Start of Transcript
Operator: Thank you for standing by and welcome to Mercury Interim Results Analyst
Briefing 2024 conference call. At this time all participants are in a listen-only mode. After speakers' presentations there will be a question and answer session. To ask a question at that time please press star one, one on your telephone. Please be advised that today's call is being recorded.
At this time I would like to introduce Vince Hawksworth, Chief Executive of Mercury Limited
Vince Hawksworth: Kia ora tatou. Welcome, everybody, to the Mercury 2024 Interim Results presentation. I'm Vince Hawksworth, Chief Executive, and I'm joined by William Meek, Chief Financial Officer.
So we'll go to slide 3, our Business Performance and Major Events slide. First half, 4.5 terawatts of renewable generation. A big contribution there from Turitea full year and Kaiwera Downs Stage 1. In fact, hydro representing 46% of our generation in first half. So showing the importance of our portfolio expansion. Full year we're forecasting 8.8 terawatt hours.
Important event in the first half was the migration of mass market customers under the Mercury brand onto the Gentrack platform. We now have a single retail platform and this will allow us to continue to grow our position as a leading multi-product utility retailer.
As I mentioned, the reflection of Kaiwera Downs Stage 1 coming in on time and under budget means that that 43 MW, 147 GWh project made an important contribution in the first half.
We also committed to OEC5, the new unit at Ngā Tamariki. That expansion will have annualised generation of 390 GWh and adds 46 MW, that commitment being important in growing some baseload into our portfolio
We've had some challenges on geothermal drilling and that campaign has been delayed and we're currently in the process of negotiating an alternative drilling contractor.
When you add that all up what that means for us from an FY24 perspective is we're increasing guidance to $880 million from $835 million EBITDAF and we are announcing a $0.093 per share interim dividend and maintaining guidance at $0.233 per share, which is the 16th year of dividend growth.
So turning to the next slide, we understand that a safe workplace is a productive workplace and is an important thing that underpins everything we do. The graph shows the data, which is obviously lagging data. But more important than that I think is the work we have initiated and continue to work through that addresses critical risks in the business, those risks that can seriously harm people, contractors, members of the public.
We are currently 36% of our way through a deep dive critical risk program. We have completed all of the outstanding improvement notices that we have had from WorkSafe and we are very focused on increasing our Process Safety program.
As you will be aware, we had an event at Rotokawa – a steam hammer event in July '21. Recently we pled not guilty to those charges, but I do want to emphasise that that is in the context of continuing to engage with WorkSafe around an enforceable undertaking. Safety coming early in this presentation I think emphasises the importance that we and the Board see with that.
I'll pass to William to take us through the next few slides.
William Meek: Thank you, Vince So we're on slide 5 now I'll just talk to some of the key financials of the half year We had a strong trading margin performance It was actually a lift of $14 million against the prior period. Trading margin is essentially revenue from our generational retail business less direct costs.
Our hydro generation, we had a record hydro generation in the PCP. So hydro was actually 663 GWh lower, coming in at 2,072 GWh for the six months. Geo was very similar, just up 11 on the PCP
But our wind portfolio performed strongly with higher output from our new wind farm at Kaiwera Downs and a full six months from the Turitea South wind farm. So overall, generation volumes were down 331 GWh. But, nevertheless, the strength of the portfolio performance showing through in that trading margin uplift of 14.
Operating expenditure was up $31 million on the prior comparable period. Two-thirds of that related to wages and maintenance. I'll come back to that shortly. EBITDAF at $434 million. So $17 million lower than last year's, which was a record performance for the Company.
Net profit before tax at $174 million, so down again largely due to higher depreciation, higher interest costs and we saw quite a significant net change in the fair value of our carbon units held for trading.
Operating cashflow was also down, pretty much all explained by higher cash interest and tax payments over the period.
CapEx was up on the prior year, both stay-in-business and growth. So good to see strong progress in terms of the rehabs at Karāpiro, the last station on the Waikato River, the start of our geothermal drilling campaign, which Vince will talk to shortly, completion of migration of customers in our retail integration project and the turnaround at Kawerau, which saw a new turbine and generator installed, and that is running fantastically.
Growth investment up on the back of the completion of Kaiwera Downs Stage 1 and OEC5, so the fifth unit at Ngā Tamariki under construction. Our dividends are at $129 million. So we're up $9 million and with a DRP operating with a 2% discount.
Turning to page 6, just a really simple bridge between the two half years. So really bridging that $17 million. Fairly self-explanatory. Generation volume is down 331 GWh, so 0.3 of a terawatt hour. So lower hydro, higher wind. We saw a strong performance in our retail position with higher pricing outcomes in both mass markets and commercial industrial. So adding a positive $33 million.
We saw electricity derivatives move adverse 11 really due to the impact of higher prices on net sales position. We've seen quite positive LWAP versus GWAP outcomes. So LWAP matters in terms of what we buy energy from the market for, GWAP is what we're selling from our power stations to the market. So we saw about a 2% movement there, 1.04 to 1.06. That's on quite a big numerator. So essentially that applies on annualised basis an 8,000 GWh base. So that's also driving our guidance upgrade, which we'll come to.
We saw lower trading gains We did get an increase in transmission charges from the new TPM, but those were offset by improvements in terms of settlements from the loss and constraint pool, and operating expenses up $31 million, explaining that $17 million bridge.
Slide 7, a bit of a deep dive here on operating expenditure. So an increase in retail capability. So some of that is head count driven, a call-out there around the NOW broadband acquisition. So there's about $4 million of that $8 million due to a full six months now
Retail integration is called out well in this deck. So, again, celebrating a migration of customers to Gentrack. We saw an uplift in maintenance capability, $6 million of that due to new wind operations again at Turitea South and KD1 and then we saw increases in our insurance costs and on several land owner agreements bridging that $31 million.
Movement of debt, so really just bridging our uses of the EBIDAF. We can see tax, big investing, uplift both in state of business and in growth in those two new power stations, interest, dividends paid of $157 million post-DRP, $19 million in other capital. So we saw a $76 million increase in net debt over the period. I'll hand back to Vince, slide 8.
Vince Hawksworth: Thanks, William. So slide 8 talks a little bit about where we're at with the generation development pipeline. The obvious project that we've been advancing for a while now is Kaiwera Downs Stage 2. That we still expect to bring to final investment decision in this financial year.
We have been working through a site optimisation process. That has dropped annualised generation, but we believe that will be the best economic investment that we can make.
For some time now we've been talking about the Kaiwaikawe wind farm. We continue to work that towards final investment decision, more likely to be early in the next financial year, largely because of delays to the procurement supply chain issues and also construction logistics, which are a factor I think for development generally in New Zealand as the world gears up to try and decarbonise.
We are reviewing our Mahinerangi Stage 2 Wind Farm project. We've had that resource consent for a long time and we're looking at a technology improvement that is likely to require some resource consent amendments. We continue to look at Puketoi and Tararua repowering.
We have a number of other prospects in the pipeline which, at the moment, we remain commercially sensitive as we close our arrangements with various parties, but we think we've got plenty to do in the short to medium term.
To go to the next slide I guess that just summarises, on slide 9 there, the progress that has really changed our generation portfolios, Turitea South added to North with Kaiwera Downs, plus the projects that we picked up through the Tilt transaction and then with Ngā Tamariki coming on board. So a much more balanced portfolio than we had three years ago.
Going a little bit more detail on slide 10, the Ngā Tamariki project still on target for first generation late in calendar ‘25. That will take the Ngā Tamariki station from having four Ormat energy converter units with 86 megawatts total capacity and it’ll add a further 46 megawatts. That's a $220 million project and adds 390 GWh.
We're well advanced on detailed design and the manufacture is advancing, and you can see there the completed cooled condensers, long lead items are underway. We are currently expecting that to be delivered in the time frames that have been outlined, although we are keeping in close contact with the supplier regarding the situation in Gaza.
Kaiwera Downs Stage 1 fully operational now. I'm really pleased with the way this project turned out. The learnings from Turitea were really important in how we approached the project. Stage 1 is completed, it's up and running. I think you can see from the photograph there that it looks pretty smart. We continue working towards Stage 2's final investment decision.
Moving to our retail business. As I mentioned in the summary up front, a real highlight for us was moving the customers, the Mercury customers onto the Gentrack billing system and completing that towards the end of the last half year. That did mean that we reduced acquisition activity for a period through that transition. That made sense to us, to make sure that existing customers were successfully migrated. We're now in a position where we can recommence acquisition activity.
That single technology stack gives us the platform for enhancing choice for customers. Effectively means that no matter what platform you were on before, you can now start to access the products that both the previous Trustpower brand and the previous Mercury brand had.
Importantly, we continue to work diligently towards getting the synergies that we put in the original announcement and we remain confident about that process completing in FY25. At present, we expect to spend about $44 million relative to the $50 million forecast, and you've got the numbers there for what we've done to date.
I think what's really exciting for us is this is completely driven internally by our people. We've developed a lot of capability in doing these sorts of projects through this work. It's quite unusual for a technology integration like this and a brand integration to really deliver very close to the timing we expect and to be on track to deliver the benefits that were described.
I suppose if I go to the next slide, slide 13, why is all of this important? Why does it matter? Well, this table here of charts shows the potential growth in renewable electricity required by 2050 - under the BCG report, The Future is Electric. Of course, it may not play out like this, but it is critically important for the business to have developed strategies that play to this potential.
If renewable electricity is to account for 58% of New Zealand's total energy demand, that's how you end up needing 30 terawatt hours. So that really is, when we say 58% of total energy we're talking, obviously, about a lot of thermal fuel being converted to electric fuel. This does require a real collective action. It will require disciplined deployment of capital. In this environment, real long dated options are important. We see throughout the globe real examples of governments and regulators accelerating this investment, whether that's the IRA in USA, New Deal in South Korea, or EUs Green Deal industrial plan. So that does put pressure on supply chains.
I'm going to pass back to William now to go into a bit more detail on the market.
William Meek: Thank you, Vince. We're on slide 14 now. There's a couple of charts here, one showing the three year forward price, the futures curve in Auckland, the other the NZU or the carbon unit price tracked since, from July ‘21 through to January ‘24.
Futures market elevated, really reflecting, well, a whole lot of variables. Cutting to the chase, the tightness in gas deliverability, feeding through into thermal offers which are, ultimately, driving pricing around the $150 a MWh mark. We have seen, we are seeing peaks. Growing demand is ups very, very marginally on the PCP, so that's positive. Certainly the outlook is for stronger demand growth as that increased electrification and decarbonisation theme picks up speed.
We can see carbon prices - so the carbon auctions last year were quite unsuccessful, so we didn't see any of those clear throughout the year. Certainly this, the new government is looking to the ETS to do heavy lifting in terms of incentivising moves to more renewable energy so the March auction for NZUs certainly will be very interesting. Certainly, there's some quite high carbon inventories out there at the moment across people that hold those and, obviously, the cost to carry for carbon is also high with higher rates, so will be interesting to see how carbon prices trend.
What these prices ultimately tell us is that more renewables are required. Ourselves and the sector are certainly moving mountains to bring new capacity to bear, to ultimately, displace higher thermal costs and see those energy prices come back.
A slide around hydrology for the year. So this is familiar to most. Certainly a very different year in the Waikato catchment and at Lake Taupo for the half year. You can see last year we were bouncing frequently along the top, and that dark blue line getting very close to the maximum controllable level. That's the consented levels that you saw in January last year - us, effectively reaching the top.
This year, it's been quite different. We can see every single month has been drier than normal, reflected in that lower hydro production. We tracked the mean storage level for Lake Taupo through Q2. We had a wet spell there during the Christmas-New Year's break so we saw quite a sharp increase in the lake level, really setting us up for the dry months of late summer and autumn, which is good. So, we've seen wetter conditions in January and February to date
There's a lot of volatility in Futures Prices versus Spot. We saw the start of the year Futures Market was predicting prices in the, let's say, $200 range. Given what was happening hydrologically in the South Island, we saw prices fall back to $120 in July and almost $150 in August. We saw Futures and Spot prices track within cooee, sort of the back part of that year. Then, again, we saw Spot prices escalate sharply and diverge away from the Futures Price three months prior. So, some interesting volatility there around Futures Prices being both higher and lower than actual Spot Price outcomes which, in the short term, are hugely affected by plant availability and, particularly, national hydrology. Vince Hawksworth: Turning to some of the operational highlights and issues that we're dealing with. As I mentioned earlier, the geothermal drilling program, we have had delays and we are in the process of rephasing that. We are also in the process of negotiating with an alternative drilling rig contractor. We still intend to complete the 8 well geothermal drilling campaign, and that's important to sustain both capacity and also ensure that we are ready for OEC5 at Ngā Tamariki.
To date, expenditure has been $46 million and, based on the revised schedule and the costs, we expect the campaign costs to be a further $114 million through to FY26, so totalling $160 million. That is a step up, however, what is going to be important is that the holes are completed and give us the ongoing fuel that we need for our geothermal stations.
Turning to the next slide, which is slide 17. A key thing about our existing assets is ensuring that we continue to invest to enhance and optimise, particularly increasing efficiency and flexibility. We have been investing in control systems at Ngā Tamariki and Kawerau, this supports our pathway towards centralising our control room operations, and we've been in the first phase of that by centralising Ngā Tamariki and Ngā Awa Pūrua. As we then work through with our operations teams and work through training and planning, we will bring all of those sites together.
We have a long programme of rehab work on the Waikato River. The important thing there is that, as we do that rehab work, we turn our minds to increased efficiency and increased opportunities with the water that flows. The picture there is a runner from the Karāpiro Station refurb. If you were to set that runner against the one that came out, the one that came out would look very agricultural. This has the benefits of computer aided design and modern technology
When these projects, the three machines are completed and we're halfway through the second machine, we'll have an increase of capacity at Karāpiro of 17 megawatts - really important in the context of peaking - and average generation will go up by 32 GWh. As William mentioned earlier on the completed unit, that's been operating really well and meeting or exceeding expectations. So, we're pretty pleased with how that project’s rolled out.
Of course, we've talked a little bit about retail integration, so on slide 18 now we just show that total connections across all products have increased by 17,000. However, we're now in a position with the integration to really focus on some of the benefits. So as well as achieving the cost synergies that the program is working on, we can now look at the benefits of providing products to all of that customer base, which gives us opportunities, particularly in the telco space. So, we're pretty pleased to be in this position and that has helped us
Looking forward the high forward curve, as prices have reset in C&I, we've seen the increase in yields and that's flowed through and also our sales yields in mass market. As William mentioned earlier, the challenge in in pricing is that transmission and distribution prices will continue to elevate as interest rates and resets flow through for those businesses.
So, we take a long term view on how those flow through to customers and try to think about that as a longer term process rather than too much a price and bill shock. So I'll pass on to William to take us through some of the balance sheet stuff.
William Meek: So now on slide 19, Mercury's capital structure. We're operating at the good end of the two times to three times credit band from S&P for a triple B plus entity. Net debt at just below two yards, so $1.983 billion, so up $76 billion. Certainly, having a balance sheet to fund major renewable generation development is important, so certainly our balance sheet puts us in good stead for that funding of our renewable program. Just a call out there around the DRP being active for the interim period.
Debt diversity, so quite a very diverse profile of debt with maturities right out. So, to 2052 or 2050 for our capital bonds if held to their 30 year maturity. We are planning for a $300 million capital bond refinance in July this year, so that's in train, there'll be more to come on that. Again, very happy with those different funding sources both domestic and offshore to provide that balance sheet strength.
Just a bridge on guidance on slide 21. We issued guidance and have confirmed that throughout the year at $835 million, guidance with these results is up to $880 millionvarious components to that. We were expecting to see our geothermal output down slightly. We've talked to these price outcomes. So, certainly in terms of time of use, price outcomes and the market both for energy purchase and generation supplied contributing over $40 million of that uplift, stronger outcomes in terms of our pricing to commercial industrial customers
Sediment residuals relate to loss and constraints. The market's been very interesting. I think the FDR option premium settlements for the gross market have been $21 million out of the money, so that's $21 million that effectively feeds back into the LCR pool for distribution back to parties facing wholesale prices. So, that's been pretty interesting with the lower prices, particularly in July and August versus futures. Then we see an uptick there in operating expenses against what we guided initially at $835 million, but yes, very pleasing to see EBITDA guidance at $880 million for the full year.
Vince Hawksworth: Thanks, William. To wrap it up before we move to questions.
Summarising the first half - important announcement with Ngā Tamariki for our future generation, completion of Kaiwera Downs, strong trading margin that is reflective of the portfolio and comparing with PCP with much higher hydro, lower hydro, but still strong trading margin.
Challenges in geothermal drilling, however we will get that back on track, $0.093 interim dividend declared. Yes, higher operating expenditure, inflation for period of now. New wind generation coming into the portfolio, maintenance and insurance costs. So, some headwinds that I think many are experiencing. Retail integration done and dusted.
So, as we look forward, looking forward to being able to move Kaiwera Downs 2 forward to investment decision. Using our single retail platform to now grow our position as a leading multiproduct utility player. Getting an alternative drilling rig contractor in place. We continue work hard at advocating for a whole of system view of the transition, and we will continue to do so. New Zealand can’t be successful in this space without the full value
chain working together to get both distribution transmission, generation and customers all lined up, and that is critically important in our view.
Dividend guidance unchanged. EBITDAF guidance updated to $880 million subject to hydrology as William has just explained. CapEX at $135 million. So, a good half year with a lot of work to do, wood to chop in the next half, but we are feeling very positive about that outlook. We will close, and open up for questions, thanks Operator.
Operator: Thank you. Again, ladies and gentlemen, if you would like to ask a question, please press star one one on your telephone. Again, to ask the question please press, star one one. One moment, for our first question. Our first question comes from the line of Grant Swanepoel of Jarden, and your line is open.
Grant Swanepoel: (Jarden, Analyst) Good morning, team. Can you hear me?
Vince Hawksworth: Yes.
William Meek: Yes.
Grant Swanepoel: (Jarden, Analyst) Fantastic. It is a great uplift in your EBITDA, but can you just help us on what is one [soft] in that, and what is more organic? So, the LWAP/GWAP, does that normalise out as we move into the following years? Also, the lost rental rebate, so that change in the ruling where the line companies used to collect that, not yourselves, that came through April last year, do you factor any of that into your guidance initially? Does that, the number, do we put $4 million, $5 million into our forecast into the future for that change in the rulings?
William Meek: Yes, I will have a crack at that question. So, yes, LWAP/GWAP it is quite volatile, so it is – if you look across the last five years, yes, it does move around quite a lot. This year has been certainly favourable. I would not bank on it reoccurring every year. But we have recently have seen some benefits in terms of leveraging the hydro system during peaks, it has done – the Waikato has done a pretty good job in that, and we certainly have seen on the demand side with customers there, their profiles generally do not respond to pricing, they are just driven by temperatures and underlying activity, and so that is – you just don’t get a correlation between price, like you do with our generation portfolio, so that has been positive.
The loss and constraint stuff, yes, it is a change in terms of the way those are distributed back to parties. There were – we had accounted for some of it, but it has increased. So, that call out around the FDRs, that has increased the loss and constraint residuals because
those are premiums. So, effectively the people that have bid for FDR contracts have overpaid relative to settlements to the tune of over $21 million in the half year.
So, it is quite a big number, and again, most of those rentals are driven by losses on grid, they are marginal, so when you do get higher prices, then essentially those rentals do expand and contract. So, again, they have even got higher volatility than our LWAP/GWAP. So very, very difficult to forecast, but certainly in the short term, we can’t see drivers for those either, the price yields, or those loss and constraint rentals, the change materially, certainly, for the next four months. So, we have extrapolated those through into our latest guidance.
Grant Swanepoel: (Jarden, Analyst) Perfect, thanks, and then the $160 million CapEx for the eight drill holes, do we now think of your drill program over the longer term at $20 million per hole, and you do by 1.3 over time, so does your maintenance CapEx over the longer term go up, or is there just some sunk costs due to changing supplier or driller?
William Meek: I think there is a combination of both, yes, it is certainly – it is not ideal having to change horses midway, but it was a decision that was necessary. We are still in the process of negotiating with an alternative supplier so that is still in train. We are certainly seeing price escalation, certainly casing costs, those sorts of things.
They do fluctuate, we will see whether global supply chains sort themselves out and we get some price reductions into the future. But yes, at the moment, based on the current costs of drilling, that will lift CapEx attributable to our geothermal plants. It is not just drilling, I mean, that $160 million includes essentially connection, so the piping networks to a site, so again, that can vary depending on where on the field you are actually drilling holes, how distant from the plant, or whether you can utilise an existing pipe system.
Grant Swanepoel: (Jarden, Analyst) Pulling back the KD2 output by a few gigawatt hours, can you talk to how wind costs are changing at the moment, and whether it is still feasible to put wind up in this country at the moment?
Vince Hawksworth: Well, I think it is still feasible on the better sites, so it is quite site specific. So, yields matter much more in a high CapEx environment than in a lower CapEx environment. So, I think it does become very project specific, Grant. This year with KD2, it is simply a layout issue where we can optimise for yield against the amount of CapEx put in. So, the incremental benefits of the additional turbines don’t make sense against their operating yield is kind of where we have got to. Certainly, on lower yield sites, the current
trajectory for wind turbines pricing makes them more challenging than they might have been four or five years ago.
Grant Swanepoel: (Jarden, Analyst) Thanks, and my final question is just on the elephant in the room. How are things going with Tiwai? Are you still prepared to supply a South Island wind farm to them, and is there any timeline on that outcome?
Vince Hawksworth: No, real information I have got on timeline. I think we have been pretty consistent to say that we are happy to keep talking with Tiwai. I think one of our competitors was much more effusive yesterday, and I will probably leave it at that.
Grant Swanepoel: (Jarden, Analyst) Thanks. Thanks, for answering those questions.
Vince Hawksworth: Thanks, Grant.
Operator: Thank you. One moment, please. Our next question comes from the line of Stephen Hudson of Macquarie Securities. Your line is open.
Stephen Hudson: (Macquarie Securities, Analyst) Hi guys, just a couple from me. I just wondered if you can give us a feel on the geo drilling campaign, the 25% increase in the cost there that you have noted today. Just how much of that is scope versus inflation? I have got a couple of other follow up questions, but if you can give us a feel for that, that will be useful.
Vince Hawksworth: I think, Stephen, as we said, we are currently just negotiating with an alternative contractor. I think, when that gets a bit more advanced, we would probably be able to give you a better feel for how those things will play out, and the scope versus inflation one is, it is probably more the latter than the former, but because of the different approach that comes in having an alternative contractor, that will have an impact as well. But we will probably have more to say on that at the full year.
Stephen Hudson: (Macquarie Securities, Analyst) Okay, thanks, then. Just continuing that theme, we saw investors largely pull out of the global EPC market, I think, beginning of last year, or late the year prior to that, are they still out of the EPC market here in New Zealand essentially?
Vince Hawksworth: I probably could not really give you a categoric answer on that. Obviously, Kaiwera Downs was not an EPC contract. We are pretty comfortable with the approach that we are taking which is not EPC. Whether they, or any other supplier would choose to do EPC in New Zealand, we have not engaged them on that basis.
Stephen Hudson: (Macquarie Securities, Analyst) Did you say, your expectation is that KD2 would not be the full turnkey, or would not be EPC, you said?
Vince Hawksworth: Correct.
Stephen Hudson: (Macquarie Securities, Analyst) Yes. Just on the FID decision for KD2, I’ll perhaps try and ask the question in a slightly different way. Is it contingent on an off-take arrangement being put in place?
Vince Hawksworth: It would be contingent on demand in the South Island not falling through the floor.
Stephen Hudson: (Macquarie Securities, Analyst) Sorry, my question is, is it contingent on an off-take arrangement being put in place?
Vince Hawksworth: Yes, I heard the question, I just said, I mean, the point I am making is clearly it will not go ahead if there isn’t enough demand, and we are probably not in a position to talk about the other part of the question that I think is implied.
Stephen Hudson: (Macquarie Securities, Analyst) Yes, okay, no, no, get you. Just on guidance, can you give us an update of what you are expecting for Trustpower retail? That is my last question.
Vince Hawksworth: Sounds like a William question, he says, throwing him the low pass out in the scrum.
William Meek: Sorry, but what aspect of Trustpower retail?
Stephen Hudson: (Macquarie Securities, Analyst) Just what the contribution in your EBITDA guidance is, what you have baked in for Trustpower retail?
William Meek: Well, it does not work like that anymore, so it has all just become Mercury with the load.
Stephen Hudson: (Macquarie Securities, Analyst) Okay, no split outs?
William Meek: No, no. So, once they all went into the same pot, they just – yes, they all, other than those that are in the Tech area, you have not got – they just – they are all Mercury customers now.
Stephen Hudson: (Macquarie Securities, Analyst) Yes, okay.
William Meek: So, we are still, in terms of the synergies, that is a huge focus from here on in, in terms of looking through those, we are confident we can deliver the synergies of the business case supporting the original acquisition, and then the integration costs, we
signalled at $50 million. Again, we are on track, I think, well, it is $43 million I think it will – in deck, spent today.
So, a few more things to do, so we can reduce licensing costs, those sorts of things, but yes, it is well advanced. We are very pleased to have migrated all those customers and seen no discernible change in churn. So, the slight reduction in electricity accounts is largely driven by a reduced acquisition activity. It is just difficult to the onboarding customers when you are trying to migrate customers on to a new stack. So, it is just – but we don’t have that impediment now, so we are back in.
Stephen Hudson: (Macquarie Securities, Analyst) That is useful, thanks Will and Vince.
Vincent Hawksworth: Thanks, Stephen.
William Meeks: Thanks, Steve.
Operator: Thank you. One moment, please. Our next question comes from the line of Andrew Harvey-Green of Forsyth Barr. Your line is open.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Good morning, Vince and William. A few questions from me were around the guidance. First question around the guidance, are you able to give us an idea how much was baked in, or has effectively occurred in the first half, versus the second half? Or another way to think about it, what was the first half you were assuming in your original guidance?
William Meeks: I do not actually know. I will have to come back to you on that.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, that is all good. Second question is just around OpEx, there has sort of been another step up here. Is there much of that OpEx increase we could describe as one-off? I guess, sort of flowing on to what we can think about for FY25, it looks like we are heading towards about $390 million for this year.
William Meeks: There is always things that are infrequently occurring. There is not very many examples of things that are just one-offs. So, yes, there is no doubt, you can see the key drivers of the change are sitting in two areas, employee compensation and maintenance, so those are two areas that we have got a laser focus on in terms of how we manage those costs and how we get maximum value per dollar spent.
So, yes, we are working through how that OpEx trend looks for the future. That being said, the retail business is well advanced in terms of its planning, in terms of delivering the efficiencies from bringing two retail businesses together a year and a half after we acquired them.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, okay, and last question around guidance. I think, at the full year you talked about insurance proceeds of around about $18 million you were expecting to come in. It looks like that has not come in in the first half. I assume that is still expected in the second half, and are we still looking at around about $18 million for that?
William Meeks: Yes, it is in the order, $18 million, $20 million, yes. So, that is built into the $880 million.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes, yes. My last question is related, I was going to ask a question around KD2, but I think that has been covered. But similarly, with the Kaiwaikawe, I think, at the full year result you were talking about off-take agreements being necessary pre-requisites for both of those from wind farms. That language has gone here. Do we take it that effectively you have an off-take agreement for Kaiwaikawe at this stage, and now it is just working through the more fundamentals about getting a wind farm up?
Vince Hawksworth: So, Kaiwaikawe is obviously taking us a lot longer than we hoped. If you recall it has an arrangement with Genesis. Neither party has terminated that arrangement, however, we do need to work through what effectively are the consequences of all of the delays that have occurred since we have been underway, whether they were the resource consent delays, the transport route delays, working through the connection arrangements, and also re-optimizing from a point of view of the technology.
So, it is a more challenging project for a number of reasons, but we would still happily sell that on a PPA basis to Genesis. There are some issues we would have to work through, and issues that they would have to be happy with. But that’s a conversation for when we have resolved some of the issues that we have got.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay, great, and last question just around Mahinerangi 2 and it looks like you reconsenting that. I assume that is mainly because the turbines are much bigger than under the original consent. Is it reasonable to assume that you are looking at a reasonable step up in the size of that project? It seems to be the usual trend when you are reconsent for bigger turbines?
Vince Hawksworth: Look, it is early days yet, Andrew, on that. But you are right, I mean, the issue is higher tip heights giving better yield, potentially fewer machines, but better yields. So, we are just working through all of the technology alternatives, the connection alternatives, and how that might turn up across the land use perspective. But we think it is
important to dust all of that off, because under certain circumstances where the smelter stays, where potentially a fibre cable lands in Southlands, that draws more load like data centres, one could see quite a demand for renewable electricity from off-takers as a consequence of that over the next decade or so.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Okay that's great, that's all from me thank you.
Operator: Thank you, one moment please. Our next question comes from the line of Jamie Gray of NZ Herald, your line is open.
Jamie Gray: (NZ Herald, Journalist) Hello, I was just wondering if you could give us some more detail around the price increases flagged for April 1, like the extent of it and what are the cost increases behind that decision?
Vince Hawksworth: Thanks, Jamie. Well I suppose starting with what are the underlying increases, we are seeing a lift in all of the input costs, so if we take transmission and distribution prices, they are obviously set through the Commerce Commission and regulated But that whole process brings in the inflationary effects, we are seeing those Our approach to those is to pass those through as they occur, so that's part of it. We have seen reasonably sustained wholesale prices and you can see those in the charts in our presentation. But we are very mindful of bill shock and impacts on customers.
So, the extent of those, they will be very regional, they will own - a certain amount of our customers are contracted, but they are quite region specific. Depending on the region, they will be in-between 5% and 8% at the highest overall, that's everything all in. I think it's just reflective of the situation that the industry finds with input costs, inflationary costs and so forth.
At the same time, as our presentation shows, we're deploying a lot of capital into new assets to make sure that we electrify to achieve decarbonisation and as that occurs, there is energy for all customers. I also note that this sector has reinvested billions of dollars over the last decade or so, and unfortunately we're not the water sector or the roading sector.
Jamie Gray: (NZ Herald, Journalist) Great, thanks Vince.
Operator: Thank you, one moment please Our next question comes from the line of Nevill Gluyas of Jarden, your line is open.
Nevill Gluyas: (Jarden, Analyst) Good morning team. Three questions from me. The first one, it was impressive to get the retail integration done so quickly. My question is a followon, can we expect new products, and I guess I’ve got [DPPs] particularly in mind, to start rolling out? Are they supported by a new system?
Vince Hawksworth: Thanks, we were pretty pleased to get it done as quickly as well. We don't really want to start skiting about new products, we certainly realise that there is a lot of scope when you're the largest retail player to bring products for customers to market. We don't subscribe to the argument that it's only the small, nimble players that can do that. We think scale helps. So, we would probably say at this stage watch this space, but we do have to make sure that we also deliver on the promise we made in the transaction, which was to get the synergies.
Those are pretty important as well is if we're going to maintain the best pricing we can to customers, but certainly around things looking at more time of use pricing, EV pricing, other things that help, that's important.
But what's also important is more innovation for those who are least able to pay So, I think all too often, innovative products, and people talk about this stuff, it's for the people who can afford the battery, the EV and everything else. We think it's pretty important to think about those that are most impacted by price, and we're doing a fair bit of work in that space.
Nevill Gluyas: (Jarden, Analyst) So, I guess follow onto that, we should expect to see developments in Globug product mix?
Vince Hawksworth: Yes, you could expect - we have some work to do with Globug in the sense that that has some integration work to complete; it wasn't in the original program but it is in a program now. But yes, one could expect to see a Globug mark 2 rollout over time.
William Meek: Nevill, the big opportunity obviously is just to cross our Telco products, broadband and mobile to the legacy Mercury base, which we didn't have that capability. We had a very small scale broadband offer, but there's a lot of customers there that we know a lot about them, can contact them quite easily, so I think that's a big opportunity for us.
Nevill Gluyas: (Jarden, Analyst) Great, makes sense thank you. Second question then, obviously a feature of recent times for all the obvious reasons, supply chains, local
resource constraints, delays to projects. I guess I just wanted to focus on that a little bit, with the new term projects.
So, KD2 if you did reach FID, when's a sensible time to expect full power, and what kind of time range of uncertainty should we think about on that, given the risks?
Vince Hawksworth: Depends on the start date doesn't it, which depends on the conversation we had earlier about demand being there. But I think your question about delays, it rather depends when seasonally it starts, because of the challenges of certain types of work through winter.
We would certainly expect, with what we learnt from Turitea, have applied KD1 to have some degree of confidence that with our contracting strategy that we would deliver to the time we said at FID. I'm not deliberately being evasive there, but it does rather depend which side of winter you start.
Nevill Gluyas: (Jarden, Analyst) Okay, that's useful thank you. My last question was just to get your views. You've mentioned you're advocating for a whole of system view, in your view what are the big gaps right now?
Vince Hawksworth: Well I think the situation, so we've had a change of government, that government is now in the process of obviously doing its first hundred days and it's repealed the MBEA and it's put the RMA back in and so on and so forth. It's talking about fast track consenting.
I think we all know that there'd been a significant number of potential new projects announced. There is a queuing process within the transmission system to get in line for those. So, I think really if the landscape has been made better from a point of view of protagonists to go on and get on with the work, I think the question then is how does the sector work together?
I don't mean that in a Commerce Act situation, I mean that in a way that generators, large like us, or small players, or the new solar people that have started up, operate with distribution companies and the transmission system.
We've got to demonstrate to society at large, and I think this government, which is trying to get out of the way and focus on the things it needs to influence, that we can deliver. We've got to deliver on the basis that the lights stay on, that the costs are reasonable and we make the progress towards electrification and sustainability. So, it's going to be about people with the right mindset, I think.
Nevill Gluyas: (Jarden, Analyst) Right, okay thank you. I suppose it's been one of the efforts of MDAG or one of the highlights of their work is suggesting there's maybe a hole in the contract space around firming. Do you guys have products in development or even working with them now, provide firming both ways, sell or buy, for independent generators?
Vince Hawksworth: In fact we…
Nevill Gluyas: (Jarden, Analyst) The sleeving deal.
Vince Hawksworth: We've made the sleeving deal is a perfect example of that We had taken view that we'll price anything that anybody comes to talk to us about The MDAG report has a whole bunch of stuff in it, which no doubt will get worked through over time. I come back to the basic situation that New Zealand has a wholesale market that has by and large kept the lights on now for two decades or more. And has done it without a dollar of government money going in, which - or with other subsidies, it is becoming increasingly renewable.
So, I think we just have to be really careful as we work through those things, that we just don't throw the baby out with the bathwater. But it's important that these new players, who if they're ready to take capital risk, that they can operate in the marketplace. So, the EA plays an important role in ensuring that market accessibility works.
Nevill Gluyas: (Jarden, Analyst) Perfect, thank you very much, that's all from me.
Operator: Thank you, I'm showing no further questions at this time. I'd like to turn it back for closing.
Vince Hawksworth: Thank you operator. Thanks everybody for coming on the call or on the internet. We will close at that and again thank you for your attention.
End of Transcript