Start of Transcript Operator: Thank you for standing by and welcome to the Mercury NZ's annual results analyst briefing 2022. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Vince Hawksworth, Chief Executive. Please go Vinceahead.Hawksworth: Kia ora tātou and welcome to the Mercury New Zealand results presentation.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page1of22
it's been an exciting year for Mercury. In the last 12 months we have become New Zealand's largest wind generator and we have also become New Zealand's largest retailer. It has truly been a year of transformation and one we have really enjoyed, but more than anything I'm really excited about what it brings for the future. In this year we integrated the Tilt New Zealand operations following the transaction completing earlier in the financial year. We have completed the transaction to acquire the Trustpower retail business and three months past the completion date of 1 May we can feel really pleased about the way that that's coming together, including the way that both teams in both the former Trustpower business and Mercury business have worked to satisfy our customers. We expect to meet our synergy targets and integration is Theprogressing.$581million
I am joined by William Meek, our Chief Financial Officer. I will turn firstly to the disclaimer page, I'm sure you have all seen that and move quickly through to the next Clearly,slide.
EBITDAF was bolstered by our new wind generation, higher prices and Thrive, but of course at the same time we saw really low inflows. In fact, the third consecutive year of dry hydro conditions in the Waikato. We were really pleased I think to say that at the end of the year in June we saw some water coming into the lake and for the first time since I took over the job finally seeing storage levels in Lake Taupō high at the end of a financial year and therefore dispelling the myth that it might have been me that was the problem. We are also really pleased about the Thrive program that we have been running. That contributed $47 million EBITDAF lift in FY22, but probably more important than that for us is the change in the ways of working. It's the beginning of a journey that will evolve our
Looking at the future, our FY23 guidance has headline EBITDAF of $580 million, but as I hope everybody has been able to work through to try and understand the movements associated with acquired derivatives, that is a EBITDAF level of $756 million if you unwind the $176 million of derivative in that result. I am sure William will talk to that into some degree because I realise that's kind of a complicated situation that we're in. Pleasingly, we were able to declare a final dividend of $0.12 per share, confirm that the DRP will be offered at a 2% discount and that our guidance for a dividend in FY23 is $0.218 per share, up 9%.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page2of22
culture through a continuous improvement mindset and I am excited by what that will bring us over the coming years.
William Meek: Thank you Vince and welcome everyone to the call. I'll probably start by saying this is actually a complicated set of results. It has been affected by some pretty significant accounting adjustments and certainly with IFRS we are seeing an increasing divergence between what we represent and our profit and loss and how that diverges from essentially underlying cashflows and certainly the derivatives which I'll talk to shortly are a key driver of that and certainly become even more material as we look forward to 2023 and 2024 and discuss our guidance. Really, we're on slide 4 now just talking to Trading Margin. We have renamed that from Energy Margin with the acquisition of Trustpower. We bring in a whole lot of additional products, mainly in the telco space and LPG, so trading margin, it's a far more generic term to capture the products that Mercury now sells through those two brands. The increase to $745 million is explained mostly by the wind generation added during the year, so the Tilt transaction, with that acquired in August, adding over 900 gigawatt hours of generation and then the Turitea commissioning adding over 300 gigawatt hours to our financial year results. Our operating expenditure we can see up $40 million. Again, in terms of the bridge, the addition of those windfarms, so five from that Tilt transaction and Turitea increasing costs by circa $20 million. The Trustpower business adding around $18 million and that included
Finally, before I hand to William to talk to the bridge slides, I want to confirm that whilst we have been busy from an acquisition point of view, careful management of our balance sheet and really thinking about our opportunities in the future mean we retain headroom for growth. I'll pass over to William.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page3of22
Operating cashflow, a small change to $352 million, probably lower than we expected largely on the consequence of the June result which in terms of cashflows, June result last year falling to July of this year. June was pretty tough with record high prices, very dry conditions in the Waikato catchment and obviously Kawerau failing on 7 June, so quite a hard month which saw lower cashflows in July. I will talk to stay in business CapEx at $68 million, so still relatively low, certainly well lower than we are guiding for the next two years with the big drilling program coming up and the difference explained largely by preparatory drilling costs and the ordering of a replacement gear to repair the Kawerau plant.
Growth investment has stepped up materially, so over $1.3 billion, again explained easily by the $800 million odd for Tilt, the Trustpower transaction at $470 million and the capital expenditure at Turitea in the mid-seventies explaining that big spike and we have talked to dividend, $275 million ordinary dividend declared for FY22. The bridge again looks fairly complicated but we will take us through it. Generation volumes were up slightly on the prior year, again driven with hydro about 50 gigawatts higher, so actually not materially better than the 2021 year. We did see Turitea push out
some transition and integration costs which did start in the two months prior to the year Veryend. pleased to see Thrive delivering a $12 million benefit to costs, so an offset from that, we did have some SaaS, so Software-as-a-Service, which essentially saw items in technology that would have been capitalised previously and then recognised as an expense. Core business expenses once adjusting for those scope changes and SaaS actually fell on the back of Thrive.
EBITDAF largely driven by the combination of trading margin and operating expenditure. It does include the insurance of $26 million from the Kawerau failure in June last year, so we expect to see further insurance payments likely in FY24 to cover most of the costs incurred from that outage. They do also include the terminations of the Norske Skog contract, so that saw us terminate a contract that had three years to run. It was an 80 megawatt baseload contract, well out of the money with a strike of around $80 a megawatt hour and I think our half year deck guided pretty clearly around the effects of that and that's signalled again in the appendices to these results.
NPAT steps up materially, up 230%, largely on the back of the gain on sale from the Tilt shares which were then immediately utilised to acquire the Tilt New Zealand business.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page4of22
the steam hammer event that we talked about last year, it occurred last July, following investigation over the last few days WorkSafe have decided to lay charges
308 gigawatt hours which was useful. We have separated the ex-Tilt windfarms. They are all subject to PPAs, so 961 gigawatts. The price has been down so generation quantity is positive, the decline in prices of around $35 a megawatt hour leading to that $185 million stepdown in generation of revenue.
The purchase costs obviously go the other way. A step down in purchase volumes for almost $120 million with purchase prices rising [I'm sorry] being a positive result with lower prices, so energy costs to supply all our customers falling. Sales volumes up slightly in terms of mass markets. We can see that 242 gigawatt is down, so given the price that's positive and some significant changes in energy prices there. A mass market well below inflation at just over 3%, but C&I really feeling some pretty stiff price increases there on the back of a high forward curve, high spot prices, so renewals coming through in much higher numbers than we would have observed two or three years Trading,ago.
you will see some unders and overs. Carbon revenue which was a new initiative for this year with the quarterly options by the government there, so quite a significant gain of $27 million in terms of trading NZUs. We saw the unwind of swaps of $75 million, most of that attributable to the termination of the Norske Skog contract. Finally, OpEx, we've already discussed, so that bridges to our $581 million from last year's $463 million. Vince. Vince Hawksworth: Thanks William. We'll move now to slide 6 and that's the health and safety and wellbeing. During the period we have really tried to think about how we bring wellbeing into our conversations on health and safety and that's a big focus for us. Whilst our results in terms of TRIFR and incidents are relatively good and we are pleased about the direction of travel, we also realise that if we are going to maintain that we need to work with everybody in the Company to create a zero-incident environment and that's what our program is about that we call out in this slide deck. It is leading us to have better conversations about the role of us as individuals, the role of us as a Company and the role of us as leaders, so we are quite encouraged by that. Equally though we have three sites which are classified as major hazard facilities. They are the sites that use pentane. There's a reasonable amount of work for us to do around critical safety elements and that work is ongoing in collaboration of working with DisappointinglyWorkSafe.
Moving to the next slide. You will have seen this before. It's our FY22 to FY24 strategic framework and I just want to note that from a point of view of our purpose and our longerterm goals, which we call 2030 at the moment but one could call “out to 10 year” goals, we are in a process of review. That review needs to take into account the growth in our business, the change of the nature of our business and we will have more to say about that later in the year. Our focus here is on the three year objectives, our thriving today and shaping tomorrow objectives and in particular, before I move to the next slides, I will call out the increase in the target EBITDAF for the business from $700 million to $800 million that reflects the changes in the underlying nature of our scope with the addition of both the Tilt assets and the Trustpower retail business.
Moving to some of the indicators that sit underneath those objectives on slide 8. Look, enhancing our licence to operate, well clearly it is really important to us that we achieve the health and safety objectives that we set ourselves. I've always believed greatly that we should think things in the order of safety of people, safety of the plant and then production and that's underlying the cultural message that we have in the business. We have been busy with customer care guidelines and we have completed reviews of our external sector engagement and the relationships with our partners. I have already touched on increasing the value of our business to the $700 million to $800 million EBITDAF and whilst we have seen benefits of course given the nature of the marketplace, shareholder returns have dipped. We believe we have got a really strong story that shareholders should be pleased to see for the coming years. A major part of our transforming through people and transforming our culture is about how we lead. This is really about bringing more diversity to our business and upping our engagement from a cultural perspective. This is not easy work and we have to be diligent and continuous in the effort, but it is a major focus of the organisation.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page5of22
and we will be working through that process over the coming weeks. There were no injuries in that event. We continue to use daily RAT testing at our generation sites. This is both to protect our people but also to protect the integrity of our ability to operate. As I think everybody can appreciate in winter both the risks of illness and also the needs of the community for generation when it's cold is important and we are trying to achieve that balance.
Really important I think from the whole sector's perspective is this whole idea of the electricity sector and Mercury playing a leading role for the successful transition to a low carbon economy. We have been doing a lot of work in this space both in terms of our own asset development, but also in trying to engage with our other sector participants and to create ways to work together, within the bounds of the Commerce Act of course, to build forward for New Zealand an environment which sees electricity drive decarbonisation. I will talk a bit more about some of that in a few minutes. Of course, executable options for growth. Well, the two transactions we have done have really set us on a pathway that allows us to have many options in our toolkit and we will have more to say about that in the weeks to come, but I do note that we did get the consent for the Kaiwaikawe Wind Farm for which we have a PPA with Genesis. I will pass back to William now to talk a little bit more detail around the market.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page6of22
Turning to slide 9. The next heading is about being adaptive and resilient. One of the things I think we have all seen as we're looking to employ people is there's massive competition for talent and that means from my point of view, we need to continue to look to develop our own capability and hence the focus on trying to fill roles through internal candidates. That will take time because it requires us to invest in people. We are also obviously reviewing our technology platforms in the light of the Trustpower acquisition.
William Meek: We are now onto slide 10 with a couple of scatter plots. Really the market did change from late 2018 with that Pohokura outage and that trend has largely continued. We can see in the first chart the dots much higher reflecting that both gas availability and high thermal costs and the strong correlation, wind versus correlation with national storage deviations from average. Certainly, during FY22 we saw some prices attenuate in the first half but then rally quite strongly in the second half, so again consistent with recent years around pricing. Similarly, gas price, so spot gas price, which has traded, again a strong correlation there. High spot gas prices flowing through to high spot prices. That's a phenomenon that's certainly still here and has been playing out over recent years. Turning to slide 11. Some familiar charts here covering off gas, national storage, coal price and carbon prices in there into play. So the world is in the clutches of an energy crisis. It's complicated, it's not just down to the Ukraine-Russia situation playing out currently and its effects on Europe. COVID has a role, investment decisions driven by climate change are a
Probably driven by high oil prices. So condensates are very valuable, and certainly predictions that gas demand could reach 20 year highs over 2023-'24 at almost 200 petajoules a year. Good to also see some flexibility there in trading of gas, particularly between Methanex and Genesis, which is helpful when those thermal fuel supplies are Coaltight.prices we can see just a very steep curve, continue to rise. The call-out there is when you observe the offering behaviour of the Rankines, we can see clearly repeating tranches in $230/MWh to $350/MWh range. Largely reflected of carbon costs, which are now over $80 a tonne, interplaying with coal pricing given 15% of our electricity generation is still supplied by thermal sources. So again creating a strong imperative to continue to invest in new renewables to assist that decarbonisation journey for New Zealand.
Slide 12, just focusing in on Lake Taupō. Slightly cheeky heading there - Start Low, Finish High - possibly describe both our mood and Lake Taupō as the year progressed. So certainly starting the year very low, on the back of those dry conditions. Finishing very high with a very wet June setting us well for FY23, which is feeding through to guidance. So acutely dry again from that January to May period, which is the seasonally dry time in the Central North Island, where both average, the lake level almost always trends down.
Just calling out the futures interactions with spot prices. We can see the South Island had some pretty good in-flows over winter last year. Futures prices and spot prices hit records at the end of FY21 at almost $300. You can see the futures prices there, well ahead of where spot prices traded out for certainly almost the whole first half of this year as spot prices came down. So certainly if you can get thermal out of the stack with high hydro generation, as we have now, prices definitely come back to levels we used to see three or four years ago. But then futures price lagged again. So they were much lower on a sort of a, if you were hedging a quarter out. Spot prices rallied strongly again with that phenomenon of expensive thermal prices and carbon combining to create pretty hot spot prices in a number of months then exceeding $200/MWh. I'll hand back to Vince.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page7of22 factor, and those are manifesting in here in little old New Zealand through oil, coal, gas, methanol and aluminium pricing. We are not immune from that in this sector. We are pleased to see that there's significant capital investment going into our gas sector.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page8of22
a technology review. We have established an integration team that is now really focusing on the processes, systems and change management required so that we can deliver the benefits expected over the next two years to three years that we set out lower in the slide.
The bottom left graph is kind of interesting because the yellow line is the rolling Ōtāhuhu spot price, 12 month rolling Ōtāhuhu spot price. The black line is the 12 month Ōtāhuhu futures price one year prior. So I guess ultimately we conclude out of that, that with a sort of sensible hedging strategy you can sort of ride these difficult waves. As William said, as we see more renewables connect we would expect prices to flatten out. But we also expect to see volatility. We also note that the close-out of Norske Skog reduced our sales position, but we are resigning customers. Those customers are often signing for five years to 10 years. We note our sales yield lift there in both mass market and C&I, and William's touched on that earlier in the conversation. So moving to the next slide, well, I think everybody will be really aware of the retail acquisition. That completed successfully at the beginning of May. As I said earlier, we are really pleased about the three month in position. Connection growth has been steady. But probably most importantly, collectively our people have been able to ensure that customer experience is maintained. We have done some realignment across our retail lead teams so that we have a combined view of both brands and the commercial positioning of those brands and customer Weoutcomes.haveundertaken
Vince Hawksworth: Thanks William. So yes, when we look at our customer mix, it has over the year tilted towards C&I. If you look at the chart on the top left you'll see the C&I physical and financial sales in blue, and the mass market in yellow. Just to point out, that the FY22 yellow number is two months of Trustpower sales, so doesn’t reflect a full year Assituation.William has said, wholesale prices did persist at an elevated level. Yet mass market competition was still pretty stiff with churn at about 18%. Residential prices did lift about 3%, and that was below inflation a little over 7%. We are still seeing connection growth in the Trustpower brand over the period since May. Whilst over the year the Mercury brand did shed some customers, that’s now flattened out and we remain optimistic about our future position there.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page9of22
Moving to the slide 15. That sort of sets out how Tilt Renewables assets have boosted our wind position. Obviously 12 months ago we didn’t have these assets, and Turitea commissioning was only underway for the North. So a big change for us during this year. Wind slightly less than we would have liked, but that’s part of the normal cycle. The production is hedged through long-time PPAs and CFDs. So our risk position is unchanged. We did suffer a fire on one turbine at Tararua. That replacement is in-country, and we will be installing that shortly. As I noted earlier, we have the CFD signed PPA with Genesis for Kaiwaikawe. So we're getting now a steady contribution from the operating assets. But importantly, and I'll talk about this in a minute, we get the opportunities that come with the pipeline. So turning to Turitea on slide 16. Northern section completed, producing, performing well. Under long-term O&M agreement. Southern section, we did benefit from pretty good weather up until June, or the end of June. So roading infrastructure largely complete, Southern substation well underway. As we stand at the moment, we are still talking about a sort of completion in the middle of next calendar year. Moving to slide 17. Look, everyone will know about the named projects here. Importantly, we are also working on a series of early stage options that will build on the back of this deployment. I think when we think about these projects, we are advancing them in parallel. We want to try and get to a position where we have a series of investment choices that make sense. But there are challenges, and those challenges I think are well understood. The change that we are going to see from a regulatory perspective - from the RMA to the NBEA, Natural and Built Environments Act - needs to recognise that all electricity, all renewable electricity, is the platform for other industries to decarbonise. So while we should focus on making sure these pipelines of opportunities come to market, we also need to realise that core hydro, core geothermal, that comes up for reconsenting is important. It probably doesn’t need me to tell you that inflation and supply chains are a challenge. In the medium-term we expect equipment manufacturers to see some capacity constraints as
As William has noted, and I am sure we will discuss probably further in questions, there has been quite a lot of Day 1 accounting that we have had to deal with in order to deal with the derivatives. But we are really pleased about where we have got to in what is a little over three months.
Turning to slide 18. I suppose the things I want to call out in here is that the industry is responding to the pricing, and with 2.3 terawatts of renewable generation being built at the moment. But we can't avoid the fact that when we have issues like 9 August last year, that causes concern for both regulators and politicians. In high hydro times the flexibility of the hydro system delivers very well on peak demand. But we shouldn’t underestimate that at the moment as we go through this transition, the need for thermal generation back-up. Because it's less flexible, and gets dispatched less, that does add some risk. I would say though, that those who own thermal plant have done a really good job of in general keeping that available and ensuring they are up to the challenge, at a time when all of the market signals are pushing them out of the market. We see the - we know that we have several other things going on in the marketplace. New Zealand Battery project, the prospect of recontracting of the aluminium smelter. Look, I have always been of a view that these are not linked issues in the sense that a productive economy should be able to see a pathway for a smelter to stay, and for other new projects - like hydrogen and data centres - to be able to come to market.
I want to move to the next slide. Look, we have got a list of things that we have done under Thrive. But I guess the thematic here is, this is about continually questioning ourselves about the way we do work. About the opportunities to improve, and about the way that we can help our people grow their capability and their careers. So as we look into the future from these points that are on the slide our goal is to create a combined organisation, as we bring the somewhat 1400 people together that we have now got, so that we are continuously learning from our experiences. Using those experiences to improve our performance for our shareholders, partners and our customers. So I'm going to pass back to William now to talk a little bit about some of the detail around the numbers and some of the moving parts.
Europe and the US seek to decarbonise, but also in Europe disconnect themselves from Russian gas.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page10of22
Obviously we are all interested to see how Onslow progresses, and how that will work from an ownership and dispatch perspective. It will have big impacts on people’s generation investment decisions over the coming five years to 10 years.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page11of22
Just touching on carbon trading. So with the carbon auctions, we saw that as an opportunity to both buy carbon and trade. So you can see there a $27 million gain was earned during this year. We still hold 900,000 credits valued at $65 million at the end of this financial year, and sold 1.1 million during the year. So our carbon credits are essentially held in two areas of our accounts. If they are held for trading, they are held as inventory, if they are held for essentially hedging or emissions offsets, they are treated as an effectively intangible asset. Of which we currently hold 1.7 million units, which is roughly about five years of our current ETS obligation. We are very pleased to see that our trial at Ngā Tamariki around non condensable gases on one of the OECs there is reinjecting the NCGs, of which most of that are CO2, back into the reservoir. So that is a big focus on both time and resources around extending that across our geothermal fleet. We are thinking very hard about what we can do with our Scope 3 emissions also, which largely are driven by our gas sales to customers. Which have doubled with the Trustpower acquisition. Just talk about the ASX futures in terms of the prudential cost. Some may be aware of the announcements from Energy Australia a month-or-so ago, with a downgrade and having to post very large prudential to cover their exposure in Australia. So we do, you do have to post cash to the ASX. You see there it increased by $33 million to almost $100 million at the end of June. We peaked at almost $120 million in March 2022. So that is a real cost, it's real cash being posted on deposit. We have been actively managing those exposures through exchange for physical. Essentially where those futures contracts are swapped out, either with a bank or another counterparty for a CFD, which therefore removes the prudential exposure. But substitutes that for a credit with the counterparty. Just calling out that essentially for electricity
So the insurers have declared cover at the site for the incident, and made an interim payment of $26 million which is inside the $581 million EBITDA recognised in FY22. We have ordered the replacement generator and steam path. They are currently under construction in Japan, and we are expecting those to be installed in May and June of next year. We will expect a further insurance payment in FY24 once all those costs are known.
William Meek: We're on slide 21. Just talking about the Kawerau outage and the insurance proceeds. So under IFRS insurance proceeds when they are almost certain are recognised as income, irrespective of whether they relate to business interruption or property cover.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page12of22 purchases on the NZX, for clearing those are generally covered by a Letter of Credit. So don’t require that posting of cash. We’re on the home straight, final slide, in terms of guidance for FY23. So we are guiding headline guidance of $580 million, which is awfully close to what we have headlined results this year at $581 million. But on a normalised basis, if we back out those unwinds, sees us at $756 million. So those unwinds are detailed in graphic glory on slide 21 of this deck in the Appendix. So spread across the Trustpower contract - oh, the Trustpower derivatives, Norske Skog and Tilt. So net they are $176 million. So to put that in perspective, we are expecting Trustpower retail business to have a standard, or normal, EBITDAF of about $50 million in FY23. That unwind on the Manawa hedge is $200 million. So that derivative was recognised with an asset value of $488 million through the acquisition accounting. So again a DCF model, which works out the value of the business, resulting in a purchase price of $470 million, which included $50 million of receivable, is for accounting purposes then allocated across the respective Youassets.can see most of that, in fact, more of that value is allocated. So the derivative with actually the contract assets, the customers actually being valued at nil. So you can get some quite strange outcomes from the acquisition accounting. So coming back to the start. Bridging across, we start at $581 million. That obviously does include the insurance $26 million. I think the BI cost would have been about $15 million, Kawerau was out for 20 days in July. It also includes the termination of the Norske Skog contract, which is about $65 million, which was cancelled. That did see us net about 375 gigawatt hours longer as a consequence of terminating that contract after we acquired some of their existing book. Hydro was increased by about 400 gigawatt hours, worth $63 million, so normalising for that. Wind normalised, as Vince says, it was a slightly less windy year. I think it would have given us $7 million. The unwind of those derivatives gives us net $7 million. So the Trustpower negative impact is largely offset by both the Tilt and Norske Skog impacts, and we had non-recurring trading gains. So again that stellar performance in terms of carbon trading. We are not expecting that to repeat, unless we see carbon prices roar away to $120 a tonne from their current $80 price. So that gets us to about mid-$600 million. Given the stellar start to the year and the wet conditions, we’re expecting hydro to generate another 300 gigs. Trustpower retail adds
another $42 million, which is essentially another 10 months of EBITDAF from the Trustpower business. Wind steps up by almost $20 million and that’s essentially one extra month from the ex-Tilt assets plus about six or seven months of Turitea.
Cameron Parker: (Craigs Investment Partners, Analyst) Hi, guys. Congratulations on a huge year. Hey, could I just ask a question about Tiwai and how you are thinking about your development pipeline in terms of the Tiwai negotiation? Are you - have you been approached directly at all?
Vince Hawksworth: Yes, thanks, Cam. Look, I think the way we’re thinking about it is we think that there is a case for Tiwai to be able to negotiate an outcome. It’s almost certainly going to have to be probably more than they were paying, given where aluminium prices are and - but the demand for aluminium globally means there seems to be a really good case and I don’t think that’s a negative to New Zealand’s ability to de-carbonise. We are, as far as our development portfolio is concerned, I think generally in the sector, the - what I would call the concern about the Tiwai dip is being balanced by the concern about the need to ensure that we are on this pathway to decarbonisation that I’ve talked about a lot. So we are pushing ahead with projects that we have in our portfolio and we’re pushing ahead across the board so that we’ve got choices about which ones to execute on. We are - I think, in a reasonably fortunate or unique position in that we have quite a lot of choices across both islands and we need to - we believe we need to bring those to market. In terms of conversations with Tiwai themselves, look, we haven’t had any sort of serious conversations but we remain available and we would probably keep those reasonably commercially tight.
Portfolio growth is at $31 million, again that’s across the whole sales - sales book to all customers, C&I and mass markets and reflects price changes and the other costs.
Essentially increasing $27 million is mostly explained by a forecast of $25 million spent on retail integration with $5 million of synergies realised in FY23, which takes you through to the $756 million normalised FY23 EBITDAF. So with that, we’ll open the line for questions.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page13of22
Operator: Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up the handset to ask your question. Your first question comes from Cameron Parker with Craigs Investment Partners. Please, go ahead.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page14of22
Cameron Parker: (Craigs Investment Partners, Analyst) Great. Great, cheers. Are you hearing - are you being approached at all by data centres and so forth? We’re seeing some of those kick off in Auckland at the moment. Can you - could you provide any colour on Vincethat?
Vince Hawksworth: Yes, I think - well I think, actually, probably two years ago we talked about the fact that Mercury is always open for business and we are always willing to price anything anybody is looking for, for us to do, to help them manage their risks. We have seen a trend towards people wanting longer dated contracts to help smooth the near-term volatility. I don’t think that will change particularly but I don’t feel like that that’s new news. We’ve been at this for a couple of years now and it actually flows through into our forward performance. In terms of specific projects, look, we take a portfolio view of our ability to help people meet their energy needs but at the same time, we do have conversations with folks who maybe are looking to establish themselves in New Zealand or establish a different sort of presence and are interested in being more closely associated with a particular project. We welcome those enquiries as well and there’s a lot of that going on in New Zealand at the moment. So you know, our message is come and talk to us.
Vince Hawksworth: Thanks, Cam and hey, we’re keen to see those people keep talking to us as well.
Cameron Parker: (Craigs Investment Partners, Analyst) Great, thanks, Vince. Look, some of your peers and of course analysts are also predicting higher wholesale prices for longer. It definitely feels that way in terms of the impact of imported thermal and domestic thermal costs and carbon.
What are you seeing in terms of C&I customers coming to you in terms of long-dated contracts and so forth? I noticed Contact yesterday have stated that that’s stimulating that sort of process on - in terms of engagement on base load geothermal. Are you seeing the same thing coming to your portfolio?
Hawksworth: Yes, we are seeing approaches and no, I’m not providing any colour.
Cameron Parker: (Craigs Investment Partners, Analyst) No, that’s fair enough. That’s fair enough. I guess from an investor perspective, people are seeing - quite keen to see the long-awaited demand kicker - uptick. So yes, I guess we’ll wait and see there. Look, that’s it from me, guys, so thanks very much.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, thanks and next question I guess is also kind of related to - it’s on the wind [element] side. It’s just around Turitea South and I saw in the slides you alluded to potential for liquidated damages there. Are you able to indicate to us what the maximum level of LDs are on that contract?
Vince Hawksworth: I think we wouldn’t do that. We are - as it indicates on that slide, we are in quite advanced discussions with the head contractor for that and how we think about those LDs and all of the other associated claims and counterclaims is pretty sensitive. So I hopefully will be able to clear that up for you in the not too distant future, AndrewAndrew.Harvey-Green: (Forsyth Barr, Analyst) Okay, no worries. Next question I just had was around the Trustpower retail integration costs. I think you’ve indicated $50 million in total and $25 million of that is going to be in this financial year. Are you able to just give us, I think, how much was spent in FY22? I’m assuming it wasn’t a great deal but just to give us, I guess, the timing beyond FY23.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page15of22
Andrew Harvey-Green: (Forsyth Barr, Analyst) Morning, Vince and Will. A couple of questions from me. Just following on first of all in terms of the development discussions. Can you just give us a little bit of a feel around when we might see Mercury sort of get to the FID point on any of these developments? I guess more specifically around the Northland wind farm, given, I guess, the Genesis obligations there.
Cameron Parker: (Craigs Investment Partners, Analyst) Great stuff.
Operator: [Unclear] Andrew Harvey-Green with Forsyth Barr. Please, go ahead.
Vince Hawksworth: As soon as possible, our guess is the timeframes we’re trying to work to. Look, we’d like to be able to make announcements but we’re great believers in making - if we say FID has been reached, that means every single contract’s been signed and it will happen. That’s something we just have to work through. With respect to Kaiwaikawe, look, we’re working as hard as we can. We had a really difficult process that’s slowed us down with the resource consent. Which fortunately, we were able to resolve without having to get thrown into the whole appeals and court process but it took us several months longer than we had hoped. The consequence of that is, that’s just put us behind but I think that if you look at our ambitions around the FY24 goal, $800 million EBITDAF, that sort of implies we’re expecting to build a bit more but I haven’t got an exact date for you yet.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page16of22
Operator: Your next question comes from Stephen Hudson with Macquarie Securities. Please, go ahead.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Right and my last question from me is just around the FY23 dividend guidance and if I look at the level of growth you’ve got coming through from EBITDAF and I guess what that might imply from a free cashflow perspective, I guess for the uplift in dividend is a wee bit lower than the underlying EBITDA growth.
William Meek: It was only a few million on integration. The transition process was separate. So a couple million on integration in the two months.
William Meek: Yes, that’s a good question. It’s not really driven by CapEx requirements. Our view is our balance sheet is strong, recovers strongly next year with earnings uplift. It’s - we’re at the lower end of our 70% to 85% payout ratio. I think it’s a long game. This will be essentially the 15th year of ordinary dividend growth for Mercury. We are cognisant that in the medium to longer term, we expect the market prices to attenuate back down and so therefore that does give you quite strong headwinds in terms of your portfolio revenues as C&I re-prices. Arguably you could even find retail prices regressing if we got back to not - we’re probably not going to get back to prices we were back in the mid-2010s but certainly the prices where we currently are, are in the long run, unsustainable and we’d expect to see those thermal plants crowded out by renewable investments. So it’s really looking forward over the five to seven year period and where that might take you because it is quite negative to earnings in the long run if the market re-prices back to even $100 a megawatt hour.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, so no, that’s useful colour. Thanks very much. That’s all from me.
Stephen Hudson: (Macquarie Securities, Analyst) Good morning, Vince and William. Just three from me. I just wondered if you could give us some feel for whether or not you have
Are you able to give us a sense, I guess, of what free cashflow payout ratio you’re targeting and I guess by implication, I’m assuming the reason for holding things back a little bit is just given some expectations around CapEx requirements going forward but if you’re able to just talk to that, that would be great.
Hawksworth: I’ll take the first two I think and then William can have the third one, Steve. Look, I can’t - I don’t think I’d be able to say that we have a great pipeline of new geothermal that I could really call out, and whether brown or greenfield. We do have conversations with the various players from time to time but nothing I think I could really put in the stack at the moment. With respect to staff turnover, there's a number of factors at play here. We suffered the similar I guess rush to secure talent in the post-COVID environment and I guess I understand that people will look to pursue their careers; that happens. The transactions themselves, I don't think that they were particular leverage in all of that but change does create the catalyst I suppose for people to reflect on where their careers are and how that might turn out. I've no doubt some people would have also taken that opportunity. We've seen people go both to competitors - there is a very tight market in the central North Island for people across the players in that environment. We've seen people exit to banks who pay better than us, and we haven't been able to resist that. We've seen the same demand for talent within the IT and tech sector. I think everybody is seeing - we've seen people exit to Europe as soon as they could get out of the border. That said, what we are also seeing at the same time is a massive amount of interest in the roles we've got advertised. We last week had a role, that looks a pretty interesting role from my perspective, and we had over 100 applications of which 70-plus could have been Itcredible.wasn't just people throwing in a CV for a laugh. I think we've gone through all of those things, and I suspect others have, but I'd be the first to acknowledge that we've put this
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page17of22
any further brown or greenfield geothermal development options apart from the 35 MW Ngā Tamariki one that you’ve called out?
Secondly, I just saw - and this is not a comment on Mercury per se but I saw that your voluntary turnover of staff had gone up by quite a measure. Sort of 12% to 21%. I just wondered if you could give us a feel for whether or not that’s part of the various transactions that you’ve been involved with or what you’re seeing there in terms of staff Thenturnover?thirdly, if a longer duration invest deal were to be cemented in the next little while, will - would you see Standard and Poors shifting their two to three times BBB target for Vinceyou?
William Meek: Sorry, what was the start of that question?
Grant Swanepoel: (Jarden, Analyst) Good morning, just morning, team. A few questions. First of all, what are the implementation costs of that $47 million Thrive benefit in FY22?
William Meek: When what's done?
William Meek: Just on gearing metrics, Stephen. Slide 34 and the appendices have - were indicating a forecast debt-to-EBITDAF ratio of around 2.2 times in FY23. So again, quite a lot of headroom to the three times. We're not expecting any surprises there from Standard & Poor's and we'll have a catch-up when we're in Sydney - sorry, Melbourne next month with them. We're happy with the gearing where it is given certainly the strong lift in Stephenearnings.Hudson: (Macquarie Securities, Analyst) Do you think that the range may actually narrow and fall once an NZAS deal is done?
business through a heap of change in the last 18 months and that does create uncertainty and we want to make sure we try and steady the ship for the future.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page18of22
William Meek: No, I don't. It's their global credit criteria, they're not going to change the range for rating a New Zealand - for a New Zealand company versus what they're doing globally. So no, I don't think that changes anything. I think the bigger impact will be five years from now if the spot market, we're successful with the decarbonisation efforts and we can get coal out of the stack, and gas prices come back, how that feeds through to everyone's portfolios and revenues. Essentially hits EBITDAF which therefore increases your gearing. We're very cognisant of that in terms of those sorts of medium-to-long-term forecasts and what they might trend out and making sure your credit metrics can withstand that.
Stephen Hudson: (Macquarie Securities, Analyst) That's useful. Thanks, Will and thanks, WilliamVince. Meek: Cheers, Steve. Vince Hawksworth: Cheers, Steve.
Operator: Your next question comes from Grant Swanepoel with Jarden. Please go ahead.
Stephen Hudson: (Macquarie Securities, Analyst) Sorry, when a NZAS, a New Zealand Aluminium Smelter deal is done. Do you think the range is unrelated to that?
Grant Swanepoel: (Jarden, Analyst) Okay. Thank you. These questions are all around costs. Contact just had a Geoplant they're starting up at 20% up on one they started two, three-and-a-half years ago. With respect to Ngā Tamariki, does this also push that one out a little bit or are you not seeing the similar sort of costs in terms of the way you're looking at Ngā Tamariki at the moment?
William Meek: I don't think anyone can escape the ravages of inflation, so yes, we've got some indicative pricing. It's reasonably recent but will need to be refreshed. I think that the cost structures are probably more acute when you get into solar and wind. We have some real concerns around just the global capacity supply and how that works on the back - particularly if you start looking at the Russia-Ukraine conflict.
William Week: Are you trying to trick me?
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page19of22
William Meek: Our implementation to deliver those benefits - that is the net number. Not very much; most of them were essentially how we work as a team rather than investing in IT, those sorts of things. So, you're in the $1 million or $2 million, but that's alreadythat's included inside the benefit.
Grant Swanepoel: (Jarden, Analyst) Okay. The $800 million EBITDAF soft target for FY24, can I assume you've just got on the normalised FY23 number, Turitea to come through to yourself that is, and maybe half of Kaiwaikawe?
Grant Swanepoel: (Jarden, Analyst) Wow. That leads to the Kaiwaikawe property, the north wind project. With costs having gone up on that one, how does that affect the CFD that you've got with Genesis?
Grant Swanepoel: (Jarden, Analyst) The implementation costs associated with the $47 million benefit from the Thrive.
Grant Swanepoel: (Jarden, Analyst) You guys have put the number out there, Will.
Vince Hawksworth: No, you were definitely trying to trick him, Grant. The answer is the same as the answer I gave earlier about our next investment. Clearly, we have some work to do to get to that number and we have more than one option to put on there. So look, a little bit of patience and all will be revealed.
Germany is talking about 10 gigawatts by end of the year and Vestas only makes 20 gigawatts, and you've got one country asking for half of it. Now, we're expecting to see no relief in terms of renewable technology in cost structures but in terms of the projects we're working through now, price rises of 20%, 30% are not high in this world.
Vince Hawksworth: I don't know. I think those are all opinions I suppose at the end of the day that people are entitled to have. I think what we have seen - if we were having this conversation 20 years ago about wind we'd have thought $110 was pretty bloody good. We all know that these things go in cycles and technology improvements occur. I'm just thinking with the wind turbine example, wind turbines now are six, and seven, eight megawatts onshore up to 15 megawatts off the shore are the emerging standard. I think any equipment from a manufacturer is going to price to the market but is also going to want to be competitive.
Now, we have a period of time where rare earth, metals, and aluminium and copper and steel and everything else is expensive, as is transport, but generally people change their capacity to try and be in front of as many customers as possible. I think does it get back down to 80? That might feel a bit difficult at the moment, but do I think I will flatten out and come back down? Yes, I do. Is $110 as low as it can go? I don't know. I think that's just - I don't think there's maths that works for that, to be honest.
Grant Swanepoel: (Jarden, Analyst) Okay, thanks. Then back to your comment, Will, that you expect prices one day to come back down again. I'm not sure about your competitors on your call but Contact was talking about a longer marginal cost lifting from the old $80type level to $100, $110. Are they missing something in terms of long run and they're actually talking about the medium term?
Grant Swanepoel: (Jarden, Analyst) Okay. Thanks for that. Just on - sorry? William Meek: I'll just add to that, Grant. I think the problem is more complex. People tend to compartmentalise the analysis in terms of what's it cost to bring - what's the LCOE of a new plant? A solar panel is different from a wind farm, different from a geothermal plant, different from a gas plant. They're not the same and so the variability of particularly renewable sources with geothermal probably being the exception is challenging. We do need to resolve the reliability issue of drought. The New Zealand Battery Project or Onslow is one proposed solution which is ultimately a regulatory one and a market intervention, but it's complex. The interactions in terms of
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page20of22
Vince Hawksworth: Well, ultimately we have the CFD with them. It has processes in it for us to have a discussion with them but we're not in a position to have that discussion as we stand because we're still firming up on that pricing for Kaiwaikawe. It's part of being in this business I think to be able to work through things with your customers.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page21of22 grid requirements, renewables need more grid, how that all feeds through to end user Iprices.think it's complicated in terms of just trying to distil it down to an investment one at a time, which is what we're actually talking about right here right now, but at some point it's just got to make sense for the market holistically. So, we're extremely conscious of the trilemma in balancing affordability, renewability, and reliability of which of those reliability trumps all.
William Meek: Yes. Because they are for trading essentially they'll be fair valued every year. That's obviously below EBITDAF, but when you trade then they effectively turn in up in that. At the moment I think they're feeding through our other income. We'll probably move them into trading because it's no different from trading an electricity future. So yes, last year - we're not expecting to see the rally we saw with carbon prices more than doubling over '23. There was no doubt those auctions were an opportunity; quite amazing how much balance sheet and capital people were putting into those auctions.
William Meek: Thanks, Grant.
Vince Hawksworth: Thanks, Grant.
Very Grantsurprising.Swanepoel:
(Jarden, Analyst) Thank you. That's it from me. Thanks, All.
Operator: I will now hand back to Mr Hawksworth for closing remarks.
Grant Swanepoel: (Jarden, Analyst) Thanks for all the help. My final question just on carbon trading. You made $27 million in FY22 but you knocked back $9 million of that as a non-normalised. Do I take it that because you've 0.9 million units left in an inventory that there's an upside to where the current carbon price is trading that allows you to bank around about $18 million into FY23?
Vince Hawksworth: Okay, thank you. Hopefully everybody feels like they've been well informed. I guess my message is the one that I started with. We've had a huge year, a year like no other, as we described, but what that really creates is a platform for a huge decade. We're excited; there's a lot to do. I thank people for their questions. For those of you that we're going to meet over the next few days we look to meeting you one-on-one and hopefully everybody has got what they needed out of the presentation. Good day and enjoy the rest of your day.
Mercury NZ Limited 2022 Annual Results 16 August 2022 Page22of22 End of Transcript