Mercury FY2020 Results Transcript Annual Results 2020: Analyst & media briefing transcript 18 August 2020, 11am Transcribed by West Pages: 14 Start of Transcript Operator: Ladies and gentlemen, thank you for standing by and welcome to the Mercury Annual Results Briefing. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and I will now hand the conference over to your speaker today, Mr Vince Hawksworth, Chief Executive. Thank you, please go ahead. Vince Hawksworth: Thank you operator and welcome everybody. It's a privilege to undertake my first Mercury results presentation since joining the Company in March. I am joined on the call by William Meek, Chief Financial Officer and obviously William will be well known to all of you. If we turn to slide 3, I'd like to briefly touch on myself in this new role. As it says, I started on 30 March in COVID level four lockdown and that was a pretty unique experience, made better by the fact that Mercury has a strong team and a capable team. My background, obviously well known in the New Zealand energy sector, previously with Trustpower and Genesis and at Hydro Tasmania, so a long background in renewables and a long background in wind. I guess the first thing I'd want to say is that Mercury has transitioned really well in response to the COVID-19 lockdown, both the one we had in March but also in the most recent one, ensuring that we are operating our sites safely and delivering reliable and secure generation for New Zealand through our assets, through our renewable assets, both geothermal and hydro, and looking after our customers. We have got a passionate group of people in the Company. They are really clear about what it takes to achieve. It's pretty clear though that we are living in a really changed world and I think those that are going to be successful in the future are those who can adapt and reform their business processes around the challenges that we see and we are very positive about what we can do as an essential provider for our customers, for our stakeholders, looking after our staff along the way and therefore delivering for our investors. If we turn to slide 4, we'll talk a little bit about the highlights which I would characterise as a really strong result in what has been challenging times. A good EBITDAF performance at $494 million, which whilst is down compared with FY19, it reflects a really challenging hydrology in the second half of the particularly and also the sale of Metrix last year. It reflects really the underlying strength of our portfolio, North Island based geothermal and hydro and a really effective customer business. As I've touched on, the lockdown response was positive. Obviously, we had challenges with respect to our Turitea Wind Farm which we had to stop work at and we also stopped some drilling work for our geothermals. Those businesses are back up and running and we look forward to successfully completing Turitea in due course.
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One of the things that became really self-evident in the lockdown was the ability to respond to customers' needs. We have very successfully I think managed some of those difficult conversations with customers and been able to do that from home and it really leads the way for our continued opportunity to digitise and grow on the back of a strong platform. Our ordinary dividend declaration I think reflects the belief we have in our Company and represents the twelfth consecutive year of ordinary dividend growth. We were also able to complete major refurbishments at Whakamaru and Aratiatia with some staff working through the lockdown level four to ensure that that plant was back on to deliver through the winter period. We have really set ourselves up well with this refurbishment program for the future with building a strong asset base and as I said, the Turitea Wind Farm has continued to progress. That gives some highlights. I am going to pass to William who is going to talk through some of the details of the financial performance and portfolio response. So, I'll hand over to you William. William Meek: Thank you. Thank you, Vince. We are now on slide 5. Certainly, welcome again to those on the call today. Very pleased to be presenting the results for FY20 for Mercury and again, a very warm welcome to Vince, our new CEO. A well-trodden path for him presenting results, but it's certainly great to see him pitching for Mercury's performance during FY20. Just some highlights here on the financial performance chart. You can see energy margin down slightly at $652 million for the year. Again, an admirable performance given 376 gigawatt hours lower generation. The price is, the wholesale price, is well north of $100 for the year so really reflecting a strong performance across the generation and customer business. Certainly, a big focus this year, given the drop envisioned around hydro generation, lake management, our customer mix and pricing, some really good GWAP results and some strong performance in hedging and trading across the business. Operating expenditure down $9 million to $190 million. Again, whilst we adjust for Metrix and IFRS, we are broadly in line with where we have been for a number of years. EBITDAF performance at $494 million, quite a bit above our guidance we issued in June, which was signalled at $480 million. We did have a late adjustment to Tilt having worked through that with our auditors. That is signalled quite clearly in terms of the bargain purchase in our accounts, so an $18 million bargain purchase there. I think we were forecast to have a $5 million or $6 million uplift in that guidance, so that largely explains the delta between guidance and the final printed $494 million EBITDAF. NPAT again down significantly to $207 million, largely on the back of the $177 million gain on sale from Metrix last year. Underlying earnings, again comparable to the year before, up $3 million to $164 million, really reflecting lower interest costs and certainly tax expense also. Our free cashflow, a very simple bridge between the $270 million odd and $242 million in FY20. We did see a slightly lower core operating cashflow, so that's payments to suppliers and receipts from customers down about $17 million. We did see higher CapEx of $25 million, you can see in the next bar and certainly a $10 million reduction in cash interest costs largely explaining that bridge from $272 million to $240 million. It was a high capital expenditure year in terms of stay-in-business at $114 million. Again, that was in line with guidance to the market reflecting completions of major refurbishment at Whakamaru and Aratiatia and also a three well drilling program at Kawerau and Rotokawa. Growth investment stepped up. Turitea, we saw $165 million, I think $164 million actually reported to Turitea during the financial year taking life to date spend up to $184 million at Turitea, well up on the $81 million in the FY19 year which was driven again by the $55 million equity raised and the remainder at the start of the Turitea project.
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As Vince has said, ordinary dividend up $4 million to $215 million. So a good performance and certainly as we look forward to 2021, as the release says, we certainly are focused on building resilience, productivity and efficiency and referring to that will be an ongoing focus as we move through this financial year and beyond and deal with the challenges of Tiwai exit and COVID-19. Now, moving to slide 6. A quick earnings bridge from 2019 to FY20. Again, we will step through this fairly quick. The sale of Metrix and things as normalised in last year's earnings or EBITDAF reduces that to $486 million. Significant generation volume decreases, so we've signalled that, 376 gigawatts down at a GWAP of $110 a megawatt hour. The prior year saw the GWAP of $139, so quite a - so lower wholesale prices but still elevated a lot to prices we observed pre-October 2018 with those gas field outages. So quite big impacts in terms of loss of generation volumes due to drought and obviously lower revenues due to price. Obviously, you get a compensation when you go into the customer side of the business. You're seeing the opposite. You're seeing a saving in terms of purchase costs of at least $140 million and the lower volume, so 160 gigawatt hour lower volumes at FPVV, again reducing those purchase costs. Those have been essentially offset by lower sales of a similar amount and then price, certainly C&I yields up and mass market saw price lift returns by $24 million. Moving to our derivative book, which did grow about 250 gigawatt hours between FY19 and FY20 to 3,400 gigawatts. Again, a short derivative book with lower prices seeing some strong positive movements up in both enduser CFD markets and other derivatives. So, bridging through it takes us through to the end block number of $494 million. I will hand back to Vince for slide 7. Vince Hawksworth: Yes, thanks William. On slide 7 I think the really important thing as an incoming Chief Executive to Mercury is thinking about the overall direction, particularly in a world where we obviously are having these COVID-19 impacts and the way that they are playing out in our sector. I think the direction is robust. At a high level there is focus on these five pillars of commercial outcomes, customer outcomes, the partnerships, the people and kaitiakitanga, the way that we think about things in a long term is totally appropriate. You will certainly over the coming year see us talking more and more about the need to really ensure that we are match fit for the period that is coming. I think if we then turn to slide 8 which has some of the key performance indicators around these pillars, we are feeling positive about the position of the Mercury brand and our net promoter scores would indicate that those customers that are experiencing Mercury are having a positive experience. However, we are under no illusions that as we transition through the period of Tiwai exit and COVID-19, it will be about delivery and particularly delivery to customers across the spectrum. Having the brand strength as a good starting platform, we will be very much focused on resilience and efficiency. If we look at the partnerships bar, Mercury has had a long history of working well with others, whether that's our suppliers or iwi or other relationships in the community and we are very proud of how that's worked. We will have to dial up those relationships as we look to continue to manage the fallout from lockdown and this will be a key focus. From a kaitiakitanga perspective, William mentioned the LWAP and GWAP outcomes and I think it's really important to understand that the sorts of refurbishment that the Company has been doing on its hydro assets, like Whakamaru, like Aratiatia, is increasing that ability to manage peak pricing to be able to move water down the Waikato River system. This is critically important and again, as the industry transitions, we need to think about the Waikato River chain as New Zealand's best peaking station. The great thing about that is as we move through that, that we can continue to reduce our emissions intensity.
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No business can operate without great people and Mercury is fortunate to have a lot of very passionate staff who actually care about what we achieve. Whilst our health and safety incidents, unfortunately we had a lost time injury last year that we were very disappointed about, our focus is on safety first before any of the other things that we do. If we do that and we maintain strong employee engagement then I think we can continue to look at productivity as a lever that we can pull within the business and certainly that is a big focus at the moment, is how do we increase resilience and productivity in the face of the headwinds of the environment that we are operating in. Then that turns us to the commercial bar which we have some levers in there that we are able to push in a sense that we have already signalled where we see FY21 coming out and we have the benefit of completing Turitea, which brings more gigawatt hours that we will be able to manage in our portfolio book by judicious use of the Lake TaupĹ? battery. So, I think we feel positive and excited about the future. However, if we turn to slide 9, we are not complacent. COVID-19 was a difficult period for New Zealand, it is a difficult period for New Zealand industry and it's been a difficult period for many, many of our customers. We are pleased about the way we transitioned and I have spoken about that from an operational point of view. We did see that demand during that first lockdown period reduced, but it particularly reduced around commercial demand. In the medium term we know that in parts of New Zealand and the pressure that other large industries are under is going to create a period of great uncertainty and we need to adapt and learn so that we can be successful in the future. We have worked quite closely with customers. Mercury has not just the customers that deal with us through the normal processes of being a retailer, but we also have the GLOBUG product. What we found through lockdown is that by increasing communication with customers and working closely with them, we have been able to manage their exposure to debt reasonably well. But again, we are very, very aware that over the next year to two years New Zealand customers will come under pressure. As I mentioned earlier, we have had to put Turitea on hold through the initial lockdown. We have successfully restarted. Now whilst we are facing some delays to that project I can say that the work that has been done is looking good. It will not be too long before we start to erect turbines on the foundations that have been laid. So we're feeling excited about what will be New Zealand's largest wind farm and the additional gigawatt hours that will add to our portfolio. So if we move slide 9 through to slide 10 I'll hand over to William who can talk a little bit more about the low inflows we have experienced. William Meek: Thank you Vince. So just on the COVID-19 lockdown response, this is slide 9. We've certainly had a smooth transition to working from home. Certainly IT investments over the previous couple of years put us in very good stead. Certainly the move to 33 Broadway and flexible working saw us very smoothly transition to full service from home with very few exceptions. We had a couple of our traders who were operating out of the office, not because of necessity, it's just much easier when you’ve got a 20-screen setup to run a lot of power stations. But - and key maintenance happening on site. Certainly our internal surveys said that the vast majority of our people reported greater productivity while working from home. So that was certainly encouraging. Call queues remained normal. As Vince said, certainly the focus on customers was very high. Demand, as you would be aware, demand certainly was down during the Alert Level 4 lockdown but has recovered within the levels to early in the year. So certainly demand peaks have been high. We're seeing very high wholesale prices in the market coinciding with colder conditions in recent days. Certainly if we look forward and we pick the papers up today and again read about New Zealand Steel and the Refinery thinking about their futures obviously affected. So lack of any buyer and the global downturn.
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Debt, a big focus around helping our customers manage their bills. So certainly at year end we were not experiencing material changes. Again given the government support for wage subsidies and additional benefits, Winter Energy Payments, we're certainly seeing most, the vast majority of our customers are managing their balances well. Certainly a very proactive approach from our retail business in engaging with customers to help them work through those issues. On hydrology this is slide 10. I'll just quickly talk to this chart because it's quite complicated. The grey shaded areas show the minimum or maximum level of Lake Taupō over the last 20 years or so. You can see a big white area between November and February. You do not want to have the lake low going into summer because the dry period for us traditionally is late-summer/early-autumn. You can see in all cases the sequences fall down. So you really do want to have the lake up there at the top as you go into that sort of Christmas/New Year period, which is really important. So as we said, and I think we've experienced about a 12% of inflow sequence for FY20. It's near a record low from September, and that has continued into FY21 for July, dry July. In contrast the South Island had a 91st percentile inflow event last financial year, so FY20. So quite a contrast between the North Island and the South Island in terms of rainfall. So I've already said, certainly lake management and how that impacts the portfolio is key. So that is how we manage that lake is a key factor in managing both wholesale market opportunities and exposures. So being able to get the lake near the top of the operating range by the end of December certainly put us in good stead in terms of generation and supporting the portfolio as we rolled through a particularly dry six months for the second half of FY20. So it certainly, the team did a fantastic job in terms of managing those risks at a time where prices were generally elevated. But certainly they fell away during the height of the lockdown in April, with prices dropping below $48. So again we see that as a key strength in terms of Mercury managing the lake. It's not a big lake, it's only 600-odd gigawatt hours between the top and the bottom. So it's quite different to some of our - some of the lakes in the South Island. But that in combination with your retail portfolio settings and hedging through the year, again manages those price exposures and opportunities in the market very well. So turning to slide 11, looking at retail tactics. This is a familiar chart here on the right, showing the switching levels, both gains and losses by month. You can see the lines at the top and the bottom reflect the level 12 months earlier. So you can easily see the comparison. So something that’s quite stark is, in these charts is, you can that the level of acquisition activity is absolutely reduced for Mercury. Particularly since October '18. So with the elevated wholesale prices the Company has made quite clear decisions around its willingness to acquire customers through discounting or lower pricing. So that really feeds to the yellow line on the second chart showing how our proportion of acquisition customers has changed from around half in the middle of '18 coming online were effectively on acquisition rates. Now you're seeing essentially all customers are coming on either on a term contract or on headline rates with some form of incentive. So that’s really designed to avoid that very horrible moment of truth in the future when you're looking to increase prices. Obviously customers generally react badly to large price increase and either leave or essentially demand further and further rate reduction. So that has been quite a target. You can see Farm Source there in July - and June and July, August a big grey spike. So that’s the 8000 customers. Again a very deliberate decision to let that contract go. So again reducing customer numbers, but also making a decision against wholesale prices and C&I yields. A decision to trade from mass market value for C&I volumes.
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So it's a quite strong yield growth there. You're seeing mass markets up 3%, C&I yields up over $7, almost 9% versus the prior year. So again quite a focus in terms of just the returns across that customer business. Certainly as we look forward with Turitea coming online later this year we will need to work through what channels that volume will be sold into. Turning now to Turitea on slide 12, we will work through this quite quickly. So just explaining the two types of contracts that exist on the site. We do have a full EPC contract with Vestas, so they are the head contractor. So that is a fixed price contract. We have seen a delay there signalling completion of the northern 33 turbines late this financial year. We certainly have seen delays triggered by the Level 4 lockdown, shutting the site down for over 30 days. But also we have seen some challenges around design and construction on the site. The offshore procurement - so this is the blades, the towers and nacelles - they are all largely unaffected by COVID-19. So almost all the equipment for the northern zone is, are in the country now. So for those visiting Palmerston North if you drive down Rangitikei Line you will see a whole lot of wind blades there in the town currently stacked up ready to be taken up to the top of the hill. The southern zone 27 turbines, we are expecting to see completion late in calendar year '21. Of course those, heaven forbid we go back into an Alert Level 4 and the site being shut down again. It's not an essential service designation at the moment. So therefore certainly further COVID-19 restrictions could impact timing on the site. There's a picture there of the transmission poles, so certainly that’s a design and build contract with Electrix. It's well advanced, but we have seen again some delays there. That'll be complete late-calendar year 2020. But that’s not on a critical path at this point. Transpower has completed its connections works to the Linton substation, so that project has gone well. Vince, back to you. Vince Hawksworth: Thanks William. So if we turn to slide 13, I suppose the - as many of you are aware, I have some history with the Tilt investments. What it does provide for Mercury is exposure to another marketplace. A marketplace where currently only 24% of generation is renewable and has in the long-term to make this transition to more renewables. So from that point of view it's a very positive investment. It has provided that exposure to decarbonisation in Australia. We have benefited from the capital return of $55 million in July. The investment has been a good one for Mercury with it now being worth $274 million. Tilt's currently completing the Dundonnell wind farm, and that is gradually coming online now. But probably most importantly it has a strong and positive pipeline of opportunities which are available to be monetised as conditions in Australia allow. So again it does give us another string to our bow as Mercury. If we turn to, through slide 14 to slide 15, we start to think about well, what does the future look like? The graph there clearly shows the impacts of the announcement of New Zealand Aluminium Smelter's planned exit next August, August '21. It shows the futures, how the futures market dropped. Clearly it also shows the separation between the Otahuhu node and the Benmore node as a consequence of that. So that really reflects the fact that water in August next year will be trapped at the bottom of the South Island. That increases basis risk and likely increases the competitive environment in the South Island by comparison to the North Island. With demand continuing to be limited by the economic downturn and the continued risk of further deindustrialisation, so uncertainty around New Zealand Steel and Refining NZ, we can expect that supply/demand balance to be disrupted.
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From a Mercury point of view, we can think about this as on the positive side in the way that the portfolio's managed, our exposure to the North Island, plus our approach to contracting our likely output, puts us in a good position through FY21. However, we also have to think about the types of responses that might occur. So, if we turn to slide 16 and there we can see that Tiwai representing 13% of New Zealand's national demand. In order to get that water out of the bottom of the South Island, that five terawatt hours down there. The first thing that needs to happen is to de-bottleneck, if you like, the bottom of the South Island. So, in some ways we can think about the period from now in three phases. The phase from now to when the smelter actually closes, let's assume 31 August next year. The phase then between that and when the Clutha and Upper Waitaki Line Project is completed and then the phase beyond that. So, over the next 12 months, of course, supply and demand will largely be driven quite normally. We would expect to see a continued volatility driven by hydrology and we would also expect to see decisions being made by thermal generators as to how they're going to respond to the change of supply in the market. When the Clutha Upper Waitaki Line Project releases water from that bottom part of the South Island, of course, then the bottle neck is shifted northwards. Now, whilst the HVDC can shift the volume of water, the timing of that water being shifted will be the major challenge. So, we expect there to be continued volatility in the North Island, with periods potentially overnight with low demand and prices dropping and peak periods when there is both dry and calm, where prices will get quite peaky. So, management of volatility becomes a clear portfolio challenge. We would believe that Mercury's asset base is wellpositioned for that. There's been a lot of discussion about what are the right things for the New Zealand sector faced with these changes. That includes the idea of a large storage at the bottom of the South Island. But I think what really needs to happen, as governments, regulators and participants start to reflect, we need to look at both supply-side and demand-side issues. So, supply side issues will be about managing volatility, whether a South Island storage, or North Island pumped storage is better, how batteries become part of that choice and how thermal retirements feed into that picture. On the demand side, of course, it would be a lot better to be using the energy closest to where it's being generated. So, the government response and the general response to the fact there will be surplus energy at the bottom of the South Island is important. There are various things that have been mooted as a way of using some of that energy. But also, to think about the transport sector and the process heat sector, particularly in the South Island, where the opportunity is to displace coal. That's I think also a really important debate to be had over the coming months. So, we're in an interesting position. To go into that a little bit more deeply, I'm going to pass back to William on slide 17. William Meek: Thanks, Vince. So, I won't labour this, because this discussion around the Tiwai exit and closure is fairly well canvased. However, certainly the consideration issues that presents are very complex. So, while the heading here says the spot price outcomes are dependent on transmission build and thermal response, certainly those are some key ones. There are certainly a number of other variables that certainly could have a profound impact on pricing, both in the spot market and then following through to wholesale and end-user markets. I think in previous presentations, certainly we've discussed that an energy-only market is quite challenged when you approach very high levels of renewability. There's no shadow pricing provided by thermal plant in that case. Certainly, we're expecting to see that with the spill in the lower South Island before that Clutha line is upgraded and so you'll have 100% renewable down there. Hydro generation is fighting for dispatch. So, expect to see very, very low prices under that scenario.
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Certainly, with transmission constraints affecting particularly the South, but also feeding through into the North Island, the hydrology becomes much more important. So, years - particularly with South Island years to come are much more challenged in terms of actually moving that water through the wires and into the North. Certainly, there's some questions about what the basis might do between Islands, not just because of North Island reserve pricing. Certainly, we're hearing talk of large battery installations proposed by a number of industry participants. They're certainly good for reserves, but they're not so good for capacity or energy. So, certainly, while basis will remain quite a big issue, it's still unclear how effective South Island generation will be to hedge customer sales in the North Island. It's still not clear how the thermal operators will either rationalise or operate their plants while those transmission upgrades are being undertaken. So, certainly for those, those issues will be certainly worked through FY21. What we can see though is certainly these HVDC curves here do show you that it's hard to get a whole lot more megawatts through to the North Island during peak periods. So, they traditionally coincide with the highest prices. So, that - you've got a lot of head room in the DC but on off-peak. So, that's certainly interesting and about thinking through what that might mean for spot price outcomes between the North and the South Islands. Certainly, as you saw in the previous slide, the future of prices through FY22/23 are signalling sort of mid $70s, low in the $70s, with the South Island would be more below $50, because there is no doubt that the impacts are felt more acutely in the South, than the North. Just touching on demand on slide 18, demand closed just over 40 terawatt hours for the country in FY20, down about 1%. Again, we're seeing a pretty average response across most of those sectors, with again, industrial leading the charge. I suspect slightly more to come. So, we did see Potline 4 out, so that by itself is a 45-megawatt load decrease on the prior period. Certainly, drought's having an impact. We did see an increase in load due to the low rainfall during the year, again. So, yes, demand fairly challenged over that period. Lockdown obviously affecting it, but also just a general malaise around outlook, as in COVID's impacts globally and affecting export-led markets. I'll hand back to Vince. Vince Hawksworth: Yes, thanks, William. So, we're on slide 19, regulatory developments. I won't spend too much time on these. Obviously, Emissions Trading Scheme pricing is a reasonably positive thing, from a Mercury point of view. Our carbon credit balance is positive, so we are well-positioned in that space. I won't dwell on Transmission Pricing. I think we've spent 10 years talking about that. But simply to note that the decision made by the Authority is being challenged by others and we will continue to watch how that develops over the next 12 months or so. Importantly, the Electricity Pricing Review actions are being worked through. I just wanted to note here that a particular focus of the industry, but of Mercury as well, is on Medically Dependant and Vulnerable Customer Guidelines. I think to maintain high levels of credibility for the industry and high levels of credibility for the brands in the industry and particularly for Mercury, navigating this with care and empathy is an important part of our social licence to operate. So, we will be focused on doing our very best on that. Just note there that there has been a Waitangi Tribunal resumption interim decision, which we continue to monitor and work through. There is a note in the accounts saying that that is unlikely to impair our ability to operate our hydro assets. Turning to slide 20 then, looking forward, we are providing guidance. I think the reason that we are in a position to be able to provide that is due to the very strong work really done around our portfolio management, which is all about always thinking forward in how we position the business, to give investors some certainty about our trajectory.
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So, FY21 guidance, based on 3900 gigawatt hours of hydro is $515 million EBITDAF, with dividend guided to $0.17 per share, up 7.6%. Stay-in-business CapEx guided at $80 million. We are very focused on deployment of cash in the business. Clearly, we are continuing to think about efficiency and resilience when it comes to operating costs and stay-in-business CapEx. So, there's a chart there that provides somewhat of a bridge, noting the fact, as William said a few moments ago, that July has continued the rather dry run that we've seen and of course that does impact the outcome. But I think you can take from this that the underlying structure of the business and its approach is being rewarded at being able to adapt to quite a wide range of scenarios So both wetter and drier periods, both higher and lower demand and also North/South Island price separation. We are well positioned to handle those things. So I think with that, operator, I'll throw it open for questions. Operator: Thank you. Ladies and gentlemen, we'll now begin the question and answer session. 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 pound or hash key. Once again, star one and wait for your name to be announced. Thank you very much. We have multiple questions in queue. Our first question is from Grant Swanepoel from Jarden. Please ask your question, Grant. Grant Swanepoel: (Jarden, Analyst) Good morning team. Great result for a tough year on the hydro front. Can you please talk to the $11 million portfolio effect that's coming through in your guidance, particularly your reference to C&I. I'm interested to see is there a lot of liquidity in the two, three year contracts at these higher levels? Then also in terms of mass market pricing, the final quarter had a nice little bump to it. Should I assume that price increase sticks the whole year around? Then on your wind farm, are there any penalties associated and are you confident in the $464 million CapEx envelope for the whole project? Thanks. Vince Hawksworth: Okay, thanks Grant. So I think there were three questions in that question. I will defer to William in a moment. But I think the first thing you can take from the first two parts of your question is that from a portfolio perspective, by contracting out through the period ahead of us, we're reasonably well set for FY21 and don’t have a lot of business to place for that period. Hence our comfort with guidance. With respect to mass market pricing, yes, there has been a reflection of Mercury moving from the approach which was to have acquisition pricing and then bumping it up to a much more of a pricing philosophy whereas its standard pricing and yes, we do expect that to hold reasonably through the ensuing period. Notwithstanding the fact that we do expect our competitor competition to pick up. I think we will see more of that in the South Island as compared with the North Island, at least in the immediate future. With respect to Turitea, I might get William to speak to that because he's probably got a bit more of the detail at his fingertips as he's carrying the burden at the moment. William Meek: Thanks Vince. So Grant, yes on Turitea, as the deck says, it's a fixed price. EPC contract, obviously that's subject to agreed variations. I mean it's pretty standard in those contracts that time delays ultimately result in some form of cost to the contractor. And so that's something we're working through, certainly in terms of our guidance to the market in terms of those project costs at $464 million. Those costs, where we are right here, right now, still okay. But time delays will obviously mean reduced revenue because the plant is not running and certainly contractually, some of those shoot back to the contractor. Grant Swanepoel: (Jarden, Analyst) Thanks.
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Operator: Once again it is star one. Our next telephone question is from Andrew Harvey-Green from Forsyth Barr. Please ask your question Andrew. Andrew Harvey-Green: (Forsyth Barr, Analyst) Morning Vince and William. A couple of questions from me. First of all, just following on on the Turitea, I guess one of the interesting things that Contact raised in their result call was wind discount factor they believe will increase from $5 to $10 a megawatt hour to around about $40 or $50 after the smelter closes. I guess due to some transmission constraints in that central North Island but also the increased wholesale price volatility. Just interested I guess on your thoughts on that. What your analysis is saying around what that wind discount factor might be going forward? Vince Hawksworth: Thanks Andrew. I'll pass onto William in a minute because he may have a deeper insight than I have. But I would think about our Turitea project as providing gigawatt hours but we still have choices in the portfolio to think about with respect to the way we operate the Lake Taupō and the Waikato River chain. And in that sense, we can manage our portfolio. And its connection, I think, I don’t expect that connection to be overly constrained. We've some expectation that there will be some backing out of thermal as well in the North Island. But William, what's your thoughts? William Meek: Yes, I suppose - I mean I don’t have an exact answer, Andrew. The challenge obviously arises with must-run generation. If you treat wind as must-run, you know, it's going to be off-peak generation which is going to cause a yearly problem. Obviously the South Island hydros will face that in abundance. So insofar as you've got any ability to hold water, then you'll do so, because you can generate at a later period. It was obviously a geothermal plant or wind plant if it reduces generation, you can't make that back at a later point. So that's the ultimate question, is how do wholesale prices respond? You've essentially got a glut of renewables hitting the market. So that's where I really see it. Certainly a 222 megawatt wind farm sitting inside a hydro portfolio which can run from 50 to 1000 megawatts is certainly - we've certainly got a lot of flexibility to manage that variation within our generation fleet. But obviously that doesn’t apply when you're already at minimum generation on the Waikato. Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, thanks for that. Second question - just a couple of questions actually just around the dividend guidance for next year. First of all, in terms of coming up with that particular number, to what extent are you including Turitea earnings in that? Is it just the $5 million EBITDAF that you're showing in the guidance bridge? And secondly, I assume you are confident that even a worst case scenario around the smelter and I guess a bit of a retail price war that you don’t foresee the need to cut that $0.17 a share going forward? [Over speaking] William Meek: That's a good question. Obviously the - I mean the future is uncertain but certainly based on our financial analysis and looking forward, that guidance represents our thirteenth consecutive year of ordinary dividend increases. Certainly I think we've made a strong foundation in FY20 for FY21. We do have some advantages against some of our peers. (1) Turitea represents 2% market share so that's certainly a positive as it comes into the portfolio. (2) Our dividend settings historically have been set lower, again, than market averages. So there's certainly headroom there.
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And certainly by the time we get out past FY25, we're fairly confident that with some fuel substitution but also decisions will be made across the generation fleet to bring the market back into a better supply/demand balance, which it clearly won't be for [unclear] through. That year that the smelter closes in FY22. Andrew Harvey-Green: (Forsyth Barr, Analyst) So in essence, I guess you will be looking to look through any trough earnings through FY23 or '22 to '24 I guess with your dividend going forward? William Meek: Yes, so again, I mean as you look forward, obviously the Company has got contracts in place. It's got a portfolio of retail customers. It's hard to see but that doesn’t just reprice instantly. You've got to - if you're winning or losing customers you do it one by one. And so therefore there is definitely a lag in the system. If wholesale prices are suppressed in terms of how that flows through. But certainly your C&I book does hold up for a time. And it's hard to escape the tide in terms of renewing those contracts. Andrew Harvey-Green: (Forsyth Barr, Analyst) And last I guess slightly detailed question from me just in terms of OpEx guidance for FY21. I think in the past you've held things pretty constant in nominal terms. We can assume that again, 190 for next year is a reasonable - what you're looking for? William Meek: Yes, it's a good starting position. But certainly this focus inside the firm around resilience and productivity and business improvement, which again, is not unique. Everyone is doing that in the face of COVID-19 response, but - and Tiwai exit particularly. That certainly will be - the teams will look for opportunities there around doing things better. Vince Hawksworth: I mean just to add to that, Andrew, obviously we want to focus on making sure our revenue line is as robust as possible. But as William says, we're not immune to the opportunity that comes with all this disruption to do things better and to do things better to lock in better performance in the future. So we certainly are having a really good look in the mirror at the things we should stop, start, and continue to do. Andrew Harvey-Green: (Forsyth Barr, Analyst) Great. Thanks for that, guys. That's all from me. Operator: Our next telephone question is from Stephen Hudson from Macquarie Securities. Please ask your question. Stephen Hudson: (Macquarie Securities, Analyst) Good morning Vince and Will. Just three from me if I may. Just on the stay in business guidance of $80 million, I just wondered if you could discuss whether or not that involves any deferral of half-life work that you've got on the Waikato chain? Or whether or not we could see that $80 million as a new sustainable level Secondly, just the fair value adjustment for Tilt, could I check with you that - you said that $5 million to $6 million of the $18 million was included in the guidance. I just wanted to clarify that. Then thirdly, maybe one for Vince, just on Rio Tinto some of the other generators have obviously - I think Meridian have indicated that all four of the major generators pitched in with TPM, underwrite, and the most latest cuts of the contract. I just wondered if you can discuss or confirm whether or not you did actually participate in that underwrite and what your logic was in doing so? Vince Hawksworth: Thanks Stephen. I might touch on - so let's just deal with the first one first and then I'll pass to William on the second one. Then we can come back to the third one which is a little tricky I have to say. But starting with the first one, in terms of that stay in business CapEx, yes there is some deferral of the work on the Waikato River upgrade program, not driven by - not driven primarily by cash preservation issue, but more by our determination that if we - when we make those investments we want to make them with great certainty about the value that we’re creating.
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Part of the creating value is ensuring that we can get the right people through the border at the right time with the right equipment and do the job in a highly professional manner. I think it’s fair to say our confidence level about pushing forward with the next project too fast was lower given the COVID issues and given the issues of getting people through the border. So we have taken what I think is a pragmatic approach and said these projects are not die in the ditch type projects but they’re projects that you should execute with confidence by giving ourselves some breathing space that’s more likely to be the case. So some of that money will flow forward into future years as we continue to make sure the Waikato River chain is New Zealand’s best catchment and New Zealand’s best peaking station. With respect to the accounting question, the second one, I’ll pass to William. William Meek: Thanks Vince. So just to confirm, so our guidance was set at $480 million. That would assume we were looking at about a $5 million Tilt share of profits. The actual Tilt result was closer to $16 million. So you’ve got a delta of about $11 million. So if we take the $494 million and pull $11 million out to normalise that you’d be down at $483 million which I think seems to line up with where Wade and James are. So, yes just changes with the accounting there and that bargain purchase of $18 million and then there was a $17 reduction for their core profits, given $16 million for Tilt. Vince Hawksworth: So just going back to your last question Stephen on Rio Tinto. So just I think important to contextualise this. So when Rio announced the review, clearly there were different interests with different parties and Mercury was approached about participating in various arrangements, which we looked at subject to Commerce Act clearance. However, since the subsequent announcement that Rio had made that sets a date for their exit we have had no further involvement. I think logically, given the clock is ticking there’s probably two other players in the marketplace who are best positioned to come to a conclusion about whether there’s a better way than a 21 August close down. I guess you’ve had a chance to talk to one of them just recently and another one whose results will be out shortly. Clearly they’re the two participants I think best positioned to have that conversation with Rio. Stephen Hudson: (Macquarie Securities, Analyst) That’s very helpful, thanks guys. Vince Hawksworth: Thanks Steve. Operator: Once again, it is star one. We have a question from Nevill Gluyas from Jarden. Please ask your question Nevill. Nevill Gluyas: (Jarden, Analyst) Good morning team, hopefully you can hear me. Okay, just two questions from me. First question is just in relation to the post Tiwai world and maybe just a bit further elaboration on some of those concerns that others have expressed about wind GWAP. Do you have a view about the separation, price separation risk between the middle lower North Island and the upper North Island in respect of obviously that in relation to Turitea but there’s a whole lot of other assets down there affected by that as well. Do you see that as becoming an active constraint in the post Tiwai world? Vince Hawksworth: Do you want to go first William? William Meeks: Yes, you go Vince and I can follow up, yes.
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Vince Hawksworth: Okay, I mean look I think in the post Tiwai world, the reality is that all of the surplus generation at the bottom of the South Island has to make its way out over time and there will be - for that to occur there needs to be transmission upgrades. My biggest fear on this is we have to be careful that we don’t end up creating a series of major investments to shift generation around which doesn’t actually benefit the economy as a whole. So I hope we stay economically rational in those things. Once we get - when we get more generation coming across the HVDC in periods when there is surplus generation in the North Island, so I suppose it’s a very wet, very windy period, yes there will be periods of constraint. Equally, I think there will be periods of very high price as well when effectively demand can’t be - there will still be constraints coming out of the South Island I think. There will be periods when demand is volatile and high in the North Island. So I really from a Mercury perspective looking at our asset mix, go back to the portfolio issue for Wind in Mercury’s business and that is we can think about Turitea and Taupō as a bigger battery from our perspective. So we will operate the portfolio to maximise our ability to generate revenue. Nevill Gluyas: (Jarden, Analyst) Great, thank you. I guess I hear that as being in part, obviously a lot of volatility but in part your answer is that you have a great big lever with the Waikato asset. So to the extent there’s price separation you may not be incentivised for that price separation to continue in respect to the wind farm revenue. William Meeks: Look, I think the further comment I would make Nevill is that when you’re talking – the grid generally is - it’s generally operating in an unconstrained way at the moment. That’s quite important because that means power flows freely from power stations on the South Island all the way to Auckland with a fairly predictable basis. When you move to the scenario with the Tiwai exit and a number of transmission constraints, that assumption is no longer true. So the management on basis and how you hedge a generation book against ultimately a customer sales book, becomes much harder. You talk about constraints where you’ve got only mostly hydro competing, what price are we talking about? Are we talking about prices of zero, which is the worst case scenario, I mean there’s every incentive there for all generators to do something about that. It’s hard to make money generating if we’re getting paid nothing for it. It also makes it very difficult to hedge exposures in Auckland when you’re not getting paid for the power you’re making in South Island. So I think you’ve just got to be really thoughtful around how do people manage their positions and do you end up with actually limited supply for customers north of the constraint. You’re going to sit there and you go how am I going to manage the basis for us to these customers well, particularly in peak periods. So I think it’s unbelievably complicated and I think there’s a fair bit of water to go under the bridge before that’s reconciled. Nevill Gluyas: (Jarden, Analyst) Yes, very good. Thank you for that. Second question really is just in relation to the delays getting full power out of Dundonnell through Tilt and whether or not you’ve got any updates of the last recent days, more thoughts about the process of persuading AEMO to bring those into the Group? Vince Hawksworth: Well, I think what I would say to that Nevill is Tilt’s got its ASM tomorrow and Deion will no doubt deal to that in some detail at that presentation. What I would say is that the Tilt team is as good as anyone. In fact, I’d say it’s better than anyone in dealing with these sorts of connection issues. Whilst I am sure they’re very frustrated I’m also sure that it will get navigated and that Dundonnell project will be a fantastic project but I might defer to Deion’s expertise and I do know he’ll talk to that tomorrow.
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Nevill Gluyas: (Jarden, Analyst) That’s great. Thank you team. Operator: There are no more further questions from the telephone lines. I’d like to hand the call back to the speakers for closing remarks. Please continue. Vince Hawksworth: Okay, well firstly thanks everyone for getting on the call. I realise that we are all trying to learn and adapt to life in various forms of lockdown. So I do appreciate you getting on the call. I hope we’ve given you some insight to the robustness of Mercury to these various unprecedented events that are occurring. We look forward to continuing to work and communicate with you about our strategies to continue to be successful as Mercury and I hope by giving indication of where we see our guidance that provides some confidence that we are on top of the issues. Thank you very much. William, anything you want to add? William Meeks: No, that’s great. Thanks everyone for spending the time with us this morning. Vince Hawksworth: Cheers. Thanks very much operator. Operator: Thank you. Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect. Have a great day.
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