Manawa Energy Limited (MNW) Earnings Call Transcript & Summary

Excellent. Thank you very much. I am Phil Wiltshire, Chief Financial Officer at Manawa Energy. And on my right is Clayton Delmarter, who is Manawa's Interim Chief Executive, and many of you will know Clayton from his previous roles at Trustpower and also Tilt. We'll run through the presentation today, and I will take questions at the end. There are 2 ways of putting questions to us. There was -- the first one is to put a question in the chat, and we will read out that question so everyone can hear it and then respond to it. The other option is to raise your hand, use the raise hand option in the webinar, and we will unmute and we can -- you can ask your question that way verbally. So getting underway, I will cover off first couple of slides in terms of our financial results for the half year, and then I'll hand over to Clayton to talk more about our strategy, our operations and our development pipeline. Overall, it was a solid half year financial result on the back of strong hydro generation volumes with our EBITDAF from continuing operations at just shy of $78 million and our underlying earnings for the half year of $39 million. EBITDAF and underlying earnings were up 11% and 13%, respectively. As you can see there, our net profit after tax was down on the prior year, as the prior year result included $349 million gain on the sale of the mass market retail business. Our major asset investment program is now well underway, with our first half CapEx spend reflecting that at $31 million, and that's up 77% on the prior corresponding period. We are continuing to invest in the new development pipeline. And you can see at the bottom of the table, our first half spend of $10 million on development CapEx and OpEx combined, that's up $8 million on the same period last year. Our net debt here compared to March '23 was down 2%, and while our CapEx spend was higher, this was offset by lower prudential deposits on the on our ASX hedging, due to lower futures pricing during the period. And looking at our EBITDAF performance relative to the prior corresponding period in a little bit more detail, you can see there, generation volumes were actually 134 gigawatt hours higher than the prior period. And this, along with the inflation indexing on the Mercury edge, resulted in an $18 million increase in our net wholesale revenue for the period. ACoT revenue [ ceased ] from the 1st of April 2023, and the prior corresponding period included $8.6 million of contribution from ACOT. And this regulatory change to the transmission pricing methodology has been well signaled for a number of years. And the year to -- March '23 was the last year of ACoT revenue. And we also saw modest increases in generation OpEx, largely due to some weather events and new development OpEx spend, that was up slightly on the prior period, as we invest in that pipeline. With that, I'll hand over to Clayton.

Great. Thank you, Phil. So look, I'll take you through a few slides. I suppose there's an opportunity from our perspective, just to call it reintroduce or reflect on what is Manawa and where are we going, post the sale of the mass market retail business, last year. I think we reflected on this a lot and obviously have presented the terminology independent power producer in here, in this presentation quite a lot. And there's a good reason for that, and I think how it articulates how Manawa thinks about what it is and where it's going in the future. Independent Power Producer, of course, referring to the fact that we are not a utility, we don't have a mass market retail book anymore, and we are indeed just an independent generator that is capable of generating volume, developing new projects and growth, and I think have a lot more flexibility in how we think about what we are as a business. So some of the things here we've noted, obviously, with the Mercury hedge winding down over time, we'll talk a little bit more about how we're thinking about our level of contract in this or revenue certainty, and what that means for our capital structure and how we think about supporting both growth and dividends. And of course, an essential element of our business is focusing on operational excellence, our asset management practices and the enhancement and value-add opportunities we have. So it's as much about protecting value, as it is about looking for opportunities to grow that value. And linked into that, of course, is our growing and significant pipeline of newbuild opportunities, which we'll talk to in a bit more detail. So we do think that transition and thinking of ourselves as an IPP does provide a unique opportunity. The IPP model is very well understood in a global sense, and that it's a very common model and IPPs, I think, bring a significant amount of benefits to energy markets by having nimble, focused, very quick capital cost, capital allocation focused businesses that can bring a level of tension and competitiveness to markets that are otherwise dominated by larger players, which is also true in the New Zealand context. So if we think about where we are today, you can see the chart on the lower left, describing the release of the volume with the Mercury hedge, which was struck, of course, to support the sale of the retail business and the separation of that, when Manawa became an independent generator. That is repricing in a couple of years as we move away from a fixed price period or construct to an ASX linked pricing, which is a bit of a look back from October 26. And of course, that pricing currently has a CPI escalator also built into that, which as Phil noted earlier, is partly reflected in our earnings or profitability uplift versus the prior corresponding period. So the opportunity then for us and when we think about our volume from our existing assets, is very much around the level of revenue risk that we might look to take associated with their portfolio. And as you would expect, lower volatility in earnings and cash flows does provide us with an ability to have a look at our capital structure, have a think about our levels of debt, and also how we look to support potentially very significant capital deployment and what that means for debt and equity, as we look at our growing pipeline of opportunities into the future. We won't spend too much time on this. Well, obviously got a couple of slides here from both EMV and the Climate Change Commission. I think it's well understood that whatever scenario you think about for the future and electrification of the industry and transport is anticipated to drive a considerable need for additional generation development. And as we've noted, Manawa's history in this space and now as an IPP and with the team and the capability we have and the options we're developing, we do see that we're very well positioned to deliver into that growing market and opportunity. Let's spend a little bit of time just talking about our development pipeline. Obviously, Manawa was very much in a rebuilding phase for the last year or 2, when it has looked at this pipeline and the opportunity that was presented when it became an IPP. A number of projects, as you might appreciate, particularly the larger scale wind projects do take a little bit of time to mature. I think for me particularly, the focus on having fundamentally strong projects that have the right attributes in terms of resource, proximity to grids, environmental consentability, local community support, all those other key attributes of these projects, is what will ultimately deliver projects that have the lowest possible cost of energy, and that we can bring to market in a competitive way to secure offtake and support the wider economy. We have on this map, a number of projects now advancing right across New Zealand in both wind and solar. You can see that the Huriwaka project that we announced previously to the market in the Central North Island, Hapuakohe in the Waikato region, Ototoka in South Taranaki; Kaihiku in the Lower South Islands, are sort of the wind projects, we'll talk a little bit more about today. We do, of course, have other wind and solar prospects in the pipeline that are continuing to advance. And a number of solar projects, some of which we talked about previously in Marlborough, Hawkes Bay and the Kaipara region. So Kaihiku, I'll just step through some of the more prominent projects in our pipeline. We announced last month is a 50% joint venture with Pioneer Energy Limited. We see that around the 300-megawatt mark, really outstanding wind resource in that part of the country and you can see on the insert on the lower right-hand side there, the transmission [indiscernible] passes through the site. And we are currently underway with community consultation and environmental studies, community, [ EV ] engagement, et cetera, as you would expect and anticipate that we may be in a position to lodge consents for their project in half 1 of '24 -- this calendar '24. This is an area we know pretty well from previous investigations in and around the site. So have a pretty high degree of confidence in the -- as I said, in the fundamentals of that project, and we look forward to advancing that with Pioneer in the coming months and years. This is a project we haven't talked too much about previously, located along the coastline from Whanganui in the South Taranaki region. We anticipate it will be in the order of 150 megawatts, again, located proximate to the transmission network on a relatively benign site typographically or in terms of the terrain complexity, having developed and built sites in and around this area previously, we have a pretty good understanding of the law of the land, so to speak, and are advancing resource monitoring and assessments on this project has also -- probably see this as more of a medium-term opportunity, as you'll see reflected in the indicative game chart and timelines that we have put up on a subsequent slide. Hapuakohe is located in the North Waikato region. Just for those eagle eyes amongst you, we don't, in fact, intend to connect that in South Taranaki. We might have made a wee whoopsie there with a connection point, but you can see the grid is located just to the west of the site, again, very proximate. And we see that somewhere in the region of 200 to 250 megawatts. Good strong resource located in a good part of the country in terms of grid and load. And that's another project that we're just advancing through environmental assessments, community consultation, et cetera, and we'll look to progress again in the coming months. Huriwaka has previously been announced to the market, was previously developed by another party in New Zealand, have a very good understanding with a significant historical data record. It's around about 250 megawatts. Again, you can see transmission passes through the southern portion of the site on the insertion of lower right there, and circa 800 to 900 gigawatt hours. A number of the projects we're talking about here, probably only with the exception of Ototoka are in the Transpower connection queue. Although or the application has been confirmed by Transpower, you're probably familiar with the way Transpower are sort of processing connection applications at the moment, with the volume of work that they have ahead of them. But these projects are all progressing through connection and environmental studies, and are well on the way to the time line that we'll talk about in a few slides. Argyle Solar is another project we previously talked about with the market. We have secured some additional land circa 3 kilometers from the southern site or project area that you can see on the insert. We do see that the improved scale increases the prospects for this project, improving the cost of energy. We also somewhat uniquely, as is a bit of a function of our portfolio have a fairly, call-it, dedicated point of connection with the branch hydro scheme. And we -- as a result of the connection configuration there, it is something that we see potentially being able to progress a bit faster through the connection process than other grid connected projects as a result of that. We talk a little bit later about the benefits of our diverse geographic portfolio and the number of connection points and other parts of the grid that we touched, providing some benefits. I think this is an example of that. We also have about 8 to 10 hours of storage in the hydro scheme there, that we can sort of flex around the daytime solar production profile from the Argyle Solar project. And it's those sorts of benefits that we do see as being value accretive and just helping give a bit of a bump to the returns that we might otherwise be able to achieve with some of these on a stand-alone basis. What we're showing here, is an indicative time line for the pipeline. We've only sort of shown projects where we do have secured land access rights, in other words, the real projects. So we're circa just under 1 gigawatt in over 3 terawatt hours potentially of energy from this pipeline. As noted, we do have a number of other projects that we're also advancing at various stages. Now do -- assume we will develop all of these that are stacked on top of each other, no, that's clearly not the case. What we're trying to signal here is how we see realistically we can progress these projects, to really -- to build shovel ready investment, ready however you want to think about it. And that really, I think, is the advantage for Manawa, is having a range of real options that it can monetize or bring to market at the right time, when it makes sense and when we can deliver shareholder value. And previous experience that we and myself through Tilt have seen with these pipelines, is that these options have significant value, getting them ready, getting them positioned with as much flexibility, so we can optimize equipment selection through the procurement process, into delivery, to deliver value is the key. And obviously, where we can look to accelerate or progress these projects faster, we will do so, but also noting that there is inherent complexity in developing these large projects through consenting, and particularly, we do see the good connection timeline becoming more of a constraint just given the amount of work on both the generation and the load side that Transpower needs to work through currently. I did want to spend a little bit of time just emphasizing why Manawa is a bit unique as an IPP and relative to other generators or gentailers in the market. We do have a diverse and unique portfolio. We have -- on a generating units basis, almost the same number of units across our portfolio as all of the other gentailers have across their asset portfolio combined. Of course, they are considerably smaller and they are also are relatively old. And that means that, we need to think quite carefully about how we deploy our asset management practices and how we choose to invest our CapEx and OpEx profiles to protect and enhance value from this unique portfolio. And we do have a unique specialist skill set in managing assets of this nature. But that difference does deliver benefits. Many of you on the call will be familiar with portfolio theory, of course. And what we're showing really on the chart on the top right there, is looking at our annual distribution of generation volumes. And we've got a couple of examples, one is the Matahina scheme in the North Island and High Bank in the South Island. You can see on a stand-alone basis there, they have quite a wide annual distribution, as you might expect, and our combined run-of-river portfolio is much tighter. In other words, we have a lower level of -- or tighter distribution of outcomes across our diversified portfolio. That portfolio provides a number of benefits when we think about diversity across catchments, climatological conditions, machine diversity. We touched a lot of communities and have a lot of engagement with key stakeholders in and around our assets. We obviously, as noted earlier, touched a number of connection points, which provides us with some unique opportunities to think about enhancing or bolting colocating assets, thinking about storage into the future. Our stability and reliability of production as discussed, no single point of failure, greater resilience through a large number of small machines. And as you can see in the chart to the right there, we have the ability to capture additional value through enhancements, that typically generate higher than average rates of return across our portfolio. And you can see we're anticipating adding about 80 gigawatt hours to our baseline sort of P50 production by FY '28, with a number of projects in train or that will be delivered in the coming years. And they are a combination of new things or enhancements and then some of the efficiency gains we get by having more copper, higher turbine efficiency ratings, et cetera, with some of the asset enhanced or replacement CapEx projects that are underway currently. And you can see, speaking of that targeted asset management spend for the future. I mean the message here really is that we have older assets. They have run for decades. Some of them are getting a bit of a birthday at the moment, but they will run for another 50, 75 years or longer when it's done. So these are long-term value-accretive infrastructure assets. And I think it's important to remember that, when we look at our spend profile, that's what we're looking to protect and enhance. So our asset management practices and processes have looked to identify those opportunities. We've obviously got a significant amount of work underway, which has been previously disclosed to the market. And some of those have been completed and some be -- the rest will obviously be completed in the next sort of 3 to 4 financial year window. And as discussed, this is really about protecting that revenue, increasing efficiency and output. I mean, across this diversified fleet of assets, we obviously have a bit of a triage approach in terms of how we think about value in terms of the high, medium and low value assets. And therefore, that's really where we're prioritizing our spend, and you can see the higher value assets are getting that focus right now and for the next few years. And the CEATI or the asset management ratings, these are sort of industry-standard norms or terms used to describe the condition of the assets that we're obviously looking to move our higher-value assets to the highest possible condition rating we can practically achieve and get the maximum bang for our buck in terms of our CapEx spend. Along the top, you can see, again, just emphasizing why we're doing this about protecting multi-decadal revenue streams from these assets, greater reliability, enhancement opportunities where these can be captured. And we also do see with increasing levels of variable renewable energy or VRE, however you want to think about it on the system, that is likely to drive higher volatility in pricing, and we do see greater value from our peaking assets, noting we have a lot of run of river, but we do have some very valuable storages, particularly associated with Waipori, Coleridge, Cobb and to a lesser degree, a shorter duration storage through Matahina and other schemes. So these are all the things that we are thinking about to capture additional value now and into the future. A good example here, I think, of the kind of innovation and focus that Manawa has on protecting and enhancing value. The high bank pumps were installed about 10 years ago, where you take water from the Rakaia River and pump via the existing high bank station infrastructure back up into the Rangitata Diversion Race where the water's extracted by irrigators that tee off the canal, if you like. The team has identified an opportunity to run those pumps as turbines, in other words, to generate from them. They're about a megawatt each of capacity. The first conversion, if you like, was successfully trialed a couple of months ago, and we will now be rolling that out across all 6 units. So we'll have about 6 megawatts of generation. The generation volume from that during the extended high bank outage, call it waters its face off itself, but also provides us with future resilience around outages and flexibility about how we run the station around water availability between irrigation and generation seasons, if you like, on the go forward. So a great example of being able to deliver a project that keeps a bit of volume going through that outage and delivers an above average investment return. As Phil noted in the waterfall earlier, we obviously have had some spend associated with remediation of the Esk scheme that was impacted by Cyclone Gabrielle in February this year. We did have quite extensive damage across the 2 stations, Rimu and Toronui. Toronui has now been restored or reinstated to service as of October, which is pleasing to see. Obviously, all the transmission assets have also been reinstated, and we hope to have Rimu back online in the first quarter of financial year '25. So it's obviously quite a remote scheme, severely impacted by extreme rainfall events in February and pleasing to see the focus on these units, although they are small, obviously, all value accretive for Manawa. And I'll hand back to Phil. Thank you.

Thanks, Clayton. This slide provides an update on our sustainability plans. And as part of developing a new Manawa ESG strategy post the sale of the mass market retail business, we have recently completed a very thorough materiality assessment. And this identified 15 topics that are detailed on the slide, as the key areas of focus for Manawa. Now some of these 15 are very well established and others are at more of a development stage. And we will be setting targets and deliverables across all 15 of these topics to measure progress against our ESG goals. And you can expect to see more reporting on each of these in the coming years. And finally, just to talk a little bit about our FY '24 outlook and guidance. Our '24 guidance for EBITDAF and CapEx remains unchanged. When comparing our first half EBITDAF of $77 million to our full year guidance of a range of $120 million to $140 million. I would note that the planned outage at our Waipori scheme from November to January, will likely result in second half production volumes that are below the long-run average for that period. Also, as noted in previous updates, we are disposing off some surplus land and also carbon credits in FY '24. The majority of the land is in the Wairau Valley in Marlborough. There is also some surplus land on the West Coast of the South Island. The Marlborough land was acquired in the early 2000s for the proposed Wairau hydro development that did not proceed. And just to note that the FY '24 proceeds are slightly lower than previously forecast, as a portion of the land divestment will be delayed into FY '25. But we are still expecting to receive approximately $20 million from divestments in this financial year. And as Clayton noted, we have done a lot of work refining our asset management plans for our existing hydro fleet. And this has resulted in a downward revision of our medium-term capital expenditure. We talked in our previous updates about sort of our capital expenditure out to FY '30 and provided some projections for that period. And based on the work we've done, the current forecast CapEx midpoint is now about $48 million lower over the next -- spread-over the next 7 years, compared to the range that we provided previously in May. That revision also flows through to our long-term sort of business as usual CapEx projections, and which are adjusted from the previous range with $20 million to $30 million per annum to $15 million to $20 million per annum. And I would also just note that the chart and the numbers on this slide specifically exclude our CapEx on our development opportunities. So with that, we'll -- that wraps up the presentation, and we will open it up to questions either by the chat or if you raise your hand, we can get you to ask your question online. Yes, Grant, you're good to go.

Just a few questions for me. What are your assumptions in your build program around to you? Are you waiting to see if there's an outcome there before you go and build in the South Island?

Yes. Look, I think, Grant, everyone understands the materiality of the impact that TY would have not only in terms of long run price, but also the impacts on the transmission system and location factors. So I think certainly, we would not look to undertake any substantive investments without having a view on TY. Our view is, we anticipate TY being there for the foreseeable future. But clearly, it's not done until it's done, and when it's done for how long, all the usual things that come when you think TY. But certainly, we do still see that the fundamentals of a project like Kaihiku on the assumption that TY is there, are very sound.

So just to extrapolate on that, can you give us an idea of what your assumptions around the long-term wholesale prices, that your projects are now stacking up against?

Yes. I mean it's -- I think we -- perhaps without going into absolute specifics, what I would say, Grant, is in terms of how we think about this stuff, again, I'm very much a believer in the fundamentals of the project, right? You don't have good projects unless you have good fundamentals. I think without a doubt, and you're seeing it play out in real time in a few projects, right, it's pretty challenging at the moment to get a landing on where the long run pricing for some of these projects sit. We've got very challenging supply chains. We've got elevated pricing, even accessing people and resources to deliver this stuff well, is extremely challenging. If you put all that together, the price you need right now, you may take a view that isn't perhaps supported by the long run price. Now I think there's a bit of stuff to play out there. But I think if you were to say, where do we see cost are wind and the cost of solar, it's probably broadly in line with other market participants. And we do see the long-run price supporting investment in the right projects on the go forward.

And then just -- you've dropped your maintenance CapEx now again, it used to be there in the old days. And then I think new management came in and said all these things need more maintenance. And now you're going, oh actually need less maintenance again or less cost. And we've seen inflationary impacts of just inflation in general. Do we now assume that we actually go back to this $15 million to $20 million of maintenance CapEx and then every 5 to 10 years, have a quick catch up in CapEx to make up for the shortfall?

Grant, I wouldn't characterize it like that. I think we are -- what we're seeing at the moment is not a 1 in 5 or 1 a 10-year sort of increase in CapEx. We think it's a much longer life asset fleet than that. And the additional spend we're going through right now will increase the life of these assets significantly. And we -- if you replace -- replacing some of the generators and the turbines, we'll get 50 years plus out of some of this investment that we're doing now. So I think it does support the fact that after this period, it will reduce. Inevitably, there will be some blips, but it's not a blip every 5 or 10 years.

Yes. I mean, as we noted, Grant, I mean, we're focused very much on those high-value assets, and we do see with the medium and lower value assets that we are able to take that approach that has been taken historically and really control our spend and keep those assets operating reliably.

And then my final question, just on the divestments. In your guidance, is there any profit on that divestment that you've got in your guidance? That's both carbon and land?

The carbon is revalued at balance date, Grant. So there is a small gain between the valuation at 31 March, and they sell proceeds, but it's not particularly material on the carbon, given that was revalued at 31 March.

And on the land, any profits?

No, not included in our guidance. No.

Andrew?

Clayton and Phil, hopefully you can hear me now.

Hi Andrew.

Great. I just have one question, which is actually also just on the CapEx -- maintenance CapEx change and if I am interpreting effectively what we're doing here is -- which makes a lot of sense as, I guess, reducing significantly the CapEx that's going to be spent on those lower value assets, which I assume are the -- tends to be the small hydro schemes, which are run of river and I guess, in sort of lower-value locations in the country. If that's the case, I mean, should we have many issues or concerns, I guess, around the reliability side at the other end. It just sort of feels like if you're not maintaining those assets to the same level?

This is not about maintaining or not maintaining Andrew right? This is a result of how we think about our resettings and targetings. But remembering that Trustpower Manawa, through its iterations has been around for 3 decades now, right? So we need to contextualize how we think about these assets. So absolutely not. This is not about trading off reliability and production for spend. I think this is a more granular look at how we think about that spend, how we optimize it, how we get the best value for every dollar of maintenance CapEx and OpEx and our fleet and without compromising that long run sort of P50 baseline of production.

Okay. And second question, just in terms of that long-term post FY '30, the $15 million to $20 million figure. Is that -- should we think about that as a sort of a real number in today's dollars terms, so we need to inflate that over the next sort of 7 years, so it will be something north of $15 million to $20 million, I guess, by the time we get to 2030?

Yes, that's right, Andrew. [indiscernible] [ 2024 dollars ].

Yes. Sorry, we should have clarified that.

Yes. So we've got a question here from Neville. 3 questions regarding the strategy and capital management. Manawa currently has a trading function in industrial/commercial retail pool. So Would you regard an IPP approach as reducing that function and sales shifting more to PPA sales, and instead providing some firming on those new PPAs?

Look, I think the reality is that we see all of those channels to market are supporting the future business. We have outlined a view that having a degree of contractedness across the existing portfolio, supports how we think about the future builds, maybe with initial level of contracting required, versus take more wholesale market exposure and contract up a bit later, all of that stuff that comes with an IPP that you might have seen with other IPPs, active in Australia and New Zealand in recent times. We do see a lot of value in having their trading capability in their channel to market and commercial and industrial, however, you think about that in terms of smaller or larger volumes, corporate PPAs will continue to be an important part of it. But we -- as we've signaled, we do see benefits in terms of how we think about capital structure, relating to having a high degree of overall contractedness in the portfolio.

Follow-up from Neville, are the Mercury PPAs, ASX reference contracts, the 1, 2 or 3-year views from -- '26?

So we -- unfortunately, we can't really provide that level of granularity, just under the confidentiality provisions in that PPA. So sorry, Neville. Can't I give you a specific on that one.

Can you confirm the new development OpEx, CapEx, $10.3 million first half '24 going forward, and what level we see that at?

Look, I think it will be there or thereabouts for another couple of years, while we sort of push through the front-end heavy lifting on these projects with resource consenting and connections, given we're talking [ circular gig ] of projects in their portfolio. I do see that settling down to more of a -- kind of a holding cost level at some point. 2, 3, 4 years out from now, it's hard to see what that looks like. But ultimately, we'll make sure that we are spending those dollars carefully on real options that can deliver real value in the future. Obviously, got to take a few views on what that future looks like. But I think similar to how Trustpower has managed that [ Divex ], if you like, historically.

And third question from Neville is, should we read out the new projects if they reach FID, be funded by SPVs or firm level gearing plus equity rates? Yes, so our current sort of strategy is that we will fund these via SPVs. One of the benefits of the sort of the IPP model and then being more highly contracted through sort of longer-term PPAs is that, that does give us more options from a capital structure point of view. It does enable us to increase gearing potentially and therefore reduce significantly the equity required as we move into investment via those PPAs. And the next one from Neville is, if PPAs [Technical Difficulty] on a firm basis rather than generation following presumably SPV approach isn't possible?

Yes, I think that's probably right, Neville. Obviously, if you're looking to support the generation following profile, from the wider portfolio that, may present some challenges. There are probably some acute ways to structure and contract around that if required. But I think as Phil said, the advantage we have in thinking about that sort of [Technical Difficulty] capital structure going forward is that we can look to mix and match across -- leveraging off the benefits of the wider portfolio, certainly, the storage or the dispatchable generation we have in their portfolio. Anything else coming through? All right. Well, thank you very much for your attendance at the briefing this morning, and we may see a few of you in the next day or 2. But otherwise, thanks very much for your attention and participation.

Thank you, everyone.