Kia ora tātou, everybody, welcome to the Mercury results presentation. I'm joined by William Meek, our Chief Financial Officer, who will be familiar to many of you as well. If I start with what is the third page of the presentation, our highlights. Look, a really pleasing year from our perspective. Hydrology driving record production, 9 terawatt hours. A new wind farm fully commissioned at Turitea, also adding to that result. Of course, hydrology was a record at 5.2 terawatt hours. A really pleasing year backed by scale of production, but not only backed by scale of production, also by the addition of what was the Trustpower retail business, which towards the end of the year, became part of the new Mercury-branded retail business.
Which we are, again, really pleased about how that brand change went, on a refreshed technology stack that's deals a loyalty program, bill, web applications, and providing a single brand experience. The next stage being to continue to transition customers onto that single stack. We also continued our development program, and the development program meant that Kaiwera Downs 1, which has 10 turbines, has now seen 7 of those 10 turbines erected. Whilst we were anticipating production in early October, at this stage, we're expecting to see first production from that site this week. We have back energized to the site. Again, that's ahead of time, and I think is a credit to the team, but also a credit to the learnings we had out at Turitea.
Look, we can't really go past the fact that customers were impacted by what was a benefit to us in hydrology, but by enormous amount of rain in certain areas of the country. You know, we're pretty proud of the way we approached both in Auckland, Hawke's Bay with Cyclone Gabrielle, supporting customers who were affected by those massive inflows of rain and water. We will continue to work with our partners to support those customers. I suppose a successfully scaled business, and that's what we have got. We have more generation, more retail customers, have led to an EBITDA result of NZD 841 million and our 15th year of ordinary dividend growth, William will talk more to that in a moment.
When we look forward, though, and we look at this need to decarbonize the environment, to support industry to decarbonize, we stand ready to support that through our generation development pipeline. We're in the advanced stages of being able to commit up to NZD 1 billion into new projects of, with 2 wind farms and 1 geothermal project, approaching final investment decision. We also have a longer tail of opportunities, which I will talk to later in the presentation. NZD 1 billion is a significant investment opportunity in the context of New Zealand decarbonizing. I'll pass on to William now for the next 2 or 3 slides to talk about the financials in more detail.
Thanks, Vince, good morning to everyone on the call. We're now on slide 4. A strong, a strong lift in trading margin to NZD 1.163 billion for the year. We saw OpEx lift by about NZD 116 million to NZD 346 million. Again, reflecting the increase in scale. I'll come back to OpEx. Giving us a NZD 260 million improvement in our EBITDAF to just over NZD 840 million, so a record for Mercury. NPAT is actually significantly lower, at just over NZD 100 million, down from NZD 469 million.
Last year's result significantly improved as a consequence of the gain on sale, resulting from the divestment of our Tilt Renewables shares and the in funding the acquisition. It's probably worth just calling out, there have been some quite significant changes in IFRS, particularly around the recognition of fair value movements in derivatives, particularly derivatives that are not in a hedging relationship. Now, derivatives that aren't in a hedging relationship, which would, for us, include the very large Manawa hedge, which has got 9 years to run. Load following contracts on wind farms cannot be in hedging relationships. Fair values realized or unrealized now essentially are recognized through fair value movements in the income statement. You will notice that the headline income statement does not have EBITDAF in it anymore.
To see EBITDAF, you need to go to our segment note, which restates some of those fair value movements, bringing up the realized into either revenue or cost, rather than sitting below the line in fair value. Just good, strong, strong increase in operating cash flow, up almost NZD 230 million, again, reflecting that improvement in EBITDA. Staying in business, CapEx, leaping to NZD 120 million, lastly related to our work in retail integration, the turnaround at Kawerau to install new generator and turbine, the ongoing refurbishment at Karapiro. Pleased to see Unit 2 there, operating now, after quite a long outage, an outage of almost 1 year, and the start of our geothermal drilling campaign, which will continue for the next 2 years.
Growth investment at NZD 177 million, largely driven by Turitea at NZD 96 million, and Kaiwera Downs, NZD 92 million, in the financial year. A full year dividend of NZD 0.218 per share, taking the cleared ordinary dividends just over NZD 300 million. On to slide 5. Just a deeper dive into the EBITDA bridge between last year and this year. Vince has touched on the increases in generation. Certainly, hydro was very strong. We saw record wind generation. Geo was actually quite weak, so outages to affect the turnaround at Kawerau and some unplanned outages also at our Rotokawa site. We saw sales yields lift, supporting that of the increase in retail scale.
Also a full year, this relates to a full year of the Trustpower retail business as part of the Mercury family. We saw a NZD 67 million movement, largely as a consequence of the cash out of the Norske Skog transaction in the prior year. Other income was down. Last year, we had significant trading gains in carbon. Those were worth NZD 27 million. We've received the interim settlement for the Kawerau outage, worth NZD 26 million. That explains the movement in other income, largely. We saw that operating cost increase of NZD 116 million, bridging to the 840 odd for EBITDAF in 2023. Slide 6. Just a deep dive into operating expenditure. You can see NZD 70 million related to retail growth, again, largely the Trustpower business integration.
We saw OpEx of NZD 16 million, and we saw CapEx of NZD 17 million on top of that. Sitting there at NZD 33 million for the year, cash costs to affect the integration, which Vince will talk to shortly. We saw a NZD 14 million lift in our asset maintenance costs, and certainly inflation, giving it's higher running through the business, completing the bridge to that 346 OpEx print for 2023. Where's the money going? At the last chart there, really bridging from EBITDAF through to a NZD 50 million reduction in net debt. Big, big changes there. Really investing, NZD 271. We've touched on that in the CapEx. Again, the growth program between KD one and Turitea and our staying business CapEx.
Interest in tax at just over NZD 100 million a piece, with that dividend paid with cash. There were, was a DRP active during the period, reducing that slightly, and a working capital movement of NZD 50. I'll hand back to Vince.
Thanks, William. This slide tries to capture our strategic intent. I think some of the really important things to note here is that in the last quarter, we launched our new purpose, "Taking care of tomorrow, connecting people and place today." We think that's more reflective of the opportunity the business has to make a real difference in the energy transition. Alongside that, updated our 2035 long-term aspirations, which are centered around the assets that we enjoy, the communities that we serve, the customers that we value. Our people who we think make a difference, are a very important adaptive culture, leading to the commercial outcome, where we see commercial growth in generation in Aotearoa, and the supporting nature of that for our ambitions as being key and important.
Alongside that, we expect, at the end of this financial year and leading into the next financial year, to update our 3-year objectives for FY25. Moving to the next, to the next slide, where we talk about some of those people issues. Look, we can never be complacent about health, safety, and well-being. Of course, Total Recordable Injury Frequency Rate, or TRIFR, is seductive, but it is a lagging indicator. Whilst we're pleased with the direction of travel there, we know we're only 1 incident away from that not being a great number.
Really important to us is our newly refreshed health, safety, and wellbeing policy, which really focuses not only on what we do from a process point of view and process safety, but also the culture of safety, and thinks about both the physical and mental side of wellbeing. On the other chart, on the right-hand side here, we, we capture some of the things that are important to, if we really want to create a powerful and diverse workforce in the future. As you'll see, you know, whilst we are progressing on all of those metrics, we are a way off of our targets. That really is important because that pushes us to strive harder. We have, though, implemented a leaders of our ethnic diversity program. We hope to see that help that particular area.
Internal mobility is a really important thing, that's about growing our own rather than simply recruiting from outside. Our, our women in leadership has improved on the back of the retail acquisition. We can't be, we can't be in a position where we take that for granted. That said, you know, a shift in our cultural index is important. We still have a ways to go as we integrate 1,400 staff under one brand. You know, we don't take the M&A challenge that comes when you've got people from different backgrounds as an easy challenge to overcome. Going to the next slide. I talked earlier about our commitment, optionality of up to NZD 1 billion of generation investment that we can make in this financial year, driven by two wind farms and a geothermal project.
We have final investment decisions expected for Kaiwera Downs, Kaiwera Downs 2, and Ngā Tamariki Unit 5. All of those are subject to the final commercial discussions that need to occur, in some cases with suppliers and in some cases with off-takers. Look, the winds are blowing in the right direction, as you might say. I've talked to Kaiwera Downs 2, of course, we have also invested quite considerably in understanding the Puketoi Wind Farm, which we believe with optimization, can come into the discussion beyond this financial year. As we also show on the chart to the left, to the left-hand side, we have a number of other projects that we're yet to announce, but we are well advanced on understanding them, and you can watch this space in the future.
Just to reinforce that on this slide, we, you know, we just note where those major projects are. We're particularly pleased with the way that Kaiwera Downs 1 has gone. Yes, it's a smaller project, but it has proven out our multicontractor model, and it'll be great to have that fully operational, at least on time, but possibly ahead of time. The next slide really just gives a picture of Kaiwera Downs, and reinforces what I have just said, so we can move on to the next one. Increasingly, for businesses like ours, ESG is becoming an absolutely key activity, the environmental, social, and governance aspects. I think, historically, we have seen a lot of work in this space, but a lot of that work has been seen in almost in, in different silos.
Our chart on the left here tries to start to bring together some of the some of the things that we are doing under each of those headings. Some points to note here, this is the seventh year that Mercury's been a 100% renewable generator. We have really stepped up our program with our approach to customer care. That's through both our own propositions, through working with others, including with competitors like Genesis, but also supporting other propositions which appeal to particular vulnerable customer groups, Nau Mai Rā being a example of that. We are active in understanding our supply chain aspects through modern slavery initiatives. We continue to invest in the restoration of natural environments, so things like the Waikato Catchment Ecological Enhancement Trust.
That becomes important as we look into the future, going beyond greenhouse gas disclosures and start to think about how the task force on nature-related financial disclosures will be adopted by New Zealand organizations, and we're committed to taking a leading role in that space. Lots of work to come down the track here. Of course, for us, being 100% renewable, our challenges in terms of scope one emissions really all revolve around our CO2 intensity. We have adopted science-based targets from the SBTi initiatives, and that will drive some of our investment into reducing greenhouse gas emissions. That includes things like reinjecting the CO2 at our geothermals.
You can see on the left-hand side, there are some targets we have adopted as part of the SBTi program, which has a formula to, I guess, which is the formula that we are using to assess ourselves. This will be challenging, particularly challenging when we look at natural gas sales. Going on to the next slide. I will pass on to William. We'll talk a bit about hydrology, gas, and the market.
Now on slide 14, some hopefully familiar scatter plots, obviously updated for FY23 actuals. FY23, being a wet year, produced a whole lot of prints in for the delta to national storage averages, which were clearly above. Wet conditions, high lake levels, lower prices, but still materially higher than the trend we would have observed from 1999. We are seeing an absolutely higher curve fit in spot prices and its correlation with storage levels across New Zealand. We are also seeing a waning of the connection between gas prices and electricity prices, so those scatter plots are widening. Again, the flexibility of gas or the lack of gas availability is reducing the link between gas and power prices.
Though, the Methanex outage was again, this year, is helping in terms of loosening some gas supply to thermal plants over this winter. Three key charts in slide 15. We're seeing international coal prices come off their peaks in mid 2022, so the pressure is certainly off there. We have a large coal stock pile at the Huntly Power Station. That's mostly still running on gas at the moment, and obviously, people will be aware of the circuit breaker issue there at E3P. We're seeing 3 ranking units committed at the moment. That is good in terms of continued reliability of meeting peak demands in the New Zealand system.
Carbon prices are well off their peaks, which were over NZD 80 NZU again back in mid-2022. We did see concern around forestry credits and what and how the ETS framework might treat those. We saw quite a sharp decline in NZU prices. Through to mid this year, we did see quite an abrupt U-turn there from a policy level. We've seen a spike with NZUs back above NZD 50 a ton. Again, that will be, again, over time, increasing costs to greenhouse gas emitters in New Zealand. Electricity futures. We've been above NZD 150 for a 3-year, sort of 3-year look forward since early 2022. You're still seeing sustained prices, still reflecting relatively expensive thermal fuels.
We did see a uptick in futures prices out to May 2023, as a consequence of Genesis' announcement, taking E3P out of the stack. Probably a key takeaway is probably that last bullet, that forward electricity prices are affected by renewable energy intermittency and how often the most expensive generator sources set prices. And shouldn't be compared directly to the levelized cost of energy for new capacity, particularly intermittent generation from wind or solar. Another chart we like to reproduce. Certainly, this, this demonstrates the record hydro generation over FY23. That was 5,209 GWh versus a mean of around 4,050. Significantly higher.
Certainly, the wettest year on record for the Waikato catchment, with records going back to 1927, and it's an outlier, so it's several hundred GWh higher in terms of inflows for the catchment. We spilled over 1,000 GWh. Between the generation uplift and spill, we're up about 50% on average levels. Last year was dry at just under 3,700. You can see in the, the yellow line is, is this year, which is the storage track for Lake Taupo.
We are actually hitting the top, so setting new sort of, maximum, maximum levels across the year in several places where it hits the top of the blue shaded area, which reflects the minimum or maximum lake level at that time of the year, over the last 24 years. That's since essentially, Mercury or previously Mighty River Power has operated the Taupo catchment. If you go beyond that to the days of ECNZ's operation, you can get some quite strange outcomes because they were optimizing the entire hydro system rather than the catchment separately. We did actually squeak over our normal operating limit by a few centimeters. That's the first time we've done that since 2011.
Probably the last call out on this slide is just the comparison between futures prices and spot prices. We did see spot prices, relatively low for the year, on the back of wet conditions. The futures prices were actually quite high. That's showing the average monthly futures price three months earlier. The market consistently expecting prices to be stronger than how actual spot prices turned out. Clearly, couldn't predict the fact that we had persistently wet weather reoccurring, 'cause those markets tend to try to mean revert on hydrology. I'll hand back to Vince.
Thanks, William. So just talking to sort of a few issues around our core business. This slide talks about existing assets and the work we're doing. Karapiro rehab, William mentioned earlier, with the first machine now back in operation. I think what's really important is when you give these long life assets a birthday, you also get the opportunity to lift performance. So over the full life of the project, we expect to gain 17 MW of capacity at Karapiro. Coral geothermal, we were out for 2 months, largely focused on the full replacement of the generator and turbine as now, as a result of the major incident we had a year and a bit earlier. This was a really big turnaround, very complex. Many, many people hours, 53,000.
Look, we're back in service now, and that service, that station is now relatively stable as we've come out the back end of that turnaround. We've also commenced our drilling program. That 14-month, 8-well program, expected to be about NZD 128 million. We've started the first hole, and it's all about reinvestment in the capacity of the Coral, Ngatamariki, and Rotokawa fields to offset decline. And that's early days yet, but we'll continue to report back on how that goes. Going to the next slide, looking at sort of re- retail or sales. Look, we increased total connections across the year. That was pretty important to us when we bring the two brands together.
As I say, bringing two brands together, a major merger of two cultures, two sets of people, we thought it was pretty important to be able to lift connections whilst we were doing that, and we were able to do that, and that's very pleasing. We've continued to sell into C&I as the forward prices have meant that folks are still looking for long or have been looking for longer term contracts. We have done that, and we've also looked to manage yields. Mass market yields being somewhat influenced by the addition of the Trustpower customer mix. Generally speaking, pleasing, pleasing year leading into the brand, rebrand. Going to a little bit more detail on the integration.
Listeners may recall that the, you know, the sort of call to action that we've had with that was one team, one brand, one technology stack, and being future ready. The June 2023 brand change was a really big milestone. That's enabled those customers on the Gentrack stack, largely ex-Trustpower, to access the Mercury Rewards program. At the same time, we updated our bill, we updated the website, and we introduced a new app. Quite a lot of technology change inherent in that brand change. I think we, we surprised ourselves somewhat by the willingness of ex-Trustpower customers to download an app with over 100,000 customers doing that.
At 1 point, for 2 weeks, it was the fastest, the fastest set of app downloads in, in New Zealand was the Mercury customer app. We're now into the process of migrating customers off of SAP onto Gentrack, and we've done our first pilot migration a couple of weeks ago, and we're just assessing the lessons out of that. Largely speaking, we're pretty pleased with how that went and expect to continue migrating customers through the period to the end of October. From a cost point of view, well, we've spent some NZD 33 million, and we still believe we're on track for the synergies over the 3-year period. Of course, those will come, particularly as we get off of legacy technologies. Going to the next slide.
I, I mentioned earlier the issues associated with Cyclone Gabrielle, but more broadly, I think the issues associated with affordability and hardship in general, of which, of course, energy hardship always gets called out. I think because, you know, irrespective of people's living conditions, it's an essential service. We are active. We've developed a number of support mechanisms, which are outlined there on the left-hand side. We are really mindful that we are New Zealand's largest electricity retailer. We're a large multi-product retailer, and that, that does require us to stand up and step up to look after vulnerable customers.
We're particularly pleased that we've been able to start working alongside our colleagues, who we can compete with hard, but also recognize that the solutions for people in hardship come from collaboration that is appropriate under the Commerce Act. The next slide turns to decarbonization. I think, you know, we've talked now for many, many of these meetings about our commitment to decarbonizing New Zealand. I think the chart there is pretty interesting because it does show how residential prices have moved over time. It, it shows that, you know, largely the cost of electricity has tracked lower than inflation. We don't shy away from the fact that the transition is going to require significant investment across all parts of the sector.
Whether that's in generation or whether that's in transmission, whether that's in distribution, a whole of sector approach is going to be really important. In achieving that, we also still believe that thermal peaking will play a really important part because if we're to support a pathway to a largely renewable sector, then we do need to meet those peaks in the middle of winter if the wind doesn't blow and the sun doesn't shine. We think that sort of collaborative overall pathway forward, as described in the Boston Consulting Group work, is really important. I'm gonna pass back to William now, who's going to talk to a bit of a roundup on financials and take us home.
Two slides to go before Q&A. Slide 22 is really touching on Mercury's capital structure and strong balance sheet. Certainly there's some quarters are concerned about MOM companies not having the balance sheet to support essentially the decarbonization necessary for New Zealand. This slide should assuage concerns about Mercury's ability to underwrite its generation development investment program. We see a very strong improvement in our capital structure between 2022 and 2023. Over that time, we invested NZD 1.53 billion in the last two years in growth projects, between the Trustpower retail business, Tilt Renewables, and our ongoing investment in wind farms under construction.
NZD 600 million of that was funded from the sale of our Tilt shareholding, still, that leaves NZD 900 million invested over that two-year period. EBITDA has lifted from, we would tend to be trending around the NZD 500 million range to over NZD 800 million. I'll touch on guidance shortly. We're in a strong position at the good end of the BBB+ range from S&P. Again, a call out there for our debt. Mercury does have NZD 550 million of capital bonds, NZD 275 million of that will be treated as equity by Standard & Poor's in terms of them calculating our gearing ratios. Quite a lot of headroom there.
Essentially, we could increase our gearing by NZD 800 million without a change in our earnings, still be operating inside that BBB+ S&P rating. A final call out, we do have an active DRP. We've confirmed that the DRP will be active for our final declared dividend this year with a discount of 2%. Last page, call out for guidance, EBITDAF guidance for FY24 of NZD 835 million, very similar to this year's result. Again, composition quite different. We're expecting a normalization of hydrology back to mean, 4,067. That's a slight uplift reflecting the efficiency gains at Karapiro. Again, we'll expect to see those play through over the next 2 years also with steady increases.
We're expecting a normalization of geothermal generation, so we won't be having these large outages. Then wind has been normalized also with new wind coming on, so full year of Turitea South and essentially three-quarters of the year with generation from Kaiwera Downs 1. Some other call outs there. We do have about NZD 10 million increase in transmission pricing. We're expecting the final settlement for insurance of Kawerau during the financial year 2, just under NZD 20 million, increases in operating expenses, taking us through to that final guidance of NZD 835. I'll hand back to Vince for concluding remarks and kick into questions.
Thanks, William. Look, obviously a really interesting year from us. You know, high, high generation driven by high hydrology. First full year of Trustpower rebrand, and really advancing our generation development pipeline whilst taking care of our core assets. A lot of work, a lot of hard work from the team here, but developing a platform for the next decade of growth and opportunity as New Zealand decarbonizes. We'll move to questions, I think. Operator, please.
Thank you. We will now conduct the question and answer session. 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 press star 1 1 again. Please stand by as we compile the Q, Q&A roster. Just one moment, please. Our first question is from Vinesh, Vinesh from UBS. Please go ahead.
Hi, Vince and William, can you hear me?
Yes, we can.
Yes.
Awesome. Great. Congrats on the great result. Just had two quick and easy questions to begin with. You know, firstly, just looking at the projects in the pipeline of sort of 300 megawatts or so in the next 12 months for FID. Can you maybe just talk a little bit about what you need to see from here, as opposed to have full confidence in bringing those to market? Perhaps, you know, both from a supply side front, so you know, raw materials, pricing and EPC contracting, but also on the sort of offtake and demand side.
Yeah, thanks, Vinesh. Look, on the supply side, obviously we want to see the best pricing that we can get. We are very close to finalizing that pricing. I think, I don't know which global wind players might be listening to this or.
Yeah.
Look, there's, there's, there, there is still, there is still competition. I think New Zealand, at this stage, we're in a position where, some of those big global, opportunities haven't quite ramped up yet, so we think timing's pretty reasonable. I think what's probably more challenging is making sure that, we can access on the ground people in New Zealand. There is competition for civils and balance of plant-type, suppliers. We very much, want to continue the very strong relationships that we've had with some of those players, with the work we've already done. I think we're in a reasonable position from of that, because our projects aren't, aren't considered vaporware. We go in a straight line. We do what we say we're gonna do.
Mm-hmm.
That's quite helpful. On, on the offtake side of things, as you can imagine, those are pretty important commercial discussions. It's well known that Kaiwaikawe is a project that we've been working with Genesis on. We continue to talk to Genesis. We still anticipate concluding arrangements such that we can deliver that project as we want it to, albeit significantly later than we'd originally envisaged. OEC5 is a project that we can make a choice about integrating that into our portfolio, but we're always talking with other industrials or players who want long-term arrangements. OEC5 is obviously beefs up our base load. KD 2, KD 2 is obviously a project which is somewhat dependent on outcomes at the bottom of the South Island.
Yep, that, that all makes sense. Just sort of talking sequentially in terms of cost pressures from, say, steel prices and, and, and freight rates. Are you seeing sort of project economics get, get, you know, sequentially better, or are you still seeing some, you know, constraints in terms of pricing for projects?
Oh, look, I, I think, I think the, I think, you know, you could look. Freight, freight rates have obviously come off from where they were, in that immediate Covid period, but as have some sort of commodity prices. The reality is, we're not buying the freight rates or the commodity price. We're buying the, we're buying the output from a supplier and then those suppliers have plenty of choices for where their kick goes to. I don't think you can draw a sort of straight line equation or algorithm that reflects all the way through. You only have to look at the global, global media to see that some of those companies have suffered massive margin squeeze.
You know, there's a sort of new normal that we would expect to see, which won't look like what we saw in, maybe back in the Turitea days.
Yeah. Okay, that makes, that makes a lot of sense. Thank you. Secondly, I suppose just a bit of a hypothetical question on Tiwai. I think you've been pretty open about the fact that you've sort of been in discussions with Meridian, NZAS, and NZAS. I think, you know, talking to Meridian, the pricing discussion has sort of moved to a more flexible one linked to aluminum prices. I suppose I'm just keen to hear your views on this. Is a sort of flexible style of pricing arrangement, something, you know, you'll consider as part of your capacity allotment? Well, assuming that goes ahead. Sort of what's your view in, in incorporating, I suppose, more direct commodity price risk on wholesale prices?
Yeah, look, firstly, for absolute clarity, we've had no discussions with Meridian or with Contact, about because, yeah, that would be in breach of our Commerce Act obligations. We, only conversations-
Sure.
we have are with Rio, so with Tiwai.
Yep.
Look, I, I mean, my observation would be that the tone and nature of the conversations are about Tiwai, being a long-term player that understands its obligations to Aotearoa, New Zealand, that's wanting to reset, its relationship with the country after, you know, some pretty difficult press and action. At the end of the day, Mercury is still a relatively small tail on a, on a, on a big dog, and they, the discussions they're having with others have to come, have to land. They understand what we can deliver. I think they understand the value of flexibility.
You know, it's publicly announced the deal they did with Meridian on flexi demand, supply, balancing, under the current contract. I, I, I think all of that stuff comes into the mix, in this conversation. I think we're just getting to a, you know... I'm an optimist, that we are getting to a more mature way of thinking about what's in the long-term benefit of the country, which is a, I think, a sustainable, industry base that provides jobs and economic well-being, served by a retail, by a renewable energy sector that can sort of, perform for customers.
Okay, that's very helpful. Thanks, Vince. That's all for me.
Thank you. Just a moment for our next question, please. Our next question, we have Grant Swanepoel from Jarden. Please go ahead.
Good morning, team. First question around a little bit of clarification. 12-18 months ago, you set your FY24 target of NZD 800 million. That didn't include Kawerau, so your NZD 835 has three-quarters of the 147 gigawatt hours of Kawerau over and above what you were looking for back when you had your strategy day, plus that NZD 18 million in the guidance from insurance is related to FY22. A normalized NZD 817 guidance only, only, you know, with the Kawerau difference, you know, pretty flat on, on where you were looking for a couple of years ago. Getting to my question, does that assume that the margin uplift from CNI has been totally taken up by cost pressures?
Yeah. I, you've got a very mechanical calculation there in terms of what is. The NZD 800 million was always a, always a stretch. We increased, we increased from seven to eight, largely on the back of the Tilt and Trustpower transactions. We contemplated, we always contemplated other things would happen. Yeah, it was a, it was a, it was a, it was a stretch target for us in terms of hitting, hitting the NZD 800. Yeah, we, I think it's totally fair to back out the insurance. It's a, it's a one-off, and it's essentially compensating for costs incurred because of a major plant outage.
In terms of the underlying business, we're in a, we're in the hump right now in terms of retail integration, we've sort of, we've got double, we've got double, we've doubled up, we've got two, we've still got two retail systems running. We've procured extra licenses for the Gentrack system as we port across, but we're still paying for licenses on the Mercury stack. You know, we've, we've got a very big focus around how we lift our productivity and efficiency as we roll through and complete our, our, our retail, retail integration. So.
Look, Grant, I.
Thank you.
I think I'd just add that, yep, there are, there are definitely headwinds, but I would, what I would say, though, is, you know, we, we are in the phase of, massive integration of people and technology. But we have really strong belief about, our ability to work through that. Those headwinds of, inflationary headwinds, though, are real. I think everybody's seeing those. But, you know, our ambition is clear. We can, we can work through this. We can, we can get onto this single stack, get the people, get the, you know, the customers across, and see those synergies come out over the next 2, 2 years or so. It was always gonna be a 3-year journey. I, and I would say for an M&A, there are many, many stories. The world is littered with disasters.
We've got over the first Everest, which is the brand change.
Thank you. Just quickly on, on guidance or continuation on guidance. With an El Niño event that we're moving into, some of your competitors are indicating that wind gets a nice kicker from that. Are you assuming any of that in your guidance? If not, including, including in your guidance, do you expect that to occur? Around your hydro forecast, you showed how your dam levels are through the roof at the start of FY24. Why have you not indicated a higher-than-average guidance for hydro at 4,067, only 17 above 4,005 every year?
Can respond to the second one first. Yeah, we did, we did come into the financial year or close last year, about 100 gigs higher than average. We've actually had. It feels surprising because it feels like it rains every day, but we've actually had below-average inflows to the Taupō catchment over the last 7 weeks. Which is why we're, we're largely, which is also the wettest time of the year for us historically. We're, we're expecting to turn out a average year, based on, based on look forward. You've, you've got a negation of drier, drier weather against that opening position.
Can you just repeat the first question, Grant? Because we didn't quite catch it.
Oh, sorry. Meridian was indicating to me the other day that an El Niño event, which we're moving into, should push wind volumes higher than an average year. Do you guys also expect that?
No, we haven't, we haven't. We're just forecasting the just expected, expected wind. I mean, last year was below average in terms of just average wind speeds and, you know, a lot of, lot of easterlies, which is not the prevailing wind for New Zealand. It's unusual to actually have really wet conditions but not have higher wind. You sort of because wind and rain are positively correlated normally. No, we haven't. We've just assumed we'll, we'll generate our, our mean levels of wind.
Thanks. There was last just 2 quick ones. Kaiwera Downs 2 big wind farm, is that dependent on a Tiwai positive stay decision? Second one, just on carbon volatility, can you give an indication of what you're expecting from a carbon profit over FY24? Then the final one, with the market making losses now being removed from EBITDA and put below the line, do you guys have any of that impact in your FY23 numbers?
The first one, KA, KD 2, I, I think the, I think the simple answer is yes. If Tiwai doesn't stay, I think South Island generation's going to be not the place to be putting any new stuff. The second 2, I'll probably pass to William. That's carbon and market making.
Yeah. So on carbon, obviously, with the movement in the curve, curve came down significantly, has bounced up slightly. Yeah, I mean, we're normally budgeting trade and gain in the sort of NZD 15 million-NZD 16 million range. Our trading gains for last year, which had no gains in carbon, still matched that number. FY24, market making. Yeah, we've got a different view. Market making is not a cost to Mercury, so we've still our market-making obligations in terms of our trading book are offset, more than offset by trading. In that respect, we're different. I think context, explanation for bringing it below the line is it's not actually market-making obligations, it's actually just fair value for derivatives.
In derivatives, you're trading and not in a hedging relationship, therefore, gains and losses, realized or unrealized, are taken through fair value. That's what actually IFRS says. Ours, if you go back to our segment note, you'll see a restatement. We bring back, we bring back all realized gains and losses from derivatives back into revenue or cost, so it goes back up above the line for us. We're not keeping it below the line. Our EBITDA, EBITDA number includes the cost of market making as well as any trading gains or, or realized gains or losses from any derivatives that are in a non-hedged relationship.
Thanks, William. Thanks for those answers.
Thank you.
Thank you. Just one moment for our next question, please. Our next question, we have Cameron Parker from Craigs Investment Partners. Please go ahead.
Morning, guys, congratulations on a great result. Just first question is, assuming Tiwai stays, and just your confidence in that would be great. You know, what are your priorities in terms of protecting that GWAP that, that Mercury's traditionally gained, and so the flexibility and so forth out of its hydro units, and are you considering any sort of other assets, such as batteries?
A couple comments from me, Cam. We're actually in a pretty good position. We've got we've got the largest wind portfolio in New Zealand. That being said, the vast majority of it, it's actually under load following contract. With the Amazon contract, which will kick in, next year, Turitea. Essentially, we've got three-quarters of Turitea essentially sitting in our portfolio, which needs to, which needs to be firmed. It doesn't actually need to be firmed 'cause it's a, that's a value decision. Of that portfolio, I think that's quite positive. Mercury does have, certainly does have options. Our C&I book is 3,500 gigawatt hours, between physicals and financials. We do have choices, with... Those are firm contracts.
We're not, we're not selling a wind or solar profile to, to those customers, typically. It's, it's at the meter and, you know, We, we still, we back ourselves to manage exposures. If, if, if price premiums justify essentially firming, then again, Mercury would be happy to enter into contracts where essentially the, the risk of firming lay stays with us, to give the customer confidence around their, you know, their power costs. I, I think, you know, it's, it's we're in a, we're in a strong position for the next decade in terms of dealing with intermittency. We are looking at, we are looking at batteries. While the volatility in the market has increased, it's still, still not easy to get a battery to work.
In terms of just raw economics, you need, you still need bigger peak-off-peak differences. I think the investment case for Meridian up at Bream Bay is they've certainly got an uplift in terms of actually impacting reserve prices, which confers a benefit to their hydro portfolio in the South Island. We don't have that. Batteries are certainly something we continue to look for. I think they'll play an increasingly important role as we look to deal with demand peaks. Yeah, they're there. We're unlikely to be looking to build a battery during FY24, given the current developments that are on our plate today. It's in the mix.
Yeah, great. Thanks, William. Thanks. Also just, just with regards to gas and, or thermal peaking, you know, all the participants are essentially agreeing that, you know, it's required for the future. We seem to have, you know, people retiring gas plants, you know, asset owners, with their assets up for sale in the upstream area. Where do you think that, that solution might, might come from in terms of that support for a, for a, for a transition for the, for New Zealand's renewable generation?
Yeah, look, it, it's, it's challenging, isn't it? To... I mean, I, and we, you know, the BCG report was pretty clear that the most economic way forward was a good mix of renewables with a very, very small percentage of gas peaking. There are consented sites ready to be built. I think the challenge is having a sort of political, regulatory environment that allows those decisions to be made. Yeah, certainly Mercury would, would be happy to support through contracts, that sort of, that sort of investment.
We, you know, we're, we're not, we're not trying to be so sort of pure about that, because we actually think if you look at the trilemma, the, the, the issues turn up with security of supply, and we know that peak demand on a cold winter's night is, is a critical thing there, at least cost. We know that, you know, the cost of gas peaking plants is well understood. That, that facilitates the biggest amount of renewables possible to decarbonize the whole of the energy consumption, which means more EVs, more of the sorts of projects that we are seeing with New Zealand Steel. Yeah, more use of electricity in the industrial process. If you sort of look at it from that perspective, then I, I, I think given, given a bit of time, logic should prevail.
Great. Thank, thanks, Vince. Just lastly for me, just with regards to operating expenses, obviously, you've got synergies to come through from your work, through, through the Gen, Gentrack, stack and so forth. What's, what's the long run sort of OpEx, for your, for your business at, at this sort of scale going forward?
It's, it's lower than it is currently. Inflation is a monster. When you're running at 6%, 7%, that is, that is quite a challenge for, I think, all businesses. It does, it certainly does focus the mind. We're, we're seeing inflation increases in specialist areas which are just obscene. Which therefore do challenge you to explore new ways of doing things and what is, what is essential. We are working on that. We did not... I think no one, 2 years ago, would have been expecting inflation to be running at 6%, 7% through this time. It's quite materially different from where we are. We'll, we'll see whether the Reserve Bank and the rest of the world's got inflation under control.
I think the genie is still out of the bottle at the moment, but people are expecting it to come back. Yeah, we're very focused on delivering the synergies in our Trustpower retail business case. We just, we just need to get customers through onto this stack, so essentially, everyone's inside one process, one system to really move forward. We have seen some increases in terms of maintenance costs in our generation business. Some of those in terms of procurement of gear, are somewhat unavoidable because you're beholden to often, sole source supply. Again, yeah, the business is very focused around how it, how it manages its cost structures, into the future.
Yeah, Cam, you can be assured that that's something William and I agree on. It's lower than it is now.
Yeah, that's great. I look forward to seeing it. That's good. All right. Thanks, guys. That's all from me.
Thank you.
Our next question, we have Steve Houghton from Macquarie Securities and NZ. Please go ahead.
Hi, guys. Thanks for taking the questions. Just a couple from me. On the geothermal outages, I think it cost you sort of 210 gigs this year. Can we just add that back to FY24, or will you not fully recoup that? Secondly, just clarifying the market making gains and carbon trading gains, that was-- sounds like it was NZD 15 this year and going to NZD 30. Is that what you were saying before, Will? On Ngātamariki, congratulations on getting the consent there. I just wondered if you can give us a sort of a rough cost for the additional unit there. Would we be safe in using sort of NZD 80-90 for the cost?
Then just lastly, maybe a longer, longer view question around the BCG report and some of your earlier comments on sharing the burden of the investment. We've obviously got about half of that investment is going to supposedly come from the distribution companies that are owned by councils and community trusts. You know, have you got sort of reasonable confidence that they actually have the wherewithal to invest their share, sort of NZD 22 billion of that NZD 42 billion? If not, you know, where is it gonna come from?
Okay, it's there's a lot of questions there, Steve. We'll kick off. Geo-normalized. Yeah, you'd, you'd expect, putting aside a very major maintenance outage on a geo site, that you'd be running availability in the sort of 95... Well, certainly above 95, potentially higher than 96 across the geo fleet. Yeah, you do get a big step up. I think last year was actually the lowest, lowest geothermal generation we've seen since Ngātamariki commissioned back in 2013. The Koto outage was quite long, and it came out slightly earlier than we'd, we'd expected. Yeah, normalizing geo, just, just assume a availability of 95, and you'll, you'll, you'll, you'll generate that sort of 200 gig uplift. On carbon costs, no, the trading gains or losses?
No, no, no, not between... I mean, we had a very abnormal gain back in 2022 on the back of those. That's sharply rising curve. We're still, we're still forecasting a sort of annual trading gain between essentially power and carbon of sort of NZD 15 million. Carbon cost at Ngātamariki, Ngātamariki is sort of our first station that's up for sequestration, so only a quarter, a quarter of the emissions, well, a quarter of the emissions are currently sequestered. That's working successfully. We've got plans to essentially sequester more. Recognize that an expansion does increase your carbon footprint in the absence of carbon capture at, at, at Ngātamariki.
That's still, that's part of the business case in terms of what we, what we do there around the carbon footprint for, the expansion and ongoing operation at that site. Distribution networks-
Sorry, Will, I meant, for the, for the new unit, you know, what would be the, the sort of the levelized cost for that new unit coming on, rather than just the, the carbon cost? What will it cost you to build that extra 47 megawatt unit?
We're still working through that, so you won't have to wait very long to find out, I hope.
Would, would, would, would sort of 80 or 90 be a reasonable guesstimate to plug in?
Oh, in terms of levelized cost? It'll be in that range, yeah.
Yeah. Yeah. Okay, cool.
Then on distribution networks, yeah, certainly based on the BCG reports, there's significant investment required into distribution. Yeah, the funding for that, yeah, I mean, those questions remain, particularly possibly for the smaller ones. That being said, there's certainly precedent around customized price paths in terms of, the real question will be for some of these small networks, they're amortizing those costs across relatively few customers. So exactly how that plans out, pans out in a regulatory environment, we will see. There's, there's no doubt we, the sector's enjoyed some reductions in lines charges as a consequence of lower interest costs over the last pricing period. From 2025, obviously, we'll be looking at a harder environment, and further investment required on top of that, so we'll step up.
Yeah, that will be, unfortunately one of the, one of the costs of, of essentially decarbonizing the country, in that the, distribution lines companies are gonna have to make investments, which ultimately will flow through in terms of higher tariffs, to, to customers.
Very good. Thanks, Will.
Thank you. Our next question is from Andrew Harvey-Green from Forsyth Barr. Please go ahead.
Morning, Vincent and Bill. Just a couple of questions from me. First of all, just to dig in a little bit more onto the operating cost guidance for next year. Just, I just wanted to understand what the synergy, sorry, the any further integration costs coming through next year? I'm assuming there are basically no synergy benefits coming through for FY24. That's gonna be an FY25 story. The way you're talking, it sounds like that. Then lastly, in terms of the I think you highlighted now, operating costs are gonna be coming in completely as well. I presume that's sort of low single digit NZD million, but if you're able to sort of give a bit of a feel on that, that would be good.
... Yep, slide 19, said we'd spent NZD 33 million on integration, split between OpEx and CapEx, that leaves us with 17 of the 50. We're, we're expecting 17. That's all sitting in OpEx at the moment, there's probably... There are some risks some of that will be capitalized. Again, in terms of just the guidance difference between where we were sitting, for 2023 and where we outturned, a, a big chunk of that was actually just accounting. We just saw a movement from OpEx to capital. Yeah, synergies, we're, we're, we're very focused. There will be synergies in FY, FY, FY 2024. We, we have got a increase in operating costs with a full year of NOW broadband in the, in the group.
That does lift costs in terms of a change in retail scale. There, there are, there are some synergies in, in the number. Yeah, we're very diligently working through how those, how those materialize. We're seeing some good wins. Half our reconciliation, some of our, some of the metering, some of the costs are not, they're not turning up in OpEx, they're turning up in direct costs, too. We're, we're confident we'll be bridging and reconciling back to our business case outcomes.
Yep. Okay. No, that's good. Thanks. Just a couple of questions on the generation pipeline. First of all, in terms of the FIDs, we're looking for FY24, yeah, give us a sense of are we looking at first half or second half for those decisions? Sort of reading between the lines in terms of what you're saying, it sounds like Ngātamariki expansion might be the first one off the rank, I guess that might also depend on the smelter decision, too.
Yeah, I think, Ngātamariki probably is the first one, because it's not reliant on, on other commercial discussions. Then the other two are a little bit dependent on, on the discussions with the, the offtake parties. They, you know, they're, they're a bit like London buses. They could all come along at once. It's kind of we're not in full control of that conversation.
Yep. Second question relates to that pipeline. I thought it was noticeably absent in the Mahinerangi Stage Two in terms of that list, but obviously it's one that's a project that's sitting there consented. Is it fair to say that that's likely to come after Puketoi and Tararua repowering? Is that the way we should interpret that?
I think all we're saying really is that with Mahinerangi Stage Two, we have a number of choices around that. I mean, obviously the technology is gonna be different to Stage One. Stage One's now been operating 12 years, so there's a kind of a, there's quite a lot of optionality about what we do there. Whether, how that stacks up versus Puketoi is, is, is again, optionality. Certainly, we don't have that with a locked-in timeframe, where we see that as choices. We've clearly, it's got a resource consent, as has Puketoi, so, but we'd probably also want to look at some adjustments around things like tip height and, and stuff like that to, to optimize that site. I don't think. You shouldn't read too much into all of that, Andrew.
It's just, it's within the full portfolio, when we go beyond these immediate three.
Yep. Okay. That's, that's all for me. Thanks.
Thank you. Just one moment for our next question, please. Our next question, we have Nevill Gluyas from Jarden. Please go ahead.
Good morning, team. two detail questions from me, Then sort of two, perhaps a little more wandering. Detail questions: Just to confirm, the cadence on the drilling programs, those reworks, hasn't really changed, and you wouldn't expect it to change after OEC5? You know, sort of NZD 128 million, you've, you've given us that guidance for the 14 months. Should we expect that sort of roughly every four years, I think is the cadence in the past?
Yeah. This, this drilling program is large, essentially, it's creating resilience in the, in the well fleet across the 3 fields at Rotokawa, Kawerau, and Ngātamariki. You'd expect a gap, all things being equal. That, that being said, sometimes you can be surprised.
Right.
You would see a, you would see a extension in terms of the time between, this planned program and the next. So that's.
Correct.
certainly the intent.
Thank you. All right, the second detail question, Virtual Asset Swaps. Put in place obviously some time ago. They're winding off now. Any reason to expect them to be replaced, or are they sort of going to just gradually wind off?
Sorry, what, what's winding off?
The virtual asset swaps...
Oh, the VAS.
between, well, in your case, obviously between you. Yeah, yeah.
Well, with the FTR market, you probably, the, the, the need for the VAS is probably lower.
Yeah.
You can, you can, you can certainly cover a basis for us between islands quite easily, between, the, you know, FTRs, or, or into, ASX futures, too. So, no, at the moment, in terms of a, a direct arrangement between us and, and, Meridian, probably not.
Great. Okay, thank you.... Then slightly more wondering, well, I guess this one is reasonably direct. Very clear answers, I think, about the peaking requirement. I guess as the largest retailer now, you perhaps have one of the larger opportunities to develop VPPs in your own sort of demand response program, which is also highlighted in the BCG report. I just wonder if you're sort of in a position yet to have any plans for that. Is, is it on the horizon?
Yeah. Nothing we can really discuss with any confidence at the moment. I think, you know, the, the, the way to think about us in that space is, as William's indicated, we're. In a retail space, we're incredibly focused on, you know, getting, getting fully integrated on one platform. As we get integrated on that platform with our technology renewal, we're making sure that that technology can move from being fit for now to future ready. Things like VPP, how we might interface with customers, is work we are doing in the background, but unlikely to announce anything during this financial year.
Very clear. Thanks. That's useful. Then the last really was about how we should think about the futures curve. Of course, you know, ask anyone about this is, is it's an exercise in speculation about what, what the market's thinking. I just wondered if you thought the current curve, sort of beyond this year, reflects the sort of the wave of, of new renewables that are coming online, and whether or not you sort of think it's, it's a reflection of that, or whether that, that the market is waiting to see these things actually in the ground and running before it starts to react. I'm just sort of interested in your commentary there.
I don't. I'll let William, William go with. He'll probably be a little bit more analytical than, than perhaps I will be. The way I look at these things is there's been so much, there's been so much talk and vaporware that the market tends to look for spinning turbines or and real, and real megawatts as opposed to braggawatts.
Yeah
or other watts that might turn up.
Yeah.
I, I think there's always a degree of conservatism in the way people think stuff will turn up. I think that's probably founded in reality.
Yeah, just to add to that, Nevill, I mean, the flippant answer would be, if, if I knew that, then I would have won lotto, a couple weeks ago, and I wouldn't be on this call. Yeah, it, it, it certainly is interesting. We're certainly, you know, I think that that whole trilemma, when you look at it through that lens, particularly the interplay between reliability and renewability, how that, how that plays through. I mean, clearly, Contact's Tauhara Station will start up this year, but that has, that has ramifications for TCC. While it's a, it's an uplift in energy, it's a decrease in capacity.
I think that, you know, that call-out we had in, in, in, in one of our slides around just how end user pricing or how market pricing, can be quite different from the levelized cost of energy, 'cause at the end of the day, the market needs to supply the demand curve.
Yeah
How that, and how that balances. What is the, what is that price of, price of peaking? What really happens? We still... I don't think we still haven't seen what, what happens in the event of a acute national drought yet. I think, you know, those, the impacts of those sorts of events can inflate, prices quite significantly also. I suspect you're gonna get, conservative operation of hydro schemes generally across the market to, preserve flexibility. That possibly leads to increased bill, in some cases.
Right.
Um-
Yep.
I think it's just that, you know, with long, long right-hand tails on prices, it's just the payoff of, of, of being able to generate, when things are tight, are, are much, are much greater than, say, what happens when prices are very low for short periods of time, given people were largely hedged in the short term.
Yeah, a lot of risk, featuring in people's decisions about lake levels.
Yeah.
It makes sense. Okay, thanks for those thoughts. That's all for me.
Thanks, Nevill.
Thank you. I would like now to hand back for closing remarks. Thank you.
Thank you, operator. Look, thanks, everybody, for dialing in. Thanks for all the questions. As usual, wide-ranging and stimulating, I suppose. Leaving the call, we would just say that, you know, Mercury is a change business, both in scale and our opportunity to do things in the future. We appreciate the support of our investors, our customers, and our staff, and we're looking forward to another productive year. Thank you.