Manawa Energy Limited (MNW) Earnings Call Transcript & Summary

Good morning, everyone. Apologies for the late start, but we were noticing a reasonable number of people logging in quite late, and we wanted to give them an opportunity to hear the full presentation. So I'm going to hand over shortly to Mr. Paul Ridley-Smith, who is our Chairman, and he's going to take you through a short presentation. And then at the end of that, there will be an opportunity for questions to myself, Kevin Palmer, as CFO; and also in the room with me is David Prentice, our Chief Executive; and Craig Neustroski, our General Manager, Markets. So Paul, if you would like to...

Yes. Get underway. All right, everybody. Kevin, look, I'm dialing in or Zooming in from Wellington and as the others has given us, they're all based in Tauranga. So just checking here that you're hearing me okay there?

Yes, we can. Yes.

Very good, all right. So I presume that everybody else on the call does as well. So thank you, everybody, for joining the call. Look, we've given you a short presentation. And Kevin, you might go across now to the overview page. Look, we've been thinking about the strategic review of this business for a reasonable time now. And a number of things have now already fallen into place to allow it to kick off and get underway. First of all, there are some of the sort of the macro, macro things. Clearly, we can observe in the New Zealand market and elsewhere that there are benefits and scale in these utility retailing businesses. And this transaction may give somebody an opportunity to achieve that scale or greater scale. Equally, we can see that there are significant disruptions coming to the utility retailing sector with new entrants bringing in different business models, and those are a challenge to the incumbents like ourselves. And whether we continue to hold this business or whether we sell it, it's going to be necessary for us to really continue to think about our operating model as we deal with those challenges, which, generally, by the way, for the benefit of consumers, it's actually a good outcome for consumers and it's a good outcome for the market. Equally, we've got a strong degree of confidence that for a generator of our scale, the wholesale market, wholesale electricity market prices efficiently and enables a stand-alone generator that's where we end up to achieve fair pricing for its -- for our product. We know that the electricity price review concluded with broadly sensible outcomes. And recently, of course, we've now had NZ IAS bring certainty with -- to the wholesale market, at least for -- until 2024. So really, the combination of all of those things makes now a good time for us to test the market and see whether there is a different operating model for Trustpower and a different operating model for our retail business that really creates win-win outcomes all around, both for Trustpower itself, for our shareholders, for our consumers and our staff. And look, as you know, you set these processes off, then you just have to see how potential counterparties respond, and we look forward to that, and we'll engage. But if the outcome is that we sell it, then it's -- that might -- we'll do so if that's the right answer. And if the outcome is that we keep it, then we will do so for good reasons as well. Worth also stressing, clearly, the electrification story, that slide has really come up now from Kevin. We've got the Climate Change Commission going to be announcing -- making a big announcement very shortly. David will perhaps go into that matter. But clearly, there is going to be a significant need for increased generation builds in New Zealand, and capital will need to be allocated for that. So that is potentially something that we would look at. But of course, it's a multiyear, multi-decade probably, change to the New Zealand market. So look, that's really -- it's really as simple as that. Or simply it is complicated, you might say. Today, we're just simply announcing the start. There's not a great deal more that we can add, but -- because it will simply depend on our potential counterparties' response. So I am really now happy to open to questions. Or David, if you'd like to make a few Chief Executive comments, perhaps before we do questions, then please feel free to do so.

Paul, look, I think you kind of reiterated the key points that was in -- that were in the media release this morning. So now I think we should take up the time left just to take questions, and then I'm happy to answer them.

Okay. Thank you, Paul. And thanks of asking questions. [Operator Instructions] And I see we have Andrew Harvey-Green has asked us a question. He's raised his hand.

All right. So that's -- why don't we go across to Andrew for his questions?

Can you hear me okay?

Yes, fine, Andrew. Thanks.

Excellent. Well, the technology works, it's great. Just I guess the key thing for me really is just confirming what the Trust is going to do, and you talked about them undertaking consultation of beneficiaries. On this process, are they actually going to come out and formally say if Trustpower did sell its retail business, what it would be doing in terms of its, I guess, the tick to check?

Sure. Good question. So look, under confidentiality, we have been working with the Trust on this proposal and on -- and so they're well aware of the announcement today, and we've been working very constructively with them. They have -- they're developing ideas about how they will respond and they put out a release this morning, which we can share, if you don't already have it, Andrew. And we expect that in a recently prompt period of time, they will put out a proposal that deals for the questions. We're not going to get drawn today as to what that proposal is or will be. But I think you can infer from the fact that we're doing this, that we're not -- we don't expect to be unhappy with how it plays out, but that's as far as we're going on that today. It's really -- it's their trust, and it's for them to pursue any reform that might be appropriate result of this announcement or the conclusion of this transaction.

Sure. And just one other -- second question. I'm assuming that, again, you've made a sale, the TECT base, that you have some form of PPA as most likely to go back to Trustpower from the generation side. If that's your current thinking of how things would work.

Look, there's really -- we are really -- we will respond to, specifically, investor or buyer interest on that. So there were 2 bookings. We could -- with 1 booking, we could give them a 2,000 gigawatt hour PPA, or we could give them none. It really will depend on what the counterparties prefer and the relative value of that. I mean I think it's -- what is relevant is that the -- when we've done to assess interest that we may get, there are 2 key components to that: what is the sale price of the business and what are the terms of the supporting PPA. And it would be at a sweet spot in there that is the best one, but we'll just wait and see on that. But broadly, given the relative size of our generation portfolio, which as you know, is small in the New Zealand market sense, we're pretty confident in the liquidity of the market. We are confident in the liquidity of the market and our ability to place that generation through a whole variety of channels. And it would necessarily be necessary for us to require a buyer to take a long and substantial PPA. We would just wait and see.

It's David Prentice here. We've got a question from [ Tim Hunter ] that's come through Q&A. And [ Tim ] says, have you had any approaches already for the retail business? Simple answer to that is, no, not at all.

Okay. The next person who would like to ask a question is [ Pattrick Smellie ]. Can you [indiscernible]?

Can you hear me okay?

Yes, we can, [ Pattrick ].

Yes, [ Pattrick ].

Just a couple of things. Just very quickly. Can you remind me what your current hedge position is that you -- how much of your generation is taken up by your existing customer base? And how much is free, if you like? Or are you actually -- do you actually have to buy from the market? I've just forgotten. But more substantively, what's the current state of the customer retail management stack, technology stack? Have you made any significant investments there recently? What's the platform -- what platform is it on now? And would what -- I mean trying to get a sense of whether a buyer is going to have to make a significant investment to integrate from an elderly platform or whether you've done some stuff to bring it up to some kind of modern compatibility or likely compatibility.

All right, [ Pattrick ], I think those questions are best dealt with by Craig and David out of Tauranga. So why don't you deal with that?

Okay. Thanks, Paul. I'll probably go straight to that. In terms of our hedge position, yes, it's public knowledge that our retail -- current retail business, so mass market plus commercial industrial in aggregate is larger than our generation capacity, and we have hedging in place to manage the risk of that position. In terms of the technology, we are, we would say, well advanced in our digitization process. We have good automation. We have a robust billing and CRM capability. But I guess, like every company, we've got some opportunities for improvement there. And -- but in general, we would argue that we are reasonably well placed on the digital capability perspective.

And what sort of recent investment has been made there and what platform are you on? Platforms?

So our key billing platform is Gentrack. And -- but we have a number of -- so we -- our strategy is to have a loosely coupled series of specialist systems to do -- keep -- just to do what they do well rather than having one system for all, which I think will be very attractive to a prospective buyer.

Yes. And [ Pattrick ], Craig Neustroski here, just to kind of expand on what Kevin said. Trustpower has been on retail for a very long time. And so that's -- to Paul's point, that gives us confidence that both businesses separated can thrive in the New Zealand market as it stands today. And yes, just extending on Kevin's point around the technology stack, we are largely coupling Gentrack and Salesforce and invested quite a lot in Salesforce over recent years. And again, as Kevin said, that's far from perfect, but certainly fit for purpose.

Okay. There's no SAP in there?

No, no. No SAP...

No.

No.

The -- oh, sorry, keep going, [ Pattrick ].

Sorry, if you were about to make another comment, that's fine. I'm just lazily going to ask to stop me having to look it up. How long are you in your generation? Sorry, in your retail and C&I versus generation?

It's commercially sensitive information. But more broadly, our generation is about half of our retail sales.

That's a pretty good kind of get -- it paints a picture, [ Pattrick ], that is think about half...

Of your retail?

Total retail sales, yes. Trustpower's own generation is kind of circa half of our total retail sales.

Yes. With C&I being a separate category?

No, C&I embedded within that overall picture and...

Embedding C&I. Okay.

And just while we're on that, [ Pattrick ], because it's a nice segue, David Prentice here, just to answer a question from [ Nevill ]. And [ Nevill ] asked, it appears the scoping review really relates to mass market. You would only -- you intend to retain sales to the wholesale international customers. And the answer to that is yes.

Yes. So the other thing to keep in mind, [ Pattrick ], is that we have some long-term PPAs ourselves. We have with Tilt when we did the demerger a few years ago, we took a long-term PPA on Mahinerangi and Tararua. So those go into our book to give us substantial confidence about being able to sell significantly more than our owned generation. And we've got other PPA contracts with other smaller generators as well, as well as, of course, trading the market.

Paul, while you have the microphone, there's a question here from [ Tim Hunter ], probably best if you respond to this. Was the decision to invite buyers for retail influenced or driven by Infratil?

No. No, it was not. It's got nothing to do with -- completely unrelated to the Aussie Super and other speculated interest of Infratil and completely unrelated to the Tilt sales process, which is currently in the market. We've been thinking about this for longer than those 2 transactions have been around.

David Prentice, again. Just continuing to answer the question. So the one here from Nev. It says, proceeds will be investing for generation growth. If the same occurs, should we expect Trustpower to expand its pool of options into larger generation projects? And that really -- the answer to that when we touched on the earlier comments on the, I hope, working out in the media release. The part and parcel of our thesis around this is the desire to focus our efforts and focus our investment into meeting the needs of renewable energy going forward to seek to -- to see to meet the targets of 2050. I mean all of you are aware of many reports that are out there that are estimating that we need something like 70% of additional generation to effectively electrify the economy between now and 2050. And our intention is to play our part in that. So some of the answer to your question, Nev, is that is part of our intention with the strategic review here today.

So yes. So the next question is around, it's from [ Cameron Parker ], is your preference for the generation business to be run as a merchant generator. I -- well, the answer to that is that would seem quite unlikely. And we intend to retain the C&I business as a general to market. There are, as you know, a number of other areas, as Paul said earlier, to hedge our generation output without having a mass market retail business. So the chart -- the probability of the Board citing that our strategy is entirely mutual to the team incredibly unlikely to meet perhaps an element of it, but not as a general policy. And Paul may want to comment...

Yes. No, no, I agree with that. But like I said at the start, there are bookings which are a long way apart. And finding the sweet spot between the bookings will be something that we have given a lot of thought to, but it's not something that we're discussing publicly today. But equally, we have to be responsive to what the potential buyers of retail business might want in terms of cover. And like I said, in the answer to Andrew's question, all of that will go into the mix. So it's just -- all we can say is that we're aware of the range of options, and we will land on one as more information comes to hand.

And I guess just to add to that, Paul, we have our own existing long-term PPAs, and those would be part of that consideration decision as well.

Absolutely, yes.

Great. Paul, there's a question here from Jeremy, which either you or I could answer, but it says, do you expect the ComCom to look at the telco market and electricity market individually? Or do you expect that ComCom to assess competition from a bundled market perspective?

Well, I think all I'd say to that is that we have taken legal advice on the ComCom implications of this, and none of those give us any particular cause for concern, or none give us any cause for concern to be more affirmative. But look, how they would look at it if they looked at it all, I think it would be just speculative of us to say. We've done our own analysis, and we're comfortable with that.

Yes. And Jeremy, just kind of agreeing and extending Paul's point that we obviously have explored this. It's part of its process to understand the implications. We wouldn't want to prejudge, predetermine how the Commerce Commission would think about this. But as Paul said, we don't expect it to pose too many problems because, obviously, there's a very large pool of potential buyers.

Yes, yes. I think that's -- to answer [ Pattrick ]'s question which is what is the potential range of buyers. It is great to see, don't quote me, quite extensive commitment when we have no ComCom issues at all. Sure. We should take another verbal question now from [ Stanley ]. Can you unmute, [ Stanley ]? Could you unmute?

While we're doing that, while we're trying to do that, there's another question that's just come in from [ Tim ]. Probably to Paul, one for you. If a sale occurred, how would the proceeds be applied?

So there's 2 factors to that. It would depend, of course, on how large the proceeds were. So that's -- which we would have to wait and see. And then, really, other than that, we're not really -- we're not going to give specific guidance as to -- on that. Of course, we will be prudent with the use of them. We will have mined to gearing. We'll have mined to EPS, DPS and growth options. All of those are relevant to the type of gearing level that we would sustain into our dividend policy going forward. But it's too early in the process to be definitive about where we'll land on those. And like I say, it also depends on the types of values that are received -- that we might receive.

Okay. Then we'll try [ Douglas ].

Hello?

Hello, [ Douglas ]. Go ahead.

Maybe for Paul or David, just can you sort of talk about your potential generation development pipeline?

Sure. David, do you want to -- I can -- are you going to do that?

I can talk to that. And this also actually picks up a question from [ Garth Elms ] as well. Does Trustpower have a healthy pipeline of generation projects to apply the proceeds towards? So look, the answer is similar to the one I said earlier. And part of the thesis around this announcing the strategic review today is the potential future significant increase in capacity, which as a Board and senior leadership team, we are asked if, in fact, that what will be the case as we seek to electrify New Zealand as I say. In terms of whether we've got any specific pipeline of projects in front of us, obviously, I'm sure you're all well aware that, that is -- a lot of that is commercially sensitive. But I think what I can say is that at most recent strategic -- the Board strategic session which we had in December just last year, we presented a new generation development strategy to the Board, which was unanimously endorsed. So I think it's fair to assume from that, that we will be putting a material increase in terms of effort and investment into seeking out and developing generation options going forward.

And I'm assuming these are mainly hydro?

No, no, a wide range -- what you can assume is that they will all be renewable.

Okay.

And it's not important to keep in mind also that a lot of our focus in recent years has been in enhancing existing projects. Generally, you get the best return on marginal CapEx through enhancement work. And we've certainly been pretty successful in this in the last few years and certainly have that as a focus.

Paul, again, while you've got the microphone, a question from [ Deonne McCall ]. Perhaps for you, Paul. There's obviously interest from the likes of BlackRock Group and Brookfield, do you have an increased confidence in selling the generation business?

Good question. Look, if anybody can deconstruct the reasons for the price volatility in Contact and Meridian, well, you've been doing well. You're doing well. No, simple answer is, no, it's not. It's not -- the recent sort of bull run in our competitor stocks has played no part in this decision-making. It's -- we've -- this is a much more sort of kind of fundamental analysis type thing. So Meridian moving around in market cap, what is it under $2 billion in over a week? No, that's for others to try and explain, and it's not the reason we're doing this. Does that answer the question? I'm not quite sure.

Okay. Thank you. So the next question I can take is from Jeremy. It is early days, but could you make some comments around valuation? And in particular, did you think the stock private sale pricing be overvalued or undervalued? I can best answer that...

You answer that, Kevin. Yes.

No, we can't make any comments on that. That's the truthful answer. That is the whole point of the process. The stock private sale was a very small customer base who have recently acquired -- who have been customers. And as [indiscernible], basically, the seller was pretty enthusiastic to get -- to realize the sale proceeds. And so it's not really a direct or useful comparator now. Okay. Thank you, everyone. That's -- we've come now to the end of the questions, and I'll -- I'm about to close down the webinar.

Very good. Thank you, everybody, for your interest, and your line of questioning has been helpful and interesting.

Thank you, Paul.