Mighty River Power HY2014 Results Transcript

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EDITED TRANSCRIPT MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation EVENT DATE/TIME: FEBRUARY 25, 2014 / 10:00PM GMT

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

CORPORATE PARTICIPANTS Doug Heffernan Mighty River Power Limited - CE William Meek Mighty River Power Limited - CFO

PRESENTATION

Doug Heffernan - Mighty River Power Limited - CE Good morning everyone. Thank you all for coming. As you probably know, I'm Doug Heffernan, Chief Executive and I've got William Meek, our Chief Financial Officer, who will contribute to the presentation. So let's get into it straight off. Just running through the agenda, I'll do the first bits and hand over the operational update and financial update to William and then come back and deal with the business update and outlook.

Well, it's been a tough old half year. Weather gods were not very friendly to us, very warm conditions so that impacted on demand, and we in our Waikato catchment did not get much water at all. But despite that, if you look at the year-on-year comparisons, operating earnings, EBITDAF was up 4%. So good earnings growth on prior period.

A big contributor to that was operating costs of which NZD8 million are permanent cost savings. There was a significant NZD25 million one-off cost in the prior period that's obviously washed out this year. Our capital expenditure is also down and importantly, our interim dividend is as we forecast in the prospectus, at NZD0.052 per share.

Positive trends continue on health and safety, driving culture through the business and particularly into the contracting and subcontracting sector and a lot of effort is going on across the industry which I'll talk about a little bit more in a minute. For the first time we hit 40% geothermal as a percentage of our total production with the completion of Ngatamariki project which was handed over at the start of September. So 97% of our total production in the half came from renewables.

There's some big decisions made underneath the headlines in regard to the portfolio through the year and through the 6 months. Some deliberate decisions that management took. We effectively took a pricing position in the commercial contract market in competing for commercial volumes about price levels that made sense to us. And as a result we reduced our commercial volumes back to 2012 levels. I'll talk a little bit more about that in a minute.

There's a lot of water around nationally which meant that it didn't make sense to run our thermal plant itself down as much, so significantly lower utilisation there.

Probably the most important thing that you will also see come through in the numbers is because of that 40% contribution from geothermal, a slightly smaller sales portfolio, we were able to get much more value out of the limited hydro we had by targeting it into best periods for yield and also making some good decisions about when to use the water seasonally.

So as you will have seen, we're on track around IPO guidance for NZD498 million at the EBITDAF line, with the lower energy margin that we've seen in the half and expect in the rest of the year being offset by operating cost savings. We do assume a return to mean inflows with Taupo currently sitting around 60% of average.

On health and safety, as usual on health and safety no news is good news, so some very concise points here. TRIFR results continue to get down and flattening out and lowering those. The big issue, as I alluded to, is really getting that cultural change through into the contractors and subcontractor market, and it's an industry-wide, i.e. across the generator class, industry-wide if it's -- because many of us use the same people to do that work.

On to ticks and crosses, I guess the big thing is energy margin is down slightly but offset by operating cost savings which has led to the increase in the growth of EBITDAF year-on-year. [She's] got some changes in the underlying earnings and net profit. Profit is up slightly, or significantly. Some of that's to do with the lower operating costs obviously but also some positive non-cash fair value movements. And of course we took an impairment in first half 2013 that exacerbated that apparent lift.

Underlying earnings are down from low earnings from JV and associates, which William will take you through in some detail. A couple of contributions there, one at Tuaropaki Power Company and one at Energy Source level. Of course we had higher interest and depreciation coming from the commissioning of Ngatamariki.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation On dividends, the good, boring news is confirmed. The forecast interim dividend, which is of course fully imputed, will be paid on March 31. Confirmation of forecast NZD0.13 for full year.

Capital management is an ongoing process. We have had lower than -- we do have lower than expected debt with lower CapEx, continued focus on that and continued focus on growth initiatives which I'll talk about in a minute. Of course, the share buyback program started in October and we've invested NZD25 million through that program.

Looking at demand -- there's a nice shot of Ngatamariki I think -- looking at demand -- most of you will know all this because most of it's been reported by other companies already. But I think one thing we're starting to see is maybe some potential green shoots, certainly around the commercial and -- or the wider commercial and agriculture sector.

A lift in demand at the Tiwai smelter pretty much offsetting the closure of one of the paper lines, so Norske is now down to one paper line basically supplying the New Zealand market. Residential demand, as I referred to, very warm, but as we would expect, and you will have seen it with Vector's results you are seeing individual household consumption continue the 8 year trend of slow decline over and above what might be happening at a weather level.

On the wholesale market, lots going on here, and as I said earlier on, one of the key things for management is anticipating what will happen in the wholesale market rather than reacting to it after it's happened. As you would expect, thermal utilisation has been declining and that was anticipated. Largely the reason for the thermal utilisation declining is you are now seeing a lot lower fixed fuel commitments, both at Contact and also at Genesis.

So the must-run plant is now much smaller in total capacity. As a result you're now seeing a lot more volatility. You can see the bottom graph on the right hand side there's a higher volatility in the market now. In part that's related to the level of variability in wind but also the changed utilisation of thermal plants.

The period obviously was characterised by pretty high national storage conditions. You can see in the bottom left hand graph, virtually above average for the whole period, so that was useful for us given that we were suffering much poorer conditions.

Look at the impact on wholesale prices, particularly if you look at the ASX and remember, a lot of the commercial market is now using ASX as a benchmark in looking to secure forward contracts, and you can see ASX really went through a trough in the June-December period. And significant lifts in ASX pricing as you come out of that trough.

I think if you look at 2015 and 2016 forward indicators are well up on June 30. For NZD6 or NZD9, if you think about margins that would be in commercial contracts you would have been a reluctant buyer of a commercial contract at an ASX forward price back in June 30, in hindsight.

Looking at the retail market, so some of the wholesale things that are flowing through into the retail market, our estimate is there's probably 10% to 15% of the commercial and industrial volumes that run unhedged, so they will have been benefiting from relatively low wholesale prices in the prior period. In fact, a condition that's been around for probably a year or so.

You're now seeing those prices start to lift because of the increased volatility, and actually we probably think the peak of security margins has passed in the market.

Obviously Genesis announced the closure of the second ranking unit at the end of last year and you've seen significant changes in the [CCG--GT] portfolio of Contact.

The DC expansion provided significant benefits to South Island generators over the last half, so as the DC was expanded in capacity you've seen a lot more of the South Island volume that previously was tracked at low prices in the South Island now getting into the national market and them earning higher prices for that. So no doubt the DC expansion is a huge benefit to South Island generators.

Coupled with that is a less risk of negative spread appearing during dry South Island conditions, so in the past when it got very dry in the South Island limited capacity to move North Island capacity into the South Island. So you can see that in the graph back in 2008 and in 2012, periods where you had very dry conditions in the South Island, you had negative spreads between [Otahu] and (inaudible).

DC expansion will reduce that impact and that will flow through to ability of retailers to actually price risk much lower into the South Island market so that's a benefit for South Island customers.

You've seen variations on this graph in the past. One of the things we have said consistently for the last couple of years, one thing about Mighty River is because the Taupo inflows tend not to be correlated with South Island inflows and because South Island inflows are a big -- and storage is a big influence on wholesale prices, we tend not to get dry when the South Island is dry.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

And therefore have a relatively good resilience to our own dry conditions. And indeed, this last 6 months has been a good illustration of that fact. What we have said is we think we've got good resilience to downside earnings pressure under those conditions, which is exactly as our result has illustrated this last half.

One thing to also note, perhaps not quite so obvious on a graph, but you can see it in how we operated over the last half. We actually held back even some of the meagre inflows we had over the half to build storage in Taupo through December 31, and we made that decision deliberately to actually store it for the summer and autumn of this calendar year.

We're able to do that more so than in the old days because in the mid-2000s when we re-consented Waikato Hydro, we got an increase in the maximum operating range for Taupo over the January-March period. So when you're looking at long run averages, that will be distorted compared to the capability of the North Island hydro to actually run higher levels through the summer. So when we talk about our averages they are really talking about a period when we've had that higher range available to us.

Right, I'll hand over to William.

William Meek - Mighty River Power Limited - CFO Thanks, Doug. I think everyone knows I'm William Meek; I'm the CFO of Mighty River Power. I'll take us through some of the financial results for this half year. I'd like to just thank Anna, our Head of IR, [Comms] and everyone else involved with preparing this collateral, it looks pretty good. It certainly makes Doug and my job a lot easier when we're up here talking to our shareholders and the likes of people here today.

So really touching again on where Doug led off. In residential sales warmer temperatures had an effect on demand. We're seeing consumer savings so we're certainly seeing efficiency having some effects. Like he said Vector's well-reported in this space.

[Only] given our GEM product which is driving customer engagement. We're also potentially seeing that engagement resulting in people taking more care with their power consumption. As Doug said, the HVDC upgrade, which is now complete, prior to that certainly bases for us between islands was an issue, so that did see an effect there in terms of renewals into South Island. South Island's colder so generally our risk consumption there is higher, so a reduction there in residential sales.

Commercial sales, probably the much bigger movement, really quite a deliberate strategy there in terms of market positioning, prices coming off a fair way from the levels we'd seen in previous years and so a deliberate strategy there for the Company in terms of repositioning the portfolio and choosing not to renew customers that are expiring.

And generally you're seeing that through a tender process so again a lot of competition there from particularly the medium size market right through to industrial customers who often are on financial type contracts.

What we have seen though is ASX prices, so ASX prices now are starting to pick up, so we have seen some quite reasonable movements there from where they were.

So I think next year's up NZD6 odd, 2016 up NZD9. So we are seeing some quite big movements there and again, remember that commercial contracts typically have durations of circa 3 years so you are locking in those rates for not just 1 but multi-year contracts.

I think again, that portfolio structure for us a very key part of what we think about in our daily jobs and so whether the market's going up or down, that's reality but how you position yourself to take advantage of those movements is very key. So I think we can take some pride in how we've achieved that over the last 6 months.

Here, certainly average electricity prices across that fixed price variable volume segment up 2%. Again, that's assisted by not renewing at lower prices in that commercial segment, in line with PFI estimates in our prospectus last April around no energy price increases in FY15. So we have committed to a nil energy price increase for residential until April next year.

Generation charts, I'll flick through these pretty quickly. This really is a chart of records, so record low inflows in generation into the hydro-- Waikato hydro catchment for the period was just around 1850 gigawatt hours for the 6 months so it's a record low.

We saw record low production at Southdown, just 88 gigawatt hours for the half year. That's about 20 megawatts base load on a station that can generate 170 megawatts, so again, not a lot of use in Southdown given where prices were.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation And a record high in geothermal, so record production, over 40% for the first time at over 1300 gigawatt hours for the period. Probably worth noting there, we did announce issues at Nga Awa Purua and so certainly the repairs, the maintenance outage we took in October, did see--has seen that plant stabilise at circa 10 megawatts lower than its normal capacity of circa 140 megawatts.

Net position, so again with the reductions in demand, both a little bit in residential but mostly in the commercial space, despite lower generation levels, particularly from the hydro business. We saw net position rise slightly so we're almost square. Certainly if hydro levels had been normal you would have seen a long generation position for the half year.

Probably the key issue here is really around yields received for the hydro business. We are seeing the flexibility afforded by a smaller retail book leaving better opportunities and more (inaudible) flexibility inside the hydro. We'll see in the next slide when we talk about LWAP/GWAP ratios.

Also again not fixated on physical production so Southdown very low but some pickup there in terms of ASX contracts so able to contract via financial instruments more cheaply than at Southdown.

The analysts in the room LWAP/GWAP so if you look at the bar chart on the right-hand side a lower bar is actually a better outcome rather than a higher one so you want that to be lower, so the ratio of what you're paying to buy, your energy versus what you're selling it, so below one is a good outcome, ceteris paribus.

So you are certainly seeing some improvements there and that's after an increase in geothermal which typically is going to earn time weighted average price given its 24/7 power. So again you're seeing the effects there of portfolio flexibility playing out.

Moving forward to the highlights, we can all read here but certainly some of the key issues there. Energy margins down again on the back of very poor hydro conditions down 25% on the PCP. EBITDAF up almost NZD10million--over NZD8 million of permanent savings booked in the 6 months continuing the trend we saw in FY13.

Capital expenditure down significantly to a range of NZD95 million to NZD120 million and I'll talk about that a little bit later.

Dividend confirmed NZD0.052 and rating post the revised criteria of Standard & Poor's still BBB+.

Just a bridge here of EBITDAF period-on- period, so energy margin inside the blue box is really akin to gross margin so sales less line charges less energy costs less direct costs. We're seeing there as I said an increase of circa NZD10 million across the period, so losses in generation due to reduced volumes and lower prices being offset by lower fuel costs at Southdown and increasing margins across all customer segments against the floating rate.

Other income down NZD9.3 million largely due to the recognition of almost NZD9 million of revenue from the John L Featherstone dividend last year which hit the P&L and then operating costs, as Doug has touched on, down almost NZD34 million. Against PCP a lot of that's driven by the one-off FX costs book last year.

So operating expenditure, as we said, down NZD34 million, NZD25 million of that was due to IPO costs and the FX non-cash loss on the NZD140 million dividend booked September/October in the last period and NZD8 million of permanent cost savings.

So where are we seeing the savings? Certainly savings across the board but certainly the decision to bring international geothermal control back to New Zealand has reaped significant cost savings so that's good and we would expect those to continue into the future. Certainly a very organisation-wide focus on value so efficiency and effectiveness is a big key theme throughout Mighty River Power.

Some NPAT bridges again against 2013 versus 2014 EBITDAF, as we said, up NZD10million. Depreciation and interest expenses, depreciation up NZD3 million largely driven by commissioning of Ngatamariki in September. Interest costs up, cash interest costs flat but interest costs up due to lower capitalised interest so the P&L appear no impact there.

Fair value movements were in positive. We had NZD12 million negative last year, we're NZD20 million positive, so a pretty steep increase in the forward curve for interest rates. Saw over NZD40 million of movements in the interest rate book. That was partially offset by a NZD20 million movement negative in the electricity book for those contracts that are not [hedge] accounted.

Impairments -- nil impairments booked to impairment line this year but very large impairments in the previous period related to international geo. Geared international earnings from joint ventures, so joint ventures have been renamed; they were previously JCE's --jointly controlled entities. NZD60 million there change negative which was due to the revenue from the John L Featherstone distribution.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation So a big bridge NZD75 million through to NZD124 million impact so quite a big lift in the profit after tax.

Underlying earnings bridge a slightly different story. EBITDAF's actually down NZD4 million so this strips the FX, one-off FX, FX larger than NZD10 million that are one-off in nature get pulled out to give us an adjusted profit number. That's down 4% so the FX and dividend FX last year are reversed out with the last year's adjusted EBITDAF so we're down 4%. Depreciation and interest the same as in NPAT movements. Earnings from joint ventures and associates we saw NZD4 million a piece there, negatives.

So TPC, some challenging operations over the last 6 months at TPC with the extended maintenance outages and [well] repairs creating a reduce in profits there. In the joint ventures an unsuccessful exploration program on the HR2 lease has seen losses booked at the EnergySource level and so our share of those losses have been recognised in the MRP Group accounts. Those two, so associates and joint ventures, a movement of NZD9.3 million, underlying earnings down to NZD105 million.

CapEx down significantly, so down almost a third of what we had in the PCP, NZD50 million versus NZD146 million. Certainly geo down significantly really with the completion of Ngatamariki. We had a bit of spill over so the 2 month delay there saw some of the costs of Ngatamariki fall into FY14 so down significantly to NZD18 million.

Reinvestment expenditure up so again really on the back of that hydro refurbishment program also some makeup well drilling at Kawerau saw reinvestment CapEx double on prior period to NZD28 million.

Overall for the Group a revised forecast for FY14 (inaudible) of NZD95 million to NZD120 million. The prospectus had NZD199 million, NZD96 million of that was attributable also offshore. We had NZD16.5 million in the prospectus for domestic development. The outlook for FY14 would see that range much closer to the zero end of the continuum rather than the NZD110 million as foreshadowed in the PFI. So certainly like -- CapEx is still cash so certainly that focus around efficiency and effectiveness also spilling into the CapEx program for the Group. So we've got a very interesting chart here, we call it the flappy bird chart, and you can really see they're two halves but significantly lower expenditure in half year 2014 and it continues through on a forecast basis for the second half of FY14.

I'll just touch briefly on cashflows. The cashflows were down really due to lower underlying earnings and a higher P3 tax payment which falls into July. It was paid in July so it falls to this year related to higher earnings in FY13 than expected.

Looking forward, we did have some significant one-off costs in the second half of the last financial year, so we expect the operating cashflows to significantly exceed the second half levels of 2013 versus 2014 due to those one-off costs.

Financing cashflows affected by the NZD25 million buyback which took place in the first half of this year.

The final slide just touching on financial ratios so net debt is much lower than indicated in the PFI given the lower capital expenditure but partly offset by the buyback program. S&P did issue revised criteria in November, no impact on Mighty River Power.

Our key ratio really around net debt to EBITDAF targeting 2 times to 2.5 times for a [standard low] BBB credit. Mighty River's sitting circa 2.2 times so in the middle of that range in terms of that criteria. Last time S&P formally confirmed our rating was April last year at BBB+.

The majority government ownership remains a rating trigger so given John Key's announcements in regard to Genesis the last asset sale in respect of that majority government control was something that will be a feature of our shareholding base. So debt there at just over NZD1.04 billion at December 31.

I'll hand over to Doug to take us through to the end.

Doug Heffernan - Mighty River Power Limited - CE Thank you.

So turning to growth initiatives, we've talked in the past about AMI expansion. Metrix is the second largest AMI company in New Zealand so we do see some good opportunities for growth in Metrix. We talked about the offshore and William's touched on some of that obviously around the operating cost reductions.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation Ongoing discussions with the EnergySource partners in regard to potentially higher shareholding in EnergySource. The plant that was developed a year or two ago, now called John L Featherstone, has been operating very well, 96.5% availability over the period. It's exactly what we like to see, similar to our own. William's touched on the exploratory drilling and we're taking a patient approach still in Chile.

On value initiatives we are doing a sweeping review of our land portfolios in the light of low demand, low likelihood of major development, generation development, in the foreseeable future. We hold quite a bit of land at Marsden that was really there for potential thermal expansion so we're going through that review and we'll assess potential for disposals within that portfolio.

Obviously Southdown an anticipated significant reduction in utilisation since it was base load back in 2003 I think it was as we built geothermal and the rest of the market has also moved towards renewables, you've seen utilisation in Southdown progressively reduced. So we're reviewing the contribution it makes to our portfolio.

Configuration of the plant-- it's got three gas turbines and a steam turbine. Does that make sense going forward? Would a fast start gas turbine capability make more sense given the volatility that's in the market? Are there other revenue streams outside of Mighty River that Southdown could earn and just optimising the asset management given the changed nature of Southdown's contribution to the Group? So essentially wide-ranging review, all options being considered.

The retail end we've touched a fair bit on this. On GEM we're actually doing a fair bit of work at the moment. We're almost 12 months through GEM's introduction and we're doing some deep dive on the data that we've got from that. We expect to make an announcement in the next few weeks showing what the real benefits customers are getting from using GEM and what benefits that's bringing to the Company. So watch that space. There's about 80,000 customers using GEM actively now out of less than 400,000.

You've seen GLO-BUG, it's a real good product. As you can see the blue line disconnection rates for Mercury have just plummeted as we've deployed GLO-BUG and that 15,000 odd customer base that GLO-BUG's got,Ă‚ those people are on average saving NZD300 a year. Because they're not getting disconnect -- they're not paying reconnection fees, disconnection fees, and they're earning effectively PPD because they're paying in advance.

So we think it's a great tool and we're part of society that really struggles to pay their bills. We think it's got a lot more application than the 20-odd thousand customers it currently has.

On policy, I think probably one question on the slide -- the one at the bottom says more lights, less heat -- kind of means more light, less heat. I think we are seeing a little bit more light shone into the analysis of the sector, and what works and what doesn't work, what could work better.

And I think it's unlikely -- and I don't think we should be expecting -- to see opposition parties actually putting more detail around this policy out before the election.

They just don't have the wherewithal to do that. They are an opposition party. They don't have the arms of governments who do the policy work. So we're more interested in understanding what the process will be once they get -- if they elected, how they would go through moving forward with the policy that was announced in the rush of the asset sales program.

From our perspective, there's a lot of good things that they should be loath to give up. New Zealand has -- almost unique in the world -- it's made the adjustment to a renewables environment without subsidies. It's actually improved security of supply in doing that, which is really really odd.

Although prices have come up, you're sitting in the middle of the OECD pack, you look at everyone else. They're facing upward price pressure, whereas New Zealand's probably sitting in a position where it's more likely to be flat going forward. So from a future focused view of the world, New Zealand's in a great place in terms of resilience to cost pressure.

You're also seeing quite a shift at the consumer level where they now have a lot more tools, which is really what competition is designed to do to actually help them get better outcomes for themselves. Retailers such as Mercury are doing just that.

In my view, things are moving much -- should be moving much more to what's happening with people's bills, rather than what's unit rates. If we can deliver an outcome to a customer where they're actually getting lower bills despite what the unit rates are, then that's a better outcome than trying to press down unit rates. If you're just going to press on unit rates, forget about competition. You won't have any innovation. You might as well just have a single seller.

However, within all of that affordability for the lower decile of society is a real issue. It's not just about electricity, it's just electricity gives left to the last because we have a stupid archaic payment terms that are based on technology that's 50 years old.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation Nearly every other product is paid for in advance. We're still asking people to pay after they've paid every other bill. That's the beauty of GLO-BUG; it actually shifts the whole decision-making around how to manage people's budget, to the point where they're making those decisions before they're using a product.

We think there's something around GLO-BUG that could actually have much wider application, and if we want to get NZD300 savings to the people who really could benefit from it, we think there's a way to do that.

So we're very keen to engage and help shape policy to get outcomes for that part of the market who really are struggling. We think some better transparency about the industry particularly around retail and around energy would be better, and while I think in hindsight having been in the industry a long time, the arguments about the efficiency of having lines distribution -- transmission and distribution and energy all bundled into a bill are probably outdated.

With electronic billing, you're not actually saving anything on billing. You could actually have two separate bills. The regulated local network piece which is incredibly complex, separated out from energy, then you'd have national retail pricing for energy. And it would be a lot, lot simpler and a lot less complex, and people would be able to do their comparisons in a much more simple way.

TPM summary -- don't know anything more, except further delays. While they've put out one paper, it doesn't tell you anything until you see the companion paper which is what they've concluded themselves and why they've pushed back the date until probably looks like May for the residual paper.

From our perspective, it looks like implementation of TPM before the end of the year -- or decisions on TPM before the end of year -- are very unlikely. So you've got an intersection around the election and that decision timeframe. It just pushes back implementation timing.

So a bit of an update on how things are travelling since the end of the year. Already talked about low inflows into Taupo. Storage is currently sitting just over 60% or around 60%. It's actually slightly higher than where it was this time last year. Weather forecasts, external forecasts, do show return to normal inflow conditions from hereon, to the extent you can believe external weather forecasts.

South Island storage is also just sitting around the average, so pretty healthy in a national context. Southdown plant provisionally returns to service from March through April.

As I mentioned, the big thing that shifted in the last few months is those ASX prices worth NZD9 a megawatt hour and forward prices compared to 6 months ago or 8 months ago. That's a material upward shift.

Just in regard to outlook, you might recall that last year we exceeded our PFI forecasts, with hydrology starting about where it is now.

So we do think we're still on track to achieve the FY14 forecasts at the EBITDAF level, with lower energy margin being offset by operating costs savings. But obviously it does depend on things like hydrology for the remainder of the year.

We will be providing progressive updates as we go through the period on the value and growth initiatives, and also around reinvestment CapEx in the light of regulatory uncertainty.

I'm disappointed to report that Joan and the Board are very comfortable with the way the process of [going on] a Chief Executive replacement. Apparently they think they've got some good options. Very disappointing.

So announcement expected in the next quarter, and also just everyone will probably recall Trevor Janes retired from the Board at the end of December. Patrick Strange joined on, I think it was February 4, and the Board is currently in the market recruiting for a further director to restore the complement to 8. So expect that to be our announcement through the fourth quarter as well.

Questions? It's 11.43.

QUESTION AND ANSWER

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

Thanks. Doug, obviously there's quite a significant benefit from CFDs in that period. Are you able to give us any colour on nature and duration of those contracts which benefitted in that half? Secondly, when you look out into the second half and into next year, what sort of headwind do you expect around average fixed pricing from commercial contract roll-off and retail competition?

Doug Heffernan - Mighty River Power Limited - CE Yes. The ASX has become a much more useful hedging market from a portfolio management perspective, and it's certainly something we've used over the half, given our hydrology conditions, and much more attractive to use that than running our own plant. Which is one of the reasons why we decided to take Southdown down for a decent outage.

In terms of more colour -- there is another slide in the appendix today that we didn't talk about today; the usual disclosure we have around that.

Looking forward, again we took a view that through the middle of 2013, contract prices were down, so we basically reduced volumes so we've got plenty of appetite to increase those if prices lift consistent with the ASX lift. That would restore some good margins back to the commercial markets.

But notwithstanding that, we've always thought that some of the operating cost savings and those sort of things would be then -- would provide some offset to energy margin and a ceteris paribus mean hydro conditions. So if you think about longer term, you would expect mean inflows, right? So we think operating cost savings that we're betting in, those sort of things will continue to provide an offset as some of those 2012 commercial prices start to roll off.

But the ASX indicators are, I think, a positive trend, and good optionality for us going forward given our size of our book.

Anything else William?

William Meek - Mighty River Power Limited - CFO Yes, I think I understand the frustration with the CFD but we do have a big derivative book, but they are structured to give a lot more colour would particularly mean just the whole sale disclosure which we won't do. We do take a forward view about -- in for a year, movements in prices and how our portfolio may play, so play to strengths of dry and wet throughout that and how market might move. Certainly the liquidity we're seeing in ASX, in reduction of FDRs, we all see those as playing to Mighty Rivers' strengths in terms of that trading competency across the Group.

Doug Heffernan - Mighty River Power Limited - CE Yes I think, got to get the best value out of the character -- the assets you've got. The flexibility in the Waikato hydro and its location is something you've really got to leverage, or get new management if they're not.

And the use of those structured products is a key part of being able to leverage the real pleasant characteristics of that plant. And with geothermal now 40%, you've got a lot more ability to do that. But if you get too big a sales book, you just compromise your ability to do that.

So more sales at a retail level is -- some simplistic evaluation might say more sales or higher market share's a good thing. Not for us. It's getting the right size, right price. That's how we make money.

Unidentified Audience Member Morning. I just want to continue on from Matt's question; can I take it that you guys are more comfortable with your hedge position now than what the PFI was indicating you would have in terms of CNI sales? So while you're indicating that the ASX futures are picking up, you might not necessarily build a position on that front going forward and try and take the advantage on pricing on the hydro instead?

Doug Heffernan - Mighty River Power Limited - CE

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

You can't conclude that, Grant. You can't just do a quant. For us it's a value versus risk. We're very happy with the commercial book we had at the IPO because we had good prices in that commercial book, and we had kit that allowed us to manage wholesale price risk.

If the prices aren't good and the sales opportunities, then sure, we'll go to a smaller book. But if prices are good, we'll go to a bigger book and manage the risk through ASX, physical plant, whatever. Don't catch us standing still.

Unidentified Audience Member Thanks, and on costs, that NZD8 million you talked about ongoing; how much is that from the restructuring of the GGE side of the business and how much is domestic?

Doug Heffernan - Mighty River Power Limited - CE Oh, bit of both.

Unidentified Audience Member Yes. So we could roll that into full year -- I won't take an answer.

Doug Heffernan - Mighty River Power Limited - CE Yes I think we'd see more savings coming on the domestic front.

William Meek - Mighty River Power Limited - CFO Yes. Unidentified Audience Member That's it for me.

Doug Heffernan - Mighty River Power Limited - CE But yes the international was clearly better than its --you can annualise at rate, yes.

Unidentified Audience Member Morning Doug and William. Just a quick question on the --you talked about Southdown and the potential for land sales there. Do you know what the book value of that land is at the moment?

Doug Heffernan - Mighty River Power Limited - CE I mentioned land at Marsden.

William Meek - Mighty River Power Limited - CFO

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

Yes. Unidentified Audience Member Yes exactly.

Doug Heffernan - Mighty River Power Limited - CE No not off the top of my head. But there's decisions we'll make about whether we look to sell that land. So at the point where we go through the review and complete the review then we'll disclose that information. But at this stage no decisions have been made on the wider portfolio. There is one particular transaction that's under negotiation but it's for a small parcel on land and it's definitely not material.

Unidentified Audience Member Just one more question before I pass to Matt. Are you finding that the industry is -- and I know -- I'm trying not to cast my question in a competitive negative perspective -- is the industry willing to talk to each other to try and get a better outcome into the future?

What I'm talking about is you talking about your options around Southdown. Would you potentially be talking to Contact and Meridian to offset some of that risk for you guys to shut or change your positioning in Southdown? You know those sorts of issues.

Doug Heffernan - Mighty River Power Limited - CE We do that all the time. We've got contracts, [shift ease], swaps with at least three of our competitors. We do that all the time. Are there revenue streams we could get from Southdown with some of our competitors? That's one of the things we'll be progressing.

Unidentified Audience Member Thanks Doug Doug Heffernan - Mighty River Power Limited - CE Yes I think one thing you can see in the New Zealand market-- well I believe more so than most markets I've looked at is you've had rapid dynamic response to changes. You know you've only got two units that were built prior to 1990 I think and the thermal fleet still running. Where else do you find that in the world? It's not because it's a coordinated approach it's just market pressures push companies to think about how to rationalise assets and how to do that by other arrangements with other competitors.

Because it's all about, particularly the New Zealand market, but any wholesale you know it's about managing risk and relying on physical only is not a competitive market. So you know the synthetics are a vital part of a dynamic evolution of the supply side of the industry. Southdown is just part of that.

Unidentified Audience Member Just a couple of follow up questions. One on price and one on costs. Are you able to give us any colour on whether there were any short term benefits in the first half potentially not recurring into the second half around either elevated CFD, pricing or sort of LWAP/GWAP benefits that may be derived from transmission constraints that have now been alleviated?

Just on costs you sort of mentioned the prospect for further cost savings. I'm just wondering if you could give us any sort of colour around your sort of expected -- your OpEx profile over the next year or two.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

Doug Heffernan - Mighty River Power Limited - CE I'll let William talk about OpEx. I don't think there's any golden nuggets that are in the first half that we think are unique and won't repeat. It's probably the other way around to some degree. I mean we were quite cautious about the pre-commissioning period of the DC Link. So we were worried about positions in the -- increasing positions in the South Island while the DC was up and running because there had been some delays. When those big beasts get commissioned there are always some problems that occur as we saw. So we were probably cautious around the South Island in that period.

GWAP well I think on the graph William showed you we've actually seen a big shift back to where we used to be 5 years ago on GWAP generally. That's deliberate and consistent with that tuning of the portfolio. I don't think changes in transmission market or whatever is going to have a big impact on it.

But we'll move a little bit around depending on how much hydro we've got. You know if we've got a wall of water it's pretty hard to get your GWAP up. But no in short no there's nothing that really worries me about well that was great to have and it's not going to repeat in the second half.

I think the general trend you're seeing is you know my comment about the dynamic evolution of the industry. It does take -- you do have constraints around that evolution in thermal plant. You know you've got for example fixed coal commitments and those sorts of things or fixed gas commitments. People, you know their incentives change once those change. We thought that was going to happen. We thought there was upside price risk in the ASX and that's the position we took through the first half and it appears that that's materialised.

So from that perspective we think that's a long term benefit for us as a result of decisions we took. It's not saying that created cash for us in that first half but I think it creates opportunity going forward.

William Meek - Mighty River Power Limited - CFO Around costs we haven't issued guidance for FY15 and out but certainly Doug -- we have confirmed guidance for FY14. Slide 35 shows very dry conditions in the Waikato catchment for January and February so again that's hydro generation was off.

We're still confirming guidance so certainly you can extrapolate somewhat from what that might be in terms of where that's being made up. EBITDAF -- you know the focus inside the Company is ongoing. There are no silver bullets but certainly some of those value initiatives do drive back to cost structure, and so we're just working through those in a diligent way.

Doug Heffernan - Mighty River Power Limited - CE No calls on the -- no questions on the line? All right. No other questions? Good. Thank you very much for your attendance.

William Meek - Mighty River Power Limited - CFO Thank you.

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FEBRUARY 25, 2014 / 10:00PM GMT, MRP.NZ - Interim Results 2014 Mighty River Power Ltd Presentation

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