INVESTING IN NEW ZEALAND MANAGEMENT PRESENTATION
THE NEW ZEALAND ELECTRICITY MARKET Meridian Energy Limited Investing in New Zealand October 2018 2
THE NEW ZEALAND ELECTRICITY MARKET ▪ Delivering a reliable, affordable and environmentally sustainable electricity system “New Zealand serves as a ▪ A well functioning market, characterised by: model for effective energy ▪ Quality renewable resources markets and secure power ▪ Progressive regulatory settings system operation” ▪ Stable political environment ▪ Rational market competition International Energy Agency (IEA) New Zealand 2017 ▪ Vertical integration is the prevailing structure Review ▪ Wholesale and retail market regulation provided by an independent regulator – The Electricity Authority (EA) ▪ EA mandate to deliver efficient market operation, security of supply, promote competition ▪ No price controls, non-competitive distribution sector has regulated rates of return Meridian Energy Limited Investing in New Zealand October 2018 3
THE NEW ZEALAND ELECTRICITY MARKET 5 major generators 33 retailers (all listed) (44 brands) 29 distribution 1 big industrial user 1 transmission grid businesses (Rio Tinto/Sumitomo owner (state owned) (various smelter) 2.1 million ownership consumers structures) (41 TWh pa) 2017 GENERATION MIX 2017 CONSUMPTION MIX Hydro Agriculture/ Geothermal Forestry/ Fishing Biogas Wood Industrial Wind Solar Sources: Electricity Authority and Ministry of Business, Innovation and Employment Commercial (incl. Oil Transport) Coal 82% renewable Gas Residential Waste Heat Meridian Energy Limited Investing in New Zealand October 2018 4
THE NEW ZEALAND ELECTRICITY MARKET ▪ New Zealand’s hydro generation is managed against limited controlled storage ▪ Bulk of hydro inflow is anti-correlated to winter demand peak ▪ Thermal capacity and fuel storage manages potential hydro inflow deficit and other renewable intermittency ▪ Efficient and well-functioning wholesale market manages this supply risk ▪ Significant oversupply has existed in the market, older thermal plant closure is bringing better balance ▪ Demand growth in the last decade has only been modest Meridian Energy Limited Investing in New Zealand October 2018 5
THE NEW ZEALAND ELECTRICITY MARKET ▪ Market will be the key enabler of greater NZ 2016 SECTOR EMISSIONS decarbonisation in New Zealand 3% 5% Electricity 6% Road transport 17% ▪ 42% of non-agricultural carbon emissions could be Stationary energy* removed over time through electrification Agricultural Industrial processes 20% Waste ▪ Converting this fossil fuel-based energy use to 49% predominately renewables could add 75% to *manufacturing (including milk processing), construction current electricity demand and commercial sectors and domestic heating Source: Ministry for the Environment ▪ Depending on the rate of future electrification, DEMAND FORECASTS significant new generation will be needed NZ Historical Demand TWh 90 Transpower MBIE - High 80 ▪ Unsubsidised renewables are likely to form the bulk MBIE - Low 70 Productivity Comm. - High of new generation Productivity Comm. - Low 60 Meridian - High Meridian - Low 50 40 30 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 Source: Meridian Meridian Energy Limited Investing in New Zealand October 2018 6
THE NEW ZEALAND ELECTRICITY MARKET ▪ New Zealand Government is conducting a review of REAL RESIDENTIAL ELECTRICITY COST c/KWh electricity prices 18 +4% ▪ An initial paper has been released: since 2009 15 ▪ Energy affordability can be an issue +28% ▪ Low income households need better support 12 since 2009 ▪ Competition is high, customer engagement varies Energy and other component Lines component 9 ▪ Industry delivers high quality supply *manufacturing (including milk processing), construction and commercial sectors and domestic heating 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ▪ Distribution and transmission could be more efficient Source: Ministry of Business, Innovation and Employment 1% AVERAGE RESIDENTIAL BILL ▪ New Zealand residential electricity prices are 20% lower 3% than the OECD average and 40% lower than Australia Generation 13% 32% Distribution ▪ Pricing from the competitive parts of the electricity Transmission 13% supply chain have been flat in real terms since 2011 Retail GST 11% ▪ Historical distribution cost increases have resulted in Metering 27% higher residential prices Other Source: Electricity Authority Meridian Energy Limited Investing in New Zealand October 2018 7
MERIDIAN ENERGY Meridian Energy Limited Investing in New Zealand October 2018 8
ABOUT MERIDIAN ENERGY ▪ NZ$ 8b company, listed in 2013, 51% Government owned ▪ Largest and most liquid of five listed New Zealand retailer generators ▪ The only New Zealand electricity company with a customer and asset base diversified across different countries ▪ Strong environmental, social and governance focus ▪ 40% of New Zealand generation covered by a price guarantee contract with Rio Tinto/Sumitomo’s New Zealand aluminium smelter Meridian Energy Limited Investing in New Zealand October 2018 9
ABOUT MERIDIAN ENERGY ▪ New Zealand’s largest generator, all production from renewable sources ▪ Seven big hydro stations – flexible plant with the country’s largest storage ▪ With low operating costs and capital needs ▪ Five New Zealand wind farms and proven success operating in a high wind environment ▪ Backed with more than a decade of construction and operational experience ▪ Typical long generation position to manage variable hydro inflows ▪ Generation portfolio of wind, hydro and renewable offtake in Australia Meridian Energy Limited Investing in New Zealand October 2018 10
STRATEGIC FOCUS Support retail growth & protecting our Champion benefits of competitive generation legacy markets ▪ Contribution of hydro to 100% ▪ Competing vigorously renewable aspiration ▪ Leadership in sustainability in New ▪ Maintaining a best in class generation Zealand and Australia portfolio ▪ Supporting wholesale liquidity ▪ Best placed renewable energy pipeline Clean energy for a fairer & healthier world Grow New Zealand retail, through Grow overseas earnings, through ▪ Simpler systems ▪ Expansion of challenger brand ▪ Reduced cost ▪ Strengthening our vertically ▪ Faster adoption integrated position ▪ Flux client success ▪ Relentless focus on customer experience Meridian Energy Limited Investing in New Zealand October 2018 11
SHAREHOLDER HIGHLIGHTS ▪ Five successive years of earnings and dividend EBITDAF $M growth since listing 700 666 657 650 ▪ Double digit shareholder returns every year since 650 listing 618 585 600 ▪ High free cash flow, high payout ratio, progressive ordinary dividend policy 550 2014 2015 2016 2017 2018 Financial Year ended 30 June Source: Meridian ▪ Structured capital management programme MERIDIAN TOTAL SHAREHOLDER RETURN running to 2022 33% 35% 31% 30% ▪ Strategic focus on potential market growth in three 25% countries 19% 20% 17% 14% 15% 10% 5% 0% 2014 2015 2016 2017 2018 Financial Year ended 30 June Source: Meridian Meridian Energy Limited Investing in New Zealand October 2018 12
NEW TECHNOLOGIES ▪ Solar uptake increasing in New Zealand as economics slowly improve ▪ New Zealand residential capacity factors are low (13%-15%) and payback high (13 years) ▪ Commercial solar opportunities are being developed ▪ Grid scale solar unlikely in New Zealand in the near term with competing land uses and winter peak demand ▪ Solar uptake is much higher in Australia with subsidy support ▪ Residential capacity factors and paybacks are better in Australia ▪ Grid scale development is happening in Australia as costs decrease significantly Meridian Energy Limited Investing in New Zealand October 2018 13
NEW TECHNOLOGIES ▪ Battery value for energy management is in load shifting (high to low price periods) ▪ Grid scale unlikely in New Zealand due to large hydro storage ▪ Grid scale possible in Australia with subsidy support ▪ Solar and batteries to achieve residential off-grid in New Zealand remains very expensive (20 year payback) ▪ Batteries also offer other value: ▪ Back-up power ▪ Grid and transmission support ▪ Avoided infrastructure costs Meridian Energy Limited Investing in New Zealand October 2018 14
NEW TECHNOLOGIES ▪ Electric vehicle levels are growing in New Zealand ▪ Government and company fleet conversions increasing ▪ Meridian will have converted 80% of its passenger fleet by 2020 ▪ New Zealand uptake dependent on the second- hand import market, so expected to be gradual ▪ Uptake may have system impacts, particularly network resilience in high peak periods ▪ Tariffs to incentivise off peak charging now in the market ▪ Technology may change with a move to fast charging infrastructure ▪ High fossil fuel generation in Australia limits electric vehicle environmental proposition Meridian Energy Limited Investing in New Zealand October 2018 15
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