Start of Transcript
Operator: Good day and thank you for standing by. Welcome to the Mercury Annual Results Analyst Briefing 2024 conference call. At this time, all participants are in a listenonly mode.
After the speakers presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 1 again. Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Vince Hawksworth, Chief Executive of Mercury Limited. Please, go ahead.
Vince Hawksworth: Kia ora tātou and welcome everybody to the FY24 Mercury Full Year Results Presentation. I’m Vince Hawksworth, I’m joined by our Chief Financial Officer, William Meek.
I want to start just by saying that this presentation really has three major elements to it. A reflection on FY24, some observations about FY25 and the events surrounding our current situation, and plodding a way towards the future and the opportunities that Mercury continues to pursue.
There is a lot of material in this presentation, so William and I are going to canter through that at a reasonable pace. We know that questions are always valuable. So I’m now on Slide 3 which is the overall highlights slide. We produced 8.8TWh of renewable generation from hydro, geothermal, and wind. Wind obviously up reasonably significantly.
We completed the integration of the Mercury and Trustpower businesses all under the one brand, one set of people, processes and systems. That we’re really pleased about because that creates great platform as we look to the future.
We completed Stage 1 of Kaiwera Downs under budget and in advance of time, and agreed on a contract with the aluminium smelter which allowed us to go to final investment decision and start Kaiwera Downs 2 which is now under construction.
We also have Ngā Tamariki geothermal expansion of 50 megawatts under construction and materials are being delivered to site and we’re pleased with the way that that has set off.
Obviously, the scale of the business that has delivered what is a record EBITDAF result of $877 million. Ordinary full year dividend of $0.233 per share, 16th year of dividend growth. However, we have also acknowledged that with a significant impact on our ability to
generate from our hydro assets, we do face into a more difficult period over the early part of this year and have issued guidance for FY25 at $820 million. We also note we have two new projects in our projects list being a grid-scale battery at Whakamaru and another wind farm west of Huntly.
Moving to Slide 4, our people, we just note that we’ve continued with those backwardlooking views to have delivered a good health and safety outcome. As I always say, you’re only one event away from breaking that record so we still acknowledge we’ve got plenty of work that we can do to reach the gold standard of safety citizenship and continue creating a very safe health and wellbeing situation for all of our staff, contractors, and visitors.
Our employee stats show that whilst we make progress we still have opportunities to build the capability and opportunity within our business. I just wanted to note here on slide 5 that we continue to update our strategic framework.
What’s particularly changed since the last time we spoke is our focus on our three-year objectives, having completed the period through to FY25 we’re not sort of focused on FY25 to FY27. Broken those down into six areas, two of those seem incredibly relevant as we speak today; the delivering more reliable, renewable energy to Aotearoa and accelerating the shift to a low-carbon future or electrification depending on how you like to talk about that. That really will help us achieve what matters.
To support that, we’re very focused on partnerships, creating success with others. On the culture and adaptive ways of working, in other words, how our people can deliver for us, our organisation, our shareholders, and to continue to innovate using the technologies that are available to us.
We - on this slide, we have represented some of the actions that we have taken to deliver value but also to do that across our five areas of aspirations for 2035. I particularly want to point out the work we’ve done on working with customers in hardship. Later in the presentation, we talk to some of that. Call out the work we’ve done with Māori, with our iwi partners, and with tangata whenua but more generally where we interact on the river and in the Central North Island. Now, of course, down in the South Island.
Investment in our hydro assets under Kaitiakitanga, are very important and as we speak we’re coming to the end of commissioning our second upgraded machine at Karāpiro which is again positive for our future performance.
People I’ve talked about, particularly empowering talent and pursuing safety. Obviously, in terms of continuing to be able to deliver that ongoing financial performance, it’s really
important that we execute some on our new generation opportunities. So that slide covers some of those things in some detail.
For the next slide, I want to pass on to William who will talk through some of the financial opportunities that we’ve been able to take and those that we face into.
William Meek: Thanks, Vince, and welcome to our listeners on this call this morning. So we’re on slide 7 of the presentation. This year is a strong performance, and it follows a very wet year last year. So last year we had 28% higher than normal hydro generation, so it was very wet. If you scan the deck you’ll see that FY24 was dry, and it’s gotten particularly dry as we’ve headed into the start of FY25.
I won’t labour on our trading margin, operating expenditure, and EBITDAF on this slide, because we’ve got further bridges to come. But a good strong performance of EBITDAF at $877 million for FY24 year.
NPAT at $290 million is 2.6 times higher than last year. Again, NPAT is not a great performance measure for companies like us. It certainly would change [unclear] for us even more so. So significant movements in the fair value financial derivatives, which essentially bring those fair values to [bare] in the current financial year.
Last year we did recognise some revaluation decreases and impairment. So that’s explaining that significant movement and the profit after tax. Operating cash flow at $612 million for FY24. Again, a strong performance. Pleasing to see almost 50% of that operating cash flow invested back into the business. So adjusting assets or into the construction of new assets this financial year, and obviously, operating cash flow also paying for dividends to our shareholders. So dividend is up from $302 million to $325 million for this financial year.
Slide 8, fits the bridge between FY23 and FY24. As noted, ’23 benefited significantly from 1,150 GWh more water than the prior year. So year on year we’re down 21% in terms of hydro generation but generated a pretty average level. It’s about 1% higher than average despite the lower-than-normal in-flow.
So we started the lake high at the beginning of the year and finished below average by the end of 30 June.
Geothermal saw an 11% increase in performance which was good. Some challenges across the fleet in ’23 and the big turnaround at Kawerau for the permanent repairs from the issues we had back in 2021.
Wind. We saw significant lift in our wind generation. So wind was up 40%, so almost 600 GWh for the year reflecting a full year of Turitea South and KD 1, Kaiwera Downs 1 coming online this financial year also. We have seen lifts in customer - in user prices. So $9.00 and $8.00 respectively between mass markets and our C&I customers.
We did receive benefits from better LWAP/GWAP. So that’s essentially code for what does it cost you to buy the energy from the market versus what you’re selling it for. So that was favourable during FY24, and we’ve talked previously around the higher than normal loss and constraint rental rebates being now returned from line companies to retailers offset by about $10 million by increases in our transmission charges from Transpower.
Other income, we recognise the $17 million benefit from our second provisional claim for the Kawerau outage with - and you’ll see in the accounts we’ve got a final claim still pending which we expect to see in FY25. So that bridges our $841 to $877 EBITDAF.
Just focusing in on OpEx, a fairly simple bridge here. So we saw OpEx rise $39 million for the financial year against ’23. Those new wind assets coming along saw our wind generation operating costs lift $11 million. Another $11 million in other asset maintenance. Inflation was relatively high adding $15 million bridging the $39 million from $346 million to $385 million. You’ll see in the segment notes, those OpEx are broken down somewhat differently between employee-related maintenance, explaining again, a lot of that $39 million difference.
EBITDAF, so a different bridge in terms of bridging EBITDAF to changes in debt. So we saw an increase in debt of just under $50 million taking us closer to closer to $2 billion NET debt for FY24, but 42% of cash, $366 million, going into effectively investing CapEx. Which is mostly either in existing generation assets or into new ones. $268 million paid in dividends with cash. So that’s active DRP saw that cash cost of dividends reduced by $43 million for the year.
Interest in tax is very similar at - in the low $120 million range, and then that working capital movement bridging for the change. So this year is our 16th year of consecutive growth in ordinary dividends, which is great.
I’ll talk now on slide 10 around just our capital expenditure. Certainly, CapEx has lifted as we look to build resilience in our fleet, particularly NGO and our hydro capacity. We resumed drilling. So we started drilling with IDC earlier in the year. We had some challenges and have employed a new drilling contractor. So we saw essentially a $30 million increase in drilling from the prior year but almost $50 million spent in the year in
drilling wells. It’s great to see those wells finishing successfully and providing production capacity to our geothermal plants.
The Karāpiro turnaround is continuing, so we’re working through the second unit. That synced to the grid earlier this week. We expect to see that fully commissioned by early September. So great to see it two-thirds of the way through a full refurb there at Karāpiro our last station on the river.
In terms of another breakdown, you’re sitting there with about $20 million invested into our retail business and $11 million into enterprise, so that’s mostly tech-related. So just about $30 million was invested during the financial year.
Now moving to sort of market perspective, so we’ve got three charts here and some key messages. I will start with national hydro storage. Yellow line is this year, the dark blue line at the top represents last year, which was wet, and the black line is the average since ECNZ back in 2000.
We do that simply because if we go back to pre-split, ECNZ had an integrated portfolio so operated the lakes and the thermal capacity quite differently to the way it is operated today.
So last year the South Island received 32nd percentile inflows but Taupō-Waikato Catchment got 30th. You combine those two together and you get essentially a national inflow percentile of 23rd, so slightly less than the lower quartile. So it was a dry year for the system, and we can certainly see that reflected through into that yellow line.
So as we speak, it’s been helpful that we’ve seen inflows into both the South and North Islands over the last weekend with that southerly front rolling up. That being said, national lake levels are close to the lowest they’ve been since that split and to get worse we really need to step back to 1992 when we had the power crisis.
So it’s certainly positive to see the system is working, prices are carrying the market, customers know - there is no loss of supply to customers. So in that respect, the market is delivering the reliability demanded.
South Island storage is over 1000 GWh lower than it would normally be at this time of year. So again, unless we have strong inflows into the South Island, we would expect to see hydro generation over the coming months to be lower than it would otherwise have been.
Everyone is aware of the challenges in the gas sector and daily deliverability to not just the generators but also to customers. So there is a call out there. We can see a very strong correlation between the increase and the spot gas price, and the power price. So gas is the marginal supply for the system, particularly during winters and so we have seen a very strong correlation there as gas prices rise it flows through to spot power prices. A particularly important call out around hydro storage is increasingly being utilised as back up generation as that thermal generation reduces. Most of the thermal stations are under fuelled at the moment which is creating some challenges particular in regard to price.
Then the electricity futures curve remains elevated. This financial year we are staring at a curve that is tracking at the moment at $276. Next year is at $199 and FY27 still elevated at $177, so we are seeing expectations that we will still have high household prices largely reflecting tightness in thermal fuel supply for the country.
Next slide. This is familiar to most. Just this is concentrating now back on our hydro catchment, Lake Taupō. Again, you can see the track there. The shaded area shows the range of storage levels we have tracked since 1999 and again you can see the yellow line tracking down close to minimums over that time period. We have seen acute dries. We have had 4th percentile inflows since May to today. Earlier this month we had a week that was producing inflows at the zero percentile, so the dryest we've seen.
The challenge for Mercury is we are a winter peaking catchment. At this time of year, we would normally expect to be receiving our peak inflows and that hasn't been the case for the July/August period. National is tracking at the 2nd percentile since May 2024. Some other interesting data, you can see that the year started, it was dry. We had a slightly wet period through summer and then it went acutely dry as you can see on the deltas on the table.
Also, some interesting observations around how the futures prices or the futures market sort of three months ahead, we're seeing relative to where spot prices were. So, certainly earlier this financial - well, last financial year the predictions were quite good. Then we saw quite a divergence as those - at dry conditions and therefore the futures prices were generally understating the impacts of the dry conditions. That became particularly acute in August where three months ago futures were picking [$260] and we were closer to [$700], obviously backing away with the transactions with Methanex.
Finally, from me before I hand back to Vince. In terms of FY25 outlook, there's a big number on the right-hand side. $820 million is our guidance for this year, so $57 million
lower than our out turn for this financial year, again reflecting three key impacts, we are forecasting a full year decrement of almost 280 gigawatt hours in terms of hydro production, so sitting at 3,800. That assumes that we will go back to 50th percentile inflows from next month, so that sort of gets us away from the resistance we have seen for quite some time.
Gas market has impacted Mercury. Most of our gas has been secured on a short-term basis so we have seen quite a significant increase in the gas cost to Mercury, so that's about 2 petajoules which we supply to our residential customers and then we have had some pricing impacts on the portfolio over the last couple of months at $28 million. So, there's a callout there. We expect our trading gain, we normally plan for around $16 million a year and at the moment we are forecasting a nil outcome for the year. That is highly volatile obviously with power prices the way they are and the volatility, that certainly can be advantageous to traders so we will see how we track for the remainder of FY25.
Back to Vince.
Vince Hawksworth: Thanks William. As I said at the start, we've covered the year that's in review. We've set some background to the year that we're in and the next few slides really want to deal to our progress against the electrification opportunity that we have been pursuing for some time. This slide sort of - look, it sets out what we're doing. We've commissioned significant generation projects and when Turitea was first entered into many people were a bit surprised and said it was ahead of any demand and uncertainly about NZAS. We believe that that was the right thing to do and we've executed on that.
Similarly, we are now delivering two more projects and we have Ngā Tamariki and Kaiwera Downs 2 and as signalled we expect to move to final investment decision on Kaiwaikawe in this calendar year. If you add all of those together that takes us well beyond the billion dollars but it's still so what comes next? We have added two new projects that we are excited to - Whakamaru for a battery and a wind farm west of Huntly. That means that we are in a position to continue to move through these project development cycles in a continuous basis for the next wee while.
If we go to this slide, that shows a bit of build up of how all of that looks and obviously Kaiwaikawe, Mahinerangi Stage 2, Puketoi on there and subsequently no doubt we will add those two additional projects as we firm those up, but we are quite excited about both of those. As I say, a lot of that is about trying to continue a development programme that
works closely with the supply chain as well both onshore and the offshore supply chain which is one of the big challenges for New Zealand as we look to further electrify.
Giving a bit more colour on those four wind farms. Kaiwaikawe I've talked to. We are well positioned. Puketoi, which has been in our portfolio for some time, currently we are working through some resource consent changes and also, we have reoptimized the layout of that wind farm in order to reduce the capital costs of civil engineering. We expect to work through that sort of stuff over the next year or so and so that we can move into FID.
Mahinerangi Stage 2, again subject to some resource consent changes largely due to the fact that technology has changed since Stage 1 was built in 2011. Again, a very strong project once we have worked through that and west of Huntly where we're well progressed with studies and also landowners and we would expect that to appear quite strongly in our forward portfolio.
Getting into the nitty-gritty of what we're doing at the moment. Some photographs there of Ngā Tamariki. Look, at the moment that project is going pretty well but we're in the early stages with lots of materials being delivered and you can see stacks of air cooled condensers there and the associated steel work. Currently on time and on budget and a highly motivated contractor who has mobilised lots of people to site and we are pleased at the moment that that remains over 100 consecutive days of safe operation and that's obviously a big priority for us.
Moving to the second project that we've got under construction at the moment, Kaiwera Downs Stage 2. Obviously, we were pleased with Stage 1. We learnt a lot from that. That has given us great ability to bring the same contractors to bear on this project who we are pleased to be working with again. They're pleased that another project in that part of the world is going ahead.
The picture of the digger there is one of quite a number of new pieces of machinery that one of the contractors has purchased in order to make sure that they deliver the project to the time expectations we have set. That project is going well. The weather when we kicked off was pretty favourable. It's been a bit chilly down there over the last couple of weeks but the main thing is we're in earthworks at the moment.
There there's some - we just repeat here a slide that we put in when we announced Kaiwera Downs Stage 2 which is being absolutely clear about the metrics of the project. I think a really important bullet point in all of that is the reference to long run marginal cost of KD2 based on the LCOE at Gore and comparing that with a firmed price. Why we think
that is important is it can be really difficult in this game to compare projects to projects, so what we are trying to do here is to give more insight into that from our perspective. We are pretty pleased with where this project will land overall in our portfolio and as part of delivering for the aluminium smelter.
This slide attempts to capture the fact that Mercury has up and down the river a large number of machines. Compared with some of our competitors we have many, many more units and each one of those units is reaching an age where we have to make sure that they're fit for the next 50 years. We have a sophisticated programme of doing that work and we are currently working with suppliers to look at what the next decade of work actually looks like to optimise that, but at the moment we're at Karāpiro and it's been mentioned a couple of times, we are almost complete on the second of three machines at Karāpiro.
Every time we look at one of these projects, we are always looking at what we can improve both in terms of energy from the existing resource but also in terms of capacity to meet peak capacity. The Waikato River remains one of the best peaking plants available and being good at doing that is the best use of that storage as we continue the transition.
William mentioned the fact that we have changed drilling contractors. This is absolutely key to the long-term performance of our geothermal assets. We are really feeling pleased with the change that we've made. We continue to drill and thus far the holes that we have drilled have been successful in terms of targeting what we were looking for in terms of capacity. As we connect those, that sustains the long-term ability to produce from those geothermal assets which are a key baseload component of what Mercury produces in its portfolio.
This next slide is a balance across our supply and demand. It breaks down supply into hydro which obviously last year at 4.1 terawatts was a good year based on a previous year that was very wet and we have talked about what we are looking into going forward. It’s geothermal at 2.6, an improvement based on the fact that we've done a lot of work on the way we maintain and operate those assets. Wind. Wind broken into spot and PPA because of the arrangements that we inherited through the Tilt transaction and then our financial position.
Then on the other side our demand being from customers, large businesses, financials, PPAs and our spot sales. We look to be strategically long in our portfolio but obviously that
is more challenging when you experience what we have experienced over the last three months and particularly as William described in the first two months of this financial year. Turning to Retail. Again, I won't dwell too much on the micro detail of this, but effectively Retail integration has completed and I think sometimes and it's something we have talked about for a while but often it's said as if well that was just a job to be done. There are many businesses who have been through these types of mergers and acquisitions in the energy sectors, in the telco sectors and elsewhere who are still on the two sets of technology a decade after doing the transaction.
We are really pleased that we are on one technology platform because that creates massive opportunity for the future. We made a conscious decision not to push acquisitions as we did the customer transfer. We wound things back up in the last three or four months of the financial year but obviously in the current situation, like everybody else, we are being very careful about how we manage our book.
Our C&I yields continue to reflect forward prices but I would say that in the context of everything that has been said that there are many customers of ours who chose to take longer term contracts over the last four years who are insulated from the immediate high spot prices. I have made the point in the recent weeks that 98% of our sales volume is to customers who have fixed prices. That's sales volume. If we looked at customers it would be well above 99% of customers but I prefer sales volume because it's I think a more transparent measure.
This slide talks more to the integration. It sets out the monies that we have spent and as it finishes up with, we pretty much hit what we said we were going to do from a point of view of spend to get to where we've got to go to and we are now focused on delivery. This slide talks to delivery of synergies. We have delivered synergies to date. We have built synergies in. Of course, this whole plan never anticipated the levels of inflation we have seen over the period but that said the changes that underpinned all those synergies both in terms of technology and people and the ability to offer new products are all playing out pretty much as we expected them to.
Obviously, there's a change occurring and this will be the last full year I present and when you get to the half year Stew will be presenting. I think it is, you know, I think I've left him in a great position. He's sitting opposite me at the moment grimacing, but in, in the medium-term Mercury is well positioned.
The board are pleased that we have internal succession which is going to be seamless in terms of what Mercury can achieve and I certainly want to thank William and the team, but particularly William today, for keeping me safe in this type of environment and as we hand over to Stew who no doubt will be speaking a lot more over the next few days as we meet with various people but also be presenting at the ASM.
The one thing I want to point out on this slide, which is a really important slide in terms of how we think about those environmental social and governance goals but I won't labour through the slide, but I point to point two, there's been a lot of discussion about disconnections. On our post-pay brand we have reduced disconnections by 76% year on year, even in an environment which has been highly inflationary and there's been a costof-living crisis. That is entirely due to the work our people do with customers to help them through their most difficult period. We'll continue to work hard at that. Internally people that lead in this area want to get to zero disconnections, but we'll do that in a supportive way that helps people to get on top of any budget problems they have.
We've also supported Nau Mai Rā and Toast Electric through these high-price periods to ensure that they can continue to make their offers to those who are really the most vulnerable in society and find it very difficult to deal with larger corporates. We're pretty proud of the work we do in that space.
But look, there's one thing for certain about the electricity or energy sector. It's never short of people with good ideas. I think we've had every possible opinion over the last couple of months, many of them based on a paucity of analysis or a hugely vested interest. We're strong believers that a whole-of-system approach is the best way to go, not breaching the Commerce Act of course, but a collective effort to deliver great outcomes for Aotearoa New Zealand that allow us to electrify. We think the sector has done a good job of that.
William mentioned 1992. In 1992, hydro inflows were lower than they have been this year. We had brownouts and blackouts, rotating power cuts. This year, under a market-led system, we have been able to manage that. Yes, spot prices have been high, but few have been exposed to those. We strongly believe that everybody also needs to assist the transition by supporting our colleagues who produce thermal-backed generation, so we are an active purchaser of Market Security Options and Huntly Firming Options, because ultimately it's the big picture that matters, not the individual picture. The graphs there show how the lines component or energy components have tracked vis-à-vis CPI.
I'm going to pass back to William now who will take us on the final stretch of the canter. William Meek: Thanks, Vince.
We're on slide 29, talking about our balance sheet. You can see our net debt has tracked relatively flat since '22, slightly under $2 billion. Our credit metrics remain very strong at 2x. Obviously FY22 saw us acquire Tilt Renewable business and the Trustpower Retail business, leading to the increase there in our gearing metrics. The balance sheet definitely supports our ambitious development programs, so we're in a strong position to deliver new capacity to the New Zealand power system. Just after the end of the financial year, we redeemed our Mercury 020 capital bonds and refired those with a $50 million upsize for the Mercury 070, so again it was a well-timed and successful debt raise by the company. Last slide from me before we get to Q&A and a wrap from Vince. We've already talked to the guidance at $820 million EBITDA on the back of the lower hydro generation. That comes obviously with the normal caveat that stuff can change, but right here right now that's our best number. Ordinary dividend guidance, up 3% to $0.24 per share. We're guiding higher capital expenditure for FY25 at $160 million with longer-term Stay-InBusiness CapEx sitting at $150 million, reflecting the geothermal drilling requirement and ongoing hydro rehab programs.
Back to Vince.
Vince Hawksworth: Thanks, William.
Quick summary slide there. I don't propose to read out every bullet point. I think the message is great. Great outcome for FY24. A tough start to FY25, but we've tried to be really transparent about what's moving there. It will rain. It always rains at some point. Really well positioned for continued investment into the future with a financial structure that backs that investment. We look forward to the future on that basis.
I'll throw back to the operator for questions.
Operator: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please star 1 1 again. Please stand by while we compile the Q&A roster.
Our first question will come from Stephen Hudson from Macquarie Securities. Your line is open.
Stephen Hudson: (Macquarie Securities, Analyst) Good morning, guys. Just a couple from me. Just interested in your comments, Vince, on the market-led response to date. If we
look at an aluminium smelter being down for in excess of - or at least one potline of an aluminium smelter being down for in excess of 200 days and a whole methanol train going down for a couple of months, do you see it as a scary experiment or do you have confidence that these demand responses either fuel or power are simply the way forward for New Zealand and for the rest of the world?
Vince Hawksworth: Yes. Thanks, Steve. Great question.
I'll deal with the first one first. The aluminium smelter’s arrangements are a reflection on their desire to stay in a fully renewable market, because they value that and their realisation that average prices over time either reflect full firming or reflect some form of interruptability. I suspect they didn't expect this particular standdown to occur so quickly afterwards, but it is built into the contractual relationships and, from what I've read, is one of four opportunities to do this over a 20-year period. I don't see that as anything other than normal functioning of the commercial arrangements between parties in a market that's not connected by cable to anywhere else and is highly renewable.
I think the Methanex one is a much more complex question. At the end of the day, I'm sure that Methanex are being suitably financially rewarded for not producing methanol. However, that isn't what their core business is.
We have a much more complex discussion, debate to be had at a national level about how a gas resource has been - we all know the history to how we got here, but what do we now about domestic gas of which there is still, I think, a reasonably strong belief there is gas there but it's a bit about how does money flow to get to that gas. How does that compare with the LNG debate that seems to have fired up. I think we do need a very careful degree of conversations around that plus also how we use coal in the mix, which has obviously been very important, because kneejerk reactions have consistently proven to be expensive and have rarely delivered a good outcome. Yes, a much more complex debate to be had, which I'm sure will be had.
Stephen Hudson: (Macquarie Securities, Analyst) That's helpful.
William Meek: Can I just add to that, please, Steve? Our view is encapsulated in our comment about a whole-of-system response. The interconnectedness between the gas market and the power market is deep. Two years ago, the forecasts for gas supply were over 200 PJs and we're sitting at 140 a year. A lot of that reduction is falling - it is falling to Methanex. It's also falling on generators in terms of gas, daily gas availability. The fact that we have had [2nd percentile] on national inflows since May - so almost four months
combined - with the constraints on the gas market and we're still – we’re going to get out of here in terms of a reliable system, albeit with high prices. I think that's still a tick to the market.
The primary purpose of the spot market, which people forget, is real-time dispatch. It does that very effectively. You've seen responses. Methanex is responding to essentially high power prices, an opportunity to essentially push gas back into the market. We've seen commercial and customers make decisions to curtail load too and enjoy the hedging they have from their fixed-price contracts. You won't read about some of that stuff in the papers, but the market's responding, not just on the supply side but also on the demand side, which is to the services of reliability, because reliability, out of the three legs of the trilemma, trumps all. You've got to keep the lights on. Despite tightness of thermal fuels and dry weather, the lights stay on.
The challenge for the sector will be continue to build into that. Certainly I expect to see, with our peers, producing results over the next week or so. The commitment from the sector will be high to deploy capital into New Zealand renewable energy to bring prices down and maintain reliability, increase the decarb of New Zealand.
Stephen Hudson: (Macquarie Securities, Analyst) Thanks. Thanks, Will and Vince. That makes sense.
Then just one last one from me. You would have seen the EAs Dashboard release last night. That's obviously suggestive of an industry that's overearning given its narrow focus. Have you read it differently or do you see it as a constructive initiative on their part?
Vince Hawksworth: I'll start and William might well have add-on views. I think, first of all, it's a very narrowly framed question that has very little context to it, so I think it's quite difficult to draw conclusions about such a small dataset.
An initial thought that we have had, as we have looked at the data, that what it definitely shows is that margins go down as spot prices go up. So it would seem to me that it is showing that a market is sending spot price signals because of a scarcity of fuel, whether that's water or gas or coal or whatever, available to meet demand. Prices have been pushed up to try and manage that scarcity. But the margins are not increasing with those. In fact, they've gone the other way.
But it's such a small dataset and it's such an ill-defined question which I don't think has been well thought through. No doubt there are a million different conclusions one could conclude.
William Meek: I’d just add, I don’t know whether increasing the cadence of disclosures actually tells us a lot. The problem it’s trying to solve is very unclear. Clearly, Mercury in terms of its guidance is down from last year. We’re clearly being affected by this so it’s not true that these costs have just fallen to consumers alone. There are impacts on the supply side.
Our results disclosures, operating stats, two of our competitors disclose results monthly. I just don’t know what the context is in terms of does - is the sector overcharging, earning surplus economic rents, those sorts of thing? We’ve got some very long-run sequences for two of the listed companies, particularly Contact, when you calculate their total shareholder returns over the long term, doesn’t look like it. So, yes, telling what trading margin in the absence of other costs, I’m just not sure what it tells you.
Stephen Hudson: (Macquarie Securities, Analyst) That makes sense. Well, we’ve got time to say goodbye to you later but Vince congratulations on your tenure and thanks for all your time and thoughts over the years.
Vince Hawkesworth: Cheers, Stephen.
Operator: Thank you. Our next question will come from Grant Swanepoel from Jarden. Your line is open.
Grant Swanepoel: (Jarden, Analyst) Good morning, Mercury team. Can you hear me?
Vince Hawkesworth: Yes.
William Meek: Loud and clear.
Grant Swanepoel: (Jarden, Analyst) Fantastic. I reiterate Steve’s comments. Vince, thanks so much for many, many years of great leadership in the sector.
Two questions on outlook and one on operational capability. On your yield growth on slide that shows the uplift, or the down lift to NZ$820 million. Of that NZ$43 million, do we think of it as the Retail book regaining NZ$10 million from the gas increase and then residential recovering NZ$11 million of transmission increases, and the rest coming from C&I uplift as normally happens with high wholesale prices?
William Meek: The yield growth, that’s just price impacts for us over the current year.
Grant Swanepoel: (Jarden, Analyst) Can I assume that your residential pricing is going to at least recover the transmission cost increases? Can I assume your gas book is going to at least recover the gas increases, et cetera?
William Meek: Yes. Our pricing principles are that we pass on direct costs to customers.
Grant Swanepoel: (Jarden, Analyst) Excellent, thanks.
William Meek: So, transmission is different.
Grant Swanepoel: (Jarden, Analyst) Then you indicated…
William Meek: Transmission for the generation side of the business is not so clear cut. You can’t just increase your offers because suddenly you get a higher fixed cost on your generation business, because the way the auction process in the market works it doesn’t matter. It’s just like a poll tax.
Grant Swanepoel: (Jarden, Analyst) Thanks. Okay. Then you indicate that there’s a final claim on Kawerau, the geothermal outage. Is there some of that in the NZ$820 million guidance?
William Meek: No.
Grant Swanepoel: (Jarden, Analyst) Then my final question is more a general question. Referring to I think slide 22 where you show your balanced book and being slightly spot exposed in FY24, Mercury seems to have always had a risk management of running a long CFD, short CFD-type cover program. Is this going to become more and more difficult as we move forward with the lack of a capacity solution?
Is Mercury a little more inwardly focused where some of the others are getting deals like for instance Meridian’s extra 20 megawatts from Tiwai recently, the little swaption they got from Contact on gas, Contact and Genesis getting some gas from Methanex but Mercury just seems to be just doing it the hard way. My question is, is your C&I book maybe a bit too long in the environment we’re facing over the next few years?
William Meek: Yes. They’re all good questions, Grant. I think at the end of the day you can’t operate your business for the worst possible outcome on the market because that will leave a whole lot of money on the table for the rest of the time. That’s my first comment. We’ve seen some very dry conditions. I’m not going to talk about our competitors’ books but certainly their lake storage is larger, so how you manage your lake is important. I don’t think it’s fair that you suddenly say we can’t handle the jandal so therefore we won’t contract with customers, because I think you’re pushing an obligation to customers that they’ve got even less levers to manage.
We’re in the business of particularly buying and - well, generating and selling power. Most of our customers, that’s not their business. They’re in the business of making stuff,
providing goods and services to their customers. I think there is an obligation on the sector to provide fixed-price cover to customers. You do that, you do that at prices that you view are acceptable. You won’t win every year but you’ve got to win more often than not.
The levers are there, there’s no doubt that if you’ve got flexibility will have value; if you can reduce your demand-side exposure through agreements for people to curtail that’s fine but as the Prime Minister says, it’s not ideal that every time the power prices go higher that people stop production which flows through to GDP, et cetera. So, that’s not the preferred approach. The preferred approach is the supply side should generally be managing the volatility in the market.
Grant Swanepoel: (Jarden, Analyst) Thanks, Will.
Operator: Thank you. Our next question will come from Andrew Harvey-Green from Forsyth Barr. Your line is open.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Morning, Vince and William. A couple of questions from me just following on I guess from Grant and I guess thinking around about the risk management practices going forward are just part of what we’ve come here is we’ve seen some fairly historic high wholesale prices.
Does it change your thinking about how you might approach risk management going forward? Particularly, I think about in the context of developing your guidance, 3,800 megawatt hours hydro isn’t actually particularly low. We’ve seen much lower years in the past and the reasonably recent past as well.
William Meek: Yes, I agree in terms of hydro outcomes but we’re not even two months into the year, and July set a record at spot prices at NZ$330 and then August was going to blow that out of the water. That’s coincided with us having come through a year which was dry, so we had 30th percentile, into a period where we traditionally - it is traditionally wetter for us.
You can revise your portfolio settings I think, and people will because the cost of dry now has got a - the high-tide line has come up. That’s something we need to work through. I don’t think that’s by saying oh, we’re going to run a longer book. I don’t know how thatwhere does that shortness turn up inside the market? Someone’s got to - it’s a zero-sum game, someone’s got to pick it up, and you can deal with that through price. If you sell power for a higher number to customers, well then that compensates you for some of the risk of shortness over time.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes. Thanks for that colour. Just a couple of questions I guess on the development side. On the consenting I think you’ve indicated there’s a number of consents that are still required for those additional windfarms, but they are I guess sites that have been consented in the past. Are we looking at relatively straightforward contingent processes here, I assume, as opposed to something more substantive?
Vince Hawksworth: I think it should be relatively straightforward. We had to make some changes to certain parts of the consenting for KD1. We found that relatively straightforward. The processes for Puketoi are slightly more because we are relocating turbine positions to reduce civil costs, but again, doesn’t really change any of the other issues within the consents. I think one of the things that folks generally don’t think about is consents are only one part of the total story. You have still got to work through all of the landowner requirements.
Actually getting the equipment to site generally requires roading changes, which you also have to work through with landowners and councils, and the delivery supply chain has been somewhat challenging on a global basis. We strongly believe that building an ongoing strong relationship with all of the core suppliers actually makes quite a bit of difference. None of it seems that insurmountable, Andrew, but it just adds time.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes. The other piece that seems to be missing from most of them I guess is that transmission connection, and just given the size of Transpower’s queue and the workload that they’ve got, do you see that as a more substantive concern or issue, or just need to work through and we’ll get there in time and we shouldn’t worry about it too much?
Vince Hawksworth: Well, I suppose the issue is we can all see a very big queue. The question that has to be resolved is, is that people banking places in a queue with projects that will not reach final investment decision or not? I think there is bound to be an emerging conversation about what’s the progress a project has made since the time it got in the queue, how likely is it to turn up, because I can see a time coming where you could have a project that is ready to go to FID and the only thing stopping you is certainty about your connection.
I suspect that Transpower are going to have to become more sophisticated about how they review the queue, where people are at, because it can’t just be you happened to pick a place in the queue, even though your project is a decade away from being able to go. That
is going to be a challenge, but we can’t pick on Transpower because to date it hasn’t stopped a project going ahead. It may well be an emerging problem, but it will get resolved. It has to get resolved, doesn’t it, because otherwise we don’t make the progress we need to make.
Andrew Harvey-Green: (Forsyth Barr, Analyst) Yes. Okay. Thanks for those comments and just to echo Steve and Grant’s comments as well, Vince, all the best for the future.
Operator: Thank you. Our next question will come from Vignesh Nair from UBS. Your line is open.
Vignesh Nair: (UBS, Analyst) Morning, Will and Vince. Can you hear me?
Vince Hawkesworth: Yes.
William Meek: Yes.
Vignesh Nair: (UBS, Analyst) Okay. Awesome. A couple of quick ones. Firstly, just a clarification from the earlier question that Grant had. The NZ$60 million of trading losses in the first couple of months, is that made up for as part of the yield growth of NZ$43 million? Is that NZ$43 million effectively dissected across…
Vince Hawkesworth: No, it’s not.
Vignesh Nair: (UBS, Analyst) Okay. So, you’re expecting a zero trading gain outcome for the full year, right?
William Meek: You got it.
Vignesh Nair: (UBS, Analyst) So, that’s aside from the yield growth, so where does that sit as part of the little bridge? On page 30 you've got $43m of yield growth - is that $16m within that?
William Meek: It's in the portfolio. It's in the $28m which is…
Vignesh Nair: (UBS, Analyst) Okay.
William Meek: If you go back to that earlier slide that talked to $820m, it's in there.
Vignesh Nair: (UBS, Analyst) Okay, that makes sense. Just on that, is a zero-style kind of trading gain outcome for the full year a reasonable base case, given this is the first couple of months of trading? What kind of line of sight do you have in the medium term on the trading business at the moment? I'm just wondering what the risk is on the $820m from short term trading?
William Meek: How do I answer that? I'll answer it like this. Volatility is a trader's friend, so I'll start with that. When prices are $700 and the whole curve is elevated, the trade that you should put on is to sell the curve on the view that, essentially, prices are going to retreat. So, that's the view. We just don't see the - as soon as it starts raining the curve is going to come off like a bomb.
William Meek: The thing to do, if the dry holds, well then you're exposed to ever increasing prices. So, that's the conundrum that, ultimately, the traders are grappling with.
Vignesh Nair: (UBS, Analyst) That's clear. Secondly, as far as a fairly straightforward one, just on Kaiwaikawe. I suppose, what's been the holdup? It feels like a project that's been perpetually delayed.
Vince Hawksworth: Gosh, have we got 20 minutes? Where do we start? Firstly, it wasn't helped by COVID, meaning that the resource consent process was abandoned and restarted several months apart by the people hearing the resource consent. It wasn't helped by the fact that a government agency objected to it based on the alleged fact that there was an Australasian bittern somewhere in the vicinity, which was never found. It wasn't helped by the fact that their experts never went to site but still decided to go to a consent hearing making those claims.
Subsequent to resolving all of those things and finally getting the resource consent, we then have faced into the challenges that, as a lower yield site, capital costs matter. Higher yield sites can stand higher capital. Kaiwaikawe is a great site but it's lower yield than a Turitea or a Kaiwera Downs. Therefore, optimising the site for that and its CapEx has been something we've had to do. Also, because of its location, resolving the transport routes has been there.
We are now in the very final stages of dotting Is and crossing Ts, but we also have an issue that the site where it connects into the transmission system is more challenged by the way that - and this gets really quite technical - by the way that there are requirements around power factor. This will be an increasing problem for many embedded wind projects. Now, we think we're finding a way through that. We expect to make decisions around that very soon and I think we remain confident that we will go to FID this side of Christmas.
Vignesh Nair: (UBS, Analyst) Is the PPA with Genesis for an offtake still intact?
Vince Hawksworth: Well, it depends what you mean by intact. We continue to talk to Genesis about where that project's at, but the passage of time has meant that we've got to have a conversation about pricing.
Vignesh Nair: (UBS, Analyst) That's all from me and, once again, echoing the sentiments from before, all the best, Vince, with retirement.
Operator: Thank you. Our next question will come from Cameron Parker from Craigs Investment Partners. Your line is open.
Cameron Parker: (Craigs Investment Partners, Analyst) Hi, guys. Just a couple from me. Do you have any updates on turbine pricing at all, given you going through these feasibility – all the feasibility work? Directionally or...
Vince Hawksworth: Look, we will. I mean, obviously, when we go to FID we'll have an update on turbine pricing. I'm not trying to be smart there, Cam, I'm just very conscious of the fact that we like to keep as much commercial pressure on our suppliers as possible, right down to the last minute that they commit and we commit. So, we are at a sensitive point in those discussions. Globally, the demand for this equipment is not going away and, globally prices will reflect steel prices, rare earth metal prices, shipping costs and all of those things. Whilst, globally, inflation is coming back on some of those things, I don't think we'll see the prices that we saw in 2018, 2019, 2020. Hopefully we see prices that aren't going up like they were in ‘23.
Cameron Parker: (Craigs Investment Partners, Analyst) Thanks, Vince. Also, bad debts. I wonder if you can just provide an indication on trends on bad debts particularly, of course, CNI, but also mass market.
William Meek: Yes. You can see the bad debt provision in the accounts, it's no different from what it was a year ago. Again, I think our team that deals with vulnerable customers have been very good in terms of assisting to manage people's ability to pay their power accounts.
CNI is a bit more binary. They are a bit more spiky so you don't tend to have CNI bad debt, but when it turns up it just pops up. So, that's much harder to predict, but certainly there were no bad debts coming out of that CNI portfolio for us, as of yet.
Cameron Parker: (Craigs Investment Partners, Analyst) Thank you.
William Meek: Obviously, and that's one of the challenges of the demand side going on spot, because obviously their financial viability then is actually connected to the spot price. So, where the spot price rises, their costs rise and therefore their viability reduces. That's, generally, unusual because most customers are not hugely exposed to power in terms of their total cost structure.
Cameron Parker: (Craigs Investment Partners, Analyst) Those CNI customers that are on spot, are you finding they're coming back to the Gentailers or then yourselves for a discussion?
William Meek: Yes.
Cameron Parker: (Craigs Investment Partners, Analyst) I don't know whether you've got a view of that, on risk management and so forth for those users on spot?
William Meek: Well, no. You definitely have conversations with them around the risks. I mean, actually, the code requires you to communicate every year with customers that have chosen to take spot price exposure, around what that means. If they're a market participant the EA actually requires quarterly exposures around what they call stress tests. So, those also exist for the very largest of CNI customers and they need to be signed off by their Board of Directors.
That was implemented in 2010 to – essentially, because companies said, we didn't know. So, they've got a reporting process, for the large users which is, well, you can't say you didn't know because you've signed these certificates, which require you to do these calculations under stress.
Cameron Parker: (Craigs Investment Partners, Analyst) Cheers, William. Last one for me is just, you're actively engaged with Genesis and the HFO. Are there other sizable kind of alternatives that you see in the market or you might see come to market in the future? Because it just seems like the ultimate unanswered question, right? The dry year risk mitigation in New Zealand. I don't know whether you've got any view on that.
Vince Hawksworth: Yes. I mean, it sort of goes a bit to a question that I think Grant was implying about sophistication of the way you deal with these things. We strongly supported MSO, I think we were possibly the only gentailer that did. We support HFO. We continue to talk with other generators about different sorts of products. We're largely fuel agnostic on that, so we're not trying to pick winners. We do talk with some of our CNI customers. We have programmes where there are on a much more micro scale, the sorts of things that we've seen operating on Tiwai. Tiwai is, obviously, very large but we do do that with other customers. We have and continue to do trades with our colleagues.
Of course ultimately, as William pointed out, the nature of our asset mix means that the way the Waikato catchment operates is - we're just at a very, very dry period. Of course, when we're more in the normal range of situation, it very much acts as a peaking arrangement and gives us the ability to manage those sort of peaking and capacity risks. It
can't ever protect us from an energy issue over a long period of time, but that's what we try and buy, is energy products.
Cameron Parker: (Craigs Investment Partners, Analyst) Thanks, Vince. That's it from me, really, and congratulations on a great stint at the helm. So, I'll leave you to it.
Operator: Thank you. And our next question will come from Nevill Gluyas from Jarden. Your line is open.
Nevill Gluyas: (Jarden, Analyst) Good morning, Team. Hopefully you can hear me.
Vince Hawksworth: Yes.
Nevill Gluyas: (Jarden, Analyst) I'll continue with the theme as a starting question. The EA obviously consulting or trying to put together an expert group to conduct or construct standardised flexibility products, which they hope to have start trading next year. I'm interested in what the Mercury view on what the right range of products would be to effectively tradable products to trade risk, to allow retailers to hedge, to allow independent generators to firm their products? What's the house view?
Vince Hawksworth: I suppose that we – look, we'll be willing participants in that conversation, there is no doubt. It will be interesting to see how the expert panel is - socalled expert panel is formed. What the terms of reference are and what success would look like because, ultimately, those products have to end up being priced. When those products are priced you can't then say, we don't like the price and therefore we're going to make some other form of market intervention, having developed the product
We have seen the consequences of that in many, many markets in the world. I suppose we've seen that with the narrative around spot prices and we've also seen it with the narrative around market making and then making sudden alterations. I guess my concern is not so much the development of product but having developed those products is the market going to be allowed to play out what those products mean and do we all understand that?
Nevill Gluyas: (Jarden, Analyst) Right.
Vince Hawksworth: Of course, everybody who then is in a position of buying and selling those products has to determine what that means in terms of their risk position around the various scenarios. In a scenario like the one we have seen at the moment where in just what I would call normal operation of the market making environment, as soon as
somebody doesn't like it, we seem to have said we can't continue to operate. Well, there's one thing…
Nevill Gluyas: (Jarden, Analyst) Right.
Vince Hawksworth: …for certain. In these sorts of products that have been described, what is going to happen if we get to the same position? I think there's a much bigger position or much bigger philosophical discussion to be had about how markets operate and what is important. I think we started this presentation today with William talking about the trilemma and the fact that reliability is incredibly important.
We should not forget that under the current market settings we have managed to keep the lights on under a set of stress settings with thermal fuels and water that have almost been, never seen before I would suggest because even in 1992, it was the investigation into 1992 which then led to the market we have got now, demonstrated that the water was used too fast and thermal couldn't then operate quick enough. Well…
Nevill Gluyas: (Jarden, Analyst) Yeah.
Vince Hawksworth: …this has demonstrated the complete opposite. Anyway, that's my little ramble on that Nevill.
Nevill Gluyas: (Jarden, Analyst) Good. That was useful, thank you. No, that's useful colour. The second question was going to be on PPP. As I see you have made a bit of progress, the trials on demand response. I'm interested, obviously you've got the largest retail base, what do you think - these will still be guestimates I'm sure - but what do you think is the scale you can get to in terms of megawatts of PPPs across your base? Should we be optimistic?
Vince Hawksworth: Look, I can't give you a number off the top of my head Nevill. We'll have a bit of a think about that…
Nevill Gluyas: (Jarden, Analyst) Okay.
Vince Hawksworth: …but look, should we be optimistic? Of course we should be optimistic. There is an enormous amount of talent in this industry and it's dealt with an enormous amount of challenges and so I am sure that we will see things emerge and develop. At the same time though we shouldn't forget that in the mid-’90s many people talked about the fact that we wouldn't need a transmission system because DER would be the thing and we all know what happened.
Nevill Gluyas: (Jarden, Analyst) I remember those days.
Vince Hawksworth: We all know what happened there.
Nevill Gluyas: (Jarden, Analyst) Yes.
Vince Hawksworth: So, what we shouldn't do is lurch from one end of the spectrum to the other. We should make sure just the environment allows the emergence of technologies and we should keep trying things and we should do that with a whole of sector view in mind.
Nevill Gluyas: (Jarden, Analyst) All good. No, completely agree. A last question from me actually was just on fast-track consenting and how do you think we should be thinking about that process? Does that unlock a whole lot of new generation that floods into the market on timeframes or taking your point earlier about there's far more to power projects than just the consenting Is that really - it's a necessary step but certainly not sufficient for a flood of generation to come in. I'm just interested in your thoughts on that.
Vince Hawksworth: I think the good thing about the fast-track process is it becomes more of a one stop shop. From a consenting process it allows things to happen. It doesn't in my view absolve you from the corporate responsibility to work with stakeholders, whether they're landowners or iwi partners, who actually can help you make projects very successful.
As I said before, just because you've got a consent doesn't mean you've got a bankable project but it can only be better than some of the things that we, as I described at Kaiwaikawe, went through. That is a complete waste of money and energy on everybody's part. It will speed things up, but as we've discussed in this, that will no doubt show up other bottlenecks. One of which we have discussed which is Transpower queue.
Nevill Gluyas: (Jarden, Analyst) Transpower, yes.
Vince Hawksworth: Another being just the capacity and capability in the marketplace because there is only so - there are only so many civil and electrical contractors in New Zealand and people who can do this work. Then there is in terms of sourcing equipment, there are only so many global players who will come to New Zealand and deliver wind turbines or transformers or other equipment.
Nevill Gluyas: (Jarden, Analyst) Very good.
William Meek: I think Nevill, yes, outside of the consenting framework, some of the national policy statements are really important. Where we get primacy, well hopefully
primacy around renewable energy, but obviously you run smack bang into biodiversity, coastal policies, freshwater, highly productive land, wetlands, it's just at some point…
Nevill Gluyas: (Jarden, Analyst) Yes.
William Meek: …someone needs to make a decision about are you going to run that gauntlet every time against those policy statements because they still matter, or is it important to actually supply green energy to New Zealand? There's just too many [unclear].
Nevill Gluyas: (Jarden, Analyst) Very good. Yes, yes. No, makes sense. Well, thanks for that. Great colour and echo everyone else's comments and lovely work Vince. Are you lost to the sector or are you sort of - maybe turn up again?
Vince Hawksworth: Is this an interview Nevill?
Nevill Gluyas: (Jarden, Analyst) I suppose so. Look, I'll put it this way, hope to see you again.
Vince Hawksworth: Yes, thanks for that.
Nevill Gluyas: (Jarden, Analyst) Yes. All right, cheers. Thanks, team.
Operator: Thank you and I am showing no further questions from our phone lines. I would now like to pass it back for any closing remarks.
Vince Hawksworth: Okay, well thanks everybody for staying on the line for so long. Great questions. It just shows the high level of interest and insight in this sector, so we appreciate the opportunity. As I said at the start, yes, we have got some immediate challenges, we have traversed those, but it's on the back of a really positive year and also looking into massive opportunities we appreciate the support of Mercury from our investors. Thank you.
William Meek: Thank you.
End of Transcript