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Turitea wind farm teleconference transcript 27 March 2019, 10:30am Transcribed by West Pages: 8 Operator: Thank you for standing by, and welcome to the Mercury Update conference call. 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 1 on your telephone keypad. I would now like to hand the conference over to Mr Fraser Whineray, Chief Executive. Please go ahead. Fraser Whineray: Thank you and kia ora tatou, everybody, thank you for joining this call. I'm joined here by several colleagues to assist with any discussion we have and any subsequent discussions we have after this to the extent we need to catch up with various media and/or investors. We're delighted this morning to announce a step of more sustainable growth for Mercury regarding stage 1 of Turitea, being a 119-megawatt 33 Vestas turbine development, for slightly over $250 million, just east of Palmerston North. We believe in renewable energy and particularly its future for New Zealand. New Zealand is blessed with tremendous renewable energy resources, which means that we can have economic unsubsidised renewable developments, which are great for New Zealand now given the proportion of renewables in this country. Also tremendous for its future as we look to electrify transport, which you know we've been passionate about for some time, and eventually industrial heat as well. This windfarm by itself at 470 gigawatt hours, that represents about 1.2% of national demand, so that lifts New Zealand's renewability in electricity by slightly over a percent by this single investment, and that will be due to break ground around August and come onstream from late 2020 and into early 2021. We felt we had the confidence and a good time to push on with renewable investment in New Zealand, we've outlined some of the details there for people on particularly the analyst side to do some of the mathematics and we have optimised the turbine within the envelope that we've got. It's also important to note, we have over-built the balance of plant. That means transmission lines and substation connection for this investment, and that's because there's an opportunity to expand Turitea to stage 2, which is a circa late '20s in terms of turbines, and also across to the ridge to the east, Puketoi, which is another 300 megawatt on possibly one of the best wind sites in the world there, and all that transmission needs to be joined up. We have all the consented arrangements, land owner agreements, to achieve all of those developments in the future, but we'll consider those on their merits as time progresses. Right now, we're just delighted to have our first investment in wind directly, given we also have 20% of Tilt Renewables, itself considering its own development options in New Zealand. But we're delighted to go into this, this gives us - we're the first company in New Zealand and I understand the fourth in the world to have all four renewables, the awesome foursome, geo, hydro, solar and wind.

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We've been working on this process since we received/won, the rights from Palmerston North City Council, to develop this site back in 2005, so if patience is a virtue, then we are entirely virtuous when it comes to how long we've had to wait and the perseverance required to do this. As I said, back in 2005, and we consented this in 2011, we have fitted the turbine within the envelope provided, which is a 125-metre tip height, but we've managed to optimise that turbine from what was originally contemplated, to keep up with trends in modern technology. So, that has been valuable and we're grateful to our partner, Vestas, in being able to co-optimise that. Also acknowledging Electrix who'll be doing transmission and Transpower, who will hook it up to the national grid in Linton. We're also interested in where this will go for co-optimisation with our same island hydro scheme, that being the Waikato hydro scheme, which is the biggest peaker in the North Island. Those opportunities weren't factored into our business case, but it is the co-optimisation of that given we are long capacity but could do with a little more energy, which is what wind farms provide, is an opportunity for the Company, and we'll be turning our minds more to that as we get closer to commissioning this in late 2020. Just want to acknowledge again Vestas, Electrix, the many landowners that are associated with this and potentially future developments, Transpower, PNCC and local iwi and many other stakeholders for their patience and support of this project. We are looking forward to breaking ground from August this year and getting things underway. That concludes what I think I'll cover off on the presentation. There's been a press release and some other materials put on the NZX this morning, which provides some data, and I am happy to move into questions and answers. Operator: Thank you, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Grant Swanepoel from Craigs Investment Partners. Grant Swanepoel: (Craigs Investment Partners, Analyst) Morning, team. This appears to be quite a congested node for wind. What is your assumption around what that node is going to achieve on average to the country's GWAP? Next question, what are the transmission costs that are in the $256 million? Could you possibly give an idea of what the long run marginal cost is on your assumptions for this wind farm, but more importantly what if all 60 were built, what that would be, so we at least get a sense of where it sits in the merit order. You guys had not really strongly signalled a new build. Is this going to be what we should be expecting from the industry, that some players, I point directly to Genesis and their Waverley indicating they’re about to make a decision on it, and that all we ever see is left field announcements, even though we were expecting this from you but you had never formally made any announcement, of build and potentially could get into a build rush program going forward. Then just in terms of your $13 per megawatt of operational costs, Tilt is pointing to that these operational costs have been trending towards mid-single digits. Why is yours looking so high still? Those are my questions, thank you. Fraser Whineray: Right, I think I've got all of those, Grant. In terms of the node, no, we have made assumptions, I'm not going to share them with you, about what the price at the gate will be for the Turitea wind farm over the 25 years of the business case. The node actually might have plenty of juice going into it, but the issue isn't actually a transmission grid exporting from there, it's actually - so that's not the congestion. The issue is actually that you have a lot of correlated wind which needs to be co-optimised with hydro. I don't think grid congestion is at all a problem in where we're hooking it up to Linton, which is a very strong part of the 220 kv

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grid. So, we're comfortable with that and we're also comfortable with the assumptions we've made about that correlation factor in terms of factory gate pricing. Co-optimisation with our North Island hydro is of course going to be pivotal to that. We haven't disclosed out what the transmission component of the build is going to be, and we won't, that is all part of the - we've indicated what the total CapEx is for the build, and if we do go on to build more, we'll be considering we've already built out a fair bit of the transmission and so we'll be considering those on their own business cases. I don't think - I think your fourth question, that this is going to lead to some sort of large rash of build announcements. I think it's all about people working out their own business cases and their merit order. I think we have been signalling pretty hard that wind's part of our future, and we've even got some of that context in the deck for you there, Grant, except there has to be a first date to make an announcement, and that is today. For commercial reasons it's pretty important that you contain this, even though it might frustrate analysts who want to put that into their reports. I think you had us commissioning something from early 2021, so I think you're not far off the mark, Grant, with your estimates there. So, everyone will have to consider on their merits. We look positively towards what Tilt is considering at Waverley. We own 20% of that, and if they're going to put good commercial capital to work in constructing that, then we see that as that's a good development for Mercury as well, because we get to participate in some of the benefit and the upside that Tilt management are able to create. In terms of OpEx, I'll just let Dennis make a comment. Dennis Radich: Yes, Grant, the $13 a megawatt hour importantly is a total OpEx to run the whole asset. So, I think the numbers that are being bandied around in the single digits per megawatt hour are O&M contract pricing. Just noting that that's not the full cost of running a wind farm, so there's a bunch of other costs that sit alongside that. Grant Swanepoel: (Craigs Investment Partners, Analyst) Thanks, can I just clarify as to why it is sensitive what your assumptions are around what you think that node might achieve relative to an average GWAP? And also, why you can't break out - is it a competitive reason - the transmission part of the $256 million? It just would help us understand where your wind site is in the merit order. Fraser Whineray: Well, we'll only disclose what we think is necessary for the market. Vestas commented last night these are - I mean if you're looking at gas fields you'd be in Kuwait, and if you're looking at wind, you're right where we are and or maybe a couple of parts of Scotland. These are the preeminent wind sites in the world, and that is still the fundamental driver of economics, particularly if you can combine that with a decent turbine size. So, we can consider that at a later date, but on the fly, Grant, we're not going to disclose those, because that wasn't part of our original plan this morning, sorry. Grant Swanepoel: (Craigs Investment Partners, Analyst) Thanks, Fraser. Operator: Your next question comes from Andrew Green from Forsyth Barr. Please go ahead. Andrew Green: (Forsyth Barr, Analyst) Morning team, a couple of questions from me. First of all, to what extent did you explore trying to do this with Tilt as your developer? Fraser Whineray: We didn't. Andrew Green: (Forsyth Barr, Analyst) Not at all, okay. Next question's just around CapEx and the timing of that CapEx, I'm assuming most of it's going to hit FY20, I presume that's a reasonable assumption. Are you able to give us a bit of a sense of when the CapEx timing is?

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Dennis Radich: Andrew, Dennis again, the CapEx is, as you say, mostly FY20. There's not a hell of a lot for the next few months until we break ground in August. The major part of the deliveries to site is when the shipments start kicking in, and late FY20 is when the lion's share of CapEx hits. Andrew Green: (Forsyth Barr, Analyst) Great, okay. Last question from me, just in terms of the Puketoi option, are you able to remind us when that consent expires? Fraser Whineray: It's 2023, around the middle of the year, Q2, Q3. Andrew Green: (Forsyth Barr, Analyst) Okay, that's great. That was all from me, thanks. Operator: Thank you. Fraser Whineray: Thanks very much, Andrew. Operator: Your next question comes from Neville Gluyas from First NZ Capital. Please go ahead. Neville Gluyas: (First NZ Capital, Analyst) Good morning, team. Probably just a few more questions on the detail from me. Morning from a very unpleasant Wellington down here. So, O&M I'm assuming one of the largest components outside the O&M charge that's in your ongoing OpEx is some kind of grid cost recovery, is a question. Then the other question's really just regarding the 25-year life maintenance agreement, are there availability guarantees under that from investors? If you could give me any colour on those, that'd be useful. Obviously pretty high capacity factor, 45%, imagine there's quite a high workload on the turbines. Is it reasonable for us to assume a 30-year actual life or economic life compared to the 25-year agreement and 25-year normal turbine guarantee? Just the last question in terms of site location, I presume you will have started at the northern zone rather than the southern zone because it's easier terrain to develop on? Just wonder if you could give us some colour on that, thank you. Fraser Whineray: So, Dennis, fire away. Dennis Radich: OpEx, the transmission's not an enormous expense outside of those O&M costs. There's a variety of consent compliance and other things overhead, there's a whole bunch of things that go into that figure, and obviously we're not about to break down all of those details. On the availability question, yes, it is a 25-year service and availability agreement with Vestas. Their job is to make sure the asset runs at a very high level of availability through those 25 years. As to the turbine life on the site, part of the contract package is that Vestas gets independent certification of fitness for purpose of that model turbine on the specific site in that wind regime for 25 years. That's in excess of what the usual international certification is at 20 years, and we're comfortable with that and a full scope service and availability combo, that we've got a great deal of confidence the 25 years is robust. As with most wind farm developers and owners, you take a view as to how long you might be able to run it beyond that 25-year period, but the 25 years is the horizon we base our economics on. Neville Gluyas: (First NZ Capital, Analyst) Great, thanks, just a couple of‌ Fraser Whineray: Sorry, you wanted a question on northern and southern? Dennis Radich: The northern zone versus the southern zone, it's a combo of ease of access, so it's not so much the ease of the terrain, but all of the access to both the north and south has to come in through the north. So, it minimises the civil costs involved in this. The trade off is that as we've said, we've built the transmission infrastructure all the way down to Linton, which goes past the southern zone and saves us building it again.

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So, essentially, it's a slightly higher quality wind resource in the north, with lower civil costs, so that's what got us up there first. Operator: Thank you, your next question comes from Janine Rankin from Manawatu Standard. Please go ahead. Janine Rankin: (Manawatu Standard, Media) Good morning, my questions are obviously a little bit more about local interest. I just wanted to tick off some issues about whether there are any further consenting issues that you need to go through regarding starting to build roads and so forth? I'm interested to know how close the nearest house is to one of the turbines. I understand that the city council will be leasing land to Mercury for the development, and just wondered whether that was all signed off and when we might see some advantages coming through for rate payers. Also just interested to know what kind of workforce numbers of jobs will be required during the construction. Thank you. Fraser Whineray: Very good, Janine, thanks for joining the call. I used to deliver the paper, the Manawatu Standard, on my bike back in Palmy, and have to bike into the very windy conditions to Monrad Intermediate et cetera when I was based growing up down there. So, good to be returning back to the Manawatu. Three of our executives are actually from the Manawatu, so we're delighted to be building down there. All of the consenting matters are dealt with, though there are a lot of conditions in the consent for ecological, noise, environmental matters which need to be addressed comprehensively during construction and during the operation of the wind farm. We're more than familiar with this, we have close to 200 consent conditions related to the Waikato hydro scheme, and over 1000 consent conditions related to our geothermal operations, both in construction of geothermal and the operation of geothermal, which we did a lot of certainly between 2007 and 2013. So, more than familiar with those aspects and they're all part of the consents that we were granted in 2011, which went through a pretty robust Board of Inquiry process. I'll just cover off one, but before Dennis can talk to proximity of residences or farms and jobs, the PNCC, yes, it is providing access, which that's the agreement we won back in 2005 through a competitive process from Palmerston North City Council, where they will receive revenue for us being accessing land on the Turitea Reserve, which they own. So, they will receive the benefit of that from the time that the plant operates, basically, which is call it early 2021 onwards for Palmerston North City ratepayers. But the PNCC's a good place to go and talk to about those aspects as well. I'll just let Dennis clarify some of the details on proximity and jobs. Dennis Radich: Proximity, as the crow flies it's in the order of, I think a kilometre to the nearest residences. There's obviously a variety of relationships with those neighbours, and we've had those neighbours front of mind all the way through here. The closest properties are in the pocket in-between the Turitea site and the Te Rere Hau site on the other side of the Pahiatua Track. What was the other one? Fraser Whineray: Jobs. Dennis Radich: Obviously it's contracted out so we're not building it ourselves. Our understanding is that the workforce peaks at about 140 onsite at its highest point on the way through the next couple of years of construction. The BAU operation is obviously much skinnier, there's three fulltime onsite, but then it's beefing up Vestas's existing O&M operations in Palmerston North. Just back to the lease arrangements with PNCC, the structure of that is that it's a production royalty that comes off the revenue for the wind farm. So, as Fraser says, it's early - from operations in early 2021 is when the cash starts rolling into the council.

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Fraser Whineray: Janine, was that helpful? Janine Rankin: (Manawatu Standard, Media) Yes, thank you very much, sorry you were on mute, that's good. Operator: Thank you, your next question comes from Madison Reidy from Radio New Zealand. Please go ahead. Madison Reidy: (Radio New Zealand, Media) Hi guys, how are we going today? Fraser Whineray: Good thanks, good. Madison Reidy: (Radio New Zealand, Media) I'll ask my questions one at a time, just so that it flows a little bit better for broadcast, we have to think about these things. First off, why wind? Why invest in wind and not expand your foray into solar? Fraser Whineray: Well, New Zealand is blessed with tremendous wind resources in terms of both wind speed and availability, and that means combined with ever increasing technology of wind turbines, that they are the most economic by some distance actually to build. Certainly, far more economic than solar. We do do solar as well, we do battery storage in homes, grid storage down there in Penrose connected to the national grid, but wind is the cheapest large-scale form of generation for renewable power that can be built in New Zealand right now, and geothermal's also in that mix. Madison Reidy: (Radio New Zealand, Media) Why are you just building the first 33? Why not go ahead with the full 60? Fraser Whineray: It's a matter of pacing ourselves in terms of what's the most economic way to develop the site. There's quite a lot of money involved at $250 million for stage 1, and then we'll consider subsequent stages, which we're futureproofing for in this investment, as we see demand and supply develop in New Zealand electricity. We're excited by the outlook. Most outlooks are by 2050 see the electricity market being 50% bigger than it is today, and we certainly think wind and the development sites we've got are going to play a significant role in that medium-term to long-term development. Madison Reidy: (Radio New Zealand, Media) What's your timeline for the remaining 27 turbines? Fraser Whineray: There's no timeline set for the balance of the project at this point, we'll get this one out of the way and then make decisions as to when we think it's optimal to expand the Turitea site and then beyond that go and expand across to the Puketoi Range. But in total, that's an opportunity of up to 500 megawatts, we're just kicking off with the first 119 megawatts in this announcement today. Madison Reidy: (Radio New Zealand, Media) You've said that your consent for the Puketoi site expires in 2023. Are you already having discussions with suppliers about taking up that opportunity before that expires? Fraser Whineray: That's far enough away that we don't need to be having those discussions at this point, and it's also we'd look - even though that is consented, that was consented in 2013 for some very large turbines, we will look to see what we do with that consent over time. Whether it's extended or modified or indeed built out, but those are all the decisions that we'll have to make over the coming couple of years. Madison Reidy: (Radio New Zealand, Media) Just a couple more questions. In terms of cost, you've flagged that the full 60 Turitea Project and the 53 at Puketoi will cost about $750 million all up. Is that a fluid figure? Fraser Whineray: Yes, the total figure to build out Turitea and Puketoi probably is close to $1 billion. We're just pushing play on the first $256 million today. The figures will change over time because technology will change, and we're looking to capitalise on the improvements globally in wind technology and Vestas as our partner, which is the leading supplier of wind turbines globally, continues to invest heavily in improvements to its turbines, which makes wind development even cheaper.

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Madison Reidy: (Radio New Zealand, Media) If that figure is subject to change, have you put a cap or a limit on the amount that you'd be willing to spend to complete the project in full? Fraser Whineray: No, it's all to do with - we don't have a cap or a limit, each of those stages will just be considered on its own merits by Mercury management and the Board of Directors as those decisions come up. We're confident we have the capital to do that development in a staged manner and over the years to come, and as I said we'll just consider each of these developments on their own merits. Madison Reidy: (Radio New Zealand, Media) Just in regards to Tilt, you've mentioned that Tilt Renewables is considering its own options in the New Zealand energy market. Because you own a near 20% stake in them, they could possibly call on Mercury for cash if they do go ahead with any plans. Do you have any concerns that going ahead with this project could strap you for cash down the line? Fraser Whineray: No, we're very comfortable with our balance sheet position, and indeed Tilt, whose main focus is developing renewable projects, particularly wind in Australia, just recently raised $300 million from its shareholders, of which we contributed our 20%, to build a huge 300-megawatt wind farm in Victoria. So now, we're more than comfortable with our debt capacity for being able to fund these developments, and potentially capital calls through Tilt. Madison Reidy: (Radio New Zealand, Media) Have they mentioned to you at all that there could be further calls possibly soon, this financial year, for more funding? Fraser Whineray: No, we're just treated the same as every other shareholder, so they have mentioned they were interested in building Waverley, and then if they do want to go ahead with that, then they'll work out how they want to fund that through a combination of bank debt and equity, and they'll let us know. But we're comfortable we have plenty of free cashflow and balance sheet capacity for that. Madison Reidy: (Radio New Zealand, Media) Great thanks, Fraser, appreciate it. Fraser Whineray: Thanks, Madison. Operator: Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Jason Lindsay from Accident Compensation Corporation. Please go ahead. Jason Lindsay: (Accident Compensation Corporation, Analyst) Gidday, Fraser. Fraser Whineray: Kia Ora, Jason. Jason Lindsay: (Accident Compensation Corporation, Analyst) How are you? Just a couple of questions. If you didn't talk to Tilt about Turitea, why do you have the investment in Tilt? Secondly, presumably ideally, you'd decide on stage 2 of that project before stage 1 completes, so Vestas can just roll into it, assuming demand stays up et cetera? Fraser Whineray: Yes, just working backwards. That is always a possibility, Jason. We've had plenty to bite off with just getting this one across the line after 14 years, and so we'll keep on working through what the best optimisation is for stage 2 and how to economically do that and the timing of that. That also depends on market conditions as well. With respect to Tilt, we've outlined previously our rationale for that investment, and also the fact that it has been a very active investment since we took up the stake back in March last year, with at least three or four decent stages to it so far. With regards to New Zealand wind development and the fact that they have wind and Tilt has wind and we own 20% of that and we've got our own wind now or soon to be operating a wind farm and development options, that is always grounds for further discussion.

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But those are all opportunities to consider ahead as we actively manage our investment in Tilt. The predominant rationale for the investment in Tilt is the Australian exposure to a need for serious decarbonisation over there. Tilt, having the best pipeline in Australia and also a great management team and support of majority shareholder which can provide a competitive advantage in terms of developing wind over there. Jason Lindsay: (Accident Compensation Corporation, Analyst) Okay thanks. So if you spend that billion that you've talked about, in New Zealand and they go full steam ahead in Australia and you need to put cash into that, presumably one option is you could sell your Tilt stake? Fraser Whineray: Yes, all of those options over time are all possibilities. Just remember, putting say a billion to work in wind here in New Zealand is a huge effort, and takes a long time. The billion dollars plus slightly over a billion we put into geothermal, took between 2005 and 2013, so you really are talking quite long timeframes to put these things in place. You're familiar with the free cashflow of Mercury, so you understand how much capacity we've got for this. Jason Lindsay: (Accident Compensation Corporation, Analyst) Cool, thanks. Fraser Whineray: Thanks, Jason. Operator: Thank you, your next question comes from Janine Rankin from Manawatu Standard. Please go ahead. Fraser Whineray: Hi, Janine. Janine Rankin: (Manawatu Standard, Media) Sorry, me again. I thought you were going to get to the answer to this question but didn't. With the staging of the development, I guess with the consent running out in 2021, it was a matter of now or never really. But I'm just wondering whether the stage 1 development is going to cover off that condition on the resource consent, does that count as having made substantial construction progress by the middle of 2021? That was all. Fraser Whineray: Janine, the wind farm will be commissioning from late 2020, and so that will satisfy the conditions that are required for Turitea consent to be on foot, which was granted in 2011. I'd kind of phrase your first bit slightly differently, I wouldn’t see it as a now or never decision, it was a now or modify the opportunity if we needed to extend, but we were comfortable with the conditions as they sat to push play on this project. This isn't something we worked out yesterday, we actually started going to tender on this following a decision with the Board in 2017. So, you take quite a long run up to get to an announcement like today. With all of those considerations around consents, drop dead dates and potentially extending consents or modifying consents is part of that. So, yes, the condition will be satisfied with the development that we're doing at Turitea. Janine Rankin: (Manawatu Standard, Media) That's great, thank you very much. Fraser Whineray: Thanks, Janine. Operator: Thank you, there are no further questions at this time. I will now hand back to Mr Whineray for closing remarks. Fraser Whineray: Well, thank you all very much for the interest you've shown in our exciting announcement today with respect to a direct investment in wind by Mercury as part of a low carbon future for the country. We're delighted with this investment decision and we look forward to updating you all as we progress the execution of this through the coming 18, 21 months to commissioning. Thanks very much. Kia ora tatou. End of Transcript

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