's actually closing in on pushing our existing generation base. But we also know that we've got TCC sitting on the sidelines of spot gas primarily, so that's potentially not going to run that much. Also these decisions, Grant, you've got to think about them in terms of whilst we might make a decision late this year, we won't have full production until probably 2022. So you're sort of looking at a reasonable time frame and understanding and managing the risk over that time frame. But yes, we did have on one of our slides too that there is a large amount of existing new generation that's going to have to be repowered or replaced in the next 20 or so years. So that will certainly be part of the build program that's New Zealand is required to complete.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [21]

--------------------------------------------------------------------------------

Yes. And the other thing that I'd is add is, Grant, is we've got great opportunities in New Zealand but we're also looking to our opportunities in Australia, and we'll make sensible decisions as though as either the growth emerges in New Zealand or we grow our business into Australia. And our goal is to increase returns. We've got shareholders and having investment potential in both New Zealand given the potential growth that's showing up as we decarbonize, but also with the growing business in Australia gives us real opportunity to do exactly that as invest in assets that are productive and useful.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Your next question comes from the line of Aaron Ibbotson from UBS.

--------------------------------------------------------------------------------

Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [23]

--------------------------------------------------------------------------------

I think we had 2 questions. So first, just a clarification, and I appreciate that you won't give us a solid answer. But we have sort of got accustomed to ordinary dividends not being cut, so I was a little bit surprised by your answer, if I interpreted it correctly in the beginning that you wouldn't deviate from your policy range of 75% to 90%. I sort of just struggled to understand the point of that and the point of not using some of your balance sheet flexibility. If you're that tight, why not just get the special now and be able to hold the ordinary in a poor hydro year? That was my first question.

Secondly, just trying to understand if there has been any development, any conversations you want to share with us with regards to long-term planning of sort of dry and -- dry winter risk and when it comes to the Genesis Swaption or discussions with the [NZAS], as to anything else?

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [24]

--------------------------------------------------------------------------------

Thanks, Aaron. I'm always happy to talk about and get your views on our policy settings for dividend performance. I'm not sure if I caught the question as directly but what we were trying to signal, Aaron, is that this year's dividend at $0.213 per share is something that we considered are reflecting on sustainability of that dividend for fin year '20. So as we look at our performance next year, and the coming years, obviously, we're exposed to variability around their inflows, and so we don't provide guidance. But we certainly haven't -- we have taken the sustainability of performance into account when we set our both ordinary profile and our total dividend profile. So hopefully, that gives you a little more insight into that. Otherwise, feel free to ask another question on it.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [25]

--------------------------------------------------------------------------------

Yes. And as regards to long-term planning for the dry winter risk, I mean, yes, we're -- well, we're very interested. We've got our own view of how the world could shake out or the many different ways the world could shake out. We are very focused on that as a potential outcome of the swaps and renegotiations that we're working on. We are though very confident that coal does not need to be part of the New Zealand market beyond probably midway through next decade. There are -- there will be a requirement for gas to continue on probably at least a decade or 2 after that. And we're working with parties and trying to give parties confidence around investment decisions that they could potentially take as part of these swaps and negotiations, which we hope to round out later this year.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question comes from the line of Stephen Hudson from Macquarie Securities.

--------------------------------------------------------------------------------

Stephen Hudson, Macquarie Research - Head of Research [27]

--------------------------------------------------------------------------------

Neal and Mike, just a few for me. Just on the RCP3 savings. I just wondered if there was upside to that $36 million saving that you called out and called out previously as a result of spot interest rates. I know Vector have talked to, sort of, more like a 60% increase in the pnode adjustment that the Commerce Commission has estimated for them. So I just wondered if there was upside to that number.

Secondly, just going to have another crack at the dividend question. Are you, sort of, signaling today that the capital management program that comes to an end in FY '22 will come to an end as a result of the step-up in the second half dividend? And your comments on, sort of, increased capital deployment opportunities, I suppose? And then just thirdly, just on the Genesis Swaption. I just wondered if there had been any -- or can you share with us any expense or cash cost that has risen as a result of suspension events being called?

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [28]

--------------------------------------------------------------------------------

In terms of RCP3, look, there may be some upside, we're certainly not counting on it. So it's not in any of our projections or forecasts. And I guess that will come through the process. We don't control it, Stephen, and because it's a bit of an unknown, we don't count on anything more than what's been published, similar to the actual one, the transmission pricing reform itself, we don't count that in any forecast that we produce until it's actually delivered. What's the second question?

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [29]

--------------------------------------------------------------------------------

Second question was on dividend and capital management program. And we're not -- the capital management program ends at the end of December fin year '21. So the -- we're not making -- '22, sorry. We're not making any statements about the capital management program here today.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [30]

--------------------------------------------------------------------------------

No. No, We -- I think what I said last year was we would give the market an update every couple of years. So once we're a couple of years out from the end of that capital management program, we'll give you some clarity as to how -- what we expect to happen. I guess what we certainly know, there is potential for growth driven by demand, driven by asset retirements, whatever. And we're just trying to make sure that we've got the balance sheet flexibility to participate properly in that growth, and ultimately, achieve our end outcome objective, which is maintaining our market share of generation in the New Zealand market and growing our Australian business to something that's meaningful in terms of the proportion of the overall bottom line of the company. And then the Genesis Swaption in terms of cost of suspension events.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [31]

--------------------------------------------------------------------------------

They're not material.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [32]

--------------------------------------------------------------------------------

Not material.

--------------------------------------------------------------------------------

Mike Roan, Meridian Energy Limited - CFO and GM of Finance & Strategy [33]

--------------------------------------------------------------------------------

No. No, there's no material issue there. We've got a disagreement over the way that functions, and we'll work it through with them. We've got a good relationship with Genesis. We obviously had a long-standing relationship with them in relation to the Swaption and plenty of other transactions. So we'll just work our way through resolution of that challenge.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

There are no further questions from the phone. Please continue, gentlemen. Thank you.

--------------------------------------------------------------------------------

Neal Barclay, Meridian Energy Limited - CEO [35]

--------------------------------------------------------------------------------

Okay. Well, thank you all very much for attending. We're quite proud of the result, as we've said, but I don't quite expect the same numbers next year. Please. Thank you, all. Cheers.