Transpower New Zealand Investor presentation November 2015 Alex Ball Chief Financial Officer 0064 277038919 alex.ball@transpower.co.nz Chris Sutherland Treasurer 0064 21994925 chris.sutherland@transpower.co.nz
Important Information Transpower New Zealand Limited (Issuer or Transpower) is offering NZ$75,000,000 fixed rate bonds (with the ability to accept NZ$50,000,000 oversubscriptions) due 30 June 2022 (Bonds) in reliance upon the exclusion in clause 19 of schedule 1 of the Financial Markets Conduct Act 2013 (FMCA). The Bonds will form part of the same tranche (and will have identical rights, privileges, limitations and conditions) as Transpower s NZ$75,000,000 fixed rate bonds maturing on 30 June 2022 with an interest rate of 4.30%, which are quoted on the NZX Debt Market under the ticker code TRP030 (TRP030 Bonds). In addition, the Bonds will have identical rights, privileges, limitations and conditions (except for the interest rate and maturity date) as Transpower s: NZ$325,000,000 fixed rate bonds maturing on 30 November 2018 with a fixed interest rate of 5.14% and which are currently quoted on the NZX Debt Market under the ticker code TRP010 (TRP010 Bonds); and NZ$200,000,000 fixed rate bonds maturing on 6 September 2019 with a fixed interest rate of 4.65% and which are currently quoted on the NZX Debt Market under the ticker code TRP020 (TRP020 Bonds), (together with the TRP030 Bonds, Quoted Bonds). Accordingly, the Bonds are of the same class as the Quoted Bonds for the purposes of the FMCA and the Financial Markets Conduct Regulations 2014. Transpower is subject to a disclosure obligation that requires it to notify certain material information to NZX Limited (NZX) for the purpose of that information being made available to participants in the market and that information can be found by visiting https://www.nzx.com/companies/trp. Investors should look to the market price of the Quoted Bonds referred to above to find out how the market assesses the returns and risk premium for those bonds. The Bonds will be debt securities and will constitute unsecured, unsubordinated debt obligations of the Issuer. The Bonds will rank equally and without any preference among themselves and at least equally with all other unsecured and unsubordinated indebtedness of the Issuer, except indebtedness preferred by law and subject to laws affecting creditors rights generally and equitable principles of general application. Neither the repayment of, nor the payment of interest on, the Bonds is guaranteed by the Crown or any other person. 2
Disclaimer This presentation does not constitute a recommendation by the Issuer, Westpac Banking Corporation acting through its New Zealand Branch (Lead Manager), The New Zealand Guardian Trust Company Limited (Trustee), nor any of their respective directors, officers, employees or agents to subscribe for, or purchase, any of the Bonds. None of the Issuer, the Lead Manager, the Trustee or any of their respective directors, officers, employees or agents accepts any liability whatsoever for any loss arising from this presentation or its contents or otherwise arising in connection with the offer. This presentation is for preliminary information purposes only and no part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. The information in this document is given in good faith and has been obtained from sources believed to be reliable and accurate at the date of preparation, but its accuracy, correctness and completeness cannot be guaranteed. All material information (including numerical data) in this document is derived from publicly available information, unless otherwise indicated. Unless otherwise indicated all of the numerical data provided in this presentation is derived from the Statement of Corporate Intent 2015/2016, the Annual Report and the audited Financial Statements for the year ended 30 June 2015. Any internet site addresses provided in this presentation are for reference only and, except as expressly stated otherwise, the content of any such internet site is not incorporated by reference into, and does not form part of, this presentation. Pricing supplement No. 9, dated 25 November 2015 (Pricing Supplement) has been prepared in respect of the offer of the Bonds. The Pricing Supplement is an important document and should be read carefully. Investors should not purchase the Bonds until they have read the Pricing Supplement. Investors should consider the risks that are associated with an investment in the Bonds, particularly with regard to their personal circumstances (including financial and tax issues). The Pricing Supplement sets out the applicable selling restrictions in respect of the Bonds. 3
Agenda 1. Overview 2. Operational and strategic update 3. Regulatory update 4. Capital expenditure update 5. Capital and funding update 6. Funding 7. Questions 4
1. Overview 5
Transpower s purpose We connect New Zealanders to their power system, through safe, smart solutions for today and tomorrow 6
Overview of Transpower 100% state owned by New Zealand Crown 1 No plans to privatise Provides essential utility service Owner and operator of the National Grid Operating revenue breakdown System Operator 4% Other 2% System Operator (SO) for the New Zealand power system Substantial regulated revenue Credit ratings Standard & Poor s: AA- (stable outlook) Moody s: A1 (stable outlook) Transmission 94% 1 The Crown does not guarantee bonds issued by Transpower 7
Transmission network 8
2. Operational and strategic update 9
Income continuing activities 2015 v 2014 Revenue up 4% Operating expenses down 2% EBITDAIF up 7% Depreciation, write-offs up 5% Net finance costs up 8% NPAT 1 up 6% 1 NPAT excluding net fair value movements NZ$ million 2015 2014 2013 Total revenue 1,046 1,004 918 Operating expenses (282) (287) (295) EBITDAIF* 764 717 623 Depreciation, write-offs (264) (251) (205) Net finance costs (226) (209) (142) Pre-tax profit 274 256 276 Net Profit After Tax (excluding net fair value movements) 195 184 202 Net Profit 113 216 197 * Earnings before interest, tax, depreciation, amortisation, impairments and fair value movements 10
NZ$ million NZ$ million Regulated revenues (pricing years from 1 April) 5,000 1,000 4,500 900 4,000 800 3,500 700 3,000 600 2,500 13/14 14/15 15/16 16/17 17/18 18/19 19/20 500 Regulated Asset Base (LHS) Regulated transmission revenue (RHS) Source: Transpower s Price-Quality Path from 2015 to 2020 11
Outlook Regulated revenues are set by the Commerce Commission in advance of Transpower s Regulatory Control Periods Maximum Allowable Revenue (MAR) forecast flat for Regulatory Control Period 2 (RCP2) 1 Focus on reducing operational costs whilst maintaining security of supply Forecast capex lower than prior years 1 RCP2 commenced 1 April 2015 and ends 31 March 2020 12
Operational performance Targets 2015 Actual 2015 Target High Voltage Alternating Current (HVAC) circuit availability 98.5% 98.8% High Voltage Direct Current (HVDC) circuit availability 97.7% 97.0% Number of loss of supply events greater than 0.05 system minutes 13 15 Number of loss of supply events greater than 1.0 system minute 1 3 Material breaches of System Operator performance obligations reported to the electricity authority 0 < 4 Note: These statistics do not include the October 2014 Penrose event due to ongoing investigations into the cause of the event 13
Strategic theme: safe workplace commercial engagement run the market plan the grid deliver grid services continuous improvement good people Strategic priorities Strategic priorities A B C D E F Safety From priority and enthusiasm to risk management and an ingrained culture Project Atlas Transform our grid operating model to improve efficiency and effectiveness System Operator & Information Systems & Technology operating model Review how we deliver the System Operator service Culture change and engagement Build leadership effectiveness and accountability, and delivery focus Risk framework Apply Semi-Quantitative Risk Analysis (SQRA) methodology Regulatory performance Implement RCP2 and prepare for RCP3 14
3. Regulatory update 15
Regulation Transpower is currently regulated by the Commerce Commission and Electricity Authority Building block approach to determining the MAR Substantial regulated revenue Enforceable requirement to pay regulated charges Post tax WACC 6.44% in RCP2 Prioritised our expenditure and introduced efficiency initiatives 16
Regulatory decisions/review pending System Operator Service Provider Agreement Currently renegotiating Current revenue ca. $41 million Commerce Commission review of Input Methodologies Draft decision due mid 2016, final decision by end 2016 and implementation in RCP3 1 Decision making framework Risk allocation mechanisms Emerging technologies WACC review included 1 RCP3 commences 1 April 2020 and ends 31 March 2025 17
Industry issues Transmission Pricing Methodology Electricity Authority considering changes that may change the allocation of transmission charges across the industry Technology Critical role in the development of the transmission grid Smart meters, smart appliances, solar photovoltaics and batteries Investment focus on operating as opposed to capital solutions Generation Government policy target of over 90% renewable generation by 2025 18
NZ Aluminium Smelter Largest electricity consumer in New Zealand Connected to the Grid in the lower South Island Supply contract variation signed, dated August 2015 Supply contract can be terminated with 12 months of notice of termination from 1 January 2017 onward Exit would have no material impact on Transpower s revenue under the current regulatory framework 19
4. Capital expenditure update 20
Capital projects Major projects now concluded Clutha-Upper Waitaki Lines - approved $197 million Two sections completed or progressing Remaining programme on hold Bunnythorpe-Haywards - approved $162 million Tower strengthening and lifting Higher capacity conductors installed Programme completion scheduled for 2020 21
MW NZ Demand forecast Overall demand growth not driving capital investment 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 1995 2000 2005 2010 2015 2020 2025 2030 Actual APR 2011 prudent APR 2014 prudent New low bound New high bound TPR 2015 prudent Source: 2015 Transmission Planning Report Prudent peak demand forecast 22
NZ$ million Capital projects Capital expenditure in RCP2 period is weighted towards maintaining the condition of our existing assets 400 350 300 250 200 150 100 50 0 14/15 15/16 16/17 17/18 18/19 19/20 23
5. Capital and funding update 24
Conservative policies/targets Maintain a high credit rating FFO/Interest of no less than 2.8x FFO/Debt of no less than 12.5% Current leverage ca. 70% Dividends between 65-75% of cash flow after maintenance capex Align interest rate risk on debt portfolio with regulatory reset 25
SCI 2014/15 Actual 2015/16 2016/17 2017/18 FFO/Interest 3.2x 3.0x 3.1x 3.1x FFO/Debt 15.3% 14.1% 14.6% 14.7% Debt/(net debt + equity) 71% 70% 70% 70% Return on equity 12.2% 11.2% 11.7% 11.0% Return on capital employed 6.8% 6.4% 6.5% 6.3% Dividend distribution 188 162 162 167 Source: Transpower s Annual Report 2014/15 (Actual) and Statement of Corporate Intent (SCI) 2015/16 26
Funding Current debt ca. $3.1 billion Refinancing of maturing debt Current leverage of ca. 70% AUD AMTN Focus on maintaining: Current financial metrics Multiple market access Other EMTN NZD Bank / Bonds Duration USD Diversity of maturities and investors 27
Volume (NZ$m equivalent) 800 Term funding maturity profile (by financial year) 700 73 $750 million 600 123 500 400 165 300 200 100 0 275 15/16 308 41 50 16/17 17/18 325 18/19 500 19/20 20/21 284 204 75 50 21/22 22/23 341 96 86 23/24 24/25 25/26 26/27 100 27/28 Domestic USPP EMTN AMTN 28
Investment highlights Stable and predictable cash flows Experienced management team Strong investment grade profile Stable regulatory environment Prudent financial risk management Low counterparty risk High barriers to entry Government ownership 29
6. Funding 30
Summary terms and conditions Issuer Issuer Ratings Expected Issue Ratings Description of Bonds Transpower New Zealand Limited A1/AA- stable (Moody s/s&p) A1/AA- (Moody s/s&p) Unsecured, unsubordinated debt obligations of Transpower Maturity 30 June 2022 Tranche size Oversubscriptions Issue price Use of Proceeds Repo-eligibility Issue Margin Principal Amount Minimum Subscription Amount Quotation NZ$75 million Up to a further NZ$50 million Determined by reference to the Issue Yield (itself determined by reference to the relevant Issue Margin) For general corporate purposes, including capital expenditure requirements of the Transpower Group The bonds have been accepted by the Reserve Bank of New Zealand as eligible securities for domestic market operations The Issue Margin will be determined by Transpower in consultation with the Lead Manager following the bookbuild process and announced via NZX NZ$1.00 per Bond NZ$5,000 and thereafter in multiples of NZ$1,000 The Bonds once issued will form one tranche with the TRP030 Bonds and will be quoted under the NZX ticker code TRP030. 31
Timetable Key transaction dates Offer opens Wednesday, 25 November 2015, immediately following release on the NZX Debt Market of the notice required by the FMC Regulations in connection with the offer Road show Wednesday 25 November 2015 Offer close Friday, 27 November 2015 Issue rate set Friday, 27 November 2015 Issue and allotment date Thursday, 3 December 2015 Expected date of initial quotation and trading on the NZX Debt Market Interest payments Friday, 4 December 2015 30 December 2015, thereafter 30 June and 30 December in each year up to and including the Maturity Date 32
Other information Investor centre http://www.transpower.co.nz/investor-centre Financial statements Publications webcasts & resources Links useful information Statement of Corporate Intent (SCI) NZX Debt Market (NZDX) Direct https://www.nzx.com/companies/trp Alex Ball - CFO Phone: 04 590 6594 Email: alex.ball@transpower.co.nz Chris Sutherland - Treasurer Phone: 04 590 7338 Email: chris.sutherland@transpower.co.nz 96 The Terrace PO Box 1021, Wellington New Zealand 33
7. Questions 34
Appendices 35
Financial performance NZ$ million June 2011 June 2012 1 June 2013 June 2014 June 2015 Total operating revenue 737 784 918 1,004 1,046 Total operating expenses 279 288 295 287 282 EBITDA 458 495 623 717 764 Earnings Before tax 112 110 269 301 159 Net profit (loss) 79 85 264 2 216 113 1 Excludes discontinued operations 2 Includes net sale proceeds of $63 million from the sale of d-cyphatrade Limited to the ASX Limited Cash flow NZ$ million June 2011 June 2012 June 2013 June 2014 June 2015 Net cash inflows (outflows) from operations Net cash inflows (outflows) from investments Net cash inflows (outflows) from financing 285 329 353 443 539 (634) (801) (605) (403) (331) 327 473 250 161 (378) Closing net cash carried forward 2 3 1 203 34 36
Financial Position NZ$ million June 2011 June 2012 June 2013 June 2014 June 2015 Total current assets 244 267 410 515 294 Total non current assets 3,926 4,638 5,034 5,154 5,434 Total assets employed 4,171 4,905 5,443 5,668 5,727 Total current liabilities 837 372 586 750 627 Total non current liabilities 1,800 3,025 3,447 3,490 3,724 Total liabilities 2,637 3,396 4,033 4,239 4,351 Total equity 1,534 1,509 1,410 1,429 1,376 Total funds employed 4,171 4,905 5,443 5,668 5,727 37
Revenue analysis Statutory backed customer charge Total 53 customers Top 10 customers account for c.a. 78% of total revenue Transmission revenue by customer: Generation - 19% Distribution - 71% Other and direct connects - 10% 38
Credit rating uplift S&P consider likelihood of government support when determining Transpower s corporate rating. A downgrade to the government or weakening of support risks Transpower s corporate rating. Current: Very High Government's local currency rating SACP AAA AA+ AA AAaa AAA AA+ AA aa- AA+ AA+ AA AAa+ AA AA AA AAa AA AA- AA- AAa- AA AA- A+ A+ bbb+ AA- AA- A+ A bbb A+ A+ A+ A bbb- A A A A bb+ A- A- A- A- Downside: High Government's local currency rating SACP AAA AA+ AA AAaa AA+ AA AA aa- AA AA AA- AAa+ AA- AA- AA- A+ a AA- A+ A+ A+ a- AA- A+ A+ A bbb+ A+ A+ A A bbb A A A A- bbb- A- A- A- A- bb+ BBB+ BBB+ BBB+ BBB- = Current = Downside risk http://www.standardandpoors.com/prot/ratings/articles/en/ap/?articletype=html&assetid=1245351148755 39