Kia ora koutou, Welcome to the Mercury NZ results presentation. I'm joined by William Meek, our Chief Financial Officer. I'll turn firstly to the disclaimer page, I'm sure you've all seen that, and move quickly through to the next slide. Clearly, it's been an exciting year for Mercury. In the last 12 months, we've become New Zealand's largest wind generator, and we've also become New Zealand's largest retailer. It has truly been a year of transformation and one we have really enjoyed, but more than anything, are really excited about what it brings for the future. In this year, we integrated the Tilt Renewables New Zealand operations following the transaction completing earlier in the financial year.
We have completed the transaction to acquire the Trustpower retail business, and three months past the completion date of 1 May, we can feel really pleased about the way that that's coming together, including the way that both teams in both the former Trustpower business and Mercury business have worked to satisfy our customers. We expect to meet our synergy targets and integration is progressing. The NZD 581 million EBITDAF was bolstered by our new wind generation, higher prices and Thrive. Of course, at the same time, we saw really low inflows. In fact, the third consecutive year of dry hydro conditions in the Waikato. We were really pleased, I think, to say that at the end of the year, in June, we saw some water coming into the lake.
For the first time since I took over the job, finally seeing storage levels in Lake Taupō high at the end of a financial year, and therefore dispelling the myth that it might have been me that was the problem. We're also really pleased about the Thrive program that we've been running. That contributed NZD 47 million EBITDA lift in FY 2022. Probably more important than that for us is the change in the ways of working. It's the beginning of a journey that will evolve our culture through a continuous improvement mindset. I'm excited by what that will bring us over the coming years. Looking at the future, our FY 2023 guidance has headline EBITDAF of NZD 580 million.
I hope everybody's been able to work through as to try and understand the movements associated with acquired derivatives, that is an EBITDAF level of NZD 756 million if you unwind the NZD 176 million of derivative in that result. I'm sure William will talk to that into some degree because I realize that's kind of a complicated situation that we're in. Pleasingly, we're able to declare a final dividend of NZD 0.12 per share, confirm that the DRP will be offered at a 2% discount, and that our guidance for a dividend in FY 2023 is NZD 0.218 per share, up 9%.
Finally, before I hand to William to talk to the bridge slides, I wanna confirm that, whilst we've been busy from an acquisition point of view, careful management of our balance sheet and really thinking about our opportunities in the future mean we retain headroom for growth. Pass over to William.
Thank you, Vince, and welcome everyone to the call. I'll probably start by saying this is actually a complicated set of results. It has been affected by some pretty significant accounting adjustments. Certainly with IFRS, we're seeing an increasing divergence between what we represent in our profit and loss and how that diverges from essentially underlying cash flows. Certainly, the derivatives, which I'll talk to shortly, are a key driver of that, and certainly become even more material as we look forward to 2023 and 2024 and discuss our guidance. Really, we're on slide four now, just talking to trading margin. We've renamed that from energy margin with the acquisition of Trustpower.
We bring in a whole lot of additional products mainly in the telco space and LPG. Trading margins is a far more generic term to capture the products that Mercury now sells through those two brands. The increase to NZD 745 million is explained mostly by the wind generation added during the year. The Tilt transaction with that acquired in August adding over 900 GWh of generation, and then the Turitea commissioning adding over 300 GWh to our financial year results. Operating expenditure, we can see, up NZD 40 million. Again, in terms of the bridges, the addition of those wind farms from that Tilt transaction in Turitea increasing cost by circa NZD 20 million.
The Trustpower business, adding around NZD 18 million. That included some transition and integration costs which did start in the two months prior to the year-end. Very pleased to see Thrive delivering a NZD 12 million benefit to cost. An offset from that. We did have some SaaS, so, Software- as- a- Service, which essentially saw items and technology that would have been capitalized previously, then recognized as an expense. Core business expenses once adjusting for those scope changes and SaaS actually fell on the back of Thrive. EBITDA largely driven by the combination of trading margin and operating expenditure does include the insurance of NZD 26 million from the Kawerau failure in June last year.
We expect to see further insurance payments likely in FY 2024 to cover most of the costs incurred from that outage. They do also include the terminations of the Norske Skog contract. That saw us terminate a contract that had three years to run. It was an 80 MW baseload contract, well out of the money with a strike of around NZD 80 MWh . I think our half-year debt guide pretty clearly around the effects of that, and that signaled again in the appendices to these results.
NPAT steps up materially, up 230%, largely on the back of the gain on sale from the Tilt shares, which were then immediately utilized to acquire the Tilt New Zealand business. Operating cash flow, a small change to NZD 352 million, probably lower than we expected, largely on the consequence of the June result, which in terms of cash flows, June result last year falling to July of this year. June was pretty tough with record high prices, very dry conditions in the Waikato catchment, and obviously Kawerau failing on the seventh of June. Quite a hard month, which saw lower cash flows in July. I've talked to same business CapEx at NZD 68 million.
Still relatively low, certainly well lower than we're guiding for the next two years with a big drilling program coming up. The difference explained largely by preparatory drilling costs and the ordering of the replacement gear to repair the Kawerau plant. Growth and investment is stepped up materially, over NZD 1.3 billion, again explained easily by the NZD 800-odd million for Tilt, the Trustpower transaction at NZD 470 million and the capital expenditure at Turitea in the mid-seventies explaining that big spike. We've talked about the dividend, NZD 275 million ordinary dividend declared for FY 2022. The bridge again looks fairly complicated, but we'll take us through it. Generation volumes were up slightly on the prior year.
Again, driven with hydro about 50 GWh higher. So actually not materially better than the 2021 year. We did see Turitea push out 108 GWh, which is useful. We have separated the ex-Tilt wind farms. They are all subject to PPAs, so 961 GWh. Prices being down, so generation quantity is positive. The decline in prices of around NZD 35/MWh, leading to that NZD 185 million step down in generation revenue. Purchase costs obviously go the other way. A step down in purchase volumes for almost NZD 120 million, with purchase prices rising. Sorry, being a positive result with lower prices, so energy costs to supply all our customers falling. Sales volumes up slightly in terms of mass markets.
We can see that 242 GW down. Given the price, that's positive and some significant changes in the energy prices there. Mass market well below inflation at just over 3%. C&I really feeling some pretty stiff price increases there on the back of a high forward curve, high spot prices. Renewals coming through at much higher numbers than we would have observed two or three years ago. Trading, you've seen some unders and overs carbon revenue with which was a new initiative for this year with the quarterly auctions by the government there. Quite a significant gain of NZD 27 million in terms of trading NZUs.
We saw the unwind of swaps of NZD 75, most of that attributable to the termination of the Norske Skog contract. Finally, OpEx we've already discussed, so that bridges to our NZD 581 from last year's NZD 463. That's.
Thanks, William. Let me move now to slide six, and that's the health and safety and wellbeing. During the period, we've really tried to think about how we bring wellbeing into our conversations on health and safety, and that's a big focus for us. While our results in terms of TRIFR and incidents are relatively good and we're pleased about the direction of travel, we also realize that if we're going to maintain that, we need to work with everybody in the company to create a zero incident environment. That's what our program is about, that we call out in this slide deck. It's leading us to having better conversations about the role of us as individuals, the role of us as a company and the role of us as leaders.
We're quite encouraged by that. Equally though, we have three sites which are classified as major hazard facilities. They're the sites that use pentane. There's a reasonable amount of work for us to do around critical safety elements, and that work is ongoing in collaboration with WorkSafe. Disappointingly, steam hammer event that we talked about last year, it occurred last July. Following investigation over the last few days, WorkSafe have decided to lay charges and we'll be working through that process over the coming weeks. There were no injuries in that event. We continue to use daily RAT testing at our generation sites. This is both to protect our people, but also to protect the integrity of our ability to operate.
As I think everybody can appreciate, in winter, both the risks of illness and also the needs of the community for generation when it's cold is important, and we're trying to achieve that balance. Moving to the next slide. You will have seen this before. It's our FY 2022-2024 strategic framework. I just want to note that from a point of view of our purpose and our longer term goals are, which we call 2030 at the moment, but one could call out to 10-year goals. We're in a process of review. That review needs to take into account the growth in our business, the change of the nature of our business, and we'll have more to say about that later in the year.
Our focus here is on the three-year objectives, our thriving today and shaping tomorrow objectives. In particular, before I move to the next slides, I'll call out the increase in the target EBITDAF for the business from NZD 700 million to NZD 800 million that reflects the changes in the underlying nature of our scope with the addition of both the Tilt assets and the Trustpower retail business. Moving to some of the indicators that sit underneath those objectives on slide eight. Look, enhancing our license to operate, well, clearly, it is really important to us that we achieve the health and safety objectives that we set ourselves. I've always believed greatly that we should think of things in the order of safety of people, safety of the plant, and then production.
That's underlying the cultural message that we have in the business. We've been busy with customer care guidelines, and we've completed reviews of our external sector engagement and the relationships with our partners. I've just already touched on increasing the value of our business through to the NZD 700 million-NZD 800 million EBITDAF. While we've seen benefits, of course, given the nature of the marketplace, shareholder returns have dipped. But we believe we've got a really strong story that shareholders should be pleased to see for the coming years. A major part of our transforming through people and transforming our culture is about how we lead. This is really about bringing more diversity to our business and upping our engagement from a cultural perspective.
This is not easy work and, you know, we have to be diligent and continuous in the effort, but it is a major focus of the organization. Turning to slide nine, the next heading is about being adaptive and resilient. One of the things I think we've all seen as we're looking to employ people is there's massive competition for talent. That means, from my point of view, we need to continue to look to develop our own capability, and hence the focus on trying to fill roles through internal candidates. That will take time because it requires us to invest in people. We are also obviously reviewing our technology platforms in the light of the Trustpower acquisition.
Really important, I think, from the whole sector's perspective is this whole idea of the electricity sector and Mercury playing a leading role for the successful transition to a low carbon economy. We've been doing a lot of work in this space, both in terms of our own asset development, but also in trying to engage with other sector participants and to create ways to work together within the bounds of the Commerce Act, of course, to build forward for New Zealand an environment which sees electricity drive decarbonization. I'll talk a bit more about some of that in a few minutes. Of course, executable options for growth. Well, you know, the two transactions we've done have really set us on a pathway that allows us to have many options in our toolkit.
We'll have more to say about that in the weeks to come. I do note that we did get the consent for the Kaiwaikawe Wind Farm for which we have a PPA with Genesis. I'll pass back to William now to talk a little bit more detail around the market.
We're now on slide 10 with a couple of scatter plots. Really, the market did change from late 2018 with that Pohokura outage, and that trend has largely continued. We can see in the first chart the dots are much higher reflecting that both gas availability and high thermal costs, and the strong correlation or inverse correlation with national storage deviations from average. Certainly during FY 22, we saw some prices attenuate in the first half, but then rally quite strongly in the second half. Again, consistent with recent years around pricing. Similarly, gas price or spot gas price was just traded. Again, strong correlation there. High spot gas prices flowing through to high spot prices.
That's a phenomenon that's certainly still here and has been playing out over recent years. Turning to slide 11. Again, some familiar charts here covering off gas, hydro, national storage, coal price, and carbon prices, and their interplay. The world is in the clutches of an energy crisis. It's complicated. It's not just down to the Ukraine-Russia situation playing out currently and its effects on Europe. COVID has a role. Investment decisions driven by climate change are a factor, and those are manifesting in here in little old New Zealand through oil, coal, gas, methanol, and aluminum pricing. We're not immune from that in this sector.
We're pleased to see that there's significant capital investment going into our gas sector, probably driven by high oil prices, so condensates are very valuable. Certainly predictions that gas demand could reach 20-year highs over 2023, 2024 at almost 200 PJs a year. Good to also see the, you know, some flexibility there in trading of gas, particularly between Methanex and Genesis, which is helpful when those thermal fuel supplies are tight. Coal prices, we can see just a very steep curve continue to rise.
The call out there is when you observe the offering behavior of the Rankine units, we can see clearly repeating tranches in the NZD 230-NZD 350 dollar range, largely reflective of carbon costs, which are now over NZD 80 a ton interplaying with coal pricing, given 15% of our electricity generation is still supplied by thermal sources. Again, creating a strong imperative to continue to invest in new renewables to assist that decarbonization journey for New Zealand. Slide 12, just focusing in on Lake Taupō. Slightly cheeky, hitting there, start low, finish high, possibly describe both our mood and Lake Taupō as the year progressed.
Certainly starting the year very low on the back of those dry conditions and finishing very high with a very wet June, setting up well for FY 2023, which is feeding through to guidance. Acutely dry again from that January to May period, which is the seasonally dry time in the central North Island, where the lake level almost always trends down. Just calling out the, you know, the futures interactions with spot prices. We can see the South Island had some pretty good inflows over winter last year. Futures prices and spot prices hit records at the end of FY 2021 at almost NZD 300. You can see the futures prices there.
It's well ahead of where spot prices traded out for certainly almost the whole first half of this year as spot prices came down. Certainly if you can get thermal out of the stack with high hydro generation as we have now, prices definitely come back to levels we used to see three or four years ago. Futures price lagged again, so they were much lower on a sort of if you're hedging a quarter out, and spot prices rallied strongly again with that phenomenon of expensive thermal prices and carbon combining to create a pretty hot spot price in a number of months there exceeding NZD 200/MWh. I hand back to Vince.
Thanks, William. You know, when we look at our customer mix, it has over the year tilted towards C&I. If you look at the chart on the top left, you'll see the C&I physical and financial sales in blue and the mass market in yellow. Just to point out that the FY 2022 yellow number is two months of Trustpower sales, so doesn't reflect a full year situation. As William has said, you know, wholesale prices did persist at an elevated level and yet mass market competition was still pretty stiff with churn at about 18%. Residential prices did lift about 3%, and that was below inflation, a little over 7%. We're still seeing connection growth in the Trustpower brand over the period since May.
While over the year, the Mercury brand did shed some customers, that's now flattened out, and we remain optimistic about our future position there. The bottom left graph's kind of interesting because the yellow line is the rolling twelve-month Otahuhu spot price, and the black line is the twelve-month Otahuhu futures price one year prior. I guess ultimately we conclude out of that with a sort of sensible hedging strategy, you can sort of ride these difficult waves. You know, as William said, as we see more renewables connect, we'd expect prices to flatten out, but we also expect to see volatility.
As we also note that the closeout of Norske Skog reduced our sales position, but we are re-signing customers, and those customers are often signing for five to 10 years. We know our sales yield lift there in both mass market and C&I, and William's touched on that earlier in the conversation. Moving to the next slide. Well, I think everybody will be really aware of the retail acquisition and that completed successfully at the beginning of May. As I said earlier, we're really pleased about the three months in position. Connection growth has been steady. Probably most importantly, collectively, our people have been able to ensure that customer experience is maintained.
We have done some realignment across our retail lead teams so that we have a combined view of both brands, and the commercial positioning of those brands and customer outcomes. We've undertaken a technology review, and we've established an integration team that is now really focusing on the processes, systems, and change management required so that we can deliver the benefits expected over the next two-three years that we set out lower in the slide. As William has noted, and I'm sure we'll discuss probably further in questions, there's been quite a lot of day-one accounting that we've had to deal with in order to deal with the derivatives. We're really pleased about where we have got to in what is a little over three months.
Moving to the slide 15, that sort of sets out how Tilt Renewables assets have boosted our wind position. Obviously, you know, 12 months ago, we didn't have these assets, and Turitea commissioning was only underway for the north. A big change for us during this year. Wind slightly less than we would have liked, but you know, that's part of the normal cycle. The production is hedged through long-term PPAs and CFDs, so our risk position is unchanged. We did suffer a fire on one turbine at Tararua. That replacement is in country, and we will be installing that shortly. As I noted earlier, we have the CFD signed PPA with Genesis for Kaiwaikawe. We're getting now steady contribution from the operating assets.
Importantly, and I'll talk about this in a minute, we get the opportunities that come with the pipeline. Turning to Turitea on slide 16, northern section completed, producing, performing well, under a long-term O&M agreement. Southern section, you know, we did benefit from pretty good weather up until June, or the end of June. Roading infrastructure largely complete. Southern substation well underway. As we stand at the moment, we're still talking about a sort of completion in the middle of next calendar year. Moving to slide 17. Look, everyone will know about the named projects here. Importantly, we're also working on a series of early-stage options that will build on the back of this deployment.
I think when we think about these projects, you know, we are advancing them in parallel. We want to try and get to a position where we have a series of investment choices that make sense. There are challenges, and those challenges I think are well understood. The change that we're going to see from a regulatory perspective, from the RMA to the NBEA, Natural and Built Environment Act, needs to recognize that all electricity, all renewable electricity is the platform for other industries to decarbonize. While we should focus on making sure these pipelines of opportunities come to market, we also need to realize that core hydro, core geothermal that comes up for reconsenting is important.
It probably doesn't need me to tell you that inflation and supply chains are a challenge, and in the medium term, we expect equipment manufacturers to see some capacity constraints as Europe and the U.S. seek to decarbonize, but also in Europe, disconnect themselves from Russian gas. Turning to 18, I suppose the things I wanna call out in here is that so the industry is responding to the pricing and with 2.3 TW of renewable generation being built at the moment. We can't avoid the fact that when we have issues like ninth of August last year, that causes concern for both regulators and politicians. In high hydro times, the flexibility of the hydro system delivers very well on peak demand.
We shouldn't underestimate at the moment as we go through this transition, the need for thermal generation backup. Because it's less flexible and gets dispatched less, that does add some risk. I would say, though, that those who own thermal plant have done a really good job of, in general, keeping that available and ensuring they are up to the challenge at a time when all of the market signals are pushing them out of the market. We know that we have several other things going on in the marketplace, NZ Battery Project, the prospective recontracting of the aluminum smelter.
Look, I've always been of a view that these are not linked issues in the sense that a productive economy should be able to see a pathway for a smelter to stay and for other new projects like hydrogen and data centers to be able to come to market. Obviously, we're all interested to see how Onslow progresses and how that will work from an ownership and dispatch perspective. It will have big impacts on people's generation investment decisions over the coming five-10 years. Wanna move to the next slide.
Look, we've got a list of things that we've done under Thrive, but I guess the thematic here is this is about continually questioning ourselves about the way we do work, about the opportunities to improve, and about the way that we can help our people grow their capability and their careers. As we look into the future from these points that are on the slide, you know, our goal is to create a combined organization as we bring the somewhat 1,400 people together that we've now got, so that we are continuously learning from our experiences and using those experiences to improve our performance for our shareholders, partners, and our customers. I'm gonna pass back to William now to talk a little bit about some of the detail around the numbers and some of the moving parts.
We're on slide 21. Just talking about the Kawerau outage and the insurance proceeds. Under IFRS, insurance proceeds when they are almost certain are recognized as income, irrespective of whether they relate to business interruption or property cover. The insurers have declared cover at the site for the incident and made an interim payment of NZD 26 million, which is inside the NZD 581 million EBITDA recognized in FY 2022. We have ordered the replacement generator and steam path. They are currently under construction in Japan, and we're expecting those to be installed in May and June of next year. We would expect a further insurance payment in FY 2024 once all those costs are known. Just touching on carbon trading.
With the carbon options, we saw that as an opportunity to both buy carbon and trade. You can see there, a NZD 27 million gain was earned during this year. We still hold 900,000 credits, valued at NZD 65 million at the end of this financial year and sold 1.1 during the year. Our carbon credits essentially held in two areas of our accounts. If they're held for trading, they're held as inventory. If they're held for essentially hedging or emissions offsets, they're treated as a particular intangible asset, of which we currently hold 1.7 million units, which is roughly about five years of our current ETS obligation.
We are very pleased to see that our trial at Ngatamariki around sequestration on one of the OECs there is reinjecting the NCGs, of which most of that is CO2, back into the reservoir. That is a big focus on both time and resources around extending that across our geothermal fleet. We are thinking very hard about what we can do with our Scope 3 emissions also, which largely are driven by our gas sales to customers, which have doubled with the Trustpower acquisition. Just talk about the ASX futures in terms of the prudential cost.
Some may be aware of the announcements from EnergyAustralia a month or so ago, with a downgrade, and having to post very large prudential, to cover their, exposure in Australia. We do, you do have to post cash to the ASX. You see there, it increased by AUD 33 million to almost AUD 100 million, at the end of June, and we peaked at AUD 100 million and almost AUD 120 million in March 2022. That is a real cost. That's real cash being posted on deposit.
We have been actively managing those exposures through exchange for physicals, essentially where those futures contracts are swapped out either with a bank or another counterparty for a CFD, which therefore removes the prudential risk exposure, but substitutes that for a credit with the counterparty. Just calling out that essentially for electricity purchases on the NZX for clearing, those are generally covered by a letter of credit, so don't require that posting of cash. In the home straight, final slide in terms of guidance for FY 2023. We are guiding headline guidance of NZD 580 million, which is awfully close to what we've headlined results this year at NZD 581 million. But on a normalized basis, if we back out those unwinds, sees us at NZD 756 million.
Those unwinds are detailed in graphic glory on slide 21 of this deck in the appendix. They spread across the Trustpower, the Trustpower contract or the Trustpower derivatives, Norske Skog and Tilt. Net they are NZD 176 million. To put that in perspective, we're expecting Trustpower retail business to have a standard or normal EBITDA of about NZD 50 million in FY 2023. That unwind on the Manawa hedge is NZD 200 million. That derivative was recognized with an asset value of NZD 488 million through the acquisition accounting.
Again, a DCF model, which works out the value of the business, resulting in a purchase price of NZD 470 million, which included NZD 50 million of receivables, is for accounting purposes, then allocated across the respective assets. You can see most of that, in fact, more of that value is allocated. The derivative with actually the contract assets of the customers actually being valued at nil. You can get some quite strange outcomes from the acquisition accounting. Coming back to the start, bridging across, we start at NZD 581. That obviously does include the insurance of NZD 26 million. I think the BI cost would have been about 15. Kawerau was out for 20 days in July.
It also includes the termination of the Norske Skog contract, which is about NZD 65 million, which was canceled. That did see us net about 375 GWh longer as a consequence of terminating that contract after we acquired some of their existing book. Hydro was increased by about 400 GWh with NZD 63 million. Normalizing for that. Wind normalized, as Vince says, was a slightly less windy year. It would have given us 7 GWh. The unwind of those derivatives gives us net 7 GWh. The Trustpower negative impact is largely offset by both the Tilt and Norske Skog impacts. We had non-recurring trading gains.
Again, that stellar performance in terms of carbon trading, we're not expecting that to repeat unless we see carbon prices roar away to NZD 120 a ton from their current NZD 80 price. That gets us to about mid-600s. Given the stellar start to the year, the wet conditions, we're expecting hydro to generate another 300 gigs. Trustpower retail adds another 42, which is essentially another 10 months of EBITDA from the Trustpower business. Wind steps up by almost 20. That's essentially one extra month from the ex- Tilt assets plus about six or seven months of Turitea. Portfolio growth is at NZD 31 million. Again, that's across the whole sales book to all customers, C&I and mass markets, and reflects price changes.
The other costs, essentially increasing NZD 27 million, is mostly explained by a forecast of NZD 25 million spent on retail integration, with NZD 5 million of synergies realized in FY 2023, which takes you through to 756 million normalized FY 2023 EBITDA. With that, we'll open the line for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Cameron Parker with Craigs Investment Partners. Please go ahead.
Hi, guys. Congratulations on a huge year. Hey, could I just ask a question about Tiwai and how you are thinking about your development pipeline in terms of the Tiwai negotiation? Have you been approached directly at all?
Yeah. Thanks, Cam. Look, I think the way we're thinking about it is we think that there is a case for Tiwai to be able to negotiate an outcome. It's almost certainly going to have to be probably more than they were paying, given where aluminum prices are. But the demand for aluminum globally means there seems to be a really good case. I don't think that's a negative to New Zealand's ability to decarbonize. Look, we are as far as our development portfolio is concerned. I think generally in the sector, the what I would call the concern about the Tiwai dip is being balanced by the concern about the need to ensure that we're on this pathway to decarbonization, that I've talked about a lot.
We are pushing ahead with projects that we have in our portfolio. We're pushing ahead across the board so that we've got choices about which ones to execute on. We're, I think, in a reasonably fortunate or unique position in that we have quite a lot of choices across both islands. We believe we need to bring those to market. In terms of conversations with Tiwai themselves, we haven't had any sort of serious conversations, but we remain available, and we would probably keep those reasonably commercially tight.
Great. Thanks, Vince. Look, some of your peers and of course analysts are also predicting kind of you know higher wholesale prices for longer. Definitely feels that way in terms of the impact of you know imported thermal and domestic thermal costs and carbon. What are you seeing in terms of C&I customers coming to you and in terms of you know long-dated contracts and so forth? I noticed a sort of Contact yesterday have you know stated that that's stimulating that sort of process on in terms of engagement on baseload geothermal. Are you seeing the same thing coming you know to your portfolio?
Yeah, I think, well, I think actually probably two years ago, we talked about the fact that, Mercury is always open for business, and we are always willing to price anything anybody is looking for us to do to help them manage their risks. We have seen a trend towards people wanting longer-dated contracts to help smooth the near-term volatility. I don't think that will change particularly. But I don't feel like that's new news. We've been at this for a couple of years now, and it actually flows through into our forward performance. In terms of specific projects, look, we take a portfolio view of our ability to help people meet their energy needs.
At the same time, we do have conversations with folks who maybe are looking to establish themselves in New Zealand or re-establish a different sort of presence and are interested in being more closely associated with a particular project. We welcome those inquiries as well. There's a lot of that going on in New Zealand at the moment. You know, our message is come and talk to us.
Great. Cheers. Are you being approached at all by data centers and so forth? We're seeing some of those kick off in Auckland at the moment. Could you provide any color on that?
Yes, we are seeing approaches, and no, I'm not providing any color.
No, that's fair enough. That's fair enough. I guess from an investor perspective, you know, people are quite keen to see the long-awaited demand kicker uptick. Yeah, I guess we'll wait and see there. Look, that's it for me, guys, so thanks very much.
Thanks, Cam.
Hey, we're keen to see those people keep talking to us as well.
Great stuff.
Andrew Harvey-Green with Forsyth Barr. Please go ahead.
Good morning, Vince and Will. A couple of questions from me. Just following on from [inaudible] in terms of the development discussions. Can you just give us a little bit of a feel around when we might expect to see Mercury sort of get to the FID point on any of these developments? I guess, more specifically around the Northland wind farm, given the Genesis obligations there.
As soon as possible, I would guess is the time frames we're trying to work to. But we'd like to be able to make announcements. We're great believers in making. If we say FID has been reached, that means every single contract's been signed, and it will happen. That's something we just have to work through. With respect to Kaiwaikawe, look, we're working as hard as we can. We had a really difficult process that slowed us down with the resource consent, which fortunately, we were able to resolve without having to get thrown into the whole appeals and court process. It took us several months longer than we had hoped.
The consequence of that is, that's just put us behind. I think if you look at our ambitions around the FY 2024 goal, NZD 800 million EBITDAF, that sort of implies we're expecting to build a bit more. I haven't got an exact date for you yet.
Okay, thanks. Next question, I guess also kind of related to on the wind element side is just around Turitea South. I saw on the slide you alluded to, you know, potential for liquidated damages there. Are you able to indicate to us what the maximum level of LDs are on that contract?
I think we wouldn't do that. We are, as it indicates on that slide, in quite, you know, quite advanced.
Yeah.
discussions with the head contractor for that. How we think about those LDs and all of the other associated claims and counterclaims is pretty sensitive. I hopefully will be able to clear that up for you in the not too distant future, Andrew.
Okay, no worries. Next question I just had was around the Trustpower retail integration costs. I think you've indicated NZD 50 million in total, and NZD 25 million of that's going to be in this financial year. Are you able to just give us, I think how much was spent in FY 2022? I'm assuming it wasn't a great deal, but just to give a sense, I guess, of the timing beyond FY 2023.
It was only a few million NZD on integration. The transition process was separate.
Okay.
NZD 2 million on integration in the two months.
Right. Our last question just from me is just around the FY 2023 dividend guidance. If I look at the level of growth you've got coming through from EBITDAF, and I guess what it might imply from a free cash flow perspective, I guess the uplift in dividend is a wee bit lower than the underlying EBITDA growth. Are you able to give us a sense, I guess, of what free cash flow payout ratio you're targeting and I guess, by implication, I'm assuming the reason for holding things back a little bit is just given some expectations around CapEx requirements going forward. If you're able to just talk to that would be great.
Yeah, it's a good question. It's not really driven by CapEx requirements. Our view is our balance sheet is strong, recover strongly next year with the earnings uplift. We're at the lower end of our 70%-85% payout ratio. I think it's a long game. This will be essentially the 15th year of ordinary dividend growth for Mercury. We are cognizant that in the medium to longer term, we expect the market prices to attenuate back down. Therefore that does give you quite strong headwinds in terms of your portfolio revenues as C&I reprices.
Arguably, you could even find retail prices regressing if we got back to, you know, we're probably not gonna get back to prices where we were back in the mid-2010s, but certainly the prices where we currently are are in the long run unsustainable, and we'd expect to see those thermal plants crowded out by renewable investments. It's really looking forward over the sort of five-seven-year period and where that might take you because it is quite negative to earnings in the long run if the market reprices back to even NZD 100/MWh.
Yeah. Yep. That's, no, that's useful color. Thanks very much. That's all from me.
The next question comes from Stephen Hudson with Macquarie Securities. Please go ahead.
Good morning, Vince and William. Just three from me. I just wondered if you could give us some feel for whether or not you have any further brown or greenfield geothermal development options apart from the 35 MW Ngā Tamariki one that you've called out. Second, I just saw, and this is not a sort of comment on Mercury per se, but I saw that your voluntary turnover of staff had gone up by quite a measure, sort of 12% to 21%.
I just wondered if you could give us a feel for whether or not that's part of the various transactions that you've been involved with or what you're seeing there in terms of staff turnover. Thirdly, if a longer duration debt deal were to be cemented in the next little while, would you see Standard & Poor's shifting their 2x-3 x triple B target for you?
Right. I'll take the first two, I think, and then William can have the third one, Steven. Look, I don't think I'd be able to say that we have a great pipeline of new geothermal that I could really call out and whether brown or greenfield. We, you know, we do have conversations with various players from time to time, but nothing I think I could really put in the stack at the moment. With respect to staff turnover, there's a number of factors at play here. We suffered the similar, I guess, rush to secure talent in the post-COVID environment and, you know, and I guess I understand that people will look to pursue their careers.
That happens. You know, the transactions themselves, I don't think that they were particular leverage in all of that, but change does create the catalyst, I suppose, for people to reflect on where their careers are and how that might turn out. I have no doubt some people would have also taken that opportunity. We've seen people go to both to competitors. There is a very tight market in the central North Island for people across the players in that environment. We've seen people exit to banks who pay better than us, and we haven't been able to resist that. We've seen the same demand for talent within the IT and tech sector that I think everybody is seeing.
We've seen people exit to Europe as soon as they could get out of the border. That said, what we are also seeing at the same time is a massive amount of interest in the roles we've got advertised. You know, we last week had a role that you know looks a pretty interesting role from my perspective, and we had over 100 applications of which 70+ could've been credible. It wasn't just people throwing in a CV for a laugh. I think yeah I think we've gone through all of those things, and I suspect others have.
I'll be the first to acknowledge that we've put this business through a heap of change in the last 18 months, and that does create uncertainty and we want to try and make sure we steady the ship for the future.
Just on gearing metrics, Steven. Slide 34's and the appendices have we're indicating a forecast debt-to-EBITDA ratio of around 2.2 x in FY 2023. Again, quite a lot of headroom to the 3 x. We're not expecting any surprises there from Standard & Poor's, and we'll have a catch-up when we're in Sydney, sorry, Melbourne, next month with them. We're happy with the gearing where it is given certainly the strong lift in earnings.
Will, do you think that the range may actually narrow and fall once an NZAS deal is done?
When what's done?
Sorry. When an NZAS, a New Zealand Aluminium Smelters deal is done. Do you think the range is unrelated to that?
No, I don't. I mean, it's their global credit criteria. They're not gonna change the range for rating a New Zealand company versus what they're doing globally. No, I don't think that changes anything. I think the bigger impact will be, you know, five years from now, if the spot market, you know, we're successful with decarbonization efforts, and we can get coal out of the stack and gas prices come back, how that feeds through everyone's portfolios and revenues, essentially hits EBITDA, which therefore increases your gearing. That we're very cognizant of that in terms of those sort of medium to long-term forecasts and what they might trend out and making sure your credit metrics can withstand that.
That's useful. Thanks, Will, and thanks, Vince.
Thanks, Steve. Cheers, Steve.
Your next question comes from Grant Swanepoel with Jarden. Please go ahead.
Good morning. Just morning team. A few questions. First of all, what are the implementation costs of that NZD 47 million Thrive benefiting FY 2022?
Sorry, what was the start of that question?
The implementation costs associated with the NZD 47 million benefit from the Thrive.
Implementation to deliver those benefits. That is the net number. Not very much.
Wow.
Most of them were essentially how we work as a team rather than investing in IT, those sorts of things. You're in the, you know, NZD 1 million or NZD 2 million, but that's already, that's included inside the benefit.
The NZD 800 million EBITDA set target for FY 2024, I can assume you've just got on the normalized FY 2023 number Turitea to come, so to yourself that is, and maybe half of Kawerau?
Are you trying to trick me? The Turitea one.
You guys have put the number out there, Will. Anyway.
Yeah.
Like that, Will.
No, you were definitely trying to trick him, Grant. The answer is the same as the answer I gave earlier about our next investment. Clearly, we have some work to do to get to that number, and we have more than one option to put on there. Look, a little bit of patience and all will be revealed.
These questions are all around costs. Contact just had a geo plant. They're starting up at 20% up on one they've started 2.5 years ago. With respect to the Ngā Tamariki, does this also push that one out a little bit? Or are you not seeing a similar sort of cost in terms of the way you're looking at that Ngā Tamariki at the moment?
Yeah. I don't think anyone can escape the ravages of inflation. So yeah, I mean, we've got some indicative pricing. It's reasonably recent, but will need to be refreshed. I think that the cost structures are probably more acute when you get into solar and wind. We have some real concerns around just the global capacity supply and how that works on the back, particularly if you start looking at, you know, the Russia-Ukraine conflict. You know, Germany is talking about 10 GW a year. I mean, Vestas only makes 20. You got one country asking for half of it. We're expecting to see no relief in terms of renewable technology and cost structures. We're, you know, in terms of the projects we're diligently working through now, I mean, price rises of 20%-30% are not out of this world.
Wow. Let's look at Kaiwaikawe. I can't pronounce that properly. The North Wind project. With costs having gone up on that one, how does it affect the CFD that you've got with Genesis?
I mean, ultimately, we have a CFD with them. It has processes in it for us to have a discussion with them. We're not in a position to have that discussion as we stand because we're still firming up on that pricing for Kaiwaikawe. Look, it's part of being in this business, I think, to be able to work through things with your customers.
Okay, thanks. Back to your comment, Will, that you expect prices one day to come back down again. I know I saw a bunch of competitors on your call, but Contact was talking about a long run marginal cost lifting from the old NZD 80 type level to NZD 110. Are they missing something in terms of long run and they're actually talking about medium term?
Look, I don't know. I think those are all opinions, I suppose at the end of the day, that people are entitled to have. I think what we have seen. If we were having this conversation 20 years ago about wind, we'd have thought 110 was pretty bloody good. We all know that these things go in cycles and technology improvements occur. You know, I'm just sticking with the wind turbine example. You know, wind turbines now at 6 MW and 7 MW and 8 MW onshore, up to 15 MW offshore are the emerging standard. I think any equipment manufacturer is going to price to the market, but is also gonna want to be competitive.
Now, we have a period of time where, you know, rare earth metals and aluminum and copper and steel and everything else is expensive, as is transport. Generally people change their capacity to try and be in front of as many customers as possible. I think, does it get back down to 18? That might feel a little bit difficult at the moment. But do I think it will flatten out and come back down? Yes, I do. Is it 110 as low as it can go? I don't know. I think that's just. I don't think there's math that works for that, to be honest.
Okay, thanks for that. Sorry.
Just to add to that, Grant. I think the problem is more complex. People tend to compartmentalize the analysis in terms of what's the cost to bring, what's the LCOE of a new plant. I mean, a solar panel is different from a wind farm, different from a geothermal plant, different from a gas plant. They're not the same. The variability of particularly renewable sources, with geothermal probably being the exception, is challenging. We do need to resolve the reliability issue of drought. The NZ Battery Project or Onslow is, you know, one proposed solution, which is ultimately a regulatory one, and a market intervention, but it's complex. The interactions in terms of grid requirements, I mean, renewables need more grid. How that all feeds through ultimately to end user prices.
I think it's complicated in terms of just trying to distill it down to a, you know, investment one at a time, which is what we're actually talking about right here, right now. At some point, it's just got to make sense for the market holistically. We're extremely conscious of the trilemma and balancing affordability, renewability, and reliability. Of those, reliability trumps all.
Thanks, Will. That helps. My final question, just on carbon trading. You made NZD 27 million in FY 2022, but you knocked back NZD 9 million of that as a non-normalized. Do I take it that because you sort of 0.9 million units left in an inventory, that there's an upside to where the current carbon price is trading that allows you to bank around about NZD 18 million into FY 2023?
Yeah. Because of the forward trading, essentially, they'll be fair value every year. That's obviously below EBITDA. Yeah, when you trade, they quickly turn up in that. At the moment, I think that's leading through our other income. We're probably moving them to trading 'cause it's no different from trading an electricity future. Yes. I mean, last year, we're not expecting to see the rally we saw with carbon prices more than doubling over 2023. There was no doubt those auctions were an opportunity. Quite amazing how much balance sheet and capital people were putting into those auctions. Very surprising.
Thank you. Well, that's it from me. Thanks, all.
Thanks, Grant.
Thanks, Grant.
I'll now hand back to Mr. Hawksworth for closing remarks.
Okay, thank you. Hopefully, everybody feels like they've been well informed. I guess my message is the one that I started with. We've had a huge year, a year like no other, as we described. What that really creates is a platform for a huge decade. We're excited. There's a lot to do. I thank people for their questions. For those of you that we're gonna meet over the next few days, we look to meeting you one-on-one, and hopefully, everybody has got what they needed out of the presentation. Good day, and enjoy the rest of your day.