Mercury FY2021 Interim Results Transcript

Mercury FY2021 Interim Results Transcript FY2021 Interim Results: Analyst & media briefing transcript 23 February 2021, 11am Transcribed by Intrado Pages: 15

Start of Transcript: Operator: Ladies and gentlemen, thank you for standing by and welcome to the Mercury Limited Interim Results Briefing. At this time, all participants are in a listen-only mode. Following the presentation there will be a question and answer session today.

To ask a question you will need to press ‘star’ followed by ‘one’ on your telephone and, please be advised that today’s conference is being recorded. I will now hand the conference over to your first speaker today, Chief Executive Vince Hawksworth. Thank you and please go ahead.

Vince Hawksworth: Good morning, everybody, and welcome to this presentation. I am joined by William Meek, our Chief Financial Officer. I will move through to slide 3, which outlines the highlights of the first half of the FY21 year. We have had a positive first half that has largely been driven by a strong trading performance and by a lift in yields across all of our sectors, at the same time overcoming some head winds due to continued low hydrology, which we continue to face into the future.

Wholesale prices have remained elevated and obviously the New Zealand Aluminium Smelter decision has firmed those prices, alongside the gas constraints and the hydrology that we have seen. The positive thing about all of this, of course, is that we do have a clear pathway to the transition to a low carbon economy and this pricing sends strong signals for new investment. Our customer segment yields have improved. However, competition has remained fierce and we expect that to continue through the coming period.

We have been very focused on operational improvement programmes. Those programmes, which we’ve called our ‘Thrive’ initiative, are focused on process, performance and culture and we have signalled that we are looking for an improvement in EBITDAF of circa $30 million in the FY22 year, from that programme.

Our investments into Turitea continue to face some head winds and difficulties. But we do now see that the north section of the project will likely be completed in October ‘21. That is largely about overcoming the access arrangements for the blades, but we do see a pathway to completion. The southern section, we still remain challenged by the physical nature of the terrain and the civil engineering issues are providing some challenges.

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We are confirming our interim dividend of $0.068 cents per share which is a 6.3% increase on the same period last year, and full year guidance at $0.17 cents is also confirmed. This will be the 13th year of ordinary dividend growth.

If we turn to the next slide (4), we can see the breakdown of that financial performance. So, energy margin reflecting the yield story that I mentioned before, our operating expenditure reflecting less planned outages compared with the previous period and the focus on operational excellence, giving us the uplift in EBITDAF. At NPAT level, the gain on Hudson Ranch sale (our US geothermal investment), has provided us with an uplift.

Free cash flow has improved, and remains positive and prudent management, and post-COVID issues have meant that our stay-in-business capital expenditure is lower than the previous period. Our growth investment reflects Turitea capital investment.

I am now going to pass to William, who will take us through the next slide.

William Meek: Good morning again to those on the call. So, we’re now on slide five with the earnings bridge for half year 2020 starting at $258 million and effectively bridging to this year’s result at $294 million EBITDAF, so an increase of $36 million, a good bridge, where most of the steps go up rather than down.

So certainly the period saw slightly lower generation, lower hydro but higher geothermal performance, so about 108 gigawatt hours, a downward swing against the PCP. We saw higher prices in this period versus the prior half year, and so that benefits generation and obviously is to the detriment of the retail portfolio, which is shown in the chart.

We did see an easing back in volumes and a benefit there in terms of prices as yields across all segments lifted strongly. So, 7% in mass market to $138 a megawatt hour and in the C&I segment up almost 9% to $94.60 a megawatt hour. Vince has called out the trading performance: you can certainly see that strongly with a $14 million delta in derivatives there, and those are bridged more exhaustively in slide 20 of this deck.

OpEx was down $6 (million) and other [EBITDAF impacts category] up again on the back of recognition of our share of profits in Tilt Renewables and from the sale of our interests in the HR1 plant in California, leaving us with a half year EDITDAF of $294 million.

I will hand back to Vince for slide 6.

Vince Hawksworth: Thanks, William. So just looking at these key performance indicators, on the customer line, our brand remains strongly positioned and we continue to be pleased about the way that that performs in the marketplace, especially in the construct of the second line where the Climate Change Commission draft report is supportive of electrification, and the Government’s commitment to vehicle emission standards really is very strongly aligned with the Mercury brand and the Mercury brand story.

Turning to Kaitiakitanga, we continue to look at our emissions intensity and we will continue to try and drive that down as part of doing our job for a net carbon neutral future.

Turning to People, I guess it was disappointing for us to have an increase in TRIFR, Total Recorded Incident Frequency Rate. But that has got some explanation around it given the high levels of activity on the Turitea site.

We have worked closely with both Vestas and Downer on process controls around injury risk and hazards on that site and I am pleased to say that we are seeing a significant improvement in the way that site is being operated.

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From a commercial line perspective, as we’ve said, we announced the dividend of $0.068 per share as the interim dividend and are continuing to stay on track for our progressive dividend increases. Stay-in-business CapEx is lower, and that reflects both the effects of COVID, and our focus on maintaining our positive cash flows.

I will hand back to William for the next few slides.

William Meek: Thanks, Vince. So we’re on slide seven now. A very familiar scatter plot here graphing delta to national storage averages, so those New Zealand lake levels versus the Auckland spot price. Certainly again, the first half of this financial year again seeing elevated prices. So, again, a lot of dots in yellow scattered with those black and blue really coinciding with elevated prices since the Pohokura outage in 2018.

So certainly, issues with the gas market and tightness of supply definitely feeding through to spot prices throughout the country. TCC (Taranaki Combined Cycle) essentially has gas just for winter, hasn’t run for some months. So, during the summer months it has been offline. We are seeing high commitment now with the Huntly Rankines, a lot of that I suspect on coal. So, gas definitely feeding through to high prices.

Hydrology nationally has been challenging over the last four months. New Zealand is running a 6th percentile inflow. That is largely driven by the South Island, which traditionally would be in its wettest in-flow period over those summer months. So very acutely dry in the South Island. Then obviously carbon outlook on the back of the Climate Change Commission report released at the end of January, certainly outlook there for carbon prices to continue to rise as the government looks to its net zero carbon targets in 2050.

So the second chart here on slide 7, really showing the decline in thermal generation. It singles out the Huntly Rankine units, which certainly in recent years have been running at much lower levels than they were at the beginning of last decade.

Then you see a very acute step up there in the Otahuhu futures price with the calendar year 2021 now pricing at around an average of $180 a megawatt hour and then falling back slightly to $140 and then $120 by cal ‘24. So, a phenomenal step change in energy costs relative to the relatively modest prices for most of the last decade, sitting in the $80 a megawatt hour range.

Turning to slide 8, a slightly different representation of similar data. Again, a number of price curves here: the yellow line showing the spot price, and we can see that big step up in terms of the rolling price from late 2018, the blue line showing Otahuhu futures price, which has steadily risen from ‘18 and then gapped very, very strongly from February this year and against, essentially Mercury’s adjusted mass market energy yield. So certainly, against spot prices and against futures prices. Those yields on a cost adjusted basis [are] well underwater, relative to an aligned energy cost, if benchmarked to futures and current spot.

So certainly, that price, as Vince has already mentioned, the commitment for the smelter to remain in operation through to December ’24, certainly is shoring up demand. Demand generally pretty resilient in the face of COVID19 impacts, with only very slight reductions.

So again, New Zealand performing fairly well there in regard to demand, and certainly we are seeing and expect to see further generation development announcements to essentially look to bring supply on to (1) decarbonise New

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Zealand’s electricity sector but (2) to certainly introduce supply to bring those power prices back from these elevated levels.

Turning to our customer business in slide 9: again, a very familiar chart in terms of net gains and losses. We do continue to focus on customer value, looking to optimise that value across all our sales channels, so that’s into spot markets, the commercial industrial, and mass markets - so that’s residential and SME. The strategy has seen a lift in sales’ yields across all those segments which I’ve already referred to. Powerswitch comparisons are very interesting. When we look at those across networks throughout New Zealand, we certainly can see quite a disparity in pricing between Mercury’s offers and the cheapest offers from other major gentailers.

So those deltas are quite large, ranging between $20- $60 a megawatt hour. So, a very large gap, with a note calling out that based on segment reporting, retail operating cost running at about $25 a megawatt hour. So certainly again, on the chart on the prior page, you’re seeing some quite large negative gross retail margins against that.

When we look at our strategy, our losses have been largely flat once normalised with the decision to exit the Farm Source contract. But what you can see very distinctly there is that Mercury’s acquisitions have been steadily declining over that 2018 to essentially early ‘21 period.

In terms of fixed price sales, fixed price sales commitments across C&I and mass markets have actually lifted. So the Company is actually selling more fixed prices to end user customers with a reduction in mass market sales volumes of 117 gigs, with C&I increasing by 172 gigawatt hours.

Onto slide 10 which looks at lake management. So clearly management of Lake Taupo, which feeds the Waikato River catchment and hydro change, very, very important. So, we can see in the yellow line, a good performance in actually dry conditions to bring the lake up to near its - particularly normal - well, what would I call it? Operating consent upper bound at 357.25 metres above sea level.

So, we’re getting pretty high, almost 600 gigs. Then you’ve seen a sharp decline and essentially the drought particularly. But again, from January/February we’re just slightly below mean levels at this time.

Certainly, in a fairly strong position going into the autumn months, where we expect to Taupo Lake levels continue to decline. But again, inflows running for the year to date at around the lower quartile. So again, dry in the North Island which has been a thematic over the last couple of years. But more acutely, you’re seeing very dry conditions starting to emerge in the South Island.

I’ll hand back to Vince.

Vince Hawksworth: Yes, thanks William. So, looking at slide 11 here. I mean I think you’re all aware that the Climate Change Commission draft advice has come out and it can only be seen as positive for the sector with renewable energy being the key driver for decarbonisation.

I guess from Mercury’s perspective, we support the view that it’s the adoption of renewable energy rather than 100% renewable electricity. However, in reality, the direction is net positive for the sector anyway.

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I think we need to be careful about focusing purely on any individual target but more the market conditions and the environment for continued investment. So that strong support for transport electrification and for process heat decarbonisation is really important. I also note that there was a UTS with subsequent actions to correct. Mercury is unlikely to be materially impacted in that process.

So, turning to Turitea. So, as I say, not without challenges. However, looking at it from a positive perspective, the transmission and grid connection works are largely complete and are available for energisation as soon as we have an operating wind turbine on the northern section where we have 14 base towers and 10 nacelles installed. The photograph there shows the black hawk helicopter delivering the top of a transmission tower and a crane lifting a nacelle.

Of course, blade access has, and remains, a critical element. We have increasing confidence that that problem will be overcome, and on that basis, expect completion of the north section in October ‘21. Obviously, the shape of that and pace to that time will be dependent on blade delivery.

The southern section does provide a much more significant challenge with contractor delays and knock on impacts from the late completion of the northern section. Now, whilst the later schedule shows a significantly later commissioning and a large delay, we continue to work with our EPC contractor, Vestas, to try and find ways to bring that date forward.

As I noted on the earlier slide, Health & Safety has been a major focus on what has proven to be a pretty challenging site from a civil construction perspective. But we are pleased with the latest audit we’ve done and with the positive way that Vestas and their subcontractor, Downer, have sought to ensure that hazards are well managed.

Turning to the next slide: now like all businesses, I think COVID-19 caused us to take stock and think about how resilient and efficient we are as a business. And it’s been fantastic to be able to use an inhouse review team of the brightest and smartest within Mercury to look at opportunities for us to work smarter, faster, and better. But also, importantly, set a culture of improvement that will stand us in good stead for many years to come.

None of that happens without obviously setting some targets. So, we’ve come to a view that there is a $30 million EBITDAF benefit to be achieved. And importantly, in achieving that, that we will be able to focus on new ways of working, using data better across the business, more digitisation, looking at what customers value, improving our capability.

And we’ve proven that already to ourselves through an Xcelerate programme which was looking for opportunities that emerge from the business and taking those through to fruition in a more deliberate, purposeful, and faster way than we perhaps would have in the past. So that’s all about being fit for the future but also being resilient to change.

So, looking at slide 14. You know, our issue of the green bonds, we were really pleased about. Because it proved once again that our business reflects what investors care about: a sustainable better world.

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Our sale of Hudson Ranch was a great outcome after many, many years of hard work by a very small team to, I guess, get out of some quite complicated arrangements. We have retained a small interest in a technology looking to extract lithium from geothermal brine.

We obviously are always looking at M&A opportunities and clearly there are two well canvased strategic reviews going on at the moment. I will be making absolutely no comment on the Tilt [Renewables Ltd] process. But I do confirm that Mercury is participating in the Trustpower strategic review of its retail business.

We’re now turning ourselves to think about what happens after Turitea and the great asset that we have in the Puketoi wind farm. We firmly believe that that is not only Mercury’s next best generation development opportunity but amongst the best new generation opportunities in New Zealand. So, we’ll be looking to progress that and understand both the economics and the pathway to a decision on build.

Simplification is a bit of a theme that we’ve got going through our business at the moment. We note there two things that we have done to reduce complexity: getting out of Mercury Solar through the sale to ChargeSmart, and; the consolidation of the Bosco brand.

So to wrap up, we did review guidance again and we’ve revised that to $520 million. That really reflects the significantly dry conditions that we have seen through late January and into February. Also reflects the fact that wholesale prices in the ASX remain significantly elevated for the remainder of the year.

Of course, as we always say, the change in the weather may result in a change in the guidance. We do confirm though that [for] our year for FY2021, dividend guidance is maintained at $0.17 per share and that stay-in-business capital guidance has been revised down from $80 million to $70 million.

So with that, thanks for your attention. I think we can head back for questions, Operator.

Operator: Thank you. So, ladies and gentlemen, we will now begin that question and answer session. Once again, if you wish to ask a question, please press ‘star one’ on your telephone and then wait for your name to be announced. And if at any time, you need to cancel your request, just press the pound or the hash key. Your first question today comes from Grant from Jarden. So please ask your question, Grant.

Grant: (Jarden, Analyst) Good morning Mercury team. First question: on the EPC contract delay. I think at the start of the year we were looking for about a $5 million EBITDAF from Turitea in this fiscal year. Is that the sort of damages we’d be expecting to be incorporated in your guidance for FY21?

William Meek: No. There’s no LDs [Liquidated Damages] in the ‘21 guidance.

Grant: (Jarden, Analyst) Is that how the contract works in terms of what you’re expecting to earn? You’d recoup that from the provider?

William Meek: Yes, so the way liquidated damages would be treated for accounting purposes, they need to be they’re like an insurance contract payout. So, they need to be particularly certain. So essentially while you’re in a until you get through that process and essentially either strike an arrangement and clarify those that they’re going to be paid, then you won’t recognise them. So…

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Grant: (Jarden, Analyst) Thanks. The $30 million of continuous improvement benefits, it sounds very much like a cost out programme. Can you give some sort of split between revenue opportunities and cost out in that $30 million?

Vince Hawksworth: Look, Grant, it’s Vince here. I think at this stage, we’re probably not ready to give you that guidance. There [are] still quite a few projects that are in early stages but it is across revenue and cost and yes, part of it is improving doing business with ourselves.

Like all organisations, over time you can look at opportunities that simplify things and you could take a bit of a steer from the executive structure changes that I’ve made as an example of where that opportunity is. The move to consolidating generation, for instance, provides opportunities to reduce friction in the business but look, we’ll talk about that some more at the full year.

Grant: (Jarden, Analyst) Thank you and then as you’re four months left in this fiscal year, are we expected to see any of that benefit this year? Or is it all accruing into FY22?

Vince Hawksworth: Any benefits that we see this year are still built into our guidance as it stands today.

Grant: (Jarden, Analyst) Thank you. My final question, just on your commentary that you are looking at the Trustpower retail opportunity. Could we also consider you guys looking at maybe buying the New Zealand assets out of the Tilt process? Or is it too early to tell there, as well?

Vince Hawksworth: You obviously didn’t listen to the no comment bit, Grant.

Grant: (Jarden, Analyst) Okay, well thanks for answering my questions.

Operator: Okay, your next question comes from Andrew Harvey-Green from Forsyth Barr. So please ask your question, Andrew.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Good morning, team. A couple of follow up questions from what Grant was asking - first of all, just on the $30 million benefit for FY22: I just wanted to confirm that that is all incremental on top of any yield increases, and obviously, Turitea benefits that will come through?

Vince Hawksworth: Yes. Yes. Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, okay and secondly, are there any costs likely to actually deliver those benefits?

Vince Hawksworth: Well there’s obviously going to be investments in multiple places to improve processes and systems and things of that nature, but we’ve made it an EBITDAF target for a reason. That’s because that’s the level of uplift we want to see.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, so the uplift is net of any costs to deliver in essence?

Vince Hawksworth: It’s at the EBITDAF level. Yes.

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Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, okay. Second question: just in terms of the Turitea delays and just confirming that there are no financial implications for yourselves other than, I guess the delayed earnings which will get offset in due course by any LDs? William Meek: Yes, so it’s best to talk about Turitea in the two parts. The north, as Vince says, we expect that to complete in October. The south is definitely more challenge. You’re looking at an almost two-year delay, so we need to work through that with the contract of Vestas.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, so there - it is possible that it may end up having some higher CapEx associated with that, then?

William Meek: Too early to tell. It’s just time. It’s mostly driven by time.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, okay.

William Meek: But time obviously does have BI [Business Interruption] consequences.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, yes and the second Turitea question is: I understand that some of the blades were on the Napier ship that caught fire earlier. You didn’t mention any sort of implications from that?

Vince Hawksworth: There weren’t - it wasn’t blades. It was nacelles.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Nacelles, right, yes.

Vince Hawksworth: But you know, no, there - that won’t cause any delays. They will get re-manufactured and delivered before they’re needed.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay.

William Meek: They’re not critical path, Andrew.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, okay. Yes. Next question as just in terms of the drop in OpEx and the drop in the maintenance. Is that just more of a timing thing, or is that an ongoing step change? It was a reasonably chunky step change in the first half.

Vince Hawksworth: Largely a timing issue from a perspective of one half-year to the next and influenced by the fact that these things do occur, partly and partly influenced by obviously reframing what we do under the COVID world that we were living in.

However, it’s fair to say that as we’ve worked through all of those things, that’s some of the opportunity that we’ve also seen in the way we approach OpEx that will lead into that $30 million.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay. Thanks. Last question from me is just around Puketoi but more a broader question in terms of looking at - we’ve seen a number of new developments announced. I suspect there might be one or two more coming in the next couple of days.

What [are] your thoughts, I guess, around the balance and the market once all of those things go through and concerns around overbuild or potentially even underbuild and how then Puketoi fits into that?

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Vince Hawksworth: Well I suppose a starting position from my perspective is that in any market situation, the most valuable projects should get built first. Now, obviously there’s a competitive overlay to that so people will make decisions based on what they can influence.

The next thing when I think about Puketoi is: its location and wind resource is exceptional. So, it is a project that will get built.

Timing, obviously, we still need to work through the risks of - I suppose at the moment, the risks of overbuild are whilst they’re real, the environment we’re in at the moment is, it’s I think really important that the sector steps up and shows a pathway that will take us past this very challenging transition we have over the coming years with uncertainty around gas and with the fact that we do need to see coal burn reduced if we are going to meet our targets for decarbonisation.

So that’s - it’s something that has to be navigated. That we have to be aware of all the time. However, I think it’s far worse if the sector sits on its hands and doesn’t start to deliver real sustainable change.

Andrew Harvey-Green: (Forsyth Barr, Analyst) Great. Thanks for that, and that’s all for me.

William Meek: Thanks, Andrew.

Vince Hawksworth: Thanks, Andrew.

Operator: Your next question comes from Cameron Parker from Craigs Investment Partners. Please ask your question, Cameron.

Cameron Parker: (Craigs Investment Partners, Analyst) Hi guys. Hey, well done on a good first half and shame about Turitea but I’m sure that’ll come along. Hey, look, can you give me a feel for Turitea generation coming on in terms of gigawatt hours over the financial years over the next FY22, ‘23?

William Meek: Yes, so ‘22, based on the timing for Turitea October full commissioning will be - so you can just take essentially a pro rata of the 470 gigs for an annualised output.

Cameron Parker: (Craigs Investment Partners, Analyst) Yes. William Meek: Then given the date of July or mid-’23, you’ll end up with the south coming on for a full year from ‘24. FY24.

Cameron Parker: (Craigs Investment Partners, Analyst) Okay, thanks, William. Just looking at your residential customer numbers in volumes, they’re coming off. What sort of level of concern do you have there and also, are you going to be putting through any residential price increases over the next 12 months or so?

Vince Hawksworth: Well I think it - I would say I don’t think I ever like losing one customer, to be honest. It - but equally, we have to accept that there is a very competitive environment out there and as William indicated, there are some pretty varied views of what appropriate netback is for residential customers.

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So I guess we’re getting increasing visibility of how people think about that transfer pricing but in this environment, I think we have to think about where we place all of our volume and obviously we have chosen the C&I market as a much more - of a market which responds over a shorter period of time to changes in price.

In terms of residential price increases, well ultimately our price increases will reflect the underlying costs. So, I think any sensible retailer passes through those costs as they come through, whether they’re transmission distribution or other underlying costs so we will pass those through and that’s currently what we’re doing and what we will continue to do.

Cameron Parker: (Craigs Investment Partners, Analyst) Okay, thanks, Vince. You mentioned C&I, what sort of level of C&I volume should we think about for Mercury going forward? It’s been increasing markedly over the last six months, so it’d be interesting to see where it - yes, where it ends up. What level in the portfolio?

Vince Hawksworth: Look, I think at this stage, we’re probably - it’s a little bit dependent on the timeframes for Turitea coming on board. So - and we - ultimately, we’re responding to the trade-off of opportunity to secure forward revenue and forward customers versus the risks that sit in the marketplace that we talked about with respect to hydrology and gas and some reasonably high levels of volatility in the marketplace. So just picking a number is probably not that helpful.

Cameron Parker: (Craigs Investment Partners, Analyst) Okay and lastly, I was just wondering what your view is on - there’s been a bit of noise in the sector recently around carbon emissions from geothermal plant. What are your thoughts on that and what’s your approach to cost mitigation as carbon prices are increasing substantially?

Vince Hawksworth: Well I suppose if you accept the thesis that carbon has to be paid for, then it’s just a fact.

There’s some carbon emissions and they have to be paid for. That will just simply, like many other technologies, mean that some fields will be better than others. I think this idea that it just means you should just close things when there is a process for mitigation, is probably not such a bright idea.

I think the other thing that we - we think this will drive, is it will drive people’s thinking about carbon re-injection and that is, that’s an interesting technological opportunity that Mercury is interested in and that’s what you want.

You want people to innovate to overcome the challenge but I would say geothermal is a fantastically good resource for New Zealand Incorporated if you take the view that it’s the overall transition to a low-carbon economy that’s important.

Cameron Parker: (Craigs Investment Partners, Analyst) Okay, all right.

William Meek: We are investigating a - trialling a re-injection at Ngatamariki on one of the OECs there.

Cameron Parker: (Craigs Investment Partners, Analyst) Great.

William Meek: So that project - so that’s very positive and if that works, obviously that can be extended across the wider fleet. The biggest opportunity is at Kawerau given that geothermal plant’s got the highest CO2 concentrations but it’s - it would require a much bigger investment.

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But certainly, in terms of outlook on carbon prices and sequestration, the economics of that look pretty positive which would massively reduce the carbon footprint and save Mercury money.

I mean, we do have carbon inventories and carbon contracts that essentially, on our carbon footprint, will take us through to 2031. So, we’re actually pretty long-dated, in terms of our existing positions, but we’re always looking for opportunities around carbon to lock in prices that will be below where carbon prices might trade in the future.

Cameron Parker: (Craigs Investment Partners, Analyst) That’s great. Thanks, William. All right, thanks, team.

That’s all from me.

Operator: Your next question comes from Stephen Hudson from Macquarie Securities. Please ask your question, Stephen.

Stephen Hudson: (Macquarie Securities, Analyst) Good morning, Vince and Will. Just a couple from me. Just firstly on the guidance, Will, can you confirm that the $6 million benefit you got in OpEx, as a result of reduced planned outages in the first half, will reverse in the second half, or are you expecting that sort of run rate to continue? Also, are you expecting any sort of carbon trading, or non-recurring items for the full year?

Then maybe one for Vince. I can’t remember if you said you were prepared to comment on the Trustpower restructure, but if you are, is your expectation that the proposal to convert that consumer trust to a charitable trust is your assumption that that is going to be successful this time?

William Meek: So, on your first question, so your full-year forecast for cost is what, Stephen?

Stephen Hudson: (Macquarie Securities, Analyst) Oh, sorry, I think you got a benefit of $6 million in the first half for lower plant outages, are you expecting that reduced level of OpEx to continue in the second half, or normalise higher?

William Meek: Oh, you mean is it going to double and carry through? No. Stephen Hudson: (Macquarie Securities, Analyst) Yes. William Meek: No, you’re not going to get a $12 million benefit with the full year, no.

Stephen Hudson: (Macquarie Securities, Analyst) Okay. So, that will normalise, largely.

William Meek: Yes. Stephen Hudson: (Macquarie Securities, Analyst) Sorry, the other part of the question was, whether or not you’re expecting any sort of non-recurring pipe items, carbon trading gains, or other non-returning gains in that fullyear guidance?

William Meek: Yes. So, the guidance takes account of any market-to-market that exists today. That obviously is a function of where prices ultimately settle over the next four months, too. So, that’s built in the guidance. So, no.

Stephen Hudson: (Macquarie Securities, Analyst) Thanks, Will.

Vince Hawksworth: I think the next one was for me, Stephen. So, look…will the trust’s proposal to restructure get through this time? Well, they’ve managed to exile one of the biggest thorns in their side last time around, put him

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out to grass somewhere else. So, look, my feeling on it is, yes, I think it’s more likely to than not. I think there’s been a lot of soul-searching go on at the trust about how to present this and they’re presenting it in a different way.

Clearly, as the trust proposal says, they were made aware of the form and approach that Trustpower wanted to take to its strategic review and have had the chance to consider that as - and what they’re putting forward is a result of that. So, I mean, notwithstanding that there may be people in the Tauranga/Western Bay community who still feel that it’s the wrong thing to do, I think, clearly, last time that voice had the full support of Trustpower, and that won’t be the case this time.

So, it seems to me that it looks much more probable and it also appears that they won’t have to go - in the way they’ve done it this time, they won’t be going for a vote, it’ll be consultation and a decision by trustees, so all of those things would lead you to say that it will get through.

Stephen Hudson: (Macquarie Securities, Analyst) That’s useful, Vince. Sorry, just while I’ve got you, I’ll sneak in one more. You mentioned that there’s quite a variation across the mass markets on what sort of prices are seen as achievable - one retailer talking about CPI and another (if my experience is anything to go by) talking two or three times that kind of level. Why do you think that is? Why do you think retailers are taking such a different approach?

Vince Hawksworth: Well, I suppose, you could come up with your own views of that, but my view is that if retailers take a view that they’re not going to pass through the real costs that come to them, it catches up with you eventually and then you face big upward step changes. But for some, maybe they see the ability to increase market share as a reason for keeping those prices lower. But you’re still, as we’ve all seen over many years, face…that one day that comes home to roost and you then face the necessity to put prices up again.

But we are seeing distribution charges largely across the board in New Zealand go back up again. I think if you don’t respond to those, well, you end up in a very difficult place, from a sustainable retail business point of view.

Stephen Hudson: (Macquarie Securities, Analyst) That’s useful. Thanks, Vince and Will.

Vince Hawksworth: Thanks, Stephen.

Operator: Okay, your next question comes from Jeremy from UBS. Please ask your question, Jeremy.

Jeremy: (UBS, Analyst) Good morning. I just have one question, myself. We’re obviously seeing some operators who are happy to sign a PPA agreement, or in the market for PPA agreement. I’d just be curious around what Mercury’s view is on that and whether or not it would impact the decision to build, or encourage, or support building at Puketoi?

Vince Hawksworth: Well, my view is it’s very positive when people are prepared to support projects by signing PPA agreements, if that enables change to occur. If anybody wanted to do a PPA agreement with Mercury, we’d be open for business.

Jeremy: (UBS, Analyst) And, relative to the levelised cost to build Puketoi, would you be happy to sign a PPA at that price or slightly above, or…what’s your thinking around that?

Vince Hawksworth: I didn’t think this was a Dutch auction, but my thinking is if someone wants to put a proposal to us, we’re open to discussion. Had you a price in mind?

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Jeremy: (UBS, Analyst) No, I’m just trying to get my head around things!

Vince Hawksworth: No, look, I mean, ultimately, I think we will be rational builders and we’ll be rational investors and obviously…yes, you know, anybody signing a PPA also has to - who is taking the capital investment risk and construction risk, has to get a fair return. One would hope the people buying the PPA are happy that it represents good value to them in the market against other choices they could make.

Jeremy: (UBS, Analyst) Understood. Thanks, Vince.

Operator: Once again, just a reminder, ‘star one’ to ask a question. But your next question comes from Nevill from Jarden. Please ask your question, Nevill.

Nevill: (Jarden, Analyst) Good morning, team. Thanks. Just three from me (or three areas). Just the first one on the Turitea delays: I’m just trying to think through what that might mean for Puketoi? So, if the terrain is difficult, are there any sort of implications for your Puketoi timing? (I guess, really two questions there.) Your FID decisionmaking on Puketoi, is that in any way constrained by having to have Turitea completed first?

Then the second part of that question is: would you expect the timeframe for construction of Puketoi to be nearer your original Turitea timeframe, or is that likely to take longer as well, from FID to completion? Just number one, thanks.

Vince Hawksworth: That sounds like three questions in one anyway, Nevill. But look, there are a lot of lessons, I think, to be learnt out of the Turitea programme. Yes, clearly the connection back into Turitea substations from Puketoi is a factual thing. Yes, there’s a transmission line. I think some of the lessons learnt are about thinking about the terrain. So, probably the biggest challenge with Puketoi is the length of the transmission line and making sure that we understand how that works.

Then there’s obviously access to the site for these rather large pieces of kit. But the actual hills and design of the Puketoi wind farm is significantly different to Turitea. So, whilst one wouldn’t say we want to be complacent about the civils on the hill itself, effectively it’s a ridge with a long line of turbines on it.

In terms of FID, well, I don’t think we’re in a position to even say when that might occur. But clearly, we have to make sure we’ve got product, we’re able to get the product to market, which is all about the transmission system.

That’s probably as much as I can say about that. William, anything?

William Meek: No [unclear].

Nevill: But you wouldn’t expect to have to show delivery of Turitea South in 2023, before you were ready to bring Puketoi to completion – you don’t have an artificial constraint about that?

Vince Hawksworth: No, well, I don’t think there’s any - yes, no, I don’t think there’s a relationship between those two things, because the transmission line will be built. It will be more about sensible timing and making sure that all of the project risks are well-understood and well-managed and the lessons that we are learning, and have learnt from the Turitea project, are built in, so that when we say we’re going to build something by a certain time, it happens.

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Nevill: (Jarden, Analyst) Perfect. Thank you. So, second question, just following on a bit…your comments about some of the potential CapEx at Ngatamariki, obviously in the Climate Change Commission review, they talked about high carbon emission geothermal plant. I mean, one presumes they’re really just referring to Ngawha and Ohaaki. But do you think Kawerau, which is somewhere towards the wrong end of that list, it looks well short of CCGTs [combined cycle gas turbines]. But do you think they were including Kawerau when they were talking about limiting emissions from geothermal projects?

William Meek: Well, I think the correct answer is we don’t know, it’s not clear. But there’s no denying that, yes, all geothermal plants have a carbon footprint. But, yes, again, against the coal or gas, significantly lower in most cases, Ngawha probably being the biggest exception.

Nevill: (Jarden, Analyst) Like a [unclear] thing.

William Meek: Yes. Nevill: (Jarden, Analyst) Yes, exactly. My last question really just goes to thinking about your portfolio for the years ahead. Obviously, you’ve talked about a bit of a switch towards C&I in the past, or as a strategy, it looks like it will continue while prices remain elevated and the mass market remains constrained.

But from our perspective, looking at your whole portfolio, it does seem like the CFD channel probably has the - if you call it a channel - has the highest net back, relative to say C&I and mass market and that would seem likely to continue. So, we shouldn’t expect - and this is the question part - we shouldn’t expect mass market and C&I combined to grow very much over the next few years in your portfolio?

William Meek: Yes, given there has historically been a link between generation and sales, that puts you in a holding pattern. If you’re going to move beyond that, that essentially means you are going to be buying spot energy or wholesale energy from market and selling to customers. That’s going to be pretty challenging, I suspect, given where acquisition pricing’s currently sitting to buy futures and then on-sell that to acquisition mass market at current prices, which are $180, $140 and $130 for calendar years ‘21, ‘22 and ‘23. So, yes, I mean total sales commitments…

Nevill: (Jarden, Analyst) Yes, that it sounds like…

William Meek: …it will be broadly consistent. We’re up slightly this year on the prior year, but it’s in the realm.

Nevill: (Jarden, Analyst) Great. No, that’s useful, thank you.

William Meek: Thank you.

Operator: There are no further questions at this time, so I’ll hand the call back to your presenters for any concluding remarks.

Vince Hawksworth: Thank you, operator. Well, thanks, everybody, for your attendance and the questions. Always good to share where we’re going and what we’re trying to achieve. So, once again, thank you from William and I. William Meek: Thank you.

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Operator: Ladies and gentlemen, that does conclude today’s conference call. Once again, thank you all for participating today, but you may now all disconnect.

End of Transcript

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