Slide 1: Analyst and Investor Presentation
Analyst and Investor Presentation 28 March 2012
Slide 2: Disclaimer
Disclaimer This presentation may contain projections or forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties Actual results may differ materially from those stated in any forward-looking state
Slide 3: Session Contents
Session Contents Hydrology (Mark Binns, Chief Executive) Wind Economics (Paul Chambers, CFO) New Capacity (Paul Chambers, CFO) Mixed Ownership (Mark Binns, Chief Executive) Analyst and Investor Presentation, 28 March 2012 3
Slide 4: Hydrology
Hydrology Analyst and Investor Presentation, 28 March 2012 4
Slide 5: Current Hydrology – Update since Interims
Current Hydrology – Update since Interims Pukaki inflows in the last 3 weeks Inflows (GWh) Pukaki + Ohau Weekly Inflows have been just above half of 350 average 300 250 200 Waitaki catchment has had lower 150 than seasonal average inflows for 100 16 weeks. Waitaki and Waiau 50 catchments together ha
Slide 6: Current Hydrology – Active Management
Current Hydrology – Active Management GWh Pukaki Storage Generating conservatively, storage 2,000 1,800 is increasing 1,600 1,400 Actively buying hedge cover to 1,200 meet contract load, instruments 1,000 already in place to assist through 800 winter 600 400 200 Measured retail activity and 0 improv
Slide 7: Current Hydrology – Compared to 2008
Current Hydrology – Compared to 2008 GWh Quarterly Hydro Generation Better balance of fixed price sales – 3,400 retail and time-of-use 3,200 3,000 More liquid market with improved 2,800 Sep qtr range of instruments on offer Dec qtr 2,600 Mar qtr 2,400 Jun qtr Enhanced monitoring of cash flow, 2,200
Slide 8: Current Hydrology – National Situation
Current Hydrology – National Situation NZ hydro storage is around 15% below usual levels for March Almost constant south flow on the HVDC Increased North Island thermal generation Low risk of shortage in the next 8-10 weeks despite low South Island hydro storage 11 days of bipole outages are planned
Slide 9: Current Hydrology - Outlook
Current Hydrology - Outlook Generating conservatively and buying $m EBITDAF (reported) hedge cover is impacting earnings 400 350 Extreme downside risk has been 300 significantly curtailed and Meridian is 250 within normal risk limits 200 1H 150 Achieving full year profitability and RoE 2H targets fr
Slide 10: Hydrology – Impact on earnings
Hydrology – Impact on earnings Historical EBITDAF by Company Hydrology impacts influence the EBITDAF 700 ($m) market and individual 600 participants, depending on nature of events 500 400 Meridian’s historical EBITDAF 300 variability (standard deviation/mean) since 2006 is 200 Contact similar to mos
Slide 11: New Zealand Wind Economics
New Zealand Wind Economics Analyst and Investor Presentation, 28 March 2012 11
Slide 12: Wind Development – Platform for Growth
Wind Development – Platform for Growth Wind development is one of multiple growth opportunities for Meridian, in addition to Improved profitability from retail Earnings upside in the core business Peaking potential of hydro assets Leverage of our core competencies overseas Meridian wind expertise ha
Slide 13: Valuing Wind
Valuing Wind Two ways of valuing wind LRMC or unit cost, average revenue the wind farm would need to earn to cover all its costs including cost of capital Project DCF – all capital and operating costs as above but also expected revenue, giving NPV and IRR key outcomes LRMC often used to compare tech
Slide 14: Meridian’s Approach
Meridian’s Approach Meridian’s approach is to value individual projects on DCF basis A number of “layered” valuations are undertaken starting from “first life” DCF that must exceed internal hurdle rate Hurdle rate > WACC to provide superior returns after sunk cost recovery Terminal value (second lif
Slide 15: Capital Cost - Turbines
Capital Cost - Turbines 1.40 Turbine procurement costs Turbines are typically 60 – 70% of total capital cost, purchase contracts in EUR or 1.20 USD EURm/MW 1.00 0.80 Over the last 6 years the cost per unit of installed capacity has peaked and is 0.60 currently on a downward to flat trend 0.40 Supply
Slide 16: Capital Cost – Balance of Plant and Civil
Capital Cost – Balance of Plant and Civil Civil and electrical assets contribute 30-40% of capital cost Civil (access and turbine roading, turbine foundations, hard stand areas) is the largest component (~55%). Costs depend on: Topography (ability to access site, amount of cut, and cut to fill ratio
Slide 17: Yield – Expected Energy Production
Yield – Expected Energy Production Highly influential factor on project value. For every ±10% change in wind speed, around ±15% - 20% change in energy Meridian has continually improved its approach over 6 wind farms, transitioning from outsourcing to insourcing of specialist functions and as an owne
Slide 18: Operations and Maintenance
Operations and Maintenance Each turbine has its own Failure Rate for Gearbox (by failure type by year) All Infant Mortality Random Wear Out Premature Serial characteristics because of its 5.0% associated wind profile 4.2% 3.3% Over time these characteristics 2.5% are optimised for each individual 1.
Slide 19: Asset Life
Asset Life 25 year average life now common Detailed modelling considers premature and late failure of turbines Confidence in performance of assets over time Wind sites have residual value Consent is typically indefinite Wind resource does not degrade Civil works (50 years) – roads and foundations El
Slide 20: Other factors
Other factors In Meridian’s first life valuation, other factors are also considered “Participation rate” or “GWAP” – wind capture of market price (includes daily and seasonal correlation effects) Constraints and outages, both planned and unplanned Operational strategies of turbines (deratings in cer
Slide 21: Putting it all together
Putting it all together Capital Cost m/MW (Euro) Turbines 0.9 1.2 $/kW (NZD) Balance of Plant and Civil 900 1,200 Percent Yield 35% 49% $/MWh Operations and Maintenance 9 20 Percent Availability 90% 99% Years Life 20 25 Percent GWAP:TWAP (participation rate) 85% 104% Resultant unit costs can vary si
Slide 22: What does a good project look like?
What does a good project look like? Capital Cost $m/MW (Euro) Turbines 0.9 1.2 $/kW (NZD) Balance of Plant and Civil 900 1,200 Percent Yield 35% 49% $/MWh Operations and Maintenance 9 20 Percent Availability 90% 99% Years Life 20 25 Percent GWAP:TWAP (participation rate) 85% 104% Can expect good pro
Slide 23: So, is wind economic?
So, is wind economic? Yes. But, like any technology, it depends on the quality of the site, planning and design, and the performance of the selected technology Currently unit cost of great wind sites < average running costs of thermals Meridian’s existing pipeline showing 4 projects <$85/MWh, 4 proj
Slide 24: New Capacity
New Capacity Analyst and Investor Presentation, 28 March 2012 24
Slide 25: Electricity demand growth has been subdued
Electricity demand growth has been subdued Underlying growth in demand has significantly reduced…… …but is forecast to recover during 2012- 80% 2020. 9,000 1000 Commercial 70% 8,000 900 Cumulative GWh, 2012-2020 60% 7,000 800 Industrial (excl 700 Cumulative Growth (%) 50% RTANZ) 6,000 600 GWh p.a. 4
Slide 26: New capacity is required in the market
New capacity is required in the market Surplus/deficit from optimal winter energy margin Thermal output is variable, but trending down since 2008 8000 GWh 14,000 (annual) 6000 Huntly units not retired 12,000 4000 10,000 GWh + Ngatamariki and Te 8,000 Builds over 2009-11 2000 Mihi + (unexpected) flat
Slide 27: Pipeline managed to meet market need
Pipeline managed to meet market need Flexible option set Active portfolio management of development options Long term view versus shorter term market conditions Project variables change over time Consentability, yield, grid access, cost, land owner arrangements A number of projects have been reviewe
Slide 28: Analyst and Investor Presentation, 28 March 2012
Analyst and Investor Presentation, 28 March 2012 28
Slide 29: Mill Creek is a highly competitive investment
Mill Creek is a highly competitive investment Fully consented Extremely competitive economics Turbine prices similar to 2005 levels Exchange rate at highly favourable levels Site yield is one of the best in New Zealand Unit cost < average running costs of thermals Smaller scale (240GWh, 26 turbines)
Slide 30: Mixed Ownership
Mixed Ownership Analyst and Investor Presentation, 28 March 2012 30
Slide 31: Characteristics of the electricity industry
Characteristics of the electricity industry Essential Key part of New Zealand’s core infrastructure Produces a “must buy” product Growth linked to GDP – 700GWh per annum, with potential for long term demand upside (home heating / electric vehicles) Mature commercial market environment Strongly cash
Slide 32: Meridian
Meridian A cash generator with excellent dividend prospects Multiple growth opportunities Affordable, value accretive wind and hydro pipeline Retail – improving performance and differentiation Earnings upside in core business through wholesale price uplift Highly flexible assets Overseas opportuniti
Slide 33: Mixed ownership preparation
Mixed ownership preparation Crown process progressing with MRP Preparatory work provided basis for Meridian’s internal work plan, no show stoppers Dedicated internal project team in place Will be ready for Crown decision later this year Meridian will be undertaking additional analyst sessions Retail