Ladies and gentlemen, thank you for standing by, and welcome to the Mercury annual results analyst briefing for 2021. At this time, all participants are just in a listen-only mode. Following the presentation, there will be some time for a question-and-answer session today. To ask a question, you will just need to press star one on your telephone keypad. Just please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker for today, Chief Executive, Vince Hawksworth. Thank you, and please go ahead, Vince.
Thank you, good morning, everybody, and welcome to the FY 2021 Mercury annual result presentation. I'm joined here this morning by William Meek, our Chief Financial Officer, and we'll work through the presentation jointly. Turning to slide three, I'll start there with the highlights. Our EBITDAF result of NZD 463 million was obviously down versus the prior year, reflecting the 4th lowest inflows since 1999, and obviously also our Kawerau plant outage. That outage of 42 days and the low inflows, combined with the high spot prices, which occurred due to generally low inflows and also low gas deliverability, resulted in a difficult year compared with the prior one. We have, though, been very focused internally on continuous improvement.
We've talked before about our thriving focus and that continues to deliver for us as we work smarter and faster and aims to deliver the NZD 30 million improvement that we've talked about previously. Externally, the year we've seen us focused on creating value through mergers and acquisition opportunities. We're really pleased about the Tilt Renewables acquisition, which brought the New Zealand assets of Tilt into the Mercury stable. We're excited by the Trustpower retail transaction, which subject to approvals, will see us increase our scale quite importantly. We've declared a final dividend of NZD 0.102 per share, which, together with our interim dividend, means the dividend for the year is NZD 0.17 per share. This is the 13th consecutive year of dividend growth and represents a 7.6% increase on FY 2020.
We're providing guidance today of NZD 590 million at the EBITDAF level due to contributions from Tilt Renewables and the Turitea Wind Farm and our continuous improvement initiatives for the FY 2022 year. Now going to turn to the next page four, and hand over to William for the next part of the presentation.
Thank you, Vince, welcome to everyone on the line today. I'm going to touch on the financial performance and some of our key financial measures here on slide four, starting with energy margin. As Vince has already said, was down 126 GWh for the year, with spot prices up around NZD 70/ MWh on the FY 2020 year. Quite sharp increases in pricing. We did see quite low inflows, particularly in the second half of the year, seeing both the lake decline to very low levels, which impacted the flexibility of our generation position from Lake Taupō across the Waikato catchment.
As Vince has also mentioned, the outage on the 7th of June at Kawerau, with a return to service on the 20th of July, also took three weeks of production from that plant out at a time that prices were near record highs. Operating expenditure, NZD 4 million lower at NZD 190 million than the prior year. It has been restated for SaaS, software as a service. Mercury has implemented those IFRIC changes to our accounts, restating last year's also by a similar number, NZD 6 million. NZD 194 million FY 2020 versus NZD 190 million in this financial year. EBITDAF, essentially the movement there of NZD 27 million down, a large combination of energy margin, operating expenditure and some slight changes to other income. NPAT declined quite significantly to NZD 141 million from NZD 209 million in the prior year. Biggest movement there was around the fair value of financial instruments, mostly electricity.
We saw a negative NZD 47 million movement there on mostly power contracts against the NZD 22 million positive movement in the prior year. That's the biggest impact to NPAT. We did enjoy a NZD 41 million gain on the back of our sale of our interest in Hudson Ranch geothermal plant in California back in November, and we did capitalize NZD 11 million of interest to the Turitea project, which is now going through commissioning. We also recognize a NZD 15 million loss related to disposals of some assets at Kawerau on the back of that outage. Operating cash flow and free cash flow I'll talk to together. Only a slight movement there in operating cash flow of NZD 14 million down to NZD 338 million for the year.
If you look at actually the core drivers, receipts from customers less the payments to suppliers and employees actually was only NZD 4 million different from the prior year. We did see cash interest NZD 9 million lower at NZD 51 million and cash tax is significantly higher. Cash tax is largely explaining the decline in operating free cash flow from NZD 352 million to NZD 338 million. Free cash up largely on the back of much lower CapEx expenditure. CapEx almost half of what it was in the prior year. We had no drilling this year, and we did make decisions to defer some projects on the back of the impacts of COVID-19, particularly the refurbishment of the Karāpiro hydro station, which is going through essentially a full replacement for turbines and generators there.
That was delayed one year, largely due to COVID-19 and concerns about factory inspection, testing, and the ability of a overseas contractor to deliver that well, given the challenges moving into New Zealand. A big year of growth investment, driven mostly by Turitea at NZD 194 million. Turitea, NZD 151 million spent in 2021, taking total project spend to NZD 335 million. We did make an investment into EnergySource Minerals. That's the holding company for the project that's looking to extract lithium from the brine at Hudson Ranch. We also invested NZD 11 million into NOW Broadband during FY 2021 and spent around NZD 20 million on the Rotokawa upgrade, which should see us increase output at Rotokawa Power Station and Nga Awa Purua Joint Venture by 5 MW or 6 MW, which is in play now. A good step up there and good to see progress at Turitea.
Dividend up 7.6% on the prior year to NZD 0.07 a share. Looking at just over NZD 230 million of dividends declared in FY 2021. Turning to the bridge of earnings. We can see we start last year at NZD 490 million, end up at NZD 463 million, NZD 27 million lower. Lower generation volumes worth about NZD 14 million. Probably the key takeout here is the effect of spot prices. We look at the combination of fixed price, variable volume purchases plus derivative settlements. We've got a delta of about NZD 489 million versus the impact to generation, which is positive NZD 441 million. That's probably the biggest impact, particularly evident in the last couple of months of FY 2021. The other big takeout here is the lifts in yield. We're seeing around 7% lifts in customer yields.
That's from mass market through C&I, some strong growth there and a lift in actually the total sales position. Total sales up over 200 GWh in those segments. A fairly comprehensive bridge there for our EBITDAF performance in 2021. I'll hand back to Vince for slide six.
Thanks, William. Slide six covers our key performance indicators. Going from the top, look, we've been really pleased with how strong the Mercury brand remains in terms of consumer awareness, and that has been proving out as we've launched our Moves campaign over the last couple of months, which has seen some retention benefits where we're not tending to lose as many customers as we were previously. The net promoter score remains firm, and as I say, churn, we are seeing declines in churn as we have launched our Mercury Movers campaigns. With respect to our partnership column there, we're really pleased that the Climate Change Commission's final advice continues to support electrification as a way of decarbonizing, and that, from our point of view, is the right way to go. We see the rollout of renewables supporting wider decarbonization as the key thing that needs to occur.
We've engaged with the New Zealand Battery Project because we think it's important that there is a broader discussion than just a discussion about Onslow, but a discussion that considers all of the ways that as New Zealand we can decarbonize and the role that electricity plays. I note that Turitea, whilst delayed, we have now had first energy from that project, and I'll talk a bit more about that subsequently. On the health and safety and employment side of things, look, we've had a good year from a health and safety point of view. Of course, we always realize that you're only as good as your last incident. What has been really pleasing is our focus on human factors as well as process factors. In terms of shareholder returns, again, good shareholder returns at a TSR of above 45%.
We've talked about the dividend, but importantly, we are creating a platform that will transform the future. Turning to the health and safety slide. I think the main focus here for us is, as I said, not just the ability to have a lower TRIFR or lower incidents, but much more importantly, the focus on human factors. As I say, as performance and process improves, people do make the difference. We'll continue to look to do that because when you come to health and safety, the last line of defense is always the culture that you have in the business. This year, very importantly, we've refreshed our strategic framework. Whilst we've retained our long-term 2030 ambitions and goals, we've got really focused on what our three-year objectives look like.
Last year, I talked about the Thrive project that had been underway for some time, and we're now starting to see the benefits of. You'll see in the three-year objectives, we have two halves to the center circle there, one being Thriving Today about the activities that we will undertake to create that thriving environment, and the other being Shaping Tomorrow. Particularly, I want to draw attention to the objectives within that circle. Our Thriving Today objective is to increase the value of our business to NZD 700 million EBITDAF over the next three years. The Tilt transaction obviously helps that platform. We think it's really important in achieving those financial outcomes to enhance our license to operate. We are really focused on collaborating with our stakeholders, whether they be iwi or regulators or whether they be government and customers.
We think this industry has a lot to offer New Zealand, and Mercury can play a leading role in this space. We also want to unleash the full potential of our people, and that is done through a culture where people can really participate and see the benefits that are achieved through their efforts. That's Thriving Today. Shaping Tomorrow is also really important. The role that this sector of Mercury will play in decarbonization in New Zealand is critical, and that is the centerpiece of our Shaping Tomorrow strategy. If we create the executable options for growth, and we now have a platform from Tilt that will allow us to play a major role in that decarbonization, then both New Zealand, the sector, and Mercury can be successful. Of course, to do that, we need to be adaptive and resilient as an organization and responsive to future needs.
Our investment in people and processes will deliver that. That's kind of how we see our next three years fitting in with those long-term objectives. Of course, if we achieve all of that, we will truly inspire New Zealanders to enjoy energy in more wonderful ways. Moving to the next slide, William will talk to this one.
Thanks, Vince. We're on slide nine now with these four charts here, which I'll just step through. This really deals with the fuel supply to New Zealand and particularly the fuel supply that impacts certainly the power sector. We're in the business of energy conversion, we're taking essentially energy sources, be they water, gas or coal, wind, solar, and effectively converting those to electricity. The first chart shows gas production. Key takeouts, you can see quite significant decreases at Pohokura, particularly over the last two years. You're looking at around about 100 TJs a day from two years ago. We're looking at drilling to improve output there, hopefully in the first quarter of next calendar year. 100 TJs a day is essentially E3P and TCC base load continuously.
It's a big impact to the energy system in New Zealand and certainly very important that we're seeing lifts across those most major fields. Certainly, we're seeing some improvements at Maui and Mangahewa, which is positive. Again, it will be common knowledge, certainly the imports of coal to drive the Rankine units at Huntly have lifted significantly. Certainly, the reliance on Huntly has been quite significant over certainly the last calendar year. You can see that those coal prices based on the Indonesian Coal Index have lifted significantly, combined with quite sharp increases in the NZ ETS prices too, which are now around NZD 48. Those coal prices plus carbon means to run Huntly, you're staring at a number that's close to NZD 150/ MWh on coal. Certainly, those fuel prices really driving impacts into the power market.
Hydro storage, 55% of New Zealand's power comes from hydro. We can see there against historical averages and historical min and maxes in the blue shaded area on the top right chart. The yellow line skirting along through that late summer, early autumn period. The bottom, the minimum we've seen in the last 20-odd years. That did reflect back into higher power prices during that period. We did see quite a rapid recovery through May and June as wet conditions lifted South Island lakes while it remained dry in the North Island. Deep dive into the Waikato catchment and Lake Taupō storage over FY 2021. Again, probably a few points to pull out of this slide on slide 10. 9% of inflows in the second half of this financial year.
Typically, we like to bring the lake up to near full over summer, as that autumn period is our driest months. You tend to see, as you can see in the average, that Lake Taupō will traditionally fall from January through to April and May. Certainly, the declines there in terms of lake level were sharper and coincided with, as you can see in the table, spot prices at Otahuhu trending well into the NZD 200s. Starting February at NZD 238 and then lifting to NZD 295 by May. The yellow line we got within, I think, about 15 cm from the bottom of the lake.
At 10 cm from the lake, our resource consents requires us to essentially have minimum flow from Karāpiro on the Waikato River that will constrain generation on the hydro system to around 7.5 GWh-8 GWh days with Karāpiro at minimum flows. Once you hit the zero operating lake range level, which is 1.4 m of range, at that point, we match outflows. Outflows from Lake Taupō will match inflows. You will see daily generation fall to about 4 GWh or 5 GWh days, which is quite a significant decrease. If you take June, for example, where you'd expect to be generating around 12.5 GWh days in a normal year, so quite a significant decline. Fortunately, that didn't happen, and we did see some rain late in June and then into July that saw the lake start to tick up again.
We're now on slide 11. Really a couple of things here, talking about our sales position to customers. Certainly, Mercury is certainly aware that the impacts of the high fuel prices into the power market are impacting customers, particularly the commercial industrial segment, with repricing at circa futures levels occurring. Mercury has committed to that market, and we see that we've stepped up our sales by, in this chart here, by about 400 GWh . Ignores some of the buying contracts. We have committed strongly to C&I, and we've eased back, in terms of mass markets, which I'll talk to more in the next slide. You can certainly see a market in the pricing chart around channel yields. You've got futures prices, spot prices well above the net yields that Mercury is selling into mass market. Certainly, it's a challenging market for retailers.
It's a challenging market for Mercury. With ICPs down circa 20,000 in FY 2021 on the back of a 28,000 decline the year before. We did make decisions to sign longer-dated C&I contracts. The consequence of that in the front end is that they were out of the money. That did impact profitability for FY 2021. As the heading says, some short-term pain for longer-term gain on those contracts. Slide 12. This is really focused more on the churn, and that's largely driven by our mass market business, our retail business. It still remains fiercely competitive. We're certainly seeing competition both in terms of just raw pricing, but also in terms of bundled offers. National churn remains above 20%. We are very focused on value for our customers. Certainly, the high price environment is creating some challenges there.
As I said, 20,000 customer loss in terms of market share during FY 2021, that is more than offset by increased sales into the C&I segment. You will have seen, certainly, if you live in the city, the Mercury Move campaign has been pretty bright. The words of Coldplay and the song "Yellow" was certainly true here in Auckland. There's certainly a lot of yellow signs promoting the Move campaign, certainly, we're very proud to see some of the successes of that coming through in terms of decreased net churn. You can see the yellow line starting to trick up towards the sort of net neutral zero mark. We're expecting to see more of the above. Also, some more targeted offers into those mass market segments, helping that net churn figure. I'll hand over to Vince.
Thanks, William. We're now on slide 13. Kawerau outage, as William mentioned, from the 7th of June to the 20th of July. Clearly a significant loss of 100 MW in our portfolio. Ultimately, the result of a loss of lubrication oil to the generator and steam turbine bearings, and that really resulted in the destruction of the generator and steam turbine rotors and also the exciter. A couple of key things, really, the availability of critical spares was really seeing the benefits of that.
Our ability to bring the plant back in such a controlled and quick and safe way was down to the abilities of the team, both internally and contractual-wise, and having those spares. One issue that we did face was that we did not have a spare for the exciter, and had we had to rely on an overseas manufacturer, we would have seen a five-month further delay in that return to service. A small engineering company in Kawerau called Milbank, who we want to give a shout-out to, were able to manufacture a new exciter in five or six weeks, such that that didn't really become the critical path to return. It was a fantastic outcome that we have that sort of capability in New Zealand. I think a bit of a lesson in this pandemic world about being able to look after yourself.
We obviously have had some lessons out of this, as there always is, and we've taken actions to prevent recurrence of a fault of this nature, including the review of systems at other similar stations that we have, and obviously also sharing this knowledge through the manufacturer as well. Insurance remains under discussion. We also had an important relationship with Norske Skog Tasman, On the closure of the mill, we've negotiated an early exit from a foundation hedge that had been in place for a long time. That has the result of reducing sales and a NZD 10 million net impact expected in the coming year as part of that termination settlement. It does obviously, though, releases that load for our future use.
On carbon, we chose to exercise the ETS fixed price option, as others have done, at a total cost of NZD 8 million in FY 2021, at a NZD 35 per unit versus the current price of circa NZD 50 per unit. We also purchased 0.7 million emissions credit through the government auction process and currently have an inventory of 2.2 million credits. Turning to Turitea. Well, obviously Turitea has been a challenging project, as we've talked about previously. We are feeling that, at least with North, there is some light at the end of the tunnel, some real potential to see the energy turn up. We have now started commissioning, with 27 turbines erected of the 33, and we expect EBITDAF contribution to start coming as we commission that part of the wind farm. Still with a target for total completion in the last quarter of this calendar year.
Turitea South, though, remains challenging from a civils perspective. Those of you that are looking at the presentation will see the lower picture there and the size of some of the civil work that needs to be done. We continue to work with Vestas and their subcontractors to look for ways forward that can bring forward the completion date from that mid-calendar 2023 date. We note the Turitea spend and that the total project cost is forecast at NZD 464 million, in line with guidance. Of course, one of the big opportunities we had in this financial year was the sale of Tilt business. I'm on slide 15. Ultimately for Mercury, our desire was to continue to see Tilt grow. Faced with the reality of the business being sold, we worked hard to find a partner that we could work with and capture the New Zealand assets.
That resulted in the process we've described previously in releases with an initial successful bid of NZD 7.80 per share, subsequently increasing to NZD 8.10 in April. We can feel really pleased by the contribution that that investment has made for us, with our 19.9% shareholding costing NZD 144 million, selling for NZD 608 million, adding the debt and ending up with the New Zealand assets. As I said earlier, this adds over 1,100 gigawatt hours of wind generation and a development pipeline. Mercury, New Zealand's largest wind generator, once Turitea North is commissioned and lift EBITDAF in FY 2022 by NZD 30 million. We also announced, alongside Tilt and Genesis, the PPA for Omamari, now known as Kaiwaikawe. This is, I think, a very important thing.
Right at the start, when we said we were acquiring the Tilt assets, we said we were taking really seriously the role that these needed to play in the decarbonization of New Zealand and work with both competitors and others to see this pipeline rolled out. We're really excited that we'll be able to start that journey with Genesis and are pleased that they and Tilt and ourselves were able to get this PPA signed. Turning to our other acquisition activity, obviously, Trustpower retail acquisition. Whilst we didn't expect this to necessarily come to market when it did, we were determined to participate sensibly in this acquisition and are pleased to be successful at NZD 441 million, which gives us the retail business, an electricity supply agreement, the ISP network, and is contingent on the Commerce Commission approvals, which are now in process and the restructure of the TECT rebate arrangements.
There's still a fair way to go and the exact timing of completion of this transaction is, at this point, uncertain. We do forecast significant synergies on a cost side and also expect to be able to see revenue upside as we become a truly bundled offering in the retail market. The full year contribution of NZD 50 million will be offset by NZD 30 million of transition costs in year one. Of course, we don't yet know when year one will start. I'm going to hand back to William to talk about continuous improvement and Thrive.
Thank you, Vince. We're on slide 17, and really I just want to talk about Thriving Today, Shaping Tomorrow, which comes straight from our strategic framework. Thrive is a continuous improvement program. A lot of it is about way we work, and certainly this slide lays out some of the initiatives and cultural changes we're making inside Mercury to ultimately deliver that NZD 30 million uplift of value in FY 2022. You can see here, there's a schematic here. This is the Digital River. This is an initiative that is now running. Essentially, this is a sophisticated hydraulic model, which can model generation across the Waikato system, looks to optimize unit dispatch, multi-day, and is a hugely valuable tool to help our traders and dispatchers essentially extract maximum value across the river catchment.
We're really excited about some of the gains that Digital River will help our people to actually run those hydro assets better. Maraetai water lowering. We've got some operating restraints. Waipapa is the smallest station on the Waikato chain. It's downstream of Maraetai, which is by far the largest. Essentially, by looking very carefully at the operating constraints, and ensuring that assets are protected, we can essentially deliver greater peaking from Maraetai for longer by managing those constraints better, while managing the physical risk to plant. That's also quite interesting in terms of how that will influence, say, GWAPS for the Waikato River. Whakapuāwai, our c ulture change program, w e've touched on that. It's really about how we do our best work together and align essentially our culture with essentially a performance mindset.
Moving to more rapid cadence around quarterly planning, business planning, again, to really allocate resources, both people and money, to the things that really matter to the firm. That's something that we're very focused on as a leadership team, and with our senior leaders across the business and how we work better with our people. Derivatives trading looks pretty exciting to us. We think we do have a competency here, so looking about how we might leverage that outside the core products of power, potentially into carbon markets, et cetera, is something we're exploring further. Around the procurement space, some nice wins around manual meter reading. We were just reviewing who supplies that, under what terms, and optimizing our meter reading runs, given 15% of our meters still are non-smart and some of those will never be smart. Gas meters are still manually read.
Class 3 outage reviews. These are reasonably significant outages, certainly less than Class 4s, but really moving and analyzing condition-based maintenance versus time, having a really deep dive review around scope, and what actually gets done to essentially minimize both the scope and time frames for undertaking those Class 3 outages, which occur periodically over every couple years. Net of that is a NZD 30 million benefit forecast in 2022, split approximately 1/3 OpEx, 2/3 revenue. On slide 18, really just touching on guidance again. EBITDAF for FY 2022 at NZD 590 million. It's reflecting hydro generation of 3,900 GWh. That's 150 GWh less than our mean hydro, which we're now stating at 4,050 GWh, reflecting the efficiency upgrades from the refurbs that have been undertaken on the river. That does exclude any contribution from the Trustpower retail acquisition.
As Vince says, the timing of that remains still uncertain or any insurance proceeds from Kawerau or any LDs related to the Turitea project. Our dividend guidance sitting at NZD 0.20, a 17.6% uplift on FY 2021 or NZD 0.03 a share, with same business CapEx of NZD 70 million. A pretty comprehensive and detailed bridge there, taking us from today's actuals through to FY 2022 guidance at NZD 590 million. I'll hand back to Vince to close this part of the presentation.
Thanks, William. I'll just close on slide 20. Slide 20 is a photograph of the Turitea North site. I think you can see there that it's a pretty impressive site. We just now to bring that all to fruition, and deliver those important gigawatt hours. That concludes our presentation, although I do want to note a couple of further things. Over the last few weeks, we've been joined by Stewart Hamilton as our GM of Generation and Craig Neustroski as our GM of Customers. We now have a fully-fledged executive team who are really all set to go and hit the opportunities that we have created within the Mercury business.
We also have the benefit of Dennis Barnes joining us as a Director in September. I think that will, again, add to the quality of debate around the board table as we transition to that net carbon neutral future that we all aspire to. With that, I'll close, and operator, hand that back for questions.
Thank you so much. Ladies and gentlemen, we'll now begin that Q&A session. Just again, if you need to ask a question, you can just press star one on your telephone and just wait for your name to be announced. If at any time you need to cancel the request, just by pressing the pound or the hash key. Your first question today comes from the line of Andrew Harvey-Green, from Forsyth Barr. Please ask your question, Andrew.
Thanks, operator, and morning, Vince and Will. A few questions from me. First of all, just around, obviously the last couple of months of the year were pretty tough, given where hydrology went and wholesale prices were. Are you rethinking your risk management strategy given the downside risks of being short in the current environment has gone up?
Yes. Look, I think, hindsight's a wonderful thing, isn't it? I think if you look at the graph on slide, give me a second, slide 10. If you look at that, I think the story to draw from that is, some of those decisions, and you look at the pricing, some of those decisions would have had to been made in the last quarter of the calendar year, in that sort of October, November time. We'll certainly be thinking quite carefully about that in the scenario work we do around thinking about where the lake can be. Ultimately, I think, yeah, hindsight's wonderful. Would we have done some things different? Yes. Will we think about those differently in the future? Yes.
I guess the follow-on question from that is, any implications for what underlying earnings might be if you, I guess, take a bit of risk off the table, presumably that does have come with a bit of a cost.
I think we're still comfortable that we've given guidance based on our ability to manage things.
Yeah, sure. Okay. Second question is just, I guess, around some of that guidance and notice, and we've got the Kawerau insurance and liquidated damages, potentially. Are you able to give us a bit of a sense on what the potential might be across those two things? I guess, sort of wrapped up in that is the extent that liquidated damages might be impacted by any renegotiation on Turitea South. Any sort of, I guess, update on those negotiations?
William here, Andrew. Yeah, both of those discussions are ongoing. Turitea damages, we're still focused on getting plants running and commissioning. We keep engaging with Vestas on those. They're confidential. We're not going to talk about those in a public forum. Yeah, they may not even come to fruition in FY 2022, given the project actually doesn't complete. We're not expecting completion until mid 2023 anyway. On insurance in Kawerau, same thing. It's still early days with insurers working through what that might mean and what the full extent of the claims will be. Most of that claim will relate to essentially repairs and replacement of damaged equipment. There will be a little bit of BI, potentially given a 30-day stand-down for insurance, and the outage was two weeks longer than that. Again, those discussions are still ongoing.
Yeah. Okay. Last question for me, was just around the investment in NOW Broadband and the timing of that. I'm not familiar with it, so I'm interested in, I guess, knowing in terms of the scale of that business around, I guess, fiber connections and how that fits in strategy-wise with the Trustpower transaction.
The NOW investment occurred around the Christmas period, prior to Christmas this last year gone. Of course, we made that investment without any knowledge of whether the Trustpower business would come to market. NOW has got circa 16,000, 17,000 connections. It's got an operating base, which in terms of an ISP network aggregation operating center. It has quite a well-tuned ability to deal in small to medium enterprises as well. Our investment in that, we're not the 100% owners of that. We invested with the original investors. I guess anything that impacts on that vis-a-vis Trustpower will play out once we know the outcome of the Trustpower process. It's difficult for us to make any assumptions around that at this stage. We still sit and await the Commerce Commission process.
Yep. Okay. That's all from me. Thanks.
Your next question comes from the line of Grant Swanepoel from Jarden. Please ask your question, Grant.
Good morning, Mercury team. First question, is Trustpower still on track to be done at the beginning of calendar 2022?
Well, again, Grant, it's really down to the Commerce Commission and TECT process. Well, we know that TECT have a court date in November. We don't know how the judge will then proceed to give his or her opinions on that. We know that the Commerce Commission process is underway. I guess our working assumption is it will be early in 2022. We're not in control of that process.
Thanks. Nothing's pushed out since the deal. Second question, the NZD 35 million in guidance for Turitea, how many gigawatt hours are you assuming from that plant?
It's essentially assuming full output from October. Whatever that comes to. That's what? 3/4 of 470.
Thank you. Norske Skog, that NZD 10 million payment there, is that assumed in your forecast for FY 2022 and is there nothing left in there for FY 2023?
Yeah. You can see there's a note at the back of our annual report around that deal. Essentially that just reflects the impacts in terms of earnings. Essentially that foundation contract has been terminated, but we've acquired some other positions from Norske, given they've ceased operations here in New Zealand, with a net effect of essentially decreasing our sales position.
That just washes through in some of the uplift for FY 2022 as you sell it into the market?
Correct.
You don't specifically disclose it in your guidance.
No.
Thanks. The NZD 30 million Tilt net, can you just explain to this layman on how the NZD 14 million associate accounting for a March year-end is ripped out in FY 2022 EBITDA?
For Tilt, at the moment we were recognizing Tilt as essentially an associate. You're recognizing your share of profits and other income. That equity accounting goes now, given we're not a shareholder in Tilt. Essentially, we recognize the uplift of essentially Tilt's revenue, which is NZD 45 million. NZD 45 million less the NZD 14 million gets you to about NZD 30.
Okay. Maybe offline you can give me some more detail on that. Final question, that SaaS NZD 10 million expense in your cost line, is that an ongoing or is this a once-off?
No. Essentially with software as a service, where you are modifying essentially mostly cloud systems, where you don't actually control the software, it's still provided by essentially a third party. While historically we would've capitalized that as IT costs, now essentially all going to OpEx. Essentially you've just got a substitution out of CapEx into operating costs. That is ongoing, but it will, depending on the level of customization and change, it will fluctuate over time. We're talking single millions unless you're investing significantly into a cloud platform.
We've been an early adopter of that, Grant, it'll flow through for all businesses that use software- as- a- service cloud platforms.
Yep. I suspect you're going to get it a lot with most large New Zealand corporates Possibly most will wait until this financial year to recognize it. You'll see it appear at the interims, I suspect.
Thanks, Will. Thanks, Vince.
Okay. Your next question comes from Jeremy Kincaid from UBS. Please ask your question, Jeremy.
Good morning, team. Just two questions from me. The first one around the full refurb of Karāpiro. Is that in the NZD 70 million of stay in business CapEx or is that growth CapEx?
No, it's inside stay in business. Essentially, it's maintenance of existing stations. Yep.
It will flow into subsequent years.
Yes. Because it's a five-year program.
Sure. Okay. Thank you. My other question is, I'll just be interested in your thoughts around, the outages of last week, and obviously there's been some industry commentary around changing the market structure, such as introducing a capacity market or breaking up the gentailers. I'll just be interested in your thoughts around that.
Right. Where to start? I guess the first thing I'd say is that, as I think I sort of said publicly, last Monday night was an incredibly rare event. I can't recall in the last decade or so, an event of that nature. I think as these various investigations get under the hood of what actually occurred, what will sort of emerge is that some of the communications that were associated with that day probably led to actions that were unnecessary. Certainly in our case, we were very particular about the outages that we had that day as the day played out and brought plant back. We had what we believe to be a record generation peak from our Waikato stations on that evening.
I think you've got to be really careful about conflating a meeting of a peak demand, which has a number of issues playing out and some sort of other problem associated with decarbonization and renewability. I think you've got to sort of separate those things. I think you've got to be really careful about reacting to one's particular specific event and say that now is an indicator for major structural change. I think we need to be really aware that when you make changes that are structural, they're not quick to do because they have to be properly implemented and they're not easy to unwind. If you want a completely different, but parallel to that, look at the issue around low user fixed charges and how long that argument's been going on about unwinding those.
I think in this case, we're careful finding a solution for a problem that will, I think, become perfectly explainable. Now, in terms of vertical integration and things of that nature. Look, right from the late 1990s, we've had vertically integrated businesses, and we've seen lots of regulatory and market change, and that has served us really well in terms of managing investment risks. It's very easy to fire a gun at vertically integrated companies. Ultimately, if we stand back from this and we want to achieve electrification of New Zealand that delivers a net carbon zero outcome, then we need investors to step up with large amounts of money. Just talking for Mercury, NZD 450 million at Turitea in a project that will run for 30 years.
You look at the Omamari project or Kaiwaikawe project as we call it now, it's another investment we are proposing to make. Look at the refurbishment on the Waikato River to ensure that those assets are intergenerational. That sort of deployment of capital is enormous. I think the last thing we want to do is make that something that people start to get nervy about. I think we've got over the Tiwai hump. We don't need to create another hump.
That's very clear. Thanks very much.
Your next question comes from Stephen Hudson, from Macquarie Securities. Please ask your question, Stephen.
Thank you, good morning, Vince. Well, just a couple of quick ones from me. Just in terms of slide 15 where you run through the development pipeline for Tilt, I just wondered if that was the full extent of that pipeline or whether or not there may be other sort of prospects at less mature stages of development. Secondly, just on the Norske Skog hedge, is 517 GWh from 2023 the number that we should be thinking of on an ongoing basis in terms of capacity, laid open for you to sell into the CFD market from here? Just on Norske Skog, I just wondered, Vince, if you could give us a bit of an update on your working assumption on that asset, post 2024.
Start with the first one, Stephen. We've only put on this chart those that are in the public domain. You would expect us to keep some of the other things in there closer to our chests at this point in time. I do note that this slide 15 is about the Tilt assets. Of course, Mercury itself has others, and we've talked about Puketoi in the past. If you start to add those two things together, that, I think, is pretty positive. On the one about Kawerau, I'm going to throw to William in a moment. In terms of the aluminium smelter, I guess I take the view that as time goes by, the energy industry in New Zealand is more able to factor in whatever that outcome is because of the certainty that we are heading towards net carbon neutral in 2050.
Look, my understanding, and you've done far more work on this than I have, is that they're not doing too badly at the moment. I think the observation I would make is if we go back to the global financial crisis, everybody sort of dumped the idea of being environmentally clean or net carbon neutral, or any of those things got dumped in the face of the financial pressures. We're just experiencing a global pandemic where even in the face of that, I think most businesses now are still keeping track to greening their position, if you like, or being less carbon intensive. I would have thought that that smelter will sit very importantly in Rio's thinking around how it wants to position itself in the next decade to 20 years. Pass to William for the other question.
Yes. On the Norske Skog deal, essentially the foundation, the long-term hedge arrangements with them were an 80 MW contract, so 700 GWh a year. Essentially we've inherited a 400-odd GWh position for this year and 200 GWh next year. Those numbers in slide 13 are 375 GWh and 517 GWh are essentially assuming you were going to hold your net position at the same settings it is now, that would be available to 60 GWh sale back into the market.
That's great. Thanks, gents.
Your next question comes from Cameron Parker from Craigs Investments . Please ask your question, Cameron.
Thanks, operator. Just a couple from me, guys. Just going back to Andrew's question with regards to risk mitigation and so forth. Are you or would you think about engaging with Genesis over dry air risk and thermal backup given their swap option expiry is coming up in 2022?
Yeah, look, we'll engage with anybody in the market to work through risk management type issues. I hope we have demonstrated with our support for their FutureGen project that we're not taking all our toys home and playing on our own. We think this is all big, too big for that. If there's a sensible thing to be done around that, of course we'll engage.
Great. Thanks, Vince. How should we be thinking about the new PPAs signed with Genesis and the commencement of that, also the Tararua repowering and so forth? How do you guys think about that? Are they mutually exclusive or?
Look, at the end of the day, I think every deal that we choose to do, it's got to stand on its own merits. Ultimately we're comfortable with the PPA that's been signed, and there's a fair bit of work to do to breathe life into that project, and we'll get on and do that. We've got the benefit of the people that came over, the Tilt staff that have come to Mercury as part of this in New Zealand. In terms of Tararua repowering, ultimately there's a fair bit of work to do there. It's a real option. It needs to be considered in, as you would any of those things about the upside benefits vis-a-vis the ongoing revenue streams that come from the current installation. We've got to get right underneath the bonnet of that one over the coming months and year or two.
Just like all the other projects we've got the opportunities to do.
It's definitely a big pipeline, for sure. In terms of the Turitea South, I was just wondering, there's a little bit in terms of slippage and so forth. There's a little bit going on in that area at the moment. You're thinking 2023. What's the probability of a potential further slippage of that, do you think?
I'd say that the only certainty is whatever I say will be wrong. Having visited the site a few times, it is a major civil undertaking. We obviously have some disputes to deal with our provider. When you travel around that site and see the amount of material that's being moved, I would still feel that there is some room to improve somewhat. We have to find a way through that conundrum with our contractor partnership. We haven't resolved that yet. We are talking positively. Like all of these things, as William said earlier, you start with saying there's one stream of work that says, "Just let's get the project finished." If everybody's in that mindset, that's good.
There's another stream of work that says, "Well, everybody's going to get their boxing gloves on, ready for the punch up if we can't resolve the situation commercially." That's going on as well. We're pleased to see the goodwill that the contractors are bringing to this challenge. When there's goodwill there, you can remain optimistic.
Great. Thanks, team. That's all from me.
Your next question comes from Eamon Rood, from Energy News. Please ask your question, Eamon.
Good morning, team. Going back to Trustpower and the Now Broadband acquisition. Can you explain, maybe elaborate on what the retail strategy is going forward and those revenue upsides you alluded to earlier? When do you expect those to translate into an increase in earnings?
Look, it's a difficult question to answer for a number of reasons. One is we're not in control of the closure date of the Trustpower acquisition. Because of that, and because obviously it's subject to Commerce Commission review at the moment, we don't want to get ahold of that process. We respect that process deeply. With respect to now, well, we have a plan. That plan will eventuate. I don't really want to flag that for all of our competitors on this call.
Okay. Thank you, Vince.
Okay. Your last question comes from Nevill Gluyas, from Jarden. Please ask your question, Nevill.
Good morning, guys. Three from me. The first one just on the next generation timing. I'm assuming Kaiwaikawe, we'd be looking at FID, your decision around that this year. If that's the case, should we expect you to look at another project FID next year? Obviously, you've got a suite of options in front of you. Should we expect a pause in terms of the next investment decision, perhaps for the following year?
With the Kaiwaikawe one, look, I think we have a process to get through to FID. Probably not in a position to disclose that just at the moment. I think we would want to do that in partnership with Genesis as we work through what needs to be done between now and then. Of course, part of that is the resource consent, which is currently being considered. As you'd well understand, Nevill, the resource consents sometimes can put a bit of a curve ball into these processes. While there's been a lot of work done, we're not in a position to pick that one out. I think we all know that if we're going to reach the big picture targets, we're going to need projects closing every year to 18 months or so.
We didn't buy the Tilt pipeline or make the investments we have into Puketoi just to sit on our hands as the environment has changed. As I think everybody's said, we're sort of poised on the cusp of significant change in the sector with renewables rolling out. That's why I suppose I've been pretty clear that I wouldn't want to see regulatory changes, knee-jerk changes that actually put that at risk.
Okay, great. Thanks. I won't get you to choose which of your children is favorite, whether or not Puketoi or Tararua one or two, but if you wanted to offer, sort of what you thought the next decision would most likely look to be, which one looks most prospective next? No guarantees as to what comes.
Look, you can ask my kids, I don't pick favorites.
Very good. Next question. Demand response. It seems to be absent from a lot of the discussion around how you work in a highly renewable power system. One of your competitors, Contact Energy, keen to sort of grow a product there. It seems to be important for the market as a whole. Do you have a product and a push there?
Look, again, Nevill, I think the short answer is we haven't done as much work as it appears that Contact have done in that space, and I sort of commend them for bringing that forward. We do talk to our larger customers quite a lot about what they want. Demand response is going to be important, isn't it, as we transition over the next couple of decades. I think what's also important in that is that organizations do also want to be focused on their core product. As a business, you're not actually in the business of demand response in most cases. You're in the business of doing something, and that's usually pretty important. I think there's an important balance to be worked through there, but I'm sure we'll get engaged in those conversations.
Just a quick follow-up on that.
Sorry, Nevill, just on that.
Oh, sorry.
Putting a commercial industrial customer onto a spot contract creates the demand response automatically. Certainly, Mercury's been a vocal proponent of essentially separating physical supply from hedging. The customer does have that incentive when prices are high, when they're on spot, to actually make those decisions in real time themselves. You don't need to have a special product necessarily for that to occur, because they can enjoy the benefits of the hedge and reduce their physical exposure and therefore reap some benefits of that as a product. I think, too, the lines company's probably the hot water control is probably not a focus like it used to be. It's definitely not as prevalent. That is a very low-cost way to essentially, provide interruptible load for reserves or for demand management. That's probably another avenue that's certainly worth exploring.
It's certainly more cost-effective for a distributor to do that than a retailer.
Right. I guess in both cases, this may be one of those situations where it takes the sort of nous and focus of a generator to, well, generator/retailer, to sort of bring those products to fruition. Whereas lines companies or industrial perhaps don't see the difficulties and perhaps don't see a clear path to how it could be achieved. Maybe not well-positioned to gauge what the benefits will be out of a future electricity market. Yeah, we'll wait and see. Third question, last one. Obviously with the acquisitions, Trustpower, Tilt, and Turitea, and I guess your commentary about the software-as-a-service approach, be useful if you can give us kind of an update of what we should think about in terms of stay-in-business CapEx, when you're populating a valuation model, say, for this decade.
How should we think stay-in-business CapEx will look, assuming, you get completion on Trustpower, merge everything together and are operating going forward? Can you give us some figures or some parts of that?
Yeah. Obviously, you've got a changing mix of generating plant, then bringing in Trustpower, clearly synergies, CapEx is shared between the two retail businesses. You've got an ISP you currently don't have.
Yeah.
Yeah. Core business is still driven by essentially, large-scale refurbishments, the drilling program. The CapEx requirements of wind, again, depending on the O&M arrangements, can be modest because they're largely contained within the maintenance agreements. In terms of Mercury's core business, on Trustpower, we're still looking at CapEx in the sort of medium term of NZD 90 million a year. That'll be bumpy depending on whether you're drilling or not.
Right. Yeah, that's sort of averaged, with the drillings averaged out. Sorry, that excludes Trustpower, did you say? The Trustpower retail business implications.
Yep.
Right. How do you think we should think about that once you've got your synergies in place? I think in the past we've talked, it was predominantly around the systems, as I recall, for Trustpower, for the retail business, which I imagine will be replaced by software as a service as a cost line. I have NZD 15 million-NZD 20 million in mind per annum.
Yeah. You just got to be careful you're not doubling up.
Exactly.
Where you've got cost synergy, so slide 16, you can see cost synergies are NZD 35 per annum after transition. That's cost in a dollar sense as opposed to just operating costs. Carry on.
Maybe we could assume sort of NZD 5 million to NZD 10 million, you think? Once synergy is in place.
Both businesses are spending, let's say round numbers, NZD 15 million apiece in capital expenditures on IT systems.
Yep.
The combined will be bigger than NZD 15 million, but less than NZD 30 million.
Yeah. Okay. No, that's useful. Thank you. Turitea, with both projects running, if we thought sort of NZD 5 million-NZD 10 million, does that sound like a sensible number? Again, averaged over sort of cycles of maintenance.
Yeah. It'd be smaller than that because it's mostly contained within the O&M. As the plants obviously age and start, you potentially get a higher CapEx profile, but certainly early on in the project, it's largely contained within the maintenance agreements with OEM.
Yeah. That's really useful. No, thank you. That's all from me.
Okay. There are no further questions at this time. With that, I'll hand the conference back to you, Vince, for any concluding remarks.
Thanks, operator. Thanks, everybody, for all the questions. It's really helpful. Hopefully we've cast some light on last year and also some light on what to expect down the track. We look forward to continuing our discussions with you all in the future. Thanks for attending, and we'll sign out.
Ladies and gentlemen, that does conclude today's conference call. Just once again, thank you all for participating, but you may now all disconnect. Thank you.