Manawa Energy Limited (MNW) Earnings Call Transcript & Summary

Okay. Right. Okay. We're just on a couple of messages to everyone. Sorry, it sounds like we had a slight problem with our audio. So let me try that again, shall we? So welcome to Trustpower's interim results for 2021. My name is David Prentice. I'm with Kevin Palmer sitting beside me here in our office in Tauranga. Hopefully, you've all had an opportunity to go through the presentation that was uploaded on to the NZX this morning. So we'll just take 20 minutes to kind of step through some of the slides and not -- and as always, throw it open for questions. So the slide that you can see in front of you now is actually the third slide into the part, which is just talking about some changes that we've had to governance over the last couple of months. And just a couple of things to highlight that Susan -- both Susan Peterson and Keith Turner -- Susan stepped down at the AGM and Keith Turner resigned effective the 31st of October, both of them from the Board. And I just want to, on behalf of the Board and senior leadership team, acknowledge the contribution that both Susan and Keith gave to the company in their tenure on the Board. But we are, of course, very lucky to have brought on board Sheridan Broadbent, Joanna Breare, both a high level of experience and capability that they have over many years working in the electricity sector. So it's great that we have Sheridan and Joanna on board. So moving on just briefly looking at results. So against 2 key challenges over the last 6 months have obviously been around COVID and the review of our mass market retail business. However, in both cases, we've navigated the complexities of this without any major disruption at all, which is a testament to the fantastic people we've got working at Trustpower. Hydrology improved since the start of the year when we had near-record drought conditions. And now we have average or above-average hydrology in most of our main storage lakes. We're still in a great position to be going into the second half of the year. So in terms of financials, a key point of note is the 6% increase in generation volume, which, when combined with the wholesale prices, was the main contributor to the 11% increase in EBITDAF on a like-for-like basis. And Kevin will talk a little bit later on in terms of the split between continued operations and discontinued operations. I'll also talk a little bit about that results around NPAT. However, before I move on from this, I think it is worth pointing out that we now have over 10,000 mobile customers, which, from an effectively outstanding start 18 months ago, is a great result as it really helps to provide more option and variability to the bundle offering. So in terms of generation performance, well, first of all, in terms of health and safety, we continue to focus on health and safety, and I'm really, really pleased with the 0 lost time injuries over the last couple of years as well as the continued reduction in TRIFR. We also just -- we just have completed a health and safety culture order, which we did right across the organization. And we had a Board meeting on Friday, and the outcome of that was presented to the Board and senior leadership team. And while there's obviously room for improvement in some areas as, quite frankly, there always should be, I think, in general, the results have been incredibly positive and encouraging. We've also, particularly over the last 6 months, been putting increased emphasis and focus actually on the well-being side of health, safety and wellbeing, especially in light of COVID and the additional pressures that, that gives to many of our people. So this is a really kind of interesting slide here. As we've mentioned before, we've got a lot of efforts and focus into what is a transformational asset management program over the last couple of years, and we're actually starting to see the benefits of that. So what you can see here is this includes increased reliability of plants as witnessed by the reduction in trips on the graph on the right-hand side of the slide as well as a far more efficient maintenance regime, which is witnessed by the graph on the left. And what that kind of multicolor graph on the left shows is really the proportion of planned versus unplanned outages. And with any proactive asset management program you've got in place, what you're really trying to do is put far more planning into planned outages. And so therefore, what you want to see is that yellow strip, which is the unplans -- which is the unplanned outages, slowly decrease over time. and I think that graph starkly shows some of the benefits of that. We continue to explore how we can use innovation and technology in terms of how we maintain and enhance our fleet. And this slide actually shows a couple of examples and one, in particular, where we have actually used drone technology. So that picture at the top right there is actually -- it looks like a photograph, but it's not. It's actually drone technology. It's creating a 3D model of a scene, which basically means -- effectively means staff no longer need to access hard-to-reach areas. So from a financial perspective, but particularly from a health and safety perspective, the use of that technology is a huge leap forward for us. And we will continue to explore other areas. We've mentioned before the enhancement program we have underway, which -- with what is effectively an unprecedented scene across the generation portfolio. And this is just one example of some work underway at our branch scheme in Marlborough where we are installing a new infiltration gallery, which will effectively double the intake and provide an extra 10 gigawatt hours per year, and that's under construction as we speak. We've also completed or are in the process of undertaking some major work at 3 of our other generation sites, which, of course, are Waipori, Cobb and Coleridge. And at Cobb and Waipori, we're installing new generators which will actually provide additional capacity over and above what we've got just now. Whereas at Coleridge, the work is critical in terms of ongoing maintenance works and prolonging the life of our units down there. So moving on to retail. Obviously, a key piece of work is -- over the last 6 months has been on the sale of the mass market retail business. So we'll talk about that in a minute. But I just want to kind of shout out to the team across Trustpower who've done an incredible job and effectively doing what is needed to do to separate into 2 businesses while maintaining business as usual at the same time and ensuring we continue to look after our customers. Now as mentioned earlier, COVID has impacted some of our customer base, particularly those in lockdown, but we continue to employ appropriate measures to ensure we look after them really well. But the impacts of the national lockdown in August and September as well as the increased competition has had an impact on churn, particularly in triple play where we saw an uptick over the last 3 months. However, this has since reduced again to more normal levers -- level, sorry, as we've provided alternative offerings to the market. And really, though, I mean despite the slight increase in churn, we are absolutely convicted in the higher value associated with our bundled offering. And as mentioned earlier, we now have over 10,000 mobile connections, which is a fantastic result, considering this is all we did in the market for the last 18 months without any major advertising to support this. In terms of customer support, our office in Tauranga is now very different, very, very different to what it was pre-COVID where we had everyone working on-site. Now I guess what COVID has done is it's created new ways of working, which clearly has benefits and improved work-life balance for many people. What this means, though, is that in any given day, we now have the majority of our customer support center actually working from home and servicing our customers, which we've been able to do seamlessly and, again, which has been a key contributor to that 5% rise in digital contracts and therefore, even better efficiency. As mentioned earlier, we've also proactively been engaging with customers, especially those in lockdown, to ensure our debt collection rates are -- continue to be well managed. I mentioned retail sales just a minute ago, it continues to progress well with shareholder and Commerce Commission approval confirmed in September. The only outstanding issue now is the proposed tax restructure, which is going to the High Court in Tauranga next week. As mentioned earlier, the team have really done an incredible job in preparing the business to transition to Mercury without any major impact on our business-as-usual operations. Moving forward, we announced at the AGM that assuming the retail sale does -- went ahead, then Trustpower will be renamed as Manawa Energy. And we are incredibly humbled to have been gifted this name by Ngati Hangarau hapu, who hold mana whenua over our Kaimai scheme here in Tauranga. The name itself directly acknowledges our shared whakapapa as well as speaking to the heritage of the business from its beginnings in the electricity generation on the Omanawa River here in the Kaimai. Now we're actually planning on having a full brand launch following the completion of the sale. And so then we look forward to sharing more about then what the name Manawa Energy means to us. So one of the key tenets of the retail sale was to allow more focused investments into new renewable energy needs, and I'll provide an update on that on the next slide. Now clearly, this is a really competitive area at present with a number of organizations looking for development options. So we are taking a broad-brush approach to this and focusing on our key strengths in terms of operating a small yet importantly, geographically dispersed generation portfolio. And as mentioned earlier, we'll also continue to drive increased efficiency and operational excellence across our investment portfolio as well as continuing to serve our existing C&I customer rate, which will remain with Manawa, but importantly, start to explore new energy solutions that customers are increasingly looking for. So I just mentioned in terms of new development, what have we done? Well, we've built up a team of around 8 people over the last couple of years. As the slide says there, we're not just focused on greenfield development, but we're also looking at options to shorten time to market while building on some of the key strengths that I mentioned earlier and in the previous slides. And on that basis, it's a fantastic thing to announce that we've got 4 utility-scale generation options, 2 in wind and 2 in solar, with an estimated capacity of 215 megawatts already secured. Now there's obviously a lot of water to go under the bridge, but the fact that we've been able to get 4 options in what has been a relatively short space of time is a testament to the fantastic work that the newly formed development team are doing. But there's no doubt that the sector at present is facing some real challenges when it comes to some of the proposed regulation being concerned. Now most of you on this call will be aware that we have opposed the proposed changes to TPM. And investment is actually considered at the High Court in Wellington over the last few weeks. So we remain very, very interested as to what the outcome of that will be. The EA also released their draft report on the Wholesale Market Review last week, and we are currently working through the implications of that. But as a minimum, it does raise a number of questions that clearly warrant further consideration. And of course, the proposed RMA conform -- reform, sorry, is currently progressing through parliament. And feedback -- really feedback from right across the sector has been broadly consistent around the need to ensure that any of the changes must be consistent with the desire to decarbonize New Zealand and must support and not hinder that. So in summary, before I hand over to Kev, despite the challenges of the extreme weather cycles, despite the continued disruptions from COVID and the potential disruption of the retail sale, we are really pleased to have delivered what we think is a really strong set of results for the half year. Our strength in critical risk control management and asset optimization program have helped drive a 6% increase in generation output in part through more efficient outage planning and better machine reliability. And as I said earlier, the work continues to proceed well in terms of splitting the business and our growth strategy for Manawa is starting to take shape. And we look forward to sharing more with that in due course. So that's probably enough from me. I'll now hand over to Kev to look at the financial results and talk more about our outlook in detail. Kevin?

Thanks, David. I think just to give a little bit of an explanation about how to read our results this year, with the sale of the mass market retail or conditional sale of the mass market retail to Mercury, we have determined that, that part of our business is now, in accounting terms, held for sale. And we can talk a little bit about the -- actually, I'll talk about that now. So there's one main condition left, which, as David said, is the High Court case next week. What's unknown here is just when that will occur, and I'll talk a bit about that there in the outlook section. But from a reading results perspective, all of the EBITDA of the held-for-sale part of the business has been excluded from the EBITDA section of the accounts, and that is shown as single line of the net profit tax -- after tax. But there is, of course, full details in note, too, for those [ of us who's not ] keen on the detail. So in this graph, we have added the 2 EBITDAFs together. So that's the continuing business, which is the generation business plus the C&I business, and then the discontinued business, which is the mass market retail business. So comparing on a sort of like-for-like with prior years, we've had an overall increase of 11%, as David said, predominantly driven by the generation volume and price increase. So a 6% increase in volume with the price driving the total increase in generation volume by 10%. The other key item here to look at is the carbon revenue. So this is a result of revaluing on a mark-to-market basis our carbon credits, which have been pleasingly subjected to a market increase in price. The other point of note is the separation costs. You can see that there was $2 million worth of separation costs in the period, roughly half of that is direct sale costs for the mass market business and the other half being increase in costs to establish Manawa Energy once the sale progresses. And we're expecting a significant increase in that in the second half of the year. I'll stop here. We haven't got a slide on the impacts, but those of you who have read the accounts will notice that our net profit after tax has increased materially from last year. And the main driver for that is the fair valuation of our hedge book. So in the prior comparative period, we had a $26 million loss. And then this year, we had $78 million gain. So this shouldn't be a surprise to anyone because we signaled that this noncash adjustment would be coming through as part of our year-end results. And without any surprise at all, it has come through in the first half of the year. We may see a further then coming through in the second half as well. So moving on to the split. So we split it this year between discontinued and continuing rather than retail and generation. So discontinued, as I said before, is the mass market business. So excluding the C&I business, the commercial and industrial business. And as you can see here, there's a few ups and downs when you draw then for a little bit more detail. So mass market electricity gross margin has been affected by the decision to remove prompt payment discounts. There were a number of customers who have failed to achieve the prompt payment discount in prior period and roughly $2.5 million of that changed -- or nearly all of that changed as a result of they're now receiving that [ in the system ]. Gas wholesale costs have increased as most people will know, and not all of those increases has been able to be passed through to customers. Telco gross margin is pleasingly up and that is driven by 2 things. One is increased customers. But as David said before, it's the rollout of the mobile product, which has increased the gross margin as well. The other items are fairly close in line, though. So moving on to continuing operations, which is our generation of business plus our commercial and industrial wholesale sales. Actually, most of the variances I've explained already in here are explained on the main front page. So we won't go through them again. Generation development, we see an increase in cost here. That's predominantly wages [indiscernible] other costs. Moving on to debt capital management. The company is committed to keeping debt under 3x EBITDAF, which will be if the sale goes ahead, very simple but the Board has said that they will pay a unimputed dividend of $0.65 once the sale progresses. So once that happens, then we will restructure our bank debt. But at this stage, we feel like we're in a very good place. We'll be paying our senior bond during -- in December. And we have sufficient capacity to manage our position even if there should be a delay to the sale. Dividends. The $0.17 fully imputed dividends, consistent with our dividends in the past, which reflects the results being broadly in line with where we expected. And as I mentioned before, there was an intention from the Board to pay a $0.65 unimputed dividend post sale. Moving on to outlook. The outlook -- the top of the outlook range has remained unchanged. However, we have tightened the range a bit up from $200 million to $210 million given the positive results in the half year. So that number excludes the cost of the retail business, which we expect to see recognized that in -- by year-end. CapEx forecast remains unchanged from that given in May. The other point to note for the forecast is that we had made an assumption that the retail business has held for the full year. And the reason we've done that is that there's still uncertainty around the exact transaction date, but that uncertainty resolved -- revolves around the TECT court case. The court case will be between the 15th and 16th of November as at this stage, it's unknown how long the judge will take to make a determination. Following that, there will be a 20 working day period for people to appeal the decision. Once the unappealed decision is in place, then the conditions of the sale and purchase agreement will be fully met. Now with Christmas in place, there are some risks that the [ first decree ] deadline that we're expecting doesn't occur. But if it does, as we're expecting, being the EBITDAF from the retail business for the months of February and March will now accrue to Trustpower, and that's around $5 million [ earmarked ]. So we've now come to the end of the presentation. So as usual, feel free to just jump in and ask Q&A and...

Okay. We have a couple already. Kev, you might want to...

Yes. So the first question from Grant was around the conditions for the sale, which I think I've just covered in the last presentation. The second one is -- second one from Grant as well is, what is the capital required to deliver 4 generation options? And is it prudent to pay the $0.65 dividend with this in mind? Yes. Look, the $0.65 dividend, of course, is just an intention of a commitment. So the Board chose -- if they chose, reduce that amount. However, even if they do, there will be borrowing capacity to invest in these things over the coming years, remembering that none of them are going to be coming to financial close in the next 6 to 12 months. This is our -- we're keen on that, Grant. So -- but Grant, you're quite right. Prudent capital management will be a hallmark of Manawa Energy going forward, managing the challenges of paying the yield dividend as well as seeking [ receiver ] funds to transact in housing projects. So we're confident that with good capital management, we can do that.

Yes. [ All this I know is just confusing ] Grant [ further ]. With the sale ending, how is staff retention? Well, that's a great question. And I think it's fair to say it's something. It's -- whenever you embark on something like this, I mean you are aware that you are creating a huge degree of uncertainty across what is a large population of staff. So it's -- so yes, our retention rates have increased in some areas more so than others. So for instance, if you look at our technology and delivery teams, some of the retention rates in there are -- have increased markedly. But actually, we're also competing with -- we're actually competing with a market across New Zealand where most of our organizations are actually having their own challenges with respect to technology and delivery. So yes, we -- I think the best thing to say to answer that question is our retention rates have increased but in line with our expectations. I'm certainly not over and above that. I think it's the best thing to say.

Okay. Do you want to take the one from Andrew Harvey-Green?

Yes. So Andrew, the new -- the question from Andrew, the new generation development, how far away are they from consent application, Part A. And Part B, are they new-to-market developments or have they been considered by other developers? Of course, you'll all be aware that they're kind of bound by confidentiality around most of this. But to answer your second part of your question first, which is are they new to market, it's a combination of both. So one of the options, in particular, is not new to market, whereas the other 3 are. How far are they away from consent applications? Again, slightly different time frames, but one, in particular, actually came with a consent that we're working through that just now. And the other thing, I'm quite a bit behind that.

So the next question is, what is the worst-case scenario if the court case goes against Trustpower and the sale of Mercury doesn't go ahead? To answer that, they -- there were 3 conditions in the contract. Two of them were consent conditions and the last one, which is the TECT court case, was a key value determiner. So even if the court case goes against TECT, which we -- to answer Andrew Harvey-Green's question later on, from our perspective, that would seem very unlikely. We think that TECT will get approval fast. Even if it does, meaning we would sit around the table with Mercury and see if there was another deal that could be done where a transition could proceed, albeit it may be a slightly different value number. But that discussion hasn't been had yet. We need to wait and see what happens in the court case. Yes. But -- and Andrew has also asked me what's the estimated decision date? The [ test ] in -- [ RST ] -- is that [ RT ] -- [ TE -- RSTE master ] can answer. Should I ask that?

Yes.

How did the TPM case go? We thought we got a very fair hearing. We found -- we thought that the judge was engaged in the process and seemed to understand the issues that has -- from both sides presentations. We have no way of knowing whether he will rule in favor of us, but we felt that we got as good a hearing as we could possibly get.

Yes.

How long will it take? We've asked this. The judge understands the importance of the decision. But of course, he's got many -- so many other decisions to make, such requirement, process as well. So it will be a number of months. And do you know if that...

I'll -- yes. I'm not sure I know the answer. So can you -- yes, yes, sorry. Can you clarify the 250-megawatt capacity? Is it across the 4 generation options rather than each? Yes, it is. So that's in total. And the second part of that question is, are there any partners involved in these projects? So just a reminder, the -- all 4 of these projects are very early on. So they really are just options. But at present, there are no other partners involved at this stage. But as I mentioned when I was talking earlier, we are certainly very open to looking at strategic partnerships. So that's not to say that as these things mature that we might not look for other partnership options. But at present, it's -- the sites are being developed by us at present.

And so just moving on to another question from Stephen Hudson. What is the ACOT in the FY '22 guidance? I think we've guided to the fact that our ACOT is around $20 million, but and it's spread evenly across the 2 half years. So roughly, $10 million each half. How -- I think I'll answer question three.

Yes.

You've got question now...

Yes.

So how often do you revalue your selling carbon credits? Every month, but obviously, carbon is done -- the revalued number is every half year, and we have done that for -- well, from the beginning of time, but many, many years now.

So the second part of Stephen's question is, what is Waipori, Coleridge planned outage volume loss for FY '22? Sorry, Stephen, I don't have those numbers on hand, but I will find out what they are and get back in touch. So sorry about that. And then the other question from Stephen is, why did staff numbers fall from 809 to 766 in [ PCV ]? Well, that was effectively what I was saying earlier in terms of the increased churn effectively that we've had from our staff primarily as a result of the strategic review. So while that does look quite stark, as I said earlier, we had an expectation that we were unfortunately going to lose some staff. So that -- and as I said, that was in line with our expectations. I guess the other challenge that we had, of course, working through the strategic review. So overlaying, of course, the uncertainty that COVID creates but working through the strategic review and trying to split the 2 businesses into kind of Trustpower, Mercury and Manawa, the ability to actually bring on new staff until we've got some certainty around all of that is difficult. So we've actually, in some places, have held back from replacing some of those staff that have gone until we can get complete clarity about what the future looks like.

Just to expand on that a bit, with the planned outages, the way you do a planned outage in a scheme like Waipori or Coleridge, which have big lakes, is you empty the lakes first through the outage and then fills up while you're not generating and then you use the water again. So neither of those 2 outages are likely to cause material amount of loss generation in totality, but that may mean that there is a difference. There'll be more generation in the first half of the year from those things than the second half [ which we ] did it over a 12-month period.

That's right.

But over the total year, in fact, there won't be that much different or certainly with Waipori, which is a multiyear thing, that may be over 2 years. But I think there won't be a lot of [ such outage ] in this cycle.

Yes. I think the other thing, we are coming into outage season, which tends to happen in spring and summer. And certainly, as far back as I can remember, we have had some kind of a planned outage around this time of year and particularly at Waipori. So this is not uncommon.

Yes. And so it's just a question on the -- I think we've had Cameron's question around the development options. But all of those development options are -- we have a contractual right to build. I.e., we've got landowner approvals, but we don't always have a regulatory approval [ or need ] approval such as this [indiscernible]

Yes.

Perhaps as a -- all right. So we've come to the point where we've run out of questions. I'll just pause for a couple of minutes in case someone's practically typing away while we speak. But if there isn't -- if we have no questions from [ you ], then we'll stop and let's draw the story to a close.

[ Guess there isn't any ].

All right. So long. Thanks. Well, that seems to be the end of it. I will now close the webinar. And thank you all for your time. Appreciate it.

Thank you, everyone.